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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, 1998
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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: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
Title of each class: Common Stock, No Par Value
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]
The aggregate market value of the voting stock held by non-affiliates
of the Issuer, as of March 15, 1999, was $23,761,472.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of March 15, 1999, was 3,861,568.
For the fiscal year ended December 31, 1998, the Issuer had total
revenues of $21.9 million.
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DOCUMENTS INCORPORATED BY REFERENCE
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10-KSB ITEM DOCUMENT INCORPORATED
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Item 6. Management's Discussion and Registrant's Annual Report to
Analysis or Plan of Operation Shareholders under 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 Proxy Statement for 1999 Annual Meeting
Officers of the Company; of Shareholders to be filed no later
Compliance with Section 16(a) than April 30, 1999
of the Exchange Act
Item 10. Executive Compensation Proxy Statement for 1999 Annual Meeting
of Shareholders to be filed no later
than April 30, 1999
Item 11. Security Ownership of Certain Proxy Statement for 1999 Annual Meeting
Beneficial Owners and of Shareholders to be filed no later
Management than April 30, 1999
Item 12. Certain Relationships and Proxy Statement for 1999 Annual Meeting
Related Transactions of Shareholders to be filed no later
than April 30, 1999
</TABLE>
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PART I
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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"). First Community Bank
changed its name, effective March 1, 1999, to Unity 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 received
its charter from the New Jersey Department of Banking on September 13, 1991. The
Bank is a full-service commercial bank, providing a wide range of business and
consumer financial services through its main office and seven branches located
in Clinton, North Plainfield, Flemington, Springfield, Scotch Plains, Linden,
Union and Colonia, 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.
On August 25, 1998 the Company executed long-term leases with First
States Properties for eight new branch locations. These leases will become
effective on various dates in 1999. The branches are existing bank offices
located in Cranford, Kenilworth, Berkeley Heights and Springfield in Union
County, New Jersey, and in East Brunswick, North Brunswick, South Plainfield and
Edison in Middlesex County, New Jersey. In addition, the Company executed a
lease for a new branch in the Colonia section of Woodbridge Township, Middlesex
County, New Jersey and is building a new office in Whitehouse, Hunterdon County,
New Jersey. The Company anticipates that these branches will open in stages
through July, 1999. At the completion of this expansion, the Company will have a
17 office network.
On February 18, 1999, the company, through the Bank, acquired Certified
Mortgage Associates, Inc. ("CMA"), a Marlboro, New Jersey based correspondent
mortgage banker. CMA originates one-to-four family home mortgages for re-sale
into the secondary market. Currently, all sales are done servicing released. The
Company believes that the acquisition of CMA will provide the Company with
additional non-interest income, and the Company intends to enhance its mortgage
banking operation through the acquisition of other mortgage bankers and brokers.
For the 12-months ended December 31, 1998, CMA originated $267.6 million in
one-to-four family mortgages.
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 and Insurance
(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.
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BUSINESS OF THE COMPANY
The Company's primary business is ownership and supervision of the
Bank. The Company, through the Bank, conducts a traditional and
community-oriented commercial banking business, and offers services including
personal and business checking accounts and time deposits, money market accounts
and regular savings accounts. The Company structures its specific services and
charges in a manner designed to attract the business of the small and medium
sized 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 and the office the Company anticipates
opening in Whitehouse, 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, and the new offices the Company anticipates opening in Cranford,
Kenilworth, Berkeley Heights, and Springfield, will serve the majority of the
communities in Union County, and the southwestern communities of Essex County.
The offices the Company anticipates opening in East Brunswick, North Brunswick,
South Plainfield, Edison, and Woodbridge Township will extend the Company's
service area into Middlesex 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 106 full-time and 14 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.
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. Over the past several years, a number
of legislative proposals have
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been debated in Congress concerning modernization of the nation's financial
system. Many of these proposals would substantially alter the current regulatory
framework, particularly as it relates to bank holding companies and their
powers. Management of the Company is unable to predict, at this time, which, if
any, of these legislative proposals may ultimately be adopted and the impact of
any such regulatory proposals on the business of the Company.
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.
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
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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-weighting and performing, guaranteed portions of unsold SBA
loans, which carry a 20% risk-weighting. Most investment securities (including,
primarily, general obligation claims of states or other political subdivisions
of the United States) are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of the
U.S. Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% risk-weighing.
Transaction related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50%
risk-weighing. Short term commercial letters of credit have a 20% risk-weighing
and certain short-term unconditionally cancelable commitments have a 0%
risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
BANK REGULATION
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
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.
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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. As a result of the
recapitalization of the SAIF, FDIC premium assessments to SAIF members, both in
the form of insurance premiums and for repayment of the Federal Finance
Corporation obligations, have been reduced from 23 basis points to 6.4 basis
points for the healthiest 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. 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 presently conducts its business through its main office
located at 64 Old Highway 22, Clinton, New Jersey, and its seven branch offices.
The Company expects to conduct its business through an additional ten branches
by the third quarter of 1999. In August 1998, the Company acquired eight branch
locations divested as part of the First Union/CoreStates merger. All sites were
acquired on a leased basis, with the leases going into effect on various dates
through the first half of 1999. The following table sets forth certain
information regarding the Company's properties as of December 31, 1998.
LOCATION LEASED OR OWNED DATE OF LEASE EXPIRATION
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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 9/30/03
Springfield, NJ
2222 South Avenue Leased 4/30/06
Scotch Plains, NJ
752 Stuyvesant Avenue Leased 10/31/99
Union, NJ
628 North Wood Avenue Owned N/A
Linden, NJ
1379 St. Georges Avenue Leased 12/28/03
Colonia, 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 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.
In the fourth quarter of 1998, the Bank discovered that it had been the
victim of an unauthorized overdraft to a single customer. Although the Bank is
still investigating this occurrence, it appears that the total amount of the
overdraft may range from $680,000 to $1,400,000. The Bank is pursuing all legal
actions available to recover this overdraft, and it appears that assets may be
available to satisfy the Bank's claim, at least in part. At this time, the Bank
has established a $300,000 reserve in November of 1998 in connection with this
situation. As a result, the Bank's loss exposure is between $380,000 and
$1,100,000, before consideration of any assets which may be realized to pay off
the Bank. Management continues to investigate this matter, and take all steps
possible to safeguard the Bank's interest.
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 1998.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing on September 21, 1998, the Company's Common Stock began
trading on the NASDAQ National Market under the symbol "UNTY". Previously, the
Company's Common Stock had traded on the American Stock Exchange under the
symbol "UBI". As of December 31, 1998, there were 678 stockholders of record of
the Common Stock.
The following table sets forth the high and low bid prices of the Common
Stock, as reported on the NASDAQ National Market for the fourth quarter of 1998.
The high and low bid prices reflect inter-dealer quotations, without retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions. For 1997 and for the first three quarters of 1998, 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 1997 cash dividends were not restated to reflect the three for two
stock split and the 5% stock dividend declared in 1998.
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CASH
HIGH LOW DIVIDEND
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1998:
4th Quarter...................................................... 12.125 10.250 0.05
3rd Quarter...................................................... 14.625 11.750 0.05
2nd Quarter...................................................... 18.250 13.188 0.05
1st Quarter...................................................... 16.625 12.750 0.05
1997:
4th Quarter..................................................... 12.302 10.159 0.05
3rd Quarter..................................................... 10.476 8.492 0.05
2nd Quarter .................................................... 9.206 8.730 0.05
1st Quarter..................................................... 11.270 8.889 0.05
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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.
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 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, 1998, the Bank had $2.7
million available for the payment of dividends to the Company pursuant to these
restrictions. In addition, pursuant to the order of the Commissioner of the New
Jersey Department of Banking and Insurance permitting the Bank to acquire eight
(8) of its new branches, the Bank will be prohibited from paying dividends to
the Company in the event that its ratio of capital to total assets at any
quarter end falls below 6.0%. At December 31, 1998, the Bank's ratio of capital
to total assets was 7.09%.
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.
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PART III
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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 1999 Annual Shareholders
Meeting under the captions "PROPOSAL 1.-- ELECTION OF DIRECTORS" and information
concerning compliance with Section 16(a) of the Exchange Act is included under
the caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934," each of which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 1999.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
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PRINCIPAL OCCUPATION DURING
NAME, AGE AND POSITION OFFICER SINCE PAST FIVE YEARS
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Thomas B. Maresca, 41, 1991 Executive Vice President of the Bank since
Executive Vice President of the Bank 1998; employed by the Bank since its inception.
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Kevin J. Killian, 43, 1998 Chief Financial Officer of the Company and
Chief Financial Officer of the Company Executive Vice President of the Bank.
Previously, Mr. Killian was President of United
Heritage Bank and Chief Financial Officer of
Independence Bancorp.
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</TABLE>
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the
definitive Proxy Statement for the Company's 1999 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 30, 1999.
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
1999 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 30, 1999.
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 1999 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 30, 1999.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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3(i) Certificate of Incorporation of the
Company, as amended(2)
3(ii) Bylaws of the Company(1)
4(i) Form of Stock Certificate(2)
10(i) 1994 Stock Option Plan for
Non-Employee Directors (1)
10(ii) Stock Bonus Plan (2)
10(iii) 1997 Stock Option Plan (3)
10(iv) 1997 Stock Bonus Plan (3)
10(v) 1998 Stock Option Plan (4)
10(vi) 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, 1998
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
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(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.
(4) Incorporated by reference from Exhibit A from the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
DATE ITEM REPORTED
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October 16 5 - announcing stock dividend.
December 10 5 - announcing regulatory approval of subsidiary
to open new branches.
5 - announcing stock dividend.
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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 29, 1999 By:/s/ John F. Tremblay
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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.
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NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Robert J. Van Volkenburgh Chairman of the Board and Chief March 29, 1999
- ----------------------------- Executive Officer
Robert J. Van Volkenburgh
/s/ John F. Tremblay President and Director March 29, 1999
- -----------------------------------
John F. Tremblay
/s/ Kevin J. Killian Chief Financial Officer (Principal March 29, 1999
- ----------------------------------- Financial and Accounting Officer)
Kevin J. Killian
/s/ David D. Dallas Vice Chairman and Corporate March 29, 1999
- ------------------------------------ Secretary
David D. Dallas
/s/ Charles S. Loring Director March 29, 1999
- -----------------------------------
Charles S. Loring
/s/ Peter P. DeTommaso Director March 29, 1999
- -----------------------------
Peter P. DeTommaso
</TABLE>
-13-
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1998
CORPORATE PROFILE
[GRAPHIC OMITTED]
The cover illustrates the Company's expanding market presence and displays its
network of retail financial service centers.
1998 ANNUAL REPORT
<PAGE>
THE Cover
- -------------------------------------------------
The cover illustrates the Company's expanding market presence and displays its
network of retail financial service centers.
o existing centers
Clinton, Colonia, Flemington, Linden, North Plainfield,
Scotch Plains, Springfield, Union
o opening in 1999
Berkeley Heights, Cranford, East Brunswick, Edison,
Kenilworth, North Brunswick, South Plainfield,
Springfield II, Whitehouse
o pending regulatory approval
Bound Brook, Flemington II, Highland Park
TABLE OF Contents
To Our Shareholders 1
Board of Directors 6
Management Profiles 8
Group Profiles 9
Retail Financial Service Centers
Union 11
Middlesex 14
Unity Country 16
Products & Services 17
<PAGE>
TO OUR Shareholders
[PICTURE] ROBERT VAN VOLKENBURGH
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
This year, we are embarking on an exciting period of growth and opportunity
which will benefit shareholders, customers and employees alike. In 1998, we
worked to strengthen the Company's foundation with sound financial management
and expansion of the franchise.
The collective achievements of Unity Bancorp, Inc. and Unity Bank in 1998
attest to the Company's stature as a dominant force in regional community
banking.
FINANCIAL PERFORMANCE
I am pleased to report that Unity Bancorp set several records over the past
year. First and foremost, the Company recorded net income of $2.1 million for
the twelve months ended December 31, 1998. As a result, basic earnings per share
equated to $.67.
While earnings exceeded that of 1997, the fourth quarter discovery of an
illegal check kiting scheme was indeed a disappointment and contributing factor
to less than expected earnings. It now appears that assets may be available to
satisfy the Bank's claim, at least in part. Please be assured that we are
pursuing all legal actions available to recover these funds. Also, we have
established the appropriate loss reserve. Finally, we have implemented
additional internal policies and procedures to insure against any further
occurrence. It is unfortunate, but understandable, this event took market
attention from an otherwise very successful year.
In 1998, the market for the financial services sector was indeed rough,
however, we do not believe that Unity Bancorp's stock price adequately reflects
the value of the Company, nor the earnings opportunities that lie ahead.
Regardless, we remain committed to increasing your investment return.
[GRAPHIC OF TIMELINE]
Jan 98 Unity Bank mascot swings into action. If We Were You, We'd Bank With Us!
Jan 98 Unity Board declares 13th consecutive quarterly cash dividend
May 98 Shareholders benefit from 3 for 2 stock split
UNITY BANCORP one
- --------------------------------------------------------------------------------
<PAGE>
1998 will also be remembered for Unity Bank topping the $250 million Total
Asset milestone. We are proud to be recognized as one of the fastest growing
banks over the last 5 years. For the calendar year, assets grew to $254.6
million, an increase of 19% over December 31, 1997. Asset growth was fueled by
increased demand for commercial and consumer loans from our primary market areas
of Hunterdon, Somerset, Union, and most recently, Middlesex Counties. Net loans
grew to $164.9 million in 1998, an increase of 24%.
Deposits also reached a record high in 1998, growing to $226.9 million, an
increase of 18%. As Unity Bank's reach extends across the thriving Central
Jersey market place, we expect the expansion of the Company's deposit base to
continue.
================================================================================
ON SEPTEMBER 21, 1998, WE WATCHED PROUDLY AS THE UNITY BANCORP COMMON STOCK
COMMENCED TRADING ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "UNITY."
================================================================================
SHAREHOLDER BENEFITS
Unity's past and present performance permits the Company to implement
shareholder services that enhance your investment and improve your return.
On September 21, 1998, we watched proudly as Unity Bancorp's common stock
commenced trading on the NASDAQ National Market under the symbol "UNTY." The
shift in trading markets reflects the Company's ongoing commitment to enhance
shareholder value through increased interest and liquidity in the stock.
Confident of the Company's ability to manage future growth while
maintaining profitability, the Board of Directors authorized a three-for-two
stock split, paid June 1, 1998, to shareholders of record as of May 15, 1998.
Additionally, on November 23, 1998, the Board declared a 5% stock dividend
payable January 1999.
In recognition of Unity Bancorp's solid financial performance, the Company
continued its proud tradition of paying quarterly cash dividends to shareholders
throughout 1998. As a result of the stock split, each subsequent cash dividend
represents an effective increase of 50%.
The Dividend Reinvestment Plan ("DRIP") introduced in January 1998 has
proven to be a positive addition. The Company also launched a stock repurchase
program in 1998, repurchasing 126,578 outstanding shares of its common stock.
Also in 1998, Unity Bancorp selected First Colonial Securities Group, Inc.
as an advisor. An investment firm highly regarded for its knowledge of the
community bank sector in New Jersey, First Colonial initiated coverage of Unity
Bancorp with a "Buy Recommendation".
In December, First Colonial assisted Unity Bancorp in the successful
exercise of 93% of its outstanding warrants. This resulted in the infusion of
approximately $5.5 million in new capital to the Company, bringing total capital
to $26.3 million, a 35% increase from $19.9 million at year end 1997. The high
percentage of warrants exercised demonstrated shareholders' support of the
Company. Market capitalization today exceeds $41.3 million, a 9% increase over
last year's $37.9 million.
[GRAPHIC OF TIMELINE]
Aug 98 Enters agreement to acquire 8 premier locations in Union and Middlesex
counties
Sept 98 SBA honors Unity with Silver Award
Sept 98 Trading commences on NASDAQ under the symbol UNTY
UNITY BANCORP two
- --------------------------------------------------------------------------------
<PAGE>
WELCOME TO UNITY COUNTRY
Effective March 1, 1999, the Company's primary subsidiary changed its name
from First Community Bank to Unity Bank. This event promoted market awareness
and strengthened the Bank's identity with its parent company, thereby presenting
a unified organization to our customers and shareholders.
IT'S NOT JUST A NEW NAME! The new name serves to catapult the Bank to a
superior and unmatched level of customer service. Our success will be measured
by your satisfaction alone. Simultaneously, we have reengineered our branches as
"Retail Financial Service Centers". In practice, customers will recognize a
professional sales culture and the introduction of electronic and interactive
marketing tools.
Further tangible examples of the Bank's commitment to change are evident in
two historic events that will help to expand the Bank's market presence. In
August 1998, the Company successfully seized the opportunity to acquire eight
branches divested as part of the First Union/ CoreStates merger. The Company's
decision to double the size of Unity Bank's network of Retail Financial Service
Centers serves the dual purpose of increasing the scope and enhancing the value
of our franchise. These quality locations were profitable community bank offices
for many years and create a unique opportunity to fulfill our strategic plan.
Unity anticipates profitability within each centers' first year of operation.
================================================================================
Effective March 1, 1999, the Company's primary subsidiary changed its name from
First Community Bank to Unity Bank.
================================================================================
The expansion into the vigorous communities of Cranford, Kenilworth,
Berkeley Heights and Springfield in Union County; and East Brunswick, North
Brunswick, South Plainfield and Edison in Middlesex County is a natural
extension of our present system. These eight retail centers are scheduled to
open in stages through July of this year. We chose these communities for their
access to a significant number of small businesses, one of our target markets,
and we are convinced they will welcome Unity Bank's unique brand of banking
where customers' needs are our first priority.
Unity Bank also opened a new full-service retail center in Colonia in 1998.
The office is the Bank's first in Middlesex County. Additionally, a retail
center in Whitehouse is expected to open in March 1999. Lastly, I am pleased to
report the Bank has identified and begun negotiations on three centers located
in Bound Brook, Flemington and Highland Park. Subject to regulatory approval,
the Unity franchise will operate at least 20 financial service centers by
year-end 1999.
The second historic event occurred during the first quarter of 1999 when
the Company completed its purchase of Certified Mortgage Associates (CMA), a
mortgage banking company based in Marlboro, NJ. The acquisition enables Unity to
expand its New Jersey presence and increase penetration of the highly profitable
residential mortgage market. Building on sales of $250 million per annum, CMA
will significantly contribute to the fee income of the Company.
[GRAPHIC OF TIMELINE]
Oct 98 Unity Bancorp agrees to acquire Certified Mortgage Associates
Nov 98 Unity unveils its signature consumer account FREE Personal Plus Checking
Dec 99 Total Assets of Unity Bank hit $250 million milestone
UNITY BANCORP three
- --------------------------------------------------------------------------------
<PAGE>
PRODUCTS AND SERVICES EVOLVE
Keeping pace with the increasingly sophisticated demands of our personal
banking customers, Unity expanded its consumer product and service offerings. In
1998, the Bank introduced its signature product, FREE Personal Plus Checking.
More recently, the Bank introduced the very appealing Top Banana Money Market
Checking. Designed to compete with investment alternatives available from
non-bank competitors, the account provides unlimited check writing privileges
with a superior yield tied to The Wall Street Journal Prime Rate, less 3%.
Introduced early February 1999, the campaign netted nearly $20 million in
deposits in its first month.
We are also pleased to announce that Unity Bank and its subsidiary, Unity
Financial Services, Inc. has reenergized its joint venture with BankMark, a New
Jersey based third-party marketing firm that supports our retail investment
program. Through this program, we are able to offer a broader range of
investment services including annuities, mutual funds, stocks and bonds.
================================================================================
DESIGNED TO COMPETE WITH INVESTMENT ALTERNATIVES AVAILABLE FROM NON-BANK
COMPETITORS, THE BANK INTRODUCED THE VERY APPEALING TOP BANANA MONEY MARKET
CHECKING.
================================================================================
To meet the ever changing landscape of financial services, Unity has begun
to develop alternative banking sources. Early third quarter 1999, unitybank.com
will link Home Banking to its website. Via the internet, customers can access
their accounts for balance inquiry, transfer of funds and electronic payment of
bills.
Customer service enhancements include the opening of a Call Center, bank by
phone, and the conversion of Unity Bank's teller and platform software to
"AutoBank". The Call Center operation will provide live assistance for customer
inquiries and develop telemarketing opportunities. Bank by phone offers 24 hour
customer service at your fingertips. AutoBank will link customer's accounts in a
single portfolio. The ability to track a customer's portfolio of accounts will
assist in identifying cross-sell opportunities and result in more profitable
relationships.
With respect to commercial lending, Unity Bank was honored to receive the
Silver Award from the U.S. Small Business Administration. The SBArecognized
Unity for approving 75 loans totaling $21.5 million during the fiscal year
ending September 30, 1998, securing its position among New Jersey's premier
small business lenders. We believe small businesses are the backbone of the
communities we serve. As such, we have assembled a skilled team of lending
professionals to support the creation and growth of these businesses across New
Jersey, New York, Pennsylvania and Delaware.
During 1998, the Company extended its successful cable advertising campaign
- - "IF WE WERE YOU, WE'D BANK WITH US." - into print media. The Bank's
"orangutan" mascot keeps busy introducing new products and making appearances at
Bank events. We are pleased with the heightened name recognition generated by
this memorable marketing effort.
[GRAPHIC OF TIMELINE]
Dec 98 Unity warrants exercised to raise approximately $5.5 million in capital
Dec 98 Unity opens its 8th retail financial center in Colonia
Feb 99 Top Banana Money Market Checking appeals to investors
UNITY BANCORP four
- --------------------------------------------------------------------------------
<PAGE>
QUALITY LEADERSHIP
We believe a solid business plan is only as effective as the people who
implement it. During the past year, we have strengthened the leadership of the
Company with key appointments to the Board of Directors and management team.
George J. Albanese of Scotch Plains and Michael Golden of Boca Raton,
Florida were named Directors of Unity Bank. Mr. Albanese, a former bank
director, brings an extensive background in government and business to the Unity
Bank Board. Mr. Golden, currently Vice Chairman of Admiralty Bank of Southern
Florida, has experience as a small businessman in the financial services sector.
We welcome them and look forward to their contributions toward the ongoing
success of the Company.
The Bank also welcomed three new members to its executive management team;
Kevin J. Killian, Executive Vice President/Chief Financial Officer and Unity
Bancorp CFO; Norman Strauss, Jr., Executive Vice President/Senior Credit Officer
and Donna Soos, Executive Vice President, Retail Banking. In addition, the Bank
promoted Thomas Maresca to Executive Vice President, Director of Marketing.
A PERSONAL NOTE
Unity Bank is poised to seize the opportunities, manage the challenges and
develop the quality products needed to fulfill our role as a customer focused
provider of exceptional financial services.
At a time when national and regional banks have distanced themselves from
customers, our organization is successfully meeting the demand for personalized
service in every facet of our business. Going forward, we will continue to
develop and deliver cost-effective solutions to customers' diverse financial
needs. In doing so, we hope to further increase the profitability of this
Company and maximize the return on your investment.
The Boards of Directors of both Unity Bancorp, Inc. and Unity Bank join our
Management and Staff in thanking you for your continued confidence.
/s/ Robert Van Volkenburgh
Robert Van Volkenburgh
Chairman of the Board
Chief Executive Officer
[GRAPHIC OF TIMELINE]
Mar 99 Name change signifies Unity's entrance into a new millennium of banking
Mar 99 Hunterdon County expansion continues with new site in Whitehouse
Apr 99 Unity Bank hits a home run with Somerset Patriot affiliation
UNITY BANCORP five
- --------------------------------------------------------------------------------
<PAGE>
BOARD OF DIRECTORS
Robert Van Volkenburgh, 56, Chairman of the Board and Chief Executive
Officer of Unity Bancorp, Inc. Chairman of the Board of Unity Bank. Founding
member of the Company in 1991. Chairman of the Board and Chief Executive Officer
of Total Packaging Corp. and Best Packaging & Design Corp., a packaging firm
based in Branchburg, NJ.
David Dallas, 44, Vice Chairman and Secretary of Unity Bancorp, Inc. Vice
Chairman of Unity Bank. Founding member of the Company in 1991. Chief Executive
Officer of Dallas Group of America, a manufacturer of specialty inorganic
chemicals based in Whitehouse, NJ.
Peter P. DeTommaso, 73, Director of Unity Bancorp, Inc. and Unity Bank.
Founding member of the Company in 1991. Retired President of Homeowners Heaven,
Inc., a building and lumber supply company based in North Plainfield, NJ.
Charles S. Loring, 57, Director of Unity Bancorp, Inc. and Unity Bank.
Founding member of the Company in 1991. Owner of Charles S. Loring CPA, an
accounting firm based in Branchburg, NJ.
John F. Tremblay, 50, President of Unity Bancorp, Inc. and Unity Bank.
Joined the Company in 1997. Mr. Tremblay has over 29 years of banking
experience.
[PHOTOGRAPH]
Peter P. DeTommaso David Dallas Robert Van Volkenburgh
John F. Tremblay Charles S. Loring
UNITY BANCORP six
- --------------------------------------------------------------------------------
<PAGE>
[PHOTOGRAPH]
George Albanese
George Albanese, 53, Director of Unity Bank. Joined the Company in 1998.
President and founder of Alman Group, LLC, a full service consulting firm based
in Westfield, NJ. Former Commissioner of the Department of Human Services, State
of NJ.
Michael E. Golden, 50, Director of Unity Bank. Joined the Company in 1998.
Chairman of the Board and CEO of First Colonial Securities Group, a full service
brokerage firm located in Marlton, NJ. (not pictured)
Robert H. Dallas, II, 57, Director of Unity Bancorp, Inc. and Unity Bank.
Founding member of the Company in 1991. President of Dallas Group of America, a
manufacturer of specialty inorganic chemicals based in Whitehouse, NJ.
Allen Tucker, 72, Director of Unity Bank. Joined the Company in 1995.
President of Tucker Enterprises, a real estate development firm based in Clark,
NJ.
Samuel Stothoff, 66, Director of Unity Bank. Founding member of the Company
in 1991. President of Samuel Stothoff Company, a well drilling company based in
Flemington, NJ.
Robert J. van Volkenburgh, Jr., MD, 34, Director of Unity Bank. Joined the
Company in 1995. Physician, based in Chicago, Il.
[PHOTOGRAPH] [PHOTOGRAPH]
Robert H. Dallas Allen Tucker Samuel Stothoff Robert van Volkenburgh, Jr., MD
UNITY BANCORP seven
- --------------------------------------------------------------------------------
<PAGE>
MANAGEMENT Profiles
Executives Officers of Unity Bank
Kevin J. Killian, 43, Chief Financial Officer of Unity Bancorp and
Executive Vice President, CFO of Unity Bank. Joined Unity Bank in 1998. Mr.
Killian has over 20 years of experience, most recently as President of United
Heritage Bank in Edison, NJ. Previously, he was CFO at Independence Bancorp.
Thomas Maresca, 41, Executive Vice President, Director of Marketing. Mr.
Maresca has been with Unity Bank since its formation in 1991. Previously an
executive officer of City Federal Savings, he brings over 20 years experience in
bank operations, retail financial services and marketing.
Norman Strauss, Jr., 61, Executive Vice President, Senior Credit Officer.
Joined Unity Bank in 1998. Mr. Strauss has over 35 years lending experience most
recently with CoreStates Bank. During his career, he held the positions of Chief
Credit Policy Officer, Senior Lending Officer and Manager of Commercial Lending.
Donna M. Soos, 42, Executive Vice President, Retail Banking. Joined Unity
Bank in 1998. Mrs. Soos has over 19 years experience in retail banking in New
York and New Jersey. She recently managed an 80+ branch network in Central
Jersey for CoreStates Bank.
[PHOTOGRAPH]
Thomas Maresca Donna M. Soos Norman Strauss, Jr. Kevin J. Killian
UNITY BANCORP eight
- --------------------------------------------------------------------------------
<PAGE>
GROUP Profiles
[PHOTOGRAPH]
Edward R. Cichone Michael Downes
Regional President Senior Vice President
Commercial Banking - West Small Business Capital
Michael Bono
Regional President
Commercial Banking - East
COMMERCIAL LENDING
Anticipating the expansion of the franchise, Unity regionalized its
business development efforts to afford increased market familiarity to the
commercial lending teams. Messrs. Bono and Cichone were promoted to Regional
Presidents of the East and West Regions, respective.
The Small Business Capital Group earned the Silver Small Business
Administration Award for the first time in recognition of Unity's outstanding
achievement in generating SBA loans in New Jersey and Eastern Pennsylvania.
CONSUMER LENDING
Both the consumer and residential mortgage lending groups experienced great
growth in 1998. An aggressive team of loan officers buoyed by an exceptional
economic period of attractive rates responded with over $17 million in new
consumer loans and over $41 million of residential mortgages. A majority of
consumer loans were closed as apart of the Bank's indirect auto lending
programs. Residential mortgages, which were primarily sold on the market, were
responsible for nearly $700 thousand of non-interest and loan fee income.
FACILITY MANAGEMENT
While much attention has been deservedly focused on the former First
Union/Corestates acquisitions, Unity moved forward on two other strategically
placed branches.
In late December, Unity opened its eighth retail financial service center
in the Colonia section of Woodbridge. Located on Route 35, St Georges Avenue,
this office announced Unity's entrance into the Middlesex County market. The
branch includes safe deposit boxes, a night depository, a 24 hr drive-up ATM,
and two attended drive-ups.
Construction started November, 1998 on a new Hunterdon County branch in
Whitehouse on Route 22 West. Expected to open March 1999, this office begins to
fill the gap between the Bank's western and eastern markets along the Routes
78/22 corridor. The traditional design is
[PHOTOGRAPH]
Barry Habib John A. Podskoc
Senior Vice President Senior Vice President
CMA Manager, Consumer Sales
UNITY BANCORP nine
- --------------------------------------------------------------------------------
<PAGE>
complimented by a customer friendly lobby and offers the conveniences of safe
deposit boxes, a night depository, a 24 hr drive-up ATM, and two attended
drive-ups.
INFORMATION SYSTEMS
Having earlier completed the installation of a LAN (Local Access Network)
in the Clinton headquarters, Unity expanded on its integration of more efficient
technology by embarking on the installation of a WAN (Wide Area Network). The
linking of all branches by year end 1998 enhanced customer service capabilities
by improving internal communications and data retrieval.
MIS was also busy developing in-house servicing operations for both
residential mortgages and direct consumer lending. The former was instrumental
towards building and maintaining a portfolio of variable rate mortgages and will
undoubtably expand as a result of the CMA acquisition. Consumer loans were
converted from a third-party processor mid-year 1998.
Unity continues to move forward with its plan to install "AutoBank", an
integrated software platform supported by the Bank's data servicer, NCR. A
conversion of teller, new account and general ledger systems is expected to be
completed by the third quarter of 1999. In addition to improving internal
operations, Autobank will consolidate customer's account files, thereby
redefining "relationship" banking.
Unity recognizes that traditional means of banking are changing and is
determined to meet the need for alternative banking sources. Management has
responded by authorizing the development of a Call Center, Bank by Phone and
Internet Banking. In all cases, customers will be able to open and access their
accounts for inquiry and transaction activity at their convenience. Internet
banking will include a bill payer feature among its many interactive devices.
All projects will be operational in the third quarter.
Other Officers of Unity Bank
Senior Vice Presidents
Robert Margherito
Samuel R. Wilson, III
Vice Presidents
Sandy Capps
Benjamin Cardell, Jr.
Walter J. DeMoss
Anthony Franchini
John Kauchak
Joanne Kelly
J. Thomas Kvederas
Eugene Matics
Richard Nikovits
Patrick O'Donnell
Brian Sayago
Eileen C. Wolfe
Assistant Vice Presidents
Edward Dalton
Aleta M. Fusco
Linda M. Gervasi
Lee Ann Hunt
Enilsa Lora
Sanjay Patel
Rose M. Phelan
Suman Saxena
Kelly A. Stashko
Joanne Suarez
James Tumolo
Ann Marie Woodward
Corporate Secretary
Linda McDermott
Assistant Secretary
Leslie Robb
Assistant Treasurers
Scott Birkner
Bruce Jala
Matthew Kilpatrick, III
Carole Marshall
Robin Storrs
UNITY BANCORP ten
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
BRANCH Expansion
The Company's decision to double the size of Unity Bank's network of Retail
Financial Service Centers serves the dual purpose of increasing the scope and
enhancing the value of our franchise. The move is a natural extension of our
present system into eight vigorous communities in Union and Middlesex Counties.
The County of Union was officially established as New Jersey's 21st and last
county in 1857, with the City of Elizabeth as the county seat. As early as 1864,
the area billed itself as a commuter community, just 45 minutes from New York
City. As such, streets and building lots flourished along the Jersey Central
Railroad. With the opening of manufacturing plants such as Singer Works, the
1870s inaugurated the large-scale industry which would characterize the county
during the 20th century.
Some of Union County's history-making residents included William
Livingston, New Jersey's first governor and a signer of the Constitution of the
United States; Abraham Clark, who signed the Declaration of Independence; Elias
Boudinot, who served as President of Congress; and Jonathan Dayton, the youngest
signer of the Constitution.
Middlesex County, whose seat is in New Brunswick, was created in 1683. Primarily
an agricultural economy during the 1800s, trade became an increasingly important
business along the Raritan River. In addition, the opening of the
Delaware-Raritan Canal in 1834 was hailed as "the most important development in
county transportation" up to that time. The canal was used commercially for 100
years until forced out of business by the railroads. Middlesex was the first
county in the United States to establish a county vocational school system in
1915.
During World War II, Camp Kilmer, named for World War I soldier/poet and
New Brunswick native Joyce Kilmer, processed millions of soldiers en route to
military service overseas. Today, the site is used as an industrial park and
extension of Rutgers University.
================================================================================
<PAGE>
UNION County
[PHOTOGRAPH] Berkeley Heights
555 Springfield Road
[PHOTOGRAPH] Springfield
52 Millburn Avenue
[PHOTOGRAPH] Cranford
Temporary
104 Walnut Avenue
Permanent
Walnut & South Avenues
[PHOTOGRAPH] Kenilworth
470 Boulevard
UNITY BANCORP ten
- --------------------------------------------------------------------------------
<PAGE>
Berkeley Heights
Berkeley Heights is the present name of the land known as the Township of New
Providence from 1899 until 1952. The Littell-Lord Farmstead is a prominent
historical landmark in town, named for the first and last owners of the home.
Two houses stand on the Farmstead, one circa 1760, the other, a Victorian
cottage circa 1875. Other treasures on the property include a stone springhouse,
early kitchen and corn crib. The Historical Society of Berkeley Heights
maintains a seven-room museum in the 11-room 1760s house. Each of the museum
rooms is decorated in the period in which it was built as an addition to the
original structure.
Opened March 3, 1999, the Berkeley Heights office is approximately 2,600 sq
ft. A 24 hr drive-up ATM, two attended drive-up lanes, a night drop and safe
deposit boxes are among its many conveniences.
Springfield II
Descendants of some of Springfield's first families still reside in the
township, originally settled in the early 1700s alongside the Unamis Indians,
one of three Lenape tribes. The aftermath of The Battle of Springfield in 1780
saw only four homes still standing. During the conflict, American troops
resorted to using Watts Hymnals distributed by the "Fighting Parson" James
Caldwell, for wadding in their armaments. The battle marked the final invasion
of British forces into New Jersey. Three of those four stalwart Springfield
homes still stand as proud reminders of that pivotal event in America's pursuit
of independence.
Opened March 3, 1999, the Springfield office is a two story brick structure
of 5,100 sq ft. A 24 hr walk up ATM, two drive-up lanes, a night drop and safe
deposit boxes are among its many conveniences. Our second office in Springfield
will also target customers from Millburn.
Cranford
The roots of Cranford's present-day families go deep in the town their forebears
founded in 1871. The township's development is linked to the expansion of the
railway system which intersects Cranford. The Eagle first chugged through town
in 1839 en route to Plainfield from Elizabethport. It was followed by The
Central Railroad of New Jersey, with the Ohio Lehigh Valley Railroad arriving in
1889.
Opened March 11, 1999, the Cranford office is temporarily located at 104
Walnut Avenue, around the corner from its permanent site at the corner of Walnut
and South Avenues. The new branch is part of a 6,000 sq. ft. retail/office
complex to be built at the site of the former glass bank in the downtown
district. This property was designated by Cranford as the premier retail
location in the township. Construction is scheduled for a fourth quarter
completion.
Kenilworth
Named New Orange by a group of real estate developers who acquired it in the
late 1800s, the land was re-named Kenilworth and incorporated in 1907. The
borough was home to John Jay, the first Chief Justice of the U.S. Supreme Court
and negotiator of the famous Jay Treaty with Great Britain; to the Kensington
Riding Academy; and to Upsala College. One famous visitor to the borough was
aviator James Doolittle, who crashed his experimental plane in March 1929 while
attempting to land at Kenilworth's former airfield.
The Kenilworth office is approximately 2,500 sq ft and will offer a 24 hr
walk up ATM, three attended drive up lanes, a night drop and safe deposit boxes
among its many conveniences. This retail financial service center is scheduled
to open in May 1999.
UNITY BANCORP thirteen
- --------------------------------------------------------------------------------
<PAGE>
MIDDLESEX County
[PHOTOGRAPH] Edison
1746 Oak Tree Road
[PHOTOGRAPH] South Plainfield
2426 Plainfield Avenue
[PHOTOGRAPH] East Brunswick
Loehmann's Plaza
Route 18
[PHOTOGRAPH] North Brunswick
949 Livingston Avenue
UNITY BANCORP fourteen
- --------------------------------------------------------------------------------
<PAGE>
Edison
Originally settled in the late 1600s, Edison is rich in state, national and
world history as the home of Thomas Alva Edison's Menlo Park factory,
constructed in 1876. The "Wizard of Menlo Park" created 400 patented items from
his workshops there, including the phonograph, electric railway and incandescent
lamp. Christie Street was the first anywhere to be illuminated by incandescent
lighting and also the site of the Edison Memorial Tower, which was erected in
1937.
Scheduled to open in April 1999, the Edison office is approximately 3,750
sq ft and will offer a 24 hr drive-up ATM, night drop, safe deposit boxes among
its many conveniences. The site provides ample parking and will target customers
from North Edison, Iselin and other surrounding communities.
South Plainfield
Settled in the 1660s, South Plainfield was founded as a Borough in 1926. Its
place in history, however, was secured in 1924 when the U.S. Postal Service
launched its first night air mail service from the airport that stood on the
site of the present Middlesex Mall. Flying by compass, pilots would travel from
South Plainfield up to Buffalo, then across to Chicago. In addition, the first
air-to-ground radio communications were developed by RCA at this same airport
where big-name airlines such as Eastern and American began their service in
1928. The airport is remembered with a granite obelisk that stands in front of
the Holiday Inn across from the mall.
Scheduled to open in May 1999, the South Plainfield office is approximately
3,300 sq ft and will offer a 24 hr drive-up ATM, two drive-up lanes, night drop,
safe deposit boxes among its many conveniences.
East Brunswick
The Township of East Brunswick was formally incorporated in 1860 after a shared
history with North Brunswick and Monroe that dates back to the 16th century.
East Brunswick's economy thrived during the 18th century thanks to plentiful
natural resources like fresh fruits and vegetables, wood and clay. The
township's geographic location between the growing markets of New York City and
Philadelphia, plus easy access to rail, boat and stage transportation, added to
its desirability as a center of commerce.
Scheduled to open in May 1999, the East Brunswick office stands within
Loehmann's Plaza. It is approximately 3,000 sq ft and will offer a 24 hr
drive-up ATM, two drive-up lanes and a night drop among its many conveniences.
North Brunswick
North Brunswick was permanently settled in 1761 by Dutch and French settlers who
purchased land from the Native Americans. Route 27, which divides the township
from Somerset County, was originally a trail of the Lenape Indians. Express
coaches carrying important people and messages for the Continental Congress and
General George Washington traveled the route during the Revolutionary War. North
Brunswick's proximity to Lawrence Brook sparked the township's evolution as an
industrial center. During 1905-1910, the township earned a small spot in
Hollywood history when episodes of "The Perils of Pauline" starring Pearl White
were filmed on the trestle of the Brunswick Traction Company trolley lines which
date back to 1859.
Scheduled to open later this year, the North Brunswick office is
approximately 4,700 sq ft and will offer a 24 hr walk-up ATM, four drive-up
lanes, night drop and safe deposit boxes among its many conveniences.
UNITY BANCORP fifteen
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<PAGE>
- --------------------------------------------------------------------------------
WELCOME TO UNITY COUNTRY
The products displayed on this page are excellent examples of Unity's ongoing
commitment to expand its offerings to meet the diverse financial needs of its
customers.
Looking forward, Unity will be issuing a MAC/VISA Check Card in early
spring. In addition to 24 hour ATM access, the multi-dimensional card also
permits purchases wherever VISA is accepted.
Unity is also developing a package of non-financial benefits that may be
attached to a customer's checking account. Participants can avail themselves of
discount purchasing power, AD&D insurance, food and lodging discounts, and other
advantages. The Unity package will increase the Bank's fee income.
For business customers, the Bank is developing a new Analysis Checking
where account balances are used to offset nominal transaction charges. Added
features include the ability to fax daily transaction activity reports to the
business owner and the introduction of cash management services. The latter
allows for the nightly investment of unused balances in an interest bearing
vehicle chosen by the customer.
IF WE WERE YOU,
WE'D BANK WITH US!
[GRAPHIC]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GRAPHIC] TOP BANANA
Don't be one of the bunch . . . be the TOP BANANA. It's Money Market Checking
with a yield tied to The Wall Street Journal Prime, less 3%. Introduced in
February 99, Top Banana balances totaled nearly $20 million in three short
weeks.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FREE CHECKING
Since inception in November 1998, hundreds of customers have chosen Unity to
guide them through the jungle of big bank fees with FREE Checking. A low $99
minimum balance avoids those dangerous service charges. And don't forget to
protect yourself from overdrafts with a PAL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSUMER LOANS
Bills getting hairy? Unity can shave your monthly payments. Tap the value of
your home with a Fixed Home Equity Loan or apply for a Signature Loan based
solely on credit-worthiness. Whether it's to consolidate debt or swing that
purchase you've always wanted, the low, low rates are just plain wild.
- --------------------------------------------------------------------------------
UNITY BANCORP sixteen
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<PAGE>
PRODUCTS & Services
[GRAPHIC] CHECKING
NJCC Account
Personal Plus
NOW Account
Money Market
Top Banana
Business
Prosperity (55+)
- --------------------------------------------------------------------------------
RETAIL FINANCIAL CENTERS o 800.618.BANK
Berkeley Heights
555 Springfield Avenue
Clinton
64 Old Highway 22
Colonia
1379 St. Georges Ave.
Cranford
104 Walnut Avenue
Flemington
110 Main Street
Linden
628 North Wood Avenue
North Plainfield
450 Somerset Street
Scotch Plains
2222 South Avenue
Springfield
733 Mountain Avenue
Springfield II
52 Millburn Avenue
Union
952 Stuyvesant Avenue
Whitehouse
370 Route 22 West
24-Hour MAC ATMs available at all offices
- --------------------------------------------------------------------------------
Visit us at www.unitybank.com
[GRAPHIC] SAVINGS/TIME
Regular
Money Market
Money Market Deposit
Money Market IRA
Holiday Club Accounts
Certificates of Deposit
o Terms from 3 mos. & up
o Retirement Accounts
[GRAPHIC] OTHER SERVICES
Safe Deposit Boxes
Certified Checks
Direct Deposit
U.S. Savings Bonds
Traveler's Cheques
Money Orders
Wire Transfers
Night Depository
Notary Public
Public Funds Depository
Escrow Account Service
Tenant Security
[GRAPHIC] CONSUMER LOANS
Home Equity Loans
Auto Loans
Signature Loans
Mortgage Loans
Personal Access Line
[GRAPHIC] BUSINESS LOANS
SBA Loans*
Commercial Loans
Construction Loans
Lines of Credit
Cash Flow Manager
* Preferred Lender in
NJ, PA, NY & DE
INVESTMENT ALTERNATIVES
Fixed & Variable Rate Tax Deferred Annuities
Mutual Funds
Stocks & Bonds
(offered through Unity Financial Services, Inc., a New Jersey State
licensed insurance agency and a wholly-owned subsidiary of
Unity Bank, MDS Bankmark and MDS Securities)
[LOGO]
OFFICIAL CORPORATE SPONSOR
SOMERSET PATRIOTS
JOIN US ON BAT DAY
JULY 11TH
UNITY BANCORP seventeen
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<PAGE>
FINANCIAL PROFILE
[GRAPHIC OMITTED]
1998 ANNUAL REPORT
<PAGE>
HISTORICAL Highlights
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Total Assets
(in millions)
1995 $121.8
1996 $172.7
1997 $213.8
1998 $254.6
================================================================================
Total Assets more than doubled in three short years, breaking $250 million.
================================================================================
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Net Income
(in millions)
1995 $1.00
1996 $1.04
1997 $2.02
1998 $2.14
================================================================================
Unity records seventh consecutive year of record Net Income.
================================================================================
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[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Shareholders' Equity
(in millions)
1995 $8.5
1996 $18.0
1997 $20.0
1998 $26.3
================================================================================
$5.5 million of exercised warrants contributed to Shareholders' Equity.
================================================================================
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Basic Earnings
(per share)
1995 $0.53
1996 $0.47
1997 $0.65
1998 $0.67
================================================================================
Unity's Net Income resulted in record Basic Earnings Per Share.
================================================================================
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[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Total Loans
(in millions)
1995 $ 58.5
1996 $ 96.9
1997 $132.9
1998 $165.0
================================================================================
Consumer loans contributed $17.0 million to 1998 growth.
================================================================================
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[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Total Deposits
(in millions)
1995 $111.0
1996 $153.6
1997 $192.4
1998 $226.9
================================================================================
Deposit growth of 17.9% lead to a record high of $226.9 million in 1998.
================================================================================
- --------------------------------------------------------------------------------
UNITY BANCORP one
<PAGE>
MANAGEMENT'S 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 1998 data.
- ----------------- Unity Bancorp, Inc. (the "Parent Company") is a bank holding
Overview company incorporated in Delaware under the Bank Holding
and Company Act of 1956, as amended. Its wholly-owned
Strategy 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
changed its name to Unity Bank in 1999. The Bank provides a
full range of commercial and retail banking services through
eight branch offices located in Hunterdon, Somerset,
Middlesex 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, Unity Financial Services, Inc.
Unity Investment Services, Inc. is also a wholly-owned
subsidiary of the Bank, used to hold part of the Bank's
investment portfolio.
- ----------------- The Company's results of operations depend primarily on its
Results of net interest income, which is the difference between the
Operations 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.
- ----------------- The Company earned a record net income of $2.1 million, or
Net Income $.67 basic earnings per share, compared to net income of
$2.0 million, or $.65 basic earnings per share, earned for
the comparable period of 1997. Basic earnings per share were
calculated on 3,198,813 weighted average shares outstanding
compared to 3,114,726 weighted average shares outstanding a
year earlier, adjusted for the 3 for 2 stock split declared
April 24, 1998 and the 5% stock dividend declared November
23, 1998, payable January 1999. The changes in the
components of net income included a $1.3 million, or 15.8%,
increase in net interest income after provision for loan
losses, and a $1.3 million, or 44.8% increase in noninterest
income. These items were offset by an increase in
noninterest expenses of $2.5 million, or 31.5%, as the
Company continued its branch expansion and increased staff
required to support and deliver its new products introduced
in 1997 and 1998.
For the year ended December 31, 1997, net income
totalled $2.0 million, or $.65 basic earnings per share.
These results compare to earnings totaling $1.0 million, or
$.47 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.
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 Company's net interest income increased by $1.6 million
Net Interest (18.3%) to $10.3 million for 1998 from $8.7 million for the
Income comparable period of 1997. The increase was attributed to an
additional $25.7 million in average earning assets, a 14%
increase over the prior year`s $185.0 million, totalling
$210.7 million for 1998. Interest expense increased by $853
thousand (13.5%) to $7.1 million for 1998 from $6.3 million
for the comparable period of 1997. The increase was
attributed to an additional $26.5 million in average
interest bearing deposits, a 19% increase over prior year's
$139.3 million, totalling $165.8 million for 1998. The net
interest margin increased to 4.91% for 1998 compared to
4.72% for 1997 due to an increase in investment yields and
lower costing time deposits.
For the 1997 year, 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 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.
For the 1996 year, 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
- --------------------------------------------------------------------------------
UNITY BANCORP two
<PAGE>
was attributable to a $38.7 million, or 66%, increase in the
Company's 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.
- ----------------- The following table reflects the components of the Company's
Comparative net interest income, setting forth for the periods presented
Average herein, (1) average assets, liabilities and shareholders'
Balance equity, (2) interest income earned on interest-earning
Sheets 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 interest income/margin on average earning
assets. Rates/Yields are computed on a fully tax-equivalent
basis, assuming a federal income tax rate of 34%.
(Dollar Amounts in Thousands - Interest Amounts and Interest
Rates/Yields on a Fully Tax-Equivalent Basis)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
1998 1997 1996
Average Rate/ Average Rate/ Average Rate/
Year Ended December 31, 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) $143,940 $13,355 9.28% $115,558 $11,227 9.72% $ 79,063 $ 7,732 9.78%
Tax-exempt securities 1,615 112 6.94% 998 58 5.81% 718 41 5.71%
Taxable investment securities 49,044 3,182 6.49% 40,021 2,460 6.15% 34,678 2,089 6.02%
Interest-bearing deposits 4,140 231 5.58% 16,418 636 3.87% 12,907 501 3.88%
Federal funds sold 11,925 638 5.35% 12,101 661 5.46% 9,653 512 5.30%
----------------- ------------------- -------------------
Total interest-earning assets 210,664 17,518 8.32% 185,096 15,042 8.13% 137,019 10,875 7.94%
Noninterest-earning assets 20,525 8,153 5,948
Allowance for loan losses (1,409) (1,065) (750)
-------------------------- --------------------------- ----------------------------
Total average assets $229,780 $192,184 $142,217
========================== =========================== ============================
Liabilities and
Shareholders' Equity
Interest-bearing liabilities:
NOW deposits $ 36,162 $ 591 1.63% $ 15,945 $ 351 2.20% $ 13,664 $ 309 2.26%
Savings deposits 13,811 312 2.26% 28,534 892 3.13% 23,401 656 2.80%
Money market deposits 18,557 928 5.00% 9,163 293 3.20% 6,883 211 3.07%
Time deposits 96,969 5,311 5.48% 85,128 4,732 5.56% 63,353 3,485 5.50%
Other debt 319 23 7.21% 568 44 7.75% 1,041 94 9.03%
----------------- ------------------- -------------------
Total interest-bearing liabilities 165,818 7,165 4.32% 139,338 6,312 4.53% 108,342 4,755 4.39%
Noninterest-bearing liabilities 1,692 822 928
Demand deposits 41,250 33,330 21,797
Shareholders' equity 21,020 18,694 11,150
-------------------------- --------------------------- ----------------------------
Total average liabilities
and shareholders' equity $229,780 $192,184 $142,217
================= =================== ===================
Net interest income $10,353 $ 8,730 $ 6,120
Net interest rate spread 3.99% 3.60% 3.55%
Net interest income/margin
on average earning assets 4.91% 4.72% 4.47%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP three
<PAGE>
- ----------------- The following table presents by category the major factors
Volume/ that contributed to the changes in net interest income for
Rate each of the years ended December 31, 1998, 1997 and 1996, as
Analysis of compared to each respective previous period. Amounts have
Changes in been computed on a fully tax-equivalent basis, assuming a
Net Interest Federal income tax rate of 34%.
Income
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Year Ended December 31 Year Ended December 31,
(Dollar Amounts in Thousands on a 1998 versus 1997 Increase 1997 versus 1996 Increase
Fully Tax-Equivalent Basis) (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) $ 2,757 $ (629) $ 2,128 $ 3,569 $ (74) $ 3,495
Tax-exempt securities 36 18 54 16 1 17
Taxable investment securities 555 167 722 322 49 371
Interest bearing deposits (476) 71 (405) 136 (1) 135
Federal funds sold (10) (13) (23) 130 19 149
-------------------------------------- --------------------------------------
Total interest income $ 2,863 $ (387) $ 2,476 $ 4,173 $ (6) $ 4,167
Interest-Bearing Liabilities
Interest expense:
NOW deposits $ 445 $ (205) $ 1,240 $ 52 $ (10) $ (42)
Savings deposits (460) (120) (580) 144 92 236
Money market deposits 300 335 635 70 12 82
Time deposits 658 (79) 579 1,198 49 1,247
Other debt (19) (2) (21) (43) (7) (50)
-------------------------------------- --------------------------------------
Total interest expense 924 (71) 853 1,420 137 1,557
-------------------------------------- --------------------------------------
Net interest income $ 1,939 $ (315) $ 1,623 $ 2,753 $ (143) $ 2,610
====================================== ======================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- The Company's provision for loan losses totaled $804
Provision thousand for 1998, compared to $497 thousand for the same
for Loan period ended 1997. The increase in the provision is
Losses primarily the result of the Company's growth in the loan
portfolio. For 1998 the reserve increased to 1.12% compared
to 1.01% as of 1997. The allowance is a result of
Management's analysis of the estimated inherent losses in
the Bank's loan portfolio. Management determines provisions
as necessary to maintain the allowance for loan losses at
appropriate levels as measured against total loans and/or
past due accounts and Management's analysis of current
economic conditions. 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 Please
refer to the subsequent Allowance for Loan Losses section
for additional information.
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.
- ----------------- Service charges on deposits increased $144 thousand to $901
Non thousand for 1998, a 19.0% increase over $757 thousand for
Interest 1997. The majority of the increase is due to the growth in
Income the demand accounts which includes higher volumes of
transactions processed, improvement in return check fee
collection ratios, the repricing of transaction fees in
March 1998 and additional fee income generated by ATM
services charges.
The Company's gain on sale of loans increased by $699
thousand (41.2%) to $2.4 million for 1998 from $1.7 million
for 1997. This increase in the gain on sale of loans
reflects the Company's increased participation in the Small
Business Administration's ("SBA") guaranteed loan program as
the Company has been designated a "preferred lender" for the
states of New Jersey, Delaware, New York and Pennsylvania.
Under the SBA program, the SBA guarantees between 75% to 90%
of the principal of a qualifying loan. The Company then
sells the guaranteed portion of the loan into the secondary
market. The Company sold $20.6 million in guaranteed SBA
loans in 1998 compared to $13.7 million sold in 1997.
Included in the
- --------------------------------------------------------------------------------
UNITY BANCORP four
<PAGE>
1998 sales were $3.8 million of unguaranteed SBA loans,
which produced $60 thousand of income after expenses. There
were on such sales in 1997.
Proceeds from sales of securities amounted to $26.2
million for 1998. Net gains on sales of securities were $255
thousand for 1998. There were no sales in 1997. For 1996,
proceeds were $1.2 million with losses of $32 thousand.
Other income which consists primarily of SBA servicing
fee income, increased $266 thousand (45.0%), to $857
thousand for 1998 due to a larger portfolio of loans
serviced.
For 1997, 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 $635 thousand, or 26%,
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. 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 $1.5 million at the year ended
December 31, 1996. SBA loan sales for 1997 totaled $13.7
million compared to $14.9 million in 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.
- ----------------- The Company's total other expenses increased by $2.5 million
Non (31.5%) to $10.5 million for 1998 from $8.0 million for
Interest 1997. Salaries and employee benefits increased $815 thousand
Expense due to additional staffing required to support the increased
level of activity on new products developed in 1997,
staffing required for the opening of the Linden and Colonia
branches in April and December 1998, along with increases in
commissions paid associated with the increased volume in
loan sales. Other operating expenses which includes items
such as data processing expenses, advertising, professional
services, office expenses and other miscellaneous expenses
increased $1.7 million, largely due to the increasing
customer base, branch expansion, product development and
marketing.
For the year ended December 31, 1997, other expenses
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.
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.
- ----------------- The income tax provision, which includes both federal and
Income Tax state taxes, for the years ended December 31, 1998, 1997 and
Expense 1996 was $1.3 million, $1.3 million, and $644 thousand
representing a 38.0%, 38.5% and 38.1% effective tax rate in
each year.
- ----------------- The Company's total assets increased $41 million (19.1%) to
Financial a record $255 million at December 31, 1998, from 1997's
Condition total assets of $214 million. Net loans totaled $165
million, a $32 million increase (24%) compared to $133
million at December 31, 1997. The Company's securities
portfolio, including securities held to maturity and
available for sale, decreased to $40.9 million, a 1%
decrease at December 31, 1998, compared to $41.3 million at
December 31, 1997. Shareholders' Equity totaled $26.3
million compared to $20.0 million at December 31, 1997. The
growth in the Company's total assets, securities and
deposits was a result of the Company's branch expansion,
continued penetration of its existing markets, emphasis on
customer service, competitive rate structures, selective
marketing, growing product line and the exercising of $5.5
million of warrants.
These increases in total assets were funded by
increases in the Company's total deposits which increased to
$226.8 million an increase of $34.4 million (17.9%) over
total deposits of $192.4 million at December 31, 1997. Time
deposits increased by $11.6 million (35.8%), savings
deposits increased by $3.1 million (10.0%), interest bearing
demand deposits increased by $10.7 million (35.8%), and
noninterest bearing demand increased by 9.0 million (22.0%).
Promotional activities contributed to the increase in time
deposits as well as the Company's continued penetration of
existing markets.
- --------------------------------------------------------------------------------
UNITY BANCORP five
<PAGE>
Deposits were obtained primarily from the market areas which
the Company serves. The Company did not have any brokered
deposits and, as such, neither solicited nor offered
premiums for such deposits.
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.
- ----------------- For 1998, the Company's net loans were $165.0 million, an
Loan increase of $32.1 million (24.0%) over total loans at
Portfolio December 31, 1997. 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.
At December 31, 1997, the Company's net loans were
$132.9 million, an increase of $36.0 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.
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 for the past five
years:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
(Dollars in Thousands) Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 41,502 24.9% $ 20,347 15.2% $ 17,965 18.4% $ 9,125 15.4% $ 6,952 19.1%
Real estate:
Non-residential properties 59,845 35.9% 66,526 49.6% 41,674 42.6% 23,612 40.0% 15,018 41.2%
Residential properties 26,565 15.9% 28,891 21.5% 23,044 23.6% 16,034 27.1% 9,514 26.1%
Construction 16,218 9.7% 13,014 9.7% 10,223 10.4% 5,705 9.7% 1,293 3.6%
Lease financing -- 0.0% -- 0.0% 17 0.0% 83 0.1% 335 .9%
Consumer 22,440 13.5% 5,419 4.0% 4,924 5.0% 4,549 7.7% 3,309 9.1%
----------------- ----------------- ----------------- ----------------- -----------------
Total loans $166,570 100.0% $134,197 100.0% $ 97,847 100.0% $ 59,108 100.0% $ 36,421 100.0%
================= ================= ================= ================= =================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP six
<PAGE>
The following table sets forth commercial & industrial
and real estate-construction loans as of December 31, 1998
and 1997 in terms of loan maturities:
-----------------------------------------------------
Secured by Residential Real Estate
(Dollars in Thousands) 1998 1997 Change %
- --------------------------------------------------------------------------------
Within 1 Year $ 14,875 $ 4,371 $ 504 11.53%
1 to 5 Years 2,241 1,803 438 24.29%
After 5 Years 6,059 -- 6,059 --
-------- -------- -------- ------
Total $ 13,175 $ 6,174 $ 7,001 113.39%
======== ======== ======== ======
- --------------------------------------------------------------------------------
Commercial, Industrial & all Other Loans
(Dollars in Thousands) 1998 1997 Change %
- --------------------------------------------------------------------------------
Within 1 Year $183,748 $ 87,256 $ (3,508) -4.02%
1 to 5 Years 59,030 37,467 21,563 57.55%
After 5 Years 10,617 3,300 7,317 19.82%
-------- -------- -------- ------
Total $153,395 $128,023 $ 25,372 19.82%
======== ======== ======== =====
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total $166,570 $134,197 $ 32,373 24.12%
======== ======== ======== =====
- --------------------------------------------------------------------------------
- ----------------- The Company's principal earning assets are its loans.
Asset Inherent in the lending function is the possibility a
Quality 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, still
accruing interest. Management has evaluated these loans and
determined that they are both well collateralized and in the
process of collection. No losses are anticipated upon
ultimate collection of these loans. 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, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $2,297 $943 $669 $78 $48
Nonaccrual loans to total loans 1.38% 0.70% 0.68% 0.13% 0.13%
Non-performing assets to total assets 1.53% 0.70% 0.50% 0.30% 0.51%
Allowance for loan losses as a
percentage of non-performing loans (a) 46.83% 88.38% 103.02% 165.29% 93.87%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans greater than 90 days past due that are still accruing
interest.
The Company's nonaccrual loans increased by $1.4
million from year end 1997 to $2.3 million at December 31,
1998. The increase in nonaccrual loans is substantially the
result of Management's decision to place two real estate
secured loans on nonaccrual status due to delinquent
payments. This increased the ratio on nonaccrual to total
loans to 1.38% at December 31, 1998 from .70% at December
31, 1997. In January 1999, a $617 thousand nonaccrual loan
was replaced by
- --------------------------------------------------------------------------------
UNITY BANCORP seven
<PAGE>
a new loan by new borrowers. Exclusion of this nonaccrual
loan would have resulted in a nonaccrual to total loan ratio
of 1.01% and a nonaccrual total of $1.7 million. The
interest income that would have been recorded had these
nonaccrual loans performed under the original contract terms
was $227 thousand for 1998, $92 thousand for 1997, and $61
thousand for 1996. At December 31, 1998, $1.6 million in
loans were contractually past due greater than 90 days but
still accruing interest, compared to $552 thousand for the
year ending December 31, 1997. The increase in past due
greater than 90 days, along with the nonaccrual loans
increased the 1998 non-performing asset to total asset ratio
to 1.53% from .70% at December 31, 1997. Exclusion of the
aforementioned $617 thousand nonaccrual loan would have
resulted in a ratio of 1.29%.
For 1997, the Company's nonaccrual loans increased by
$274 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.
At the dates indicated in the above table, there were
no concentration of loans to any borrowers or group of
borrowers 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 $0.0 at December 31, 1998, as compared to $1.1
million at December 31, 1997.
In the fourth quarter, the Bank discovered it had been
the victim of an illegal check kiting scheme to a single
customer. Although the Bank is still investigating this
occurrence, it appears that the total amount of the
overdraft may range from $680,000 to $1,400,000. The Bank is
pursuing all legal actions available to recover this
overdraft, and it appears that assets may be available to
satisfy the Bank's claims, at least in part. At this time,
the Bank has established a $300,000 reserve in November in
connection with this situation. This results in the Bank's
loss exposure of between $380,000 to $1,100,000 before
consideration of any asset which may be realized to payoff
the Bank. Management continues to investigate this matter,
and take all steps possible to safeguard the Bank's
interests. This is a non-performing asset.
- ----------------- The Company attempts to maintain an allowance for loan
Allowance losses at a sufficient level to provide for potential losses
for Loan in the loan portfolio. Loan losses are charged directly to
Losses 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 an independent loan review function 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 $1,8
million, $1.3 million, $886 thousand, $562 thousand and $380
thousand at December 31, 1998, 1997, 1996, 1995 and 1994,
respectively. The increases in the allowance are due to the
continued increase in the Company's total loan portfolio and
specific reserves for nonperforming loans.
- --------------------------------------------------------------------------------
UNITY BANCORP eight
<PAGE>
- ----------------- The following is a summary of the reconciliation of the
Analysis of allowance for loan losses for the past five years:
the
Allowance
for Loan
Losses
<TABLE>
<CAPTION>
(Dollars in Thousands)
-----------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $1,322 $ 886 $562 $380 $302
Charge-offs
Real estate 254 55 -- 49 45
Consumer 15 3 6 1 10
Commercial and industrial 60 10 44 -- 28
Lease financing -- -- 43 -- --
------ ------ ----- ----- -----
Total charge-offs 329 68 93 50 83
------ ------ ----- ----- -----
Recoveries
Real estate 23 6 -- 3 --
Consumer 5 -- -- -- --
------ ------ ----- ----- -----
Total recoveries 28 6 -- 3 --
------ ------ ----- ----- -----
Total net charge offs 301 62 92 47 83
------ ------ ----- ----- -----
Provision charged to expense 804 498 416 229 161
------ ------ ----- ----- -----
Balance of allowance at end of year $1,825 $1,322 $886 $562 $380
------ ------ ----- ----- -----
Ratio of net charge-offs to average loans outstanding 0.21% 0.05% 0.12% 0.11% 0.26%
------ ------ ----- ----- -----
Ratio of allowance to total loans,
net of loans held for sale 1.12% 1.01% 0.93% 1.01% 1.07%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- The following table sets forth for each of the Company's
Allocation major lending areas, the amount and percentage of the
of the allowance for loan losses attributable to such category and
Allowance the percentage of total loans represented by such category,
for Loan as of the periods indicated:
Losses
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
% of % of % of % of % of
(Dollars in Thousands) 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 $ 741 24.9% $ 267 15.2% $152 18.4% $596 15.4% $362 19.1%
Real estate:
Non-residential properties 663 35.9% 555 49.6% 336 42.6% 187 39.9% 166 41.2%
Residential properties 96 15.9% 340 21.5% 247 23.5% 92 27.2% 123 26.2%
Construction 160 9.7% 107 9.7% 82 10.5% 121 9.7% 11 3.5%
Lease financing 0 0.0% 0 0.0% 4 0.0% 1 0.1% 3 0.9%
Consumer 165 13.5% 53 4.0% 65 5.0% 65 7.7% 15 9.1%
----------------- ----------------- -------------- --------------- ---------------
Total $1,825 100.0% $1,322 100.0% $886 100.0% $562 100.0% $380 100.0%
================= ================= ============== =============== ===============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- The Company maintains an investment security portfolio for
Investment asset-liability risk control purposes and to provide an
Securities additional source of funds. The portfolio is comprised of
U.S. Treasury securities, obligations of U.S. Government and
government sponsored agencies, selected state and municipal
obligations, corporate securities and equity securities.
Accounting for these securities is in accordance with
applicable Statement of Financial Accounting Standards.
There are no securities used for trading purposes.
Management determines the appropriate security
classification of Available for Sale or Held to Maturity at
the time of purchase.
During 1998, the Company adopted Statement of Financial
Accounting Standards No. 133 " Accounting for Derivative
Instruments and Hedging Activities" which was issued June
1998. The statement establishes accounting and reporting
standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an
asset or liability measured at it's fair value. The
Statement requires the changes in the derivative's fair
value be recognized currently in earnings unless specific
hedge accounting criteria is met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income
statement, and requires that a company must formally
document, designate and assess the effectiveness of
transactions that receive hedge accounting. The adoption of
this new standard did not have a material impact on the
- --------------------------------------------------------------------------------
UNITY BANCORP nine
<PAGE>
Company's financial condition or results of operations. In
accordance with the new standard, the Company re-classified
approximately $10.9 million of securities classified as
Held-to-Maturity to Available-for-Sale on July 1, 1998. As
of that date, the unrealized gain on these securities of
$114,264 was recorded as a cumulative effect of change in
accounting principle, net of related income tax provision of
$43,420 and was included in the statement of comprehensive
income for 1998.
At December 31, 1998, $19.4 million of investment
securities were classified as held to maturity and $21.5
million were classified as available for sale. At December
31, 1998, no investment securities were classified as
trading securities. Total investment securities were $40.9
million, relatively unchanged from 1997, which was $41.3
million. The portfolio remained unchanged due to economic
conditions of lower interest rates and management's decision
to grow the loan portfolio.
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 for the last three years is follows:
- -----------------
Securities
<TABLE>
<CAPTION>
---------------------------------------------------------------------
December 31, 1998 1997 1996
Amortized Fair Amortized Fair Amortized Fair
(Dollars in Thousands) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 243 $ 244 $ 1,995 $ 2,008 $ 351 $ 352
U.S. Govt. agencies 4,309 4,339 -- -- -- --
U.S. Govt. sponsored agencies and corporations 14,972 14,834 12,988 12,969 7,460 7,433
State and municipal 931 945 1,064 1,072 874 874
Other 1,242 1,128 1,355 1,360 2,489 2,494
------------------- ------------------- -------------------
Total $21,697 $21,490 $17,402 $17,409 $11,174 $11,153
------------------- ------------------- -------------------
Held to maturity
U.S. Govt. agencies $ 3,757 $ 3,402 $ 6,452 $ 6,418 $ 7,208 $ 7,190
U.S. Govt. sponsored agencies and corporations 15,182 15,188 9,014 8,563 10,011 9,461
Other 500 499 8,433 8,518 8,781 8,596
------------------- ------------------- -------------------
Total $19,439 $19,089 $23,899 $23,499 $26,000 $25,247
=================== =================== ===================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
Contractual
Maturity
Distribution
of
Securities
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
December 31, 1998 1997 1996
Amortized Fair Avg. Amortized Fair Avg. Amortized Fair Avg.
(Dollars in Thousands) Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury
Under 1 year $ 243 $ 244 5.01% $ 997 $ 999 6.24% $ 351 $ 352 5.93%
1-5 years -- -- -- 998 1,009 6.51% -- -- --
U.S. Government agencies
Under 1 year 4,309 4,339 6.11% -- -- -- -- -- --
U.S. Govt. sponsored
agencies and corporations
Under 1 year 5,105 5,008 5.28% 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 9,867 9,826 6.11% 3,000 3,000 6.82% -- -- --
State and municipal
Under 1 year 273 274 4.04% 201 201 3.70% 874 874 3.92%
1-5 years 658 671 4.35% 863 871 4.25% -- -- --
Other
Under 1 year 612 498 0.00% -- -- -- 2,024 2,029 5.92%
1-5 years 630 630 4.00% 1,355 1,360 0.00% 465 465 6.69%
--------------------------- --------------------------- ---------------------------
Total $21,697 $21,490 5.62% $17,402 $17,409 6.04% $11,174 $11,153 5.78%
=========================== =========================== ===========================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP ten
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
December 31, 1998 1997 1996
Amortized Fair Avg. Amortized Fair Avg. Amortized Fair Avg.
(Dollars in Thousands) Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
U.S. Government agencies
Under 1 year $ 2,750 $ 2,395 2.97% -- -- -- -- -- --
5-10 years 1,007 1,007 4.74% -- -- -- -- -- --
Over 10 years -- -- -- $ 6,452 $ 6,418 6.42% $ 7,207 $ 7,190 6.17%
U.S. Govt. sponsored
agencies and corporations
Under 1 year 593 594 6.00% 1,247 1,247 4.66% -- -- --
1-5 years -- -- -- 3,501 3,500 6.32% 5,242 5,241 6.02%
5-10 years 543 544 5.98% 3,017 2,896 5.37% 3,520 3,361 6.03%
Over 10 years 14,046 14,050 6.46% 1,249 920 2.83% 1,250 859 3.57%
Other
1-5 years 500 499 4.30% 672 674 6.00% 670 670 6.20%
Over 10 years -- -- -- 7,761 7,844 6.20% 8,111 7,926 6.11%
--------------------------- --------------------------- ---------------------------
Total $19,439 $19,089 5.80% $23,899 $23,499 5.91% $26,000 $25,247 5.98%
=========================== =========================== ===========================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- Deposits are the Company's primary source of funds. The
Deposits Company experienced growth in deposit balances of $34.4
million, or 18%, to $227 million at December 31, 1998,
compared to year end 1997. Deposits increased by $38.9
million, or 25%, to $192.4 million at December 31, 1997 from
$154.0 million at December 31, 1996. 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. From December 31, 1996 to December
31, 1998, the Company's level of noninterest-bearing demand
deposits increased from $31.4 million, or 20% of total
deposits to $50.1 million, or 22% of total deposits. In
addition, the Company's time deposits increased from $75.9
million at December 31, 1996 to $101.8 million at December
31, 1998, an increase of $25.9 million, or 34%. The Company
has no foreign deposits, nor are there any material
concentrations of deposits. Between 1996 and 1998, interest
bearing demand deposits increased from $21.2 million to
$40.6 million, a $19.3 million (90.7%) increase. Between
1996 and 1998, Savings and Money Market deposits increased
from $25.0 million to $34.3 million, a $9.3 million (37%)
increase.
The following tables set forth the average and period
end amounts of various types of deposits for each of the
periods indicated:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
(Dollars in Thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Balance:
NOW deposits $ 36,162 17.5% $ 15,945 9.3% $ 13,664 10.6%
Savings deposits 13,811 6.7% 28,534 16.6% 23,401 18.1%
Money market deposits 18,557 9.0% 9,163 5.3% 6,883 5.3%
Time deposits 96,969 46.9% 85,128 49.5% 63,353 49.1%
Demand deposits 41,250 20.0% 33,330 19.4% 21,797 16.9%
---------------------- --------------------- ----------------------
Total $206,749 100.0% $172,100 100.0% $129,098 100.0%
====================== ===================== ======================
Ending Balance:
NOW deposits $ 40,585 17.9% $ 29,897 15.5% $ 21,282 13.9%
Savings deposits 15,098 6.7% 11,938 6.2% 10,273 6.7%
Money market deposits 19,222 8.5% 19,261 10.0% 14,704 9.6%
Time deposits 101,835 44.9% 90,224 46.9% 75,911 49.4%
Demand deposits 50,120 22.1% 41,094 21.4% 31,385 20.4%
---------------------- --------------------- ----------------------
Total $226,860 100.0% $192,414 100.0% $153,555 100.0%
====================== ===================== ======================
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP eleven
<PAGE>
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 for the past three
years.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Over 3 months Over 1 year
3 months through through Over
(Dollars in Thousands) or less 1 year 3 years 3 years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
$100,000 or more $18,748 $7,685 $1,731 -- $28,164
Less than $100,000 24,784 36,665 11,020 1,202 73,671
Year Ended December 31, 1997
$100,000 or more 11,234 7,812 1,881 -- 20,927
Less than $100,000 13,800 37,440 16,886 1,171 69,297
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- The principal objectives of the Company's asset and
Interest liability management function are to establish prudent risk
Rate management guidelines, evaluate and control the level of
Sensitivity interest rate risk in balance sheet accounts; determine the
Analysis level of appropriate risk given the Company's business
focus, operating environment, capital, and liquidity
requirements; and actively manage risk within the Board
approved guidelines. The Company seeks to reduce the
vulnerability of its operations to changes in interest
rates, and actions in this regard are taken under the
guidance of the Asset/Liability Management Committee
("ALCO") of the Board of Directors. The ALCO reviews the
Company's maturities and repricing of loans, investments,
deposits and borrowings, cash flow needs, current market
conditions, and interest rate levels.
The Company uses various techniques to evaluate risk
levels on both a short and long-term basis. One of the
monitoring tools is the interest rate sensitivity table or
"gap". A gap ratio as a percentage of assets is calculated
to determine the maturity and repricing mismatch between
interest-sensitive assets and interest-sensitive
liabilities. A gap is considered positive when the amount of
interest-sensitive assets exceeds the amount of
interest-sensitive liabilities in a designated time period.
A positive gap should result in higher net interest income
with rising interest rates, as the amount of assets
repricing exceeds the amount of liabilities. Conversely, a
gap is considered negative when the amount of
interest-sensitive liabilities exceeds interest-sensitive
assets, and lower rates should result in higher net interest
income.
The following table sets forth the gap ratio at
December 31, 1998. Assumptions regarding the repricing
characteristics of certain assets and liabilities are
critical in determining the projected level of rate
sensitivity. Certain savings and interest checking accounts
are less sensitive to market interest rate changes than
other interest-bearing sources of funds. Core deposits such
as NOW, Savings, and Money Market deposits are allocated
based on their expected repricing in relation to changes in
market interest rates. Historically, these rates are
administered and have lagged market changes in both up and
down environments. As an example, the rate on NOW accounts
is expected to increase just 1/3 of a 1% change Federal
Funds rate. Accordingly, 1/3 or 33% of the balances are
represented on the table as repricing within six months.
Repricing of mortgage-related investments are shown by
contractual amortization and estimated prepayments based the
most recent 3-month constant prepayment rate (CPR). Callable
agency securities are shown based upon their option-adjusted
spread modified duration date ("OAS"), rather than the next
call date or maturity date. The OAS date considers the
coupon on the security, the time to next call date, the
maturity date, market volatility, and current rate levels.
Fixed rate loans are allocated based on expected
amortization.
Other models are also used in conjunction with the
static gap table, which is not able to capture the risk to
changing spread relationships over time, the effects of
projected growth in the balance sheet, or dynamic decisions
such as the modification of investment maturities as a rate
environment unfolds. For these reasons, a simulation model
is used, where numerous interest rate scenarios and balance
sheets are combined to produce a range of potential income
results. Net interest income is managed within guideline
ranges for interest rates rising or falling by 300 basis
points. Results outside of guidelines require action by the
ALCO to correct the imbalance. Simulations are typically
created over a 12-24 month time horizon. The Company's
variance in net interest income for the next 12 months is
within the ALCO guideline of +/-7% at December 31, 1998.
Finally, to measure the impacts of longer-term asset
and liability mismatches beyond two years, the Company
utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models. The modified duration of
equity measures the potential price risk of equity to
changes in interest rates. A longer modified duration of
equity indicates a
- --------------------------------------------------------------------------------
UNITY BANCORP twelve
<PAGE>
greater degree of risk to rising interest rates. Because of
balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability
cash flows, with rates ranging up or down 200 basis points.
The economic value of equity is likely to be different as
interest rates change. Like the simulation model, results
falling outside prescribed ranges require action by the
ALCO. The Company's variance in the economic value of equity
as a percentage of assets with rate shocks of 200 basis
points is within the +/-3% guideline.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
More than More than More than More than
Six months one year two years five years ten years
Under six through through through through and
(Dollars in Thousands) months one year two years five years ten years not repricing Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash & due from banks -- -- -- -- -- $ 5,768 $ 5,768
Federal funds sold $ 17,100 -- -- -- -- -- 17,100
Interest bearing deposits -- -- -- -- $ 9,620 -- 9,620
Investment securities 14,205 $ 2,511 $ 3,971 $ 9,179 6,533 4,530 40,929
Loans, net of unearned income 88,431 9,204 12,823 47,291 7,187 1,857 166,793
Other assets -- -- -- -- -- 14,402 14,402
Total assets $119,736 $ 11,715 $ 16,794 $ 56,470 $ 23,340 $ 26,557 $254,612
Liabilities and
Shareholders' Equity
Non interest demand -- -- -- -- -- $ 50,120 $ 50,120
NOW deposits $ 3,829 -- -- $ 5,453 $ 2,320 -- 11,602
Savings deposits 16,659 -- $ 2,915 11,794 2,951 -- 34,319
Money market deposits 14,492 -- 7,246 7,246 -- -- 28,984
Time deposits 63,333 $ 24,550 10,118 3,691 143 -- 101,835
Other debt -- -- -- -- -- 304 304
Other liabilities -- -- -- -- -- 1,102 1,102
Shareholders' Equity -- -- -- -- -- 26,346 26,346
Total liabilities and
shareholders' equity $ 98,313 $ 24,550 $ 20,279 $ 28,184 $ 5,415 $ 77,871 $254,612
Gap $ 21,423 $(12,835) $ (3,485) $ 28,286 $ 17,926 $(51,315)
Cumulative gap $ 21,423 $ 8,588 $ 5,103 $ 33,389 $ 51,315 --
Cumulative gap to total assets 8.4% 3.4% 2.0% 13.1% 20.2% 0.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------- As of December 31, 1998, cash and cash equivalents decreased
Operating, $129 thousand to $32.5 million. Net cash provided/(used in)
Investing by operating activities totaled $(7,901) million, compared
and to $876.0 thousand in 1997. This was primarily due to the $1
Financing million of costs associated with acquiring nine new branch
Cash locations and $6 million for the initial funding of company
owned life insurance policies issued to certain Board
members and executive management. Net cash used in investing
activities decreased $9.7 million to $30.7 million in 1998,
compared to $40.4 million during the prior year. This was
primarily from a decrease in loans of $4.1 million and a net
decrease in securities of $4.1 million. Net cash provided by
financing activities totaled $38.4 million, compared to
$38.7 million provided a year earlier, primarily attributed
to a $4.4 million deposit decrease and a net $4.1 million
stock increase.
For 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.
- --------------------------------------------------------------------------------
UNITY BANCORP thirteen
<PAGE>
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.
- ----------------- The Company's liquidity is a measure of its ability to fund
Liquidity 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 $227 million,
$192 million, $153 million and $111 million as of December
31, 1998, 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.
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,
- ----------------- A significant measure of the strength of a financial
Capital 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 for the last three
years, as well as the required minimum regulatory capital
ratios:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Minimum Well
Regulatory Capitalized
1998 1997 1996 Requirements Provisions
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk-based Capital:
Total capital ratio 14.85% 14.28% 17.24% 8.00% 10.00%
Tier I capital ratio 13.89% 13.42% 16.43% 4.00% 6.00%
Leverage ratio 10.87% 9.51% 11.09% 4.00% 5.00%
Risk Weighted Assets $190,387 $148,675 $109,297
Average Quarterly Assets $243,294 $209,783 $161,942
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The 1998 ratios improved 4.0%, 3.5% and 14.3% respectively,
between 1998 and 1997. This improvement was the result of
the increase in capital through the warrant conversion. The
decrease between 1997 and 1996 of 17.1%, 18.3% and 14.2% was
the result of loan growth. The loans, as a percent of
assets, rose 6% as cash and securities to assets decreased
6%. Loans generally have a higher risk factor than cash and
securities.
- --------------------------------------------------------------------------------
UNITY BANCORP fourteen
<PAGE>
- ----------------- The financial statements of the Company and notes thereto,
Impact of presented elsewhere herein, have been prepared in accordance
Inflation with generally accepted accounting principles, which require
and the measurement of financial position and operating results
Changing in terms of historical dollars without considering the
Prices 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.
- ----------------- The Company Adopted Statement of Financial Accounting
Recently Standards No. 130 "Reporting Comprehensive Income"
Issued ("Statement 130") effective January 1, 1998. Statement 130
Accounting establishes standards for reporting and display of
Pronouncements comprehensive income and its components in a full set of
general purpose financial statements. Under Statement 130,
comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes
items previously recorded directly in equity, such as
unrealized gains or losses on securities available-for-sale.
Comparative financial statements provided for earlier
periods are reclassified to reflect application of the
provisions of the statement.
Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131") was issued September, 1997.
Statement 131 establishes standards for the way public
business enterprises are to report information about
operating segments in annual financial statements and
requires those enterprises to report selected financial
information about operating segments in interim financial
reports to shareholders. Statement 131 is effective for
financial statements for periods beginning after December
15, 1997. The Company has determined that it has no separate
reportable segments.
Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Post
retirement Benefits" ("Statement 132") was issued February,
1998. Statement 132 revises employers' disclosures about
pension and other post retirement benefit plans. The
Statement becomes effective for fiscal years beginning after
December 15, 1997. Earlier application is permitted. The
Company has determined it has no effect on its current
disclosures.
Statement of Financial Accounting Standards No. 133 "
Accounting for Derivative Instruments and Hedging
Activities" was issued June 1998. The statement establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at
it's fair value. The Statement requires the changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria is met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in
the income statement, and requires that a company must
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning
after June 15, 1999,. A company may also implement the
Statements as of the beginning of any fiscal quarter after
issuance (that is , fiscal quarters beginning June 16, 1998
and thereafter). Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a)
derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 3, 1997
(and, at the company's election, before January 1, 1998).
The transition provisions of Statement 133 provide that
at the date of initial application, a bank holding company
may transfer any debt security categorized as
held-to-maturity into the available-for-sale category or the
trading category without calling into question the intent to
hold other debt securities to maturity in the future. The
transition provisions further require that the unrealized
gain (losses) on a transferred held-to-maturity debt
security be reported as part of the cumulative-effect-type
adjustment of net income if transferred to the trading
category or as part of the adjustment to the change in net
unrealized holding gains (losses) on available for sale
securities if transferred to the available-for-sale
category. The adoption of this new standard did not have a
material impact on the Company's financial condition or
results of operations. In accordance with the new standard,
the Company re-classified approximately $10.9 million of
securities classified as Held-to-Maturity to
Available-for-Sale on July 1, 1998. As of that date, the
unrealized gain on these securities of $114,264 was recorded
as a cumulative effect of change in accounting principle,
net of related income tax provision of $43,420 and was
included in the statement of comprehensive income.
- ----------------- The Company continues its commitment to be Y2K compliant.
Readiness Currently, the Company remains on schedule with its Year
for Year 2000 testing, in accordance to the FFIEC schedule, having
2000 completed testing with its main data servicer and item
processor with success. The Company assessed its risks on
it's lending portfolio and continues to perform due
diligence to ensure all new and existing borrowers meet the
appropriate guidelines, as necessary, as put forth by the
regulators. Many conversions to Year 2000 compliant
equipment and softwares have been completed.
- --------------------------------------------------------------------------------
UNITY BANCORP fifteen
<PAGE>
- ----------------- The Company utilizes software and related technologies
Summary throughout its business that will be affected by the century
date change in the year 2000 ("Y2K"). During 1997, a
committee comprised of the entire senior management team and
other key associates was formed to determine the full scope
and related costs of this problem to ensure that the
Company's systems continue to meet its internal needs and
those of its customers.
The first phase of this project, the assessment phase,
has been completed. The Y2K committee has identified all
hardware, software, systems and processes that might be
affected by the century date change. It has evaluated the
criticality of all systems. A plan of action for all items
was developed which includes tests and alternatives.
Possible worst case scenarios were discussed to help
determine the criticality of an item. For example, if the
Company's primary accounting software does not read the
century date change correctly, it is possible that borrowers
and depositor accounts will have miscalculations and balance
errors. The entire internal bookkeeping process could be
affected to the point were the Company would halt operations
until a remedy was put in place. Thus the Company's primary
accounting system is considered to be a mission critical
item and was assigned as mission critical. On the positive
side, the accounting system's vendor has represented to the
Company that its software is Y2K compliant. The vendor has
obtained Y2K compliance certification from an independent
testing organization and the software has also been reviewed
by an appropriate party. In addition, a lending subcommittee
was formed to evaluate the risk that the Y2K problem might
have on all of the Company's borrowers who have indebtedness
in excess of $250,000. This evaluation, now substantially
complete, was undertaken to assess borrowers' ability to
repay loans in the year 2000 and beyond. Overall, the
Company believes hat the Y2K issue poses a low risk to a
large majority of its borrowers. The project is currently in
its last testing stage. Written testing plans have been
prepared for all items assigned as mission critical verses
not mission critical. Testing has been completed on most all
of these applications. Testing of the Company's most
critical application, its data processing system, has been
completed. The vendor has provided the Company with a copy
of its internal test of the system for Y2K compatibility. To
date the Company has advanced the system's operating date to
January 3, 2000 and has reviewed the results. In addition,
the results of the many internal tests provided by the
vendor have been reviewed for their adequacy.
The final phase of this project is to administer the
contingency plans where testing has uncovered weaknesses.
This phase has been completed with success. For instance,
many old personal computers (PC's ) and their software have
been replaced with Y2K compliant PC's and software. The
Company's primary processor, NCR, certified that they are
compliant. The system date of the upgraded software has been
successfully advanced to the year 2000 and tested with
successful results.
The Company believes it has committed sufficient resources
to this project to ensure its success. Costs incurred to
date have not been material. The Company has no programmers
on staff and is reliant on the vendors of purchased software
to upgrade their products to be Y2K compliant, if necessary.
To date, the Y2K project is on schedule and future costs are
not expected to be material.
- --------------------------------------------------------------------------------
UNITY BANCORP sixteen
<PAGE>
CONSOLIDATED Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
---------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,388 $ 19,567
Federal funds sold 17,100 13,050
--------- ---------
Total cash and cash equivalents (Notes 2 and 15) 32,488 32,617
Securities (Notes 2, 3 and 14)
Available for sale, at fair value 21,490 17,409
Held to maturity, at amortized cost (aggregate fair value of $19,089
and $23,499 in 1998 and 1997, respectively) 19,439 23,899
--------- ---------
Total securities 40,929 41,308
Loans held for sale 3,569 2,787
Loans held to maturity 163,001 131,410
--------- ---------
Total loans (Notes 2, 4, 5 and 15) 166,570 134,197
Less: Net (Deferred costs)/Unearned income (222) 21
Less: Allowance for loan losses 1,825 1,322
--------- ---------
Net loans 164,967 132,854
Premises and equipment, net (Notes 2 and 6) 4,559 4,269
Accrued interest receivable 1,163 1,348
Cash surrender value of insurance policies (Note 10) 6,000 --
Other assets (Note 4, 6 and 11) 4,506 1,386
--------- ---------
Total Assets $ 254,612 $ 213,782
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Notes 7 and 15)
Demand
Noninterest-bearing $ 50,120 $ 41,093
Interest-bearing 40,585 29,898
Savings 34,320 31,199
Time, $100,000 and over 28,164 20,927
Time, under $100,000 73,671 69,297
--------- ---------
Total time 101,835 90,224
--------- ---------
Total Deposits 226,860 192,414
Obligation under capital lease (Note 12) 304 335
Accrued interest payable 408 493
Accrued expenses and other liabilities 694 550
--------- ---------
Total Liabilities 228,266 193,792
--------- ---------
Commitments and contingencies (Note 12)
Shareholders' equity (Notes 2, 8 and 13)
Common stock, no par value, 7,500,000 shares authorized; 3,759,251 issued and
3,668,197 outstanding in 1998. 3,127,138 shares issued and outstanding in 1997 23,146 17,127
Retained earnings 4,534 2,901
Accumulated other comprehensive loss,
net of tax benefit (132) (38)
Treasury stock at cost 91,054 and 0 shares outstanding in 1998 and 1997 (1,202) --
--------- ---------
Total Shareholders' Equity 26,346 19,990
--------- ---------
Total Liabilities and Shareholders' Equity $ 254,612 $ 213,782
========= =========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
UNITY BANCORP seventeen
<PAGE>
CONSOLIDATED STATEMENTS OF Income
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
------------------------------------------------
For the years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest on loans (Note 2) $ 13,355 $ 11,227 $ 7,732
Interest on securities 3,487 3,137 2,616
Interest on Federal funds sold 638 661 512
---------- ---------- ----------
Total interest income 17,480 15,025 10,860
Interest Expense 7,165 6,312 4,756
---------- ---------- ----------
Net Interest Income 10,315 8,713 6,104
Provision for loan losses (Note 2) 804 497 417
---------- ---------- ----------
Net Interest Income after Provision for Loan Losses 9,511 8,216 5,687
---------- ---------- ----------
Other Income
Service charges on deposits 901 757 521
Net gain on sale of securities (Note 3) 255 -- 32
Gain on sale of loans (Note 2) 2,394 1,695 1,468
Other income 857 591 383
---------- ---------- ----------
Total other income 4,407 3,043 2,404
---------- ---------- ----------
Other Expenses
Salaries and employee benefits 4,743 3,927 2,832
Occupancy expense 1,037 1,009 787
Special SAIF assessment -- -- 370
Other operating expenses (Note 16) 4,719 3,049 2,414
---------- ---------- ----------
Total other expenses 10,499 7,985 6,403
---------- ---------- ----------
Income before provision for income taxes 3,419 3,274 1,688
---------- ---------- ----------
Provision for income taxes (Notes 2 and 11) 1,282 1,259 644
---------- ---------- ----------
Net Income $ 2,137 $ 2,015 $ 1,044
========== ========== ==========
Basic earnings per share (Notes 2 and 9) $0.67 $0.65 $.47
Diluted earnings per share (Notes 2 and 9) $0.64 $0.64 $.46
========== ========== ==========
Weighted Average Shares Outstanding (Notes 2 and 9) 3,198,813 3,114,726 2,236,272
Weighted Average Shares Outstanding Diluted (Notes 2 and 9) 3,355,844 3,148,708 2,251,088
========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
UNITY BANCORP eighteen
<PAGE>
CONSOLIDATED STATEMENTS OF Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------
For the years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 2,137) $ 2,015 $ 1,044
Other comprehensive income
Unrealized gain (loss) on securities (266) 36 (152)
Tax (provision)/benefit 101 (14) 58
------- ------- -------
Unrealized gain (loss), net of reclassification adjustment (165) 22 (94)
======= ======= =======
Cumulative effect of change in accounting principle, net of tax 71 -- --
------- ------- -------
Other comprehensive income/(loss), net of tax (94) 22 (94)
------- ------- -------
Comprehensive income $ 2,043) $ 2,037 $ 950
======= ======= =======
Disclosure of reclassification amount, net of tax:
Unrealized holding gains (losses) arising during the period $ (7) $ 22 $ (75)
Less: reclassification adjustment for gains in net income 158 -- 19
------- ------- -------
$ (165) $ 22 $ (94)
======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
UNITY BANCORP nineteen
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN Shareholders' Equity
(in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Accumulated
Other
Comprehensive Total
For the years ended Common Retained Treasury Income/ Shareholders'
December 31, 1998, 1997 and 1996 Stock Earnings Stock (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 7,372 $ 1,071 $ -- $ 34 $ 8,477
======== ======== ======== ======== ========
Cash dividend - $.11 per share -- (359) -- -- (359)
Stock dividend - 5% 570 (573) -- -- (3)
Issuance of common stock, net of
offering expenses (Note 8) 5,405 -- -- -- 5,405
Subordinated debt conversion (Note 8) 3,520 -- -- -- 3,520
Net income - 1996 -- 1,044 -- -- 1,044
Other comprehensive income/(loss),
net of taxes -- -- -- (94) (94)
-------- -------- -------- -------- --------
Balance, December 31, 1996 16,867 1,183 -- (60) 17,990
======== ======== ======== ======== ========
Cash dividend - $.10 per share -- (297) -- -- (297)
Issuance of common stock, net 260 -- -- -- 260
Net income - 1997 -- 2,015 -- -- 2,015
Other comprehensive income/(loss),
net of taxes -- -- -- 22 22
-------- -------- -------- -------- --------
Balance, December 31, 1997 $ 17,127 $ 2,901 -- $ (38) $ 19,990
======== ======== ======== ======== ========
Cash dividend - $.20 per share -- (504) -- -- (504)
Issuance of common stock
Warrant conversion 5,649 -- -- -- 5,649
Dividend ReInvestment Plan (10) -- 195 -- 185
Grants 60 -- 208 -- 268
Options 320 -- 60 -- 380
Purchase of treasury stock, gross -- -- (1,665) -- (1,665)
Net income - 1998 2,137 2,137
Cumulative effect of implementation
of FASB 133 on unrealized gain
on securities available for sale,
net of taxes -- -- -- 71 71
Other comprehensive income/(loss),
net of taxes -- -- -- (165) (165)
-------- -------- -------- -------- --------
Balance, December 31, 1998 $ 23,146 $ 4,534 $ (1,202) $ (132) $ 26,346
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty
<PAGE>
CONSOLIDATED STATEMENTS OF Cash Flows
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,137 $ 2,015 $ 1,044
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Provision for loan losses 804 497 416
Depreciation and amortization 442 446 318
Net (gain) on sale of securities (255) -- (32)
Gain on sale of loans (2,394) (1,695) (1,468)
Stock grants 268 -- --
Amortization of securities premiums, net 5 (13) 52
Deferred tax benefit (262) (202) (78)
Increase (decrease) in accrued interest receivable 185 (295) (194)
Increase in other assets (1,857) (210) (356)
Increase in deferred costs - construction in process (1,001) -- --
Increase in bank owned life insurance (6,000) -- --
(Decrease) increase in accrued interest payable (85) (41) 142
Increase (decrease) in accrued expenses and other liabilities 113 374 (200)
--------- --------- ---------
Net cash provided by (used in) operating activities (7,900) 876 (356)
--------- --------- ---------
Investing Activities:
Purchases of securities held to maturity (14,064) (10,020) (8,030)
Purchases of securities available for sale (86,763) (17,000) (8,448)
--------- --------- ---------
Total purchases of securities (100,827) (27,020) (16,478)
Maturities and principal payments on securities held to maturity 18,523 12,101 1,883
Maturities and principal payments on securities available for sale 56,596 10,814 12,191
Proceeds from sale of securities available for sale 26,243 -- 1,234
--------- --------- ---------
Total maturities and principal payments of securities 101,362 22,915 15,308
Proceeds from sale of loans 20,626 13,682 14,907
Net increase in loans (51,149) (48,397) (52,300)
Capital expenditures (732) (1,611) (1,934)
--------- --------- ---------
Net cash used in investing activities (30,720) (40,431) (40,497)
--------- --------- ---------
Financing Activities:
Increase in deposits 34,446 38,859 42,558
Proceeds from issuance of subordinated debt -- -- 2,010
Proceeds from issuance of common stock, net 6,019 260 5,405
Treasury stock purchases (1,665) -- --
Treasury stock DRIP purchases 195 -- --
Cash dividends and fractional shares paid (504) (395) (362)
--------- --------- ---------
Net cash provided by financing activities 38,491 38,724 49,611
--------- --------- ---------
Net change in cash and cash equivalents (129) (831) 8,758
Cash and cash equivalents at beginning of year 32,617 33,448 24,690
--------- --------- ---------
Cash and cash equivalents at end of year $ 32,488 $ 32,617 $ 33,448
========= ========= =========
Supplemental Disclosures:
Interest paid $ 7,250 $ 6,311 $ 4,614
Income taxes paid 1,476 1,283 1,152
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-one
<PAGE>
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, Unity 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 eight
branches in Hunterdon, Middlesex, 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. Actual results could differ from those
estimates.
Securities
The Company classifies its securities into three categories: (1) held
to maturity, (2) available for sale and (3) trading. Securities which the
Company has the ability and intent to hold until maturity are classified as
held to maturity. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts.
Securities which are held for an indefinite period of time which
management intends to use as part of its asset/liability strategy, or that
may be sold in response to changes in interest rates, changes in prepayment
risk, increased capital requirements or other similar factors, are
classified as available for sale and are carried at market value.
Differences between a security's amortized cost and market value is
charged/credited directly to shareholders' equity, net of income tax
effect. The cost of securities sold is determined on a specific
identification basis. Gains and losses on sales of securities are
recognized in the statements of income on the date of sale.
The Company adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging" ("Statement 133")
in the third quarter of 1998 and as a result, reclassified certain
securities from the held-to-maturity to available for sale classification
The Company follows 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. The Company has
not classified any of its securities as trading.
Loans & Loans Held For Sale
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, interest accruals
are discontinued and all past due interest, previously recognized as income
is reversed and charged against current period earnings.
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, in accordance with Statement of Financial
Accounting Standards 91.
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
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 SBA loans and are reflected at the lower of
aggregate cost or market value.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-two
<PAGE>
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 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. 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. 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.
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 of Small Business Administration (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. In 1998,
the Company sold $3.8 million of the unguaranteed portion of its SBA loan
portfolio. This sale was made to decrease the Company's SBA loan
concentration and to provide additional liquidity to fund new loans. The
sale resulted in a net gain of $60 thousand after commission expense.
To calculate the gain (loss) on the sale of the guaranteed portion of
the SBA loans, the Company's investment in an SBA loan is allocated among
the retained portion of the loan, excess servicing retained and the sold
portion of the loan, based on the relative fair market value of each
portion. The gain on the sold portion of the loan is recognized. The
carrying value of the retained portion of the loan is reduced, which
increases the future yield. The excess servicing fees are reflected as an
asset and are classified in loans for financial reporting purposes. As of
December 31, 1998 and 1997, the amount of this asset was approximately
$1,202,000 and $1,069,000, 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
$44,684,000 and $35,738,000 at December 31, 1998 and 1997, 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. At December 31,
1998, there were no outstanding certificates of deposits. At December 31,
1997 certain certificates of deposit with maturities in excess of 90 days,
amounted to approximately $2,773,000 and were included in cash and due from
banks.
Net Income Per Share
Basic earnings per share is computed based on the weighted average number
of shares outstanding for the periods presented, in accordance with SFAS
No. 128, "Earnings per Share". 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.
Comprehensive Income-
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 did not have a material effect on the Company's results
of operations or financial position.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-three
<PAGE>
New Financial Accounting Standards
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 a 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 has determined that the
Company has no reportable segments.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post retirement Benefits" ("Statement
132") was issued February, 1998. Statement 132 revises employers'
disclosures about pension and other post retirement benefit plans. The
Statement becomes effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. The Company has determined that
there are no effects on its disclosures as the Company does not currently
offer pensions and other post retirement benefits.
Statement of Financial Accounting Standards No. 133 " Accounting for
Derivative Instruments and Hedging Activities" was issued June 1998. The
statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at it's fair value. The Statement requires the
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria is met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Statement 133 is effective for
fiscal quarters beginning after June 15, 1999.
The transition provisions of Statement 133 provide that at the date of
initial application, a bank holding company may transfer any debt security
categorized as held-to-maturity into the available-for-sale category or the
trading category without calling into question the intent to hold other
debt securities to maturity in the future. The transition provisions
further require that the unrealized gain (losses) on a transferred
held-to-maturity debt security be reported as part of the
cumulative-effect-type adjustment of net income if transferred to the
trading category or as part of the adjustment to the change in net
unrealized holding gains (losses) on available for sale securities if
transferred to the available-for-sale category.
The Company adopted this accounting standard in the third quarter of
1998. The adoption of this new standard did not have a material impact on
the Company's financial condition or results of operations. In accordance
with the new standard, the Company re-classified approximately $10.9
million of securities classified as Held-to-Maturity to Available-for-Sale
on July 1, 1998. As of that date, the unrealized gain on these securities
of $114,264 was recorded as a cumulative effect of change in accounting
principle, net of related income tax provision of $43,420 and was included
in the statement of comprehensive income. The Company does not have any
other types of derivative instruments, which were impacted upon the
adoption of SFAS 133.
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, 1998 and 1997 is as follows-
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1998 1997
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
Obligations of U.S.
Government agencies $ 3,757 -- $(355) $ 3,402 $15,467 $ 16 $(502) $14,981
Corporate debt securities 500 -- (1) 499 497 5 -- 502
Mortgage-backed securities 15,182 $ 7 (1) 15,188 7,935 154 (73) 8,016
Total held to maturity $19,439 $ 7 $(357) $19,089 $23,899 $175 $(575) $23,499
=========================================== =============================================
Available for sale
U.S. Treasury securities $ 243 $ 1 -- $ 244 $ 1,995 $ 13 -- $ 2,008
Obligations of U.S.
Government agencies 4,371 35 $ (5) 4,401 12,988 4 $ (23) 12,969
Obligations of states &
political subdivisions 931 14 -- 945 1,064 7 -- 1,071
Mortgage-backed securities 14,910 9 (148) 14,771 82 -- (414) 82
Federal Home Loan Bank stock 630 -- -- 630 518 -- -- 518
Other corporate stocks 612 3 (116) 499 755 28 (22) 761
Total available for sale $21,697 $62 $(269) $21,490 $17,402 $ 52 $ (45) $17,409
=========================================== =============================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-four
<PAGE>
The amortized cost and estimated fair value of securities at December 31,
1998 and 1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
---------------------------------------------------------------
1998 1997
Estimated Estimated
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Due in one year or less $ 1,507(a) $ 1,506 $ 1,247 $ 1,247
Due after one years through five years 1,500(a) 1,425 3,998 4,002
Due after five years through ten years 1,250(a) 970 3,017 2,896
Due after ten years -- -- 7,702 7,338
------------------------- -------------------------
Mortgage-backed securities 15,182 15,188 7,935 8,016
========================= =========================
$19,439 $19,089 $23,899 $23,499
Available for sale
Due in one year or less $ 516 $ 517 $ 4,195 $ 4,198
Due after one year through five years 658 671 8,853 8,849
Due after five years through ten years -- -- 3,000 3,001
Due after ten years 4,371 4,401 -- --
Mortgage-backed securities 14,910 14,771 82 82
Corporate stocks 1,242 1,129 1,272 1,279
------------------------- -------------------------
$21,697 $21,490 $17,402 $17,409
========================= =========================
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) the decrease in Held to maturity is the result of adopting Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging". The adoption of this new standard did not have a
material impact on the Company's financial condition or results of
operations. In accordance with the new standard, the Company re-classified
approximately $10.9 million of securities classified as Held-to-Maturity to
Available-for-Sale on July 1, 1998. As of that date, the unrealized gain on
these securities of $114,264 was recorded as a cumulative effect of change
in accounting principle, net of related income tax provision of $43,420 and
was included in the statement of comprehensive income.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations without call or
prepayment penalties.
Proceeds from sales of securities were $26,243,000 in 1998, $0 in 1997
and $1,234,000 in 1996. Gross gains (losses) on sales of securities were
$255,000, $0 and $32,000 in 1998, 1997 and 1996, respectively.
Securities with carrying values aggregating $10,117,000 were pledged
to secure public deposits at December 31, 1998, compared to $750,000 in
1997.
4. Loans
Total loans outstanding by classification as of December 31, 1997 and 1996,
are as follows-
-------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Loans secured by real estate-
Residential properties $ 26,565 $ 28,892
Nonresidential properties 59,845 66,526
Construction loans 16,218 13,014
Commercial and industrial loans 41,502 20,348
Lease financing receivables -- --
Loans to individuals 22,440 5,417
-------- --------
$166,570 $134,197
======== ========
- --------------------------------------------------------------------------------
As of December 31, 1998 and 1997, the Bank's recorded investment in
impaired loans, defined as nonaccrual loans, was $2,297,000 and $943,000,
respectively, and the related valuation allowance was $496,000 and
$204,000, respectively. This valuation allowance is included in the
allowance for possible loan losses in the accompanying balance sheet.
Interest income that would have been recorded during 1998 and 1997 had
these loans performed under the original contract terms was $227,000 and
$92,000 respectively. Average impaired loans for 1998 and 1997 were
$2,292,000 and $912,000, respectively. At December 31, 1998 and 1997,
$1,600,000 and $552,000 respectively in loans were past due greater than 90
days but still accruing interest. Management has evaluated these loans and
determined that they are both well collateralized and in the process of
collection. No losses are anticipated upon ultimate collection of these
loans.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-five
<PAGE>
As of December 31, 1998, approximately 62% of the Company's loans were
secured by real estate. 58% of these loans are not secured by residential
real estate. As such, a substantial portion of the Company's borrowers'
ability to repay their loans is dependent on the economic environment 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-
(in thousands)
- --------------------------------------------------------------------------------
Balance at December 31, 1997 $ 9,668
New Loans 2,532
Repayments (5,118)
-------
Balance at December 31, 1998 $ 7,082
=======
- --------------------------------------------------------------------------------
As of December 31, 1998, the Bank had recorded a net impaired other
asset of $1,100,000, which is included in other assets on the balance
sheet. There was no such asset in 1997. This impaired asset relates to the
Bank's discovery that it had been the victim of an unauthorized overdraft
to a single customer, subsequent to the close of the third quarter.
Although the Bank is still investigating this occurrence, it appears that
the total amount of the overdraft may range from $680,000 to $1,400,000.
The Bank is pursuing all legal actions available to recover this overdraft,
and it appears that assets may be available to satisfy the Bank's claim, at
least in part. At this time, the Bank has established a $300,000 reserve in
November in connection with this situation. This results in the Bank's loss
exposure of between $380,000 and $1,100,000, before consideration of any
assets which may be available to pay off the Bank. Management continues to
investigate this matter, and take all steps possible to safeguard the
Bank's interests.
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 1998,
1997 and 1996 is as follows-
------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 1,322 $ 886 $ 562
Provision charged to expense 804 497 417
Loans charged-off (329) (68) (93)
Recoveries on loans previously charged-off 28 7 --
------- ------- -------
Balance at end of year $ 1,825 $ 1,322 $ 886
======= ======= =======
- --------------------------------------------------------------------------------
6. Premises and equipment
The detail of premises and equipment as of December 31, 1998, 1997 and 1996
is as follows-
---------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Land and buildings $ 1,825 $ 1,746
Furniture, fixtures and equipment 2,815 2,182
Leasehold improvements 1,486 1,466
------- -------
6,126 5,394
Less: Accumulated depreciation and amortization (1,567) (1,125)
------- -------
$ 4,559 $ 4,269
======= =======
- --------------------------------------------------------------------------------
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 $304,000 is included
in land and buildings. The Company also has recorded in other assets on the
balance sheet $1.1 million which relates to the construction-in-process for
the expansion of its branch network.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-six
<PAGE>
7. Deposits
Time deposits in denominations of $100,000 or more totaled $28,164 and
$20,927 at December 31, 1998 and 1997, respectfully.
Schedule maturities of certificates of deposit are as follows -
<TABLE>
<CAPTION>
----------------------------------------------------------------
Over 3 mos Over 1 year
3 mos through through Over
(in thousands) or less 1 year 3 years 3 years Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
$100,000 or more $18,748 $ 7,685 $ 1,731 -- $28,164
Less than $100,000 $24,784 $36,665 $11,020 $1,202 $73,671
Year Ended December 31, 1997
$100,000 or more $11,234 $ 7,812 $ 1,881 -- $20,927
Less than $100,000 $13,800 $37,440 $16,886 $1,171 $69,297
- -----------------------------------------------------------------------------------------------------------
</TABLE>
8. Shareholders' equity
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. In April 1998, the Company declared a 3 for 2 stock split
and a 5% stock dividend was declared on November 23, 1998, for shareholders
of record on December 21, 1998 payable January 8, 1999. All share and per
share information for all periods presented in these financial statements
has been adjusted to give effect for the stock dividends and the stock
splits.
In December 1996, the Company completed a stock offering resulting in
the issuance of 401,500 shares of common and, attached to each share, a
nontransferable warrant to purchase one share of common stock at an
original exercise price of $15.75 at any time within two years after the
offering expiring at the close of business on December 15, 1998. Based on
the Company's 3 for 2 stock split in April 1998, the total number of shares
available to be received from the warrants became 602,250 and had a new
effective price of $10.50. During the course of 1997, 3,090 shares relating
to the warrants were exercised and 557,971 shares relating to the warrants
were exercised in 1998. The exercising of warrants in 1998 led to a net
increase to capital of $5,649,000. The remaining 41,189 shares relating to
the warrants expired at the close of business December 15, 1998.
On April 29, 1994, the Company's shareholders approved the 1994
Employee Non-qualified Stock Option Plan (the Employee Plan) and the 1994
Non-employee Director Stock Option Plan (the Director Plan). Under the
Plans, the Board of Directors may grant options to officers or non-employee
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, 1998, 196,876 shares have been reserved for
issuance under the Plans, 193,383 shares have been utilized leaving 3,493
shares available.
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 Company 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 the 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 form the date of grant. As of December 31, 1998, 78,750 shares have
been reserved for issuance under the Plan and 74,550 have been issued
leaving 4,200 shares available.
On April 24, 1998, the Company's shareholders approved the 1998 Stock
Option Plan. The specifics to this plan are similar to the 1997 Stock
Option Plan. Options were granted to all employees under this plan. These
employee options vest at five years, but could vest 20% each year if the
Company reached its' annual performance goals. As of December 31, 1998,
236,250 shares have been reserved for issuance under the Plan and 216,977
have been issued leaving 19,273 shares available.
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-seven
<PAGE>
Transactions under the stock option plans are summarized as follows-
---------------------------------------------
Number Exercise Price Weighted Average
of Shares Per Share Exercise Price
- --------------------------------------------------------------------------------
Outstanding, December 31, 1995 -- -- --
Options granted 79,064 $6.17-$6.86 $ 6.69
Options exercised -- -- --
Options expired (315) 6.17-6.17 6.17
------- ------------ ------
Outstanding, December 31, 1996 78,749 6.17-6.86 6.69
Options granted 63,316 7.28-8.84 8.13
Options exercised (16,241) 6.17-7.28 6.71
Options expired -- -- --
------- ------------ ------
Outstanding, December 31, 1997 125,824 $6.17-$8.84 $ 7.41
Options granted 363,322 10.59-15.24 11.14
Options exercised (46,560) 6.17-11.21 7.90
Options expired (20,476) 11.19-11.21 11.20
------- ------------ ------
Outstanding, December 31, 1998 422,110 $6.17-$15.24 $10.38
- --------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plans and, accordingly,
recorded compensation expense totaling $195,640 in 1998 and $16,600 in 1997
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-
-------------------------------
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income-
As reported $2,137 $2,015 $1,044
Pro forma 1,638 1,902 914
Earnings per share-
Basic as reported $0.67 $0.65 $0.47
Pro forma $0.51 $0.61 $0.41
Diluted as reported $0.64 $0.64 $0.46
Pro forma $0.49 $0.61 $0.41
- --------------------------------------------------------------------------------
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 1998, 1997 and
1996; dividend yields of 2.0%, 1.5% and 0.0%, expected volatility of
33.80%, 47.06% and 47.06%, a risk-free interest rates of 5.48%, 6.08% and
5.21% and an expected lifes of 2.6 years, 2.6 years and 2.6 years,
respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998-
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Number Number
Outstanding at Remaining Exercisable at
Exercise Price December 31, 1998 Contractual Life December 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$6.17 1,969 2.0 years 1,969
6.86 44,297 2.0 years 44,297
7.28 5,906 3.0 years 5,906
8.49 31,500 3.0 years 31,500
8.77 1,103 3.9 years 1,103
8.84 3,938 3.9 years 3,938
10.59 49,613 4.1 years 49,613
11.07 7,350 4.9 years --
11.19 250,578 4.6 years 152,035
11.21 16,931 4.1 years 16,931
11.31 5,250 4.9 years --
13.69 2,625 4.6 years 2,625
15.24 1,050 4.5 years 1,050
------- -------
$10.38* 422,110 310,967
======= =======
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Weighted average exercised price
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-eight
<PAGE>
Select key employees and Board members are eligible to participate in
the Companyis two Stock Bonus Plans (1994 and 1997). 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 no shares during 1996 and 14,175 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, which became 78,750 shares after the 3 for 2 split and the 5%
stock dividend (39,375 were approved under the 1994 Plan). The Company
granted 24,573 shares to employees and Board members in 1998, resulting in
approximately $320,000 in expenses. As of December 31, 1998, the Company
has 74,540 shares reserved for issuance under the Stock Bonus Plans.
9. Earnings Per Share
The following is a reconciliation of the calculation of basic and diluted
earnings per share-
<TABLE>
<CAPTION>
--------------------------------------------------
Net Weighted Earnings
(in thousands) Income Average Shares Per Share
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31, 1998-
Basic earnings per share -
Income available to common shareholders $2,137 3,198,813 $0.67
Effect of Dilutive Securities -
Stock Options and Warrants 160,031
------ --------- -----
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $2,137 3,358,844 $0.64
====== ========= =====
For the Year Ended December 31, 1997-
Basic earnings per share -
Income available to common shareholders $2,015 3,114,726 $0.65
Effect of Dilutive Securities -
Stock Options and Warrants 33,982
------ --------- -----
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $2,015 3,148,708 $0.64
====== ========= =====
For the Year Ended December 31, 1996-
Basic earnings per share -
Income available to common shareholders $1,044 2,236,272 $0.47
Effect of Dilutive Securities -
Stock Options and Warrants 14,816
------ --------- -----
Diluted earnings per share - Income available to
common shareholders plus assumed conversions $1,044 2,251,088 $0.46
====== ========= =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. Cash surrender value of insurance policies
On December 30, 1998, the Company entered into company owned life insurance
policy agreements on its key directors and executive officers. The cash
surrender value of the policies is equal to the initial $6.0 million
investment at December 31, 1998.
11. Income taxes
The components of the provision for income taxes are as follows-
--------------------------------
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal
Current $ 1,274 $ 1,221 $ 622
Deferred benefit (262) (202) (78)
------- ------- -------
Total Federal 1,012 1,018 544
State 270 240 100
------- ------- -------
Total provision for income taxes $ 1,282 $ 1,259 $ 644
======= ======= =======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITY BANCORP twenty-nine
<PAGE>
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>
-----------------------------
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 1,162 $ 1,113 $ 574
State income taxes, net of Federal income tax effect 178 159 66
Other (58) (13) 4
------- ------- -------
Provision for income taxes $ 1,282 $ 1,259 $ 644
======= ======= =======
- ------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. The components of the net deferred tax asset at December 31,
1998 and 1997 are as follows-
-----------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Provision for loan losses $ 639 $ 465
Unrealized loss on securities available for sale 73 24
Other, net 10 (3)
----- -----
Net deferred tax asset $ 722 $ 486
===== =====
- --------------------------------------------------------------------------------
12. Commitments and contingencies
Lease Obligations
The Company leases its headquarters and three of its branch facilities
under operating leases. Future minimum rental payments under these leases,
excluding renewal options, are as follows at December 31, 1998-
(in thousands)
1999 $708
2000 708
2001 708
2002 708
2003 708
Thereafter 1,678
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 $554,000 and will be paid in monthly
installments through April, 2006. The company entered into lease agreements
effective on various dates in the first and second quarters of 1999 for
eight new branches. The Company is evaluating whether these leases meet the
accounting criteria for capital lease treatment. Future gross lease
obligations total approximately $7,935,000 and will be paid in monthly
installments beginning throughout the first six months of 1999, as
facilities become occupied, and ending in various months in 2009.
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 management's
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 $36,250,000 and $18,300,000 to its borrowers as of
December 31, 1998 and 1997, respectively. These 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 $581,000 and $712,000 as of December 31, 1998 and 1997,
respectively. These standby letters of credit generally expire within one
year.
13. 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
- --------------------------------------------------------------------------------
UNITY BANCORP thirty
<PAGE>
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the 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, 1998, that the Parent Company and the Bank
meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Parent Company as well capitalized and the
most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Parent
Company and the Bank must maintain minimum total risk-based; Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
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
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998-
Total Capital
(to Risk Weighted Assets) $28,271 14.85% >=$15,231 >=8.00% >=$19,039 >=10.00%
Tier I Capital
(to Risk Weighted Assets) 26,446 13.89% >=$ 7,615 >=4.00% >=$11,423 >=16.00%
Tier I Capital
(to Average Assets) 26,446 10.87% >=$19,723 >=4.00% >=$12,165 >=15.00%
As of December 31, 1997-
Total Capital
(to Risk Weighted Assets) 21,231 14.28% >= 11,894 >=8.00% >= 14,868 >=10.00%
Tier I Capital
(to Risk Weighted Assets) 19,958 13.29% >= 5,947 >=4.00% >= 8,921 >= 6.00%
Tier I Capital
(to Average Assets) 19,958 9.51% >= 8,391 >=4.00% >= 10,489 >= 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</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
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998-
Total Capital
(to Risk Weighted Assets) $18,613 9.80% >=$15,190 >=8.00% >=$18,987 >=10.00%
Tier I Capital
(to Risk Weighted Assets) 16,788 8.84% >=$ 7,595 >=4.00% >=$11,392 >=16.00%
Tier I Capital
(to Average Assets) 16,788 7.09% >=$ 9,472 >=4.00% >=$11,840 >=15.00%
As of December 31, 1997-
Total Capital
(to Risk Weighted Assets) 16,318 11.03% >= 11,841 >=8.00% >= 14,801 >=10.00%
Tier I Capital
(to Risk Weighted Assets) 14,997 10.13% >= 5,920 >=4.00% >= 8,881 >= 6.00%
Tier I Capital
(to Average Assets) 14,997 7.35% >= 8,162 >=4.00% >= 10,203 >= 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-one
<PAGE>
14. Employee benefit plans
The Bank has a 401(k) savings plan covering substantially all employees.
Under the Plan, an employee can contribute up to 15% of their salary on a
tax deferred basis. The Bank may also make discretionary contributions to
the Plan. The Bank contributed $44,000, $31,000, and $32,000 to the Plan in
1998, 1997 and 1996, respectively.
The Bank does not currently provide any post retirement or post
employment benefits to its employees other than the 401(k) plan.
15. 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, 1998, the Bank had standby letters of credit outstanding of
$581,000. The fair value of these commitments is nominal.
At December 31, 1998, the bank had commitments to extend credit
totaling $36,250,000. 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, 1998, the Bank services loans owned by outside
investors in the amount of $46,093,000 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.
The estimated fair value of the Company's financial instruments as of
December 31, 1998 and 1997 is as follows-
<TABLE>
<CAPTION>
------------------------------------------------------
1998 1998 1997 1997
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets-
Cash and Federal funds sold $ 32,488 $ 32,488 $ 32,617 $ 32,617
Securities held to maturity 19,439 19,089 23,899 23,499
Securities available for sale 21,490 21,490 17,409 17,409
Net loans 164,967 165,931 132,854 133,953
Financial liabilities-
Total deposits $226,860 $227,022 $192,414 $192,117
- --------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-two
<PAGE>
16. Other operating expenses
The components of other operating expenses for the year ended December 31,
1998, 1996 and 1995 are as follows
--------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Professional and other fees $1,801 $ 514 $ 315
Office expenses 1,042 809 615
Advertising expense 370 272 251
Communication expense 240 212 152
Bank services 491 427 333
FDIC insurance assessment 116 100 182
Directors fees 298 271 276
Non loan losses 370 16 19
Loan processing expense 430 192 112
Other expenses 561 236 159
------ ------ ------
$4,719 $3,049 $2,414
====== ====== ======
- --------------------------------------------------------------------------------
17. Condensed financial statements of Unity Bancorp, Inc. (Parent Company only)
Balance Sheets
<TABLE>
<CAPTION>
-------------------------
December 31, (in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from Banks $ 8,837 $ 2,097
Securities available for sale, at fair value 498 2,769
Investment in Bank subsidiary 16,763 14,990
Other assets 311 145
-------- --------
Total assets $ 409 $ 20,001
======== ========
Liabilities and Shareholders' Equity-
Other liabilities $ 363 $ 11
Shareholders' equity 26,346 19,990
-------- --------
Total liabilities and shareholders' equity $ 26,409 $ 20,001
======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
Income Statements
<TABLE>
<CAPTION>
------------------------------------------
December 31, (in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 57 $ 291 $ 11
Dividends from Bank subsidiary (a) 505 296 359
Other income 384 -- 15
-------- -------- --------
Total income 946 587 385
Interest expense -- -- 94
Other expenses 665 361 60
-------- -------- --------
Income before income taxes and equity in undistributed
income of subsidiary 281 226 231
Income tax benefit (a) (76) (24) (51)
-------- -------- --------
Income before equity in undistributed income of subsidiary 357 250 282
Equity in undistributed income of subsidiary 1,780 1,765 762
-------- -------- --------
Net income $ 2,137 $ 2,015 $ 1,044
======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-three
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
------------------------------------------
December 31, (in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities -
Net income $ 2,137 $ 2,015 $ 1,044
Adjustments to reconcile net income to net cash
provided by operating activities -
Equity in undistributed income of subsidiary (1,780) (1,765) (762)
Amortization of securities premiums, net -- (39) --
Depreciation and amortization 13 13 13
Increase in other assets (171) (38) (48)
(Decrease) increase in other liabilities (64) (12) --
------- ------- -------
Net cash provided by operating activities 135 174 247
======= ======= =======
Investing activities -
Sales and maturities of securities available for sale 5,743 1,000 --
Purchases of securities available for sale (3,449) (3,711) --
Net decrease in loans outstanding -- -- 1,412
Additional equity investment in Bank subsidiary -- (1,750) (2,325)
------- ------- -------
Net cash used in investing activities 2,294 (4,461) (913)
======= ======= =======
Financing activities -
Proceeds from issuance of common stock, net 6,019 260 5,405
Payment to repurchase common stock, net (1,202) -- --
Proceeds from issuance for subordinated debt -- -- 2,010
Cash dividends and fractional shares paid (505) (297) (362)
Net cash provided (used in) by financing activities 4,311 (37) 7,053
------- ------- -------
Net change in cash and cash equivalents 6,740 (4,324) 6,388
------- ------- -------
Cash and cash equivalents, beginning of year 2,097 6,420 32
------- ------- -------
Cash and cash equivalents, end of year $ 8,837 $ 2,097 $ 6,420
======= ======= =======
Supplemental disclosures:
Interest paid -- -- $ 109
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, $2,918,000 of retianed earnings of the subsidiary
Bank were available to pay dividends to the Parent Company.
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-four
<PAGE>
18. Quarterly financial information (unaudited)
The following quarterly financial information for the years ended December
31, 1998, and 1997 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>
---------------------------------------------------------
1998 March June September December
(in thousands, except per share data) 31 30 30 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $4,092 $4,299 $4,532 $4,557
Total interest expense 1,747 1,789 1,863 1,766
------ ------ ------ ------
Net interest income 2,345 2,510 2,669 2,791
Provision for loan losses 204 73 197 330
Net interest income after provision for ------ ------ ------ ------
loan losses 2,141 2,437 2,472 2,461
Total other income 821 1,206 1,154 1,226
Total other expenses 2,412 2,619 2,574 2,894
Tax provision 210 405 388 279
------ ------ ------ ------
Net income $ 340 $ 619 $ 664 $ 514
====== ====== ====== ======
Basic earnings per common share $ .10 $ .20 $ .21 $ .15
Diluted earnings per common share $ .10 $ .18 $ .20 $ .15
1997
Total interest income $3,272 $3,693 $3,977 $4,083
Total interest expense 1,427 1,542 1,655 1,688
------ ------ ------ ------
Net interest income 1,845 2,151 2,322 2,395
Provision for loan losses 58 176 161 102
------ ------ ------ ------
Net interest income after provision for
loan losses 1,787 1,975 2,161 2,293
Total other income 565 811 662 1,005
Total other expenses 2,031 2,029 1,881 2,045
Tax provision 125 295 366 473
------ ------ ------ ------
Net income $ 196 $ 462 $ 576 $ 780
====== ====== ====== ======
Basic earnings per common share $ .06 $ .15 $ .19 $ .25
Diluted earnings per common share $ .06 $ .15 $ .19 $ .24
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-five
<PAGE>
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, 1998 and 1997,
and the related consolidated statements of income, comprehensive income, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 22, 1999
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-six
<PAGE>
CORPORATE Information
Unity Bancorp, Inc.
Corporate Headquarters
Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
Counsel
Jamieson Moore Peskin & Spicer
Morristown, New Jersey
Auditors
Arthur Andersen LLP
Roseland, New Jersey
Registrar & Transfer Agent
Shareholder address changes or inquiries
regarding shareholder accounts and
stock transfers should be directed to:
First City Transfer Company
P.O. Box 170
Iselin, New Jersey 08837-0170
(732) 906-9227
Investor and Media Inquiries
Analysts, institutional investors, individual
shareholders and media representatives
should contact:
John F. Tremblay
Shareholder Relations
Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
(908) 730-7630
or
L. G. Zangani, Inc.
Financial Public Relations
9 Main Street
Flemington, NJ 08822
(908) 788-9660
Principal Market Makers:
Advest, Inc.
First Colonial Securities, Inc.
Janney Montgomery Scott
Legg Mason Wood Walker, Inc.
Paragon Drake & Co.
Ryan Beck & Co., Inc.
Sandler O'Neill & Partners
Sherwood Securities, Inc.
Web Info
Information on financial results, products and services, and branch locations is
available on the internet at: www.unitybank.com
Financial Information
Copies of the corporation's annual report on Form 10-K filed with the Securities
and Exchange Commission may be obtained:
o by writing to Kevin Killian, CFO at corporate headquarters.
o electronically at the SEC's home page at www.sec.gov.
Stock Listing
Unity Bancorp, Inc. common stock is traded on the NASDAQ under the symbol
"UNTY".
Common Stock Prices/Dividend Paid
The table below sets forth by quarter the range of high, low and quarter-end
closing sale prices for Unity Bancorp, Inc. common stock and the cash dividends
paid per common share.
Cash
1998 Dividend
Quarter High Low Close Paid
- --------------------------------------------------------------------------------
First $16.625 $12.750 $16.500 $0.05
Second $18.250 $13.188 $13.188 $0.05
Third $14.625 $11.750 $11.938 $0.05
Fourth $12.125 $10.375 $11.625 $0.05
- --------------------------------------------------------------------------------
Total $0.20
Unity Bancorp authorized a 3 for 2 stock split, made June 1, 1998, to
shareholders of record as of May 15, 1998.
Dividend Reinvestment
and Stock Purchase Plan
The Unity Bancorp, Inc. dividend reinvestment and stock purchase plan enables
holders of common stock to purchase additional shares of common stock
conveniently and without paying brokerage commissions or service charges. A
prospectus and enrollment card may be obtained by writing to Shareholders
Relations at corporate headquarters. For more information on these programs,
please contact us at (908) 713-4304.
Annual Meeting of Shareholders
Shareholders are cordially invited to the Annual Meeting of Shareholders. The
Meeting will convene at 3:30 pm, Friday, April 30, 1999, in Unity Bancorp's
Corporate Headquarters located at 64 Old Highway 22, Clinton, NJ.
- --------------------------------------------------------------------------------
UNITY BANCORP thirty-seven
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The Registrant has one subsidiary, First Community Bank, which changed
its name to Unity Bank, effective March 1, 1999.
Unity Bank has two subsidiaries, Unity Investment Services, Inc., and
Unity Financial Services, Inc.
EXHIBIT 23
CONSENT OF ARTHUR ANDERSEN LLP
To Unity Bancorp, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 22, 1999 and to all references 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.
333-46509 on Form S-3 and Registration Statement No. 333-65675 on Form S-3.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the
Registrant's audited December 31, 1998 financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,898,000
<INT-BEARING-DEPOSITS> 8,490,000
<FED-FUNDS-SOLD> 17,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,490,000
<INVESTMENTS-CARRYING> 19,439,000
<INVESTMENTS-MARKET> 19,089,000
<LOANS> 166,570,000
<ALLOWANCE> 1,825,000
<TOTAL-ASSETS> 254,612,000
<DEPOSITS> 226,860,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,102,000
<LONG-TERM> 304,000
0
0
<COMMON> 23,146,000
<OTHER-SE> 4,534,000
<TOTAL-LIABILITIES-AND-EQUITY> 254,612,000
<INTEREST-LOAN> 13,355,000
<INTEREST-INVEST> 3,487,000
<INTEREST-OTHER> 638,000
<INTEREST-TOTAL> 17,480,000
<INTEREST-DEPOSIT> 7,142,000
<INTEREST-EXPENSE> 7,165,000
<INTEREST-INCOME-NET> 10,315,000
<LOAN-LOSSES> 804,000
<SECURITIES-GAINS> 255,000
<EXPENSE-OTHER> 10,499,000
<INCOME-PRETAX> 3,419,000
<INCOME-PRE-EXTRAORDINARY> 3,419,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,137,000
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 4.91
<LOANS-NON> 2,297,000
<LOANS-PAST> 1,600,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,322,000
<CHARGE-OFFS> 329,000
<RECOVERIES> 28,000
<ALLOWANCE-CLOSE> 1,825,000
<ALLOWANCE-DOMESTIC> 1,825,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
