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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT, PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
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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(Exact name of registrant as specified in its charter)
DELAWARE 22-3282551
- ------------------------------- ----------------
(State of other jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification)
64 OLD HIGHWAY 22, CLINTON, NEW JERSEY 08809
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(Address of principal executive offices) (zip code)
(908) 730-7630
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all report required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
The number of shares outstanding of each of the registrant's classes of common
equity stock, as of November 12, 1999: 3,704,708
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
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<PAGE>
UNITY BANCORP. INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts) (Unaudited) (Audited)
September December 31
1999 1998
--------- ---------
ASSETS
Cash and Due From Banks $ 18,467 $ 15,388
Federal Funds Sold 0 17,100
--------- ---------
Total Cash and Cash Equivalents 18,467 32,488
--------- ---------
Securities
Available For Sale, At Fair Value 41,530 21,490
Held To Maturity, At Amortized Cost 34,533 19,439
Aggregate Fair Value Of $32,868 and $19,089
--------- ---------
Total Securities 76,063 40,929
--------- ---------
Loans, Held For Sale 3,797 3,569
Loans, Held To Maturity 310,944 163,001
--------- ---------
Loans, Total 314,741 166,570
Less: (Deferred Costs) / Unearned Income (1,280) (222)
Less: Loan Loss Reserve 2,237 1,825
--------- ---------
Net Loans 313,784 164,967
--------- ---------
Premises and Equipment 12,053 4,559
Accrued Interest Receivable 2,827 1,163
Cash Surrender Value Of Life Insurance 3,991 6,000
Other Assets 10,400 4,506
--------- ---------
TOTAL ASSETS $ 437,585 $ 254,612
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $ 56,778 $ 50,120
Demand Interest 103,630 40,585
Savings 35,288 34,320
Time, $100,000 and Over 85,004 28,164
Time, Under $100,000 97,215 73,671
--------- ---------
Time, Total 182,219 101,835
--------- ---------
Total Deposits 377,915 226,860
--------- ---------
Borrowed Funds 30,000 0
Obligation Under Capital Lease 3,564 304
Accrued Interest Payable 1,092 408
Accrued Expenses and Other Liabilities 1,088 694
--------- ---------
TOTAL LIABILITIES 413,659 228,266
--------- ---------
Shareholders' Equity
Common Stock, $0.00 par, 26,224 23,146
7,500,000 authorized;
Issued Shares of 3,861,568 and 3,759,251
Outstanding Shares of 3,704,708 and 3,668,197
Treasury Stock, at cost; (1,762) (1,202)
Outstanding Shares of 156,860 and 91,054
Retained Earnings 190 4,534
Accumulated other comprehensive loss (726) (132)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 23,926 26,346
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 437,585 $ 254,612
========= =========
See accompanying notes to financial statements
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands, except per share data) (Unaudited) (Unaudited)
(unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income
Interest on Loans $ 5,532 $ 3,429 $ 13,257 $ 9,672
Interest on Securities 1,217 960 2,938 2,768
Interest on Federal Funds Sold 10 143 514 483
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 6,759 4,532 16,709 12,923
----------- ----------- ----------- -----------
Interest Expense On Deposits and Borrowed Funds 3,714 1,863 8,657 5,399
----------- ----------- ----------- -----------
NET INTEREST INCOME 3,045 2,669 8,052 7,524
----------- ----------- ----------- -----------
Provision for Loan Losses 867 197 1,528 474
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,178 2,472 6,524 7,050
----------- ----------- ----------- -----------
Other Income
Service Charges On Deposits 215 235 561 667
Gain on Sale of Loans 328 594 3,686 1,660
Gain on Sale of Securities (33) 91 194 233
Other Income 588 233 1,187 620
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 1,098 1,153 5,628 3,180
----------- ----------- ----------- -----------
Other Expenses
Salaries and Employee Benefits 2,043 1,304 6,578 3,738
Occupancy Expense 682 228 1,717 765
Other Operating Expense 3,350 1,042 6,546 3,102
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 6,075 2,574 14,841 7,605
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,799) 1,051 (2,689) 2,625
----------- ----------- ----------- -----------
Provision For Income Taxes (1,118) 388 (1,134) 1,003
----------- ----------- ----------- -----------
NET INCOME (LOSS) ($1,681) $663 ($1,555) $1,622
=========== =========== =========== ===========
Basic Earnings / (Loss) per Share ($0.45) $0.21 ($0.42) $0.51
----------- ----------- ----------- -----------
Diluted Earnings / (Loss) per Share ($0.45) $0.20 ($0.42) $0.48
----------- ----------- ----------- -----------
Weighted Average Shares Outstanding-Basic 3,721,223 3,211,889 3,729,763 3,167,423
Weighted Average Shares Outstanding- Diluted 3,721,223 3,360,989 3,729,763 3,388,396
Weighted Average Shares Outstanding -
Effect of dilutive securities stock options N/A 149,100 N/A 220,973
</TABLE>
<PAGE>
UNITY BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the nine month period ended Sept 30, 1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net (loss) / income (1,555) 1,622
Adjustments to reconcile net (loss) / income to net cash provided
by operating activities
Provision for loan losses 1,528 474
Depreciation and amortization 881 401
Net gain on sale of securities (194) (233)
Gain on sale of loans (3,686) (1,660)
Stock Grants, from Treasury 424 0
Amortization of securities premiums, net 0 7
Amortization of loan fees and costs 87 0
Increase in accrued interest receivable (1,664) (110)
Decrease in other assets (2,802) 62
Proceeds from sale of loans 16,381 13,467
(Decrease) / Increase in accrued interest payable 685 (9)
Increase in accrued expenses and other liabilities 394 253
-------- --------
Net cash provided by operating activities 10,479 14,274
-------- --------
Investing activities:
Purchases of securities held to maturity (17,494) (10,928)
Purchases of securities available for sale (39,840) (67,414)
Maturities and principal payments on securities held to maturity 2,400 14,392
Maturities and principal payments on securities available for sale 4,583 43,975
Proceeds from sale of securities available for sale 14,421 10,505
Proceeds from Bank Owned Life Insurance 2,009 0
Purchases of Loans (56,071) 0
Net increase in loans (107,056) (34,820)
Capital expenditures (5,191) (667)
Proceeds from sale of Assets 0 10
Cash payment - CMA acquisition (1,700) 0
-------- --------
Net cash used in investing activities (203,939) (44,947)
-------- --------
Financing activities:
Increase in deposits 151,055 22,792
Increase in Borrowings 30,000 0
Proceeds from issuance of common stock 0 1,493
Treasury stock purchases (984) (1,190)
Cash Dividends (632) (350)
-------- --------
Net cash provided by financing activities 179,439 22,745
-------- --------
Decrease in cash and cash equivalents (14,021) (7,928)
-------- --------
Cash and cash equivalents at beginning of year 32,488 32,617
-------- --------
Cash and cash equivalents at end of period 18,467 24,689
======== ========
Supplemental disclosures:
Interest paid 7,973 5,408
Income taxes paid 776 1,003
</TABLE>
<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"), and
reflect all adjustments and disclosures, which are, in the opinion of
management, necessary for a fair presentation of interim results. All
significant inter-company balances and transactions have been eliminated in
consolidation. The financial information has been prepared in accordance with
generally accepted accounting principles and has not been audited.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These interim financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1998, included in the Company's annual
report on Form 10-KSB.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
Reclassifications-
Certain reclassifications have been made to prior years' amounts to conform with
the current year presentation.
(2) COMPREHENSIVE (LOSS) / INCOME
Total comprehensive (loss)/income for the nine months ended September 30,
1999 and 1998 was ($2,149) thousand and $1,725 thousand. Total
comprehensive (loss)/income for the three months ended September 30, 1999
and 1998 was ($1,860) thousand and $815 thousand.
<PAGE>
(3) LOANS
Total loans outstanding by classification as of September 30, 1999 and
December 31, 1998 are as follows:
(in thousands)
September 30, December 30,
1999 1998
---------------- ---------------
Commercial & industrial $46,799 $41,502
Loans secured by real estate:
Non-residential properties 56,729 59,845
Residential properties 163,487 26,565
Construction 15,993 16,218
Loans to individuals 31,733 22,440
---------------- ---------------
$314,741 $166,570
================ ===============
As of September 30, 1999 and December 31, 1998, the Bank's recorded
investment in impaired loans, defined as nonaccrual loans, was $1.5 million
and $2.3 million respectively. At September 30, 1999, $2.0 million in loans
were past due greater than 90 days but still accruing interest as compared
to December 31, 1998 of $1.6 million.
(4) 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 for the nine months ended September 30, 1999 and
1998 are as follows- (in thousands)
1999 1998
-------------------------
Balance at beginning of period, January 1, $1,825 $1,322
Provision charged to expense 1,528 474
Loans charged-off (1,130) (219)
Recoveries on loans previously charged-off 14 27
-------------------------
Balance at end of period, September 30, $2,237 $1,604
=========================
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(5) ACQUISITIONS
On February 18, 1999, the Company, through its Bank Subsidiary acquired
Certified Mortgage Associates Inc. ("CMA"), a Marlboro, New Jersey based
correspondent mortgage banker. The Company paid the shareholders of CMA
$2.8 million (the "Purchase Price"). The Purchase Price was paid in cash
and shares of the Company's common stock, with $1.7 million of the Purchase
Price paid in cash and $1.1 million paid in shares of the Company's common
stock, valued at the average of the bid ask price for the stock during the
first twenty trading days in the thirty day period prior to consummation of
the transaction. The Company issued 102,459 shares of its common stock. The
transaction was accounted for as a purchase and the company recognized $3.9
million in goodwill. The $2.8 million purchase price will amortize over
eight years and $1.1 will amortize over ten years.
The Company has entered into a definitive Purchase Agreement dated as of
July 23, 1999 pursuant to which it will acquire Einbinder Mortgage
Corporation, a New Jersey licensed mortgage banker ("Einbinder"). The
Company will pay $600,000 for Einbinder as follows: $150,000 in cash at
closing, $350,000 through delivery of a six month promissory note with an
interest rate of 10% and the issuance of $100,000 in market value of the
Company's common stock. Consummation of the transaction is subject to
certain regulatory approvals. The parties are currently in the process of
amending the agreement to a lower purchase price of $290,000.
(6) SHAREHOLDERS' EQUITY
The Board of Directors declared a cash dividend on July 13, 1999.
Shareholders of record on August 10, 1999, received a $0.06 per share cash
dividend paid on August 25, 1999. The Board of Directors, on March 16,
1999, approved a stock repurchase program pursuant to which the Company may
repurchase from time to time up to 250,000 shares of its outstanding stock.
Shares purchased by the Company through the repurchase program will be used
to fund the dividend reinvestment program, the Company's stock option plans
and for other corporate purposes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(7) REGULATORY CAPITAL
The Parent Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies.
THE BANK'S CAPITAL AMOUNTS AND RATIOS ARE PRESENTED IN THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
----------------------------- --------------------------
Amount Ratio Amount Ratio
----------------------------- --------------------------
<S> <C> <C> <C> <C>
As of September 30, 1999-
Total Capital (to Risk $ 19,480 6.22% >= $ 25,060 8.00%
Weighted Assets)
Tier I Capital (to Risk 17,243 5.50% >= 12,530 4.00%
Weighted Assets)
Tier I Capital (to 17,243 4.28% >= 16,217 4.00%
Average Assets)
As of December 31, 1998-
Total Capital (to Risk $ 18,613 9.80% >= $ 15,190 8.00%
Weighted Assets)
Tier I Capital (to Risk 16,788 8.84% >= 7,595 4.00%
Weighted Assets)
Tier I Capital (to 16,788 7.09% >= 9,472 4.00%
Average Assets)
</TABLE>
The Parent Company's consolidated capital amounts and ratios are presented
in the following table:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
----------------------------- --------------------------
Amount Ratio Amount Ratio
----------------------------- --------------------------
<S> <C> <C> <C> <C>
As of September 30, 1999-
Total Capital (to Risk $ 22,423 7.20% >= $ 19,540 8.00%
Weighted Assets)
Tier I Capital (to Risk 20,186 6.48% >= 9,770 4.00%
Weighted Assets)
Tier I Capital (to 20,186 4.74% >= 10,510 4.00%
Average Assets)
As of December 31, 1998-
Total Capital (to Risk $ 28,271 14.85% >= 15,231 8.00%
Weighted Assets)
Tier I Capital (to Risk 26,466 13.89% >= $ 7,615 4.00%
Weighted Assets)
Tier I Capital (to 26,466 10.87% >= 9,723 4.00%
Average Assets)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of September 30, 1999, the most recent notification from the Federal
Reserve Bank categorized the Parent Company as under capitalized and the
most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as under capitalized under the regulatory framework
for prompt corrective action.
The Company has an 4.74% Tier I Leverage Ratio at September 30, 1999
compared to the federally-mandated minimum Tier I Leverage Ratio of 4.0%,
as compared to a 10.87% Ratio at December 31, 1998. The Bank has a 4.28%
Tier I Leverage Ratio at September 30, 1999 compared to the
federally-mandated minimum Tier I Leverage Ratio of 4.0%, as compared to a
7.09% Leverage Ratio December 31, 1998. These decreases were primarily due
to the capitalization of leases related to the branch expansion program and
intangibles associated with the acquisition of CMA. In addition to the
capital adequacy requirements of the Federal Reserve Board and the FDIC,
discussed above, pursuant to the order of the New Jersey Commissioner of
the Department of Banking and Insurance approving our recent acquisition of
eight branch offices, the bank is required to maintain a ratio of equity
capital to total assets of at least 6% for the next five years of
operations. At September 30, 1999, the bank's ratio of equity capital to
average total assets was 4.28%. Because the Bank does not currently meet
this minimum, it is prohibited from paying dividends to the Parent Company.
Because the Bank failed to satisfy the minimum total risk-based capital
requirement of 8% at September 30, 1999, it was deemed to be
"undercapitalized" under the Prompt Corrective Action provisions of the
Federal Deposit Insurance Act and the regulations of the FDIC. Because of
this designation, the Bank is required to submit a capital plan to the FDIC
by December 15, 1999. In addition, the Bank is generally prohibited from
making capital distributions to the holding company, paying management fees
to any entity that controls the Bank or increasing its average assets until
the capital plan has been approved. We have retained the services of an
investment banking firm to review capital augmentation plans.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
None
(9) IMPAIRED ASSETS
During the fourth quarter of 1998, we discovered that we had been the victim of
an illegal check kiting scheme to a single customer. During the quarter
September 30, 1999, in light of the passage of time without significant
recoveries from the Company's ongoing litigation against the other financial
institution involved in the scheme and our view of the assets currently
available from the debtor and his affiliates to satisfy the Company's claims,
management recorded a write down of $786 thousand before tax against this asset.
The remaining balance of the asset is $344 thousand, which represents equity in
a house owned by the spouse of the debtor, who HPS agreed to turn the residence
over to us.
<PAGE>
(10) POTENTIAL LEASE OBLIGATIONS
In August 1999, the Bank entered into leases or sublease for five (5) potential
branch locations. Under the terms of these leases or sublease the annual lease
obligation in the base year of the leases or sublease is $428 thousand in the
aggregate, $471 thousand on a fully phased in basis beginning in the fourth year
of the lease term, and increases thereafter back on increases in the consumer
price index and the lease terms range from 12 to 18 years. Payments on these
five leases or sublease were to commence on January 1, 2000. Subsequent to
September 30, 1999, the Bank provided the landlord under the leases or sublease
with notice to terminate each of the leases or sublease. Although no legal
action has been commenced, the landlor through its counsel, has indicated that
the landlord does not agree with the bank's right to terminate the leases.
(11) OTHER EXPENSE
The components of other operating expenses for the nine months ended September
30, 1999 and 1998 are as follows:
1999 1998
---- ----
Professional services 761 495
Office expense 1418 771
Advertising expense 547 279
Communication expense 525 188
Bank services 579 374
FDIC insurance 121 87
Director fees 200 211
Non loan losses(1) 824 22
Loan processing expense 933 317
Amortization of Intangibles 274 9
Other expense 364 349
----- -----
Total Other Expense 6,546 3,102
===== =====
- ----------
(1) Includes a $786 thousand write-down of uncollected assets associated with
the check-kiting scheme, disclosed in Note #9.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
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 our consolidated financial
statements and the notes relating thereto included herein. When necessary,
reclassifications have been made to prior period's data throughout the following
discussion and analysis for purposes of comparability with prior period data.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Our results of operations depend primarily on our net interest income,
which is the difference between the interest earned on our 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. Results of operations are also affected by the amounts of
non-interest income, which includes gains on sales of loans, including loans
originated under the SBA's Guaranteed Loan Program and home mortgage loans
originated for resale into the secondary market by our CMA subsidiary which was
acquired on February 18, 1999, operating expenses, and the provision for loan
losses.
NET INCOME (LOSS)
For the three months ended September 30, 1999, we incurred a net loss of $1.7
million, or a loss of $0.45 per diluted share, compared to net income of $663
thousand, or $0.20 per share, for the three months ended September 30, 1998. The
loss incurred for the three months ended September 30, 1999 reflects our
non-interest expenses growing faster than our non-interest other income. Also
contributing to the loss was an increase in our provision for loan losses. For
the three months ended September 30, 1999, our non-interest expenses increased
by $3.5 million, or 136.0%, to $6.1 million from $2.6 million for the three
months ended September 30, 1998. Our interest expense increased by $1.9 million,
or 99.4%, to $3.7 million from $1.9 million for the comparable 1998 period. Our
interest income increased by $2.2 million, or 49.1%, to $6.8 million in the 1999
period from $4.5 million in the 1998 period. Our other income decreased by $55
thousand, or 4.8%, over the comparable period of 1998 to $1.1 million in 1999
from $1.2 million in 1998. In addition, our provision for loan losses increased
for the three months ended September 30, 1999 by 340.1% over the comparable
period of 1998 from $197 thousand to $867 thousand for the three months ended
September 30, 1999. The increases in our other non-interest expenses reflect the
growth of our branch network, as the bank opened ten new branches in the past
year, as well as non-interest expense associated with the operation of our CMA
subsidiary, including amortization of goodwill incurred in connection with our
purchase of CMA, and a non-recurring writedown of an uncollected balance.
Non-interest expense associated with our operation of CMA totaled $2.0 million
for the three months ended September 30, 1999. There were no expenses associated
with CMA during the same period in 1998. Our increase in interest expense
reflects increases in the level of deposits, as well as increases in rates as a
promotional tool to attract deposits at our new branches. Our interest income
reflects increases in the level of earning assets as a result of increased
deposits.
6
<PAGE>
Included in our non-interest expense for the three months ended September
30, 1999 was a non-recurring write-down of $786 thousand regarding an
uncollected balance the bank has been carrying as an asset and which derived
from a previously disclosed check-kiting scheme. In light of the passage of time
without significant recoveries from our ongoing litigation against the other
financial institution involved in the scheme and our view of the assets
currently available from the debtor and his affiliates to satisfy our claims,
management elected to record this write-down. The company intends to pursue all
legal remedies available to obtain recoveries of uncollected amounts. The
remaining balance of this asset is $344 thousand, which represents equity in a
house owned by the spouse of the debtor, who has agreed to turn the residence
over to us.
NET INTEREST INCOME
Our net interest income increased by $376 thousand, or 14.1%, to $3.0
million for the three months ended September 30, 1999 from $2.7 million for the
three months ended September 30, 1998. The increase was primarily attributable
to an increase of $131.4 million in average earning assets for the current
three-month period totaling $353.2 million over the prior year's three-month
period totaling $221.8 million. The yield on the earning assets decreased from
8.20% for the three months ended September 30, 1998 to 7.67% for the three
months ended September 30, 1999, primarily due to the bank's shift to consumer
and mortgage lending during a lower rate environment as a response to continued
competition for commercial loans. During the third quarter, our CMA subsidiary
originated $61.1 million in loans for the bank's portfolio and the bank
purchased $30.3 million of home equity loans. Increases in interest-earning
assets were primarily funded through an increase of $170.4 million, or 82.2%, in
average deposits and borrowings to $377.8 million for the three months ended
September 30, 1999 from $207.4 million for the comparable period of 1998. In
addition to increases in the average balance of deposits and borrowings, rate on
interest bearing liabilities increased to 4.53% for the three months ended
September 30, 1999 from 4.47% for the comparable period of 1998. The increase in
the cost of funds reflects the Company's decision to offer high, promotional
rates of interest to attract new customers to our new branch locations. These
rates of interest were offered both on time deposits and through our money
market product, which paid an introductory interest rate of 6.05%. We have
discontinued offering this high rate money market product, and have reduced the
rates offered on time deposits to be comparable with those offered by competing
institutions. In addition, our promotional money market product had a temporary
introductory rate that declined by 1.25% after the first three months. All of
the deposits obtained under this promotion have reached the re-pricing stage and
the interest rate on this account is variable at the Wall Street Journal prime
interest rate less 3%.
The following table reflects the components of our net interest income,
setting forth for the periods presented herein (1) average assets, liabilities
and shareholders' equity, (2) interest income earned on interest-earning assets
and interest expense paid on interest-bearing liabilities, (3) interest yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) our net interest spread (i.e., the average yield on
interest-earning assets less the average rate on interest-bearing liabilities),
and (5) our 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%.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 vs. September 30, 1998
-------------------------------------------------------------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Taxable loans
(net of unearned income) $ 274,170 $5,533 8.07% $143,436 $3,431 9.57%
Tax-exempt securities 2,444 42 6.94% 1,562 39 0.09%
Taxable investment securities 74,407 1,155 6.21% 54,109 896 6.62%
Interest-bearing deposits 1,419 32 9.02% 12,345 37 1.20%
Federal funds sold 729 10 5.49% 10,309 143 5.55%
--------- ------ -------- ------
Total interest-earning assets 353,169 6,772 7.67% 221,761 4,546 8.20%
Noninterest-earning assets 78,356 5,773
Allowance for loan losses 2,275 1,433
-------- --------
Total average assets $429,250 $226,101
======== ========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
NOW deposits 105,687 1,021 3.86% 33,347 236 2.83%
Savings deposits 18,953 81 1.71% 14,671 78 2.13%
Money market deposits 17,813 127 2.85% 18,543 162 3.49%
Time deposits 153,121 2,002 5.23% 100,092 1,383 5.53%
Other debt 32,425 484 5.97% 313 5 6.39%
--------- ------ -------- ------
Total interest-bearing liabilities 328,000 3,715 4.53% 166,966 1,864 4.47%
Noninterest-bearing liabilities 27,841 6,510
Demand deposits 49,840 40,381
Shareholders' equity 23,570 12,243
-------- --------
Total average liabilities and
shareholders' equity $429,250 $226,101
======== ========
Net interest income 3,057 2,682
Net interest rate spread 3.14% 3.73%
Net interest income/margin on
average earning assets 3.46% 5.04%
</TABLE>
8
<PAGE>
The following table presents by category the major factors that contributed
to the changes in net interest income for each of the three-month periods ended
September 30, 1999 and 1998.Amounts have been computed on a fully tax-equivalent
basis, assuming a federal income tax rate of 34%.
Three Months Ended September 30, 1999 Versus 1998
Increase (Decrease) Due to Change In:
Volume Rate Net
------ ------- ------
Interest-Earning Assets
Interest income:
Taxable loans
(net of unearned income) 3,127 (1,025) 2,102
Tax-exempt securities 22 (19) 3
Taxable investment securities 336 (77) 259
Interest bearing deposits (33) 28 (5)
Federal funds sold (133) (0) (133)
------ ------- ------
Total interest income $3,320 $(1,094) $2.226
====== ======= ======
Interest-Bearing Liabilities
Interest expense:
NOW deposits 512 273 785
Savings deposits 23 (20) 3
Money market deposits (6) (29) (35)
Time deposits 733 (114) 619
Other debt 513 (34) 479
Total interest expense 1,774 77 1,851
------ ------- ------
Net interest income $1,546 $(1,171) $ 375
====== ======= ======
PROVISION FOR LOAN LOSSES
Our provision for loan losses for the three months ended September 30, 1999
totaled $867 thousand, an increase of $670 thousand over the provision of $197
thousand for the three months ended September 30, 1998.The increase in our
provision for the three months ended September 30, 1999 over the comparable
prior year period reflects the increase in our loan portfolio and increased
charge-offs incurred during the quarter, as well as our analysis of the
estimated potential losses inherent in the loan portfolio based upon our review
of particular loans, the credit worthiness of particular borrowers and general
economic conditions. For the three months ended September 30, 1999, our average
loans (net of unearned) totaled $274.2 million, an increase of $130.8 million,
or 91.2% over average total loans of $143.4 million for the three months ended
September 30, 1998.In addition, during this period, our ratio of non-performing
loans to total loans decreased to .49% from 1.50% at September 30, 1998.
OTHER INCOME
Our other income, which consists of service charges on deposits, gains on
sales of securities and loans and other income decreased by $55 thousand, or
4.8%, to $1.1 million for the three months ended September 30, 1999 from $1.2
million for the three months ended September 30, 1998.This decrease primarily
represents a decrease of $266 thousand in the gain on sale of loans and a
decrease of $124 thousand on the gain/loss on the sale of securities. Partially
offsetting these decreases was our other income, representing other transaction
charges and fees on non-deposit services which increased by $355
9
<PAGE>
thousand, or 152.4% to $588 thousand for the three months ended September 30,
1999 from $233 thousand for the comparable period of 1998.We sell loans into the
secondary market both through our SBA Guaranteed Loan Program and through our
CMA subsidiary. The decline in the gain on sale of loans for the three months
ended September 30, 1999 is attributable to a decrease of $186 thousand in the
gain on the sale of SBA loans which sales were negatively impacted by lower
market prices, a decrease of $67 thousand in the gain on the sale of mortgage
loans, and a decrease of $13 thousand in the gain on sale of other loans.
The increase in our other income of $355 thousand is primarily due to an
increase of $285 thousand in mortgage fees, an increase of $25 thousand in
interest on the cash surrender value of life insurance, an increase of $25
thousand in transaction charges on non-deposit services, and an increase of $20
thousand in miscellaneous income.
OTHER EXPENSES
Our other expenses increased to $6.1 million for the three months ended
September 30, 1999 from $2.6 million for the comparable period of 1998.We
experienced increases of $739 thousand in salaries and benefits which increased
to $2.0 million from $1.3 million, $454 thousand in occupancy expenses which
increased to $682 thousand from $228 thousand, and $2.3 million in other
operating expenses which increased to $3.4 million from $1.0 million during the
current three months ended September 1999 compared to the three months ended
September 30, 1998.The increases in salary and benefits and occupancy expenses
were substantially attributable to the increase in our branch network, as we
opened ten additional branches over the past year, as well as administrative
expenses from the operation of our CMA subsidiary. Increases reflect the
increased lease and other occupancy expenses associated with these branches, as
well as increases in salary expenses to hire personnel to operate the branches.
In addition, our salary expense increased because of the need to hire additional
administrative staff to oversee and administer the growth in our loan portfolio.
Other expenses were also impacted by the writedown related to the check kiting
of $786 thousand, which was previously discussed.
10
<PAGE>
The following table presents the breakout of our other operating expenses
for the three month period ended September 30, 1999:
Three Months Ended
September 30, 1999 v. 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Increase
September 30, 1999 September 30, 1998 (Decrease)
------------------ ------------------ ----------
<S> <C> <C> <C>
Professional Services $ 305 $ 126 $ 179
Office Expense 573 267 306
Advertising Expense 233 101 132
Communication Expense 249 73 176
Bank Services 219 116 103
FDIC Insurance 57 30 27
Director Fees 21 57 (36)
Other Losses 794(1) 17 777
Loan Processing Expense 576 129 447
Goodwill 119 3 116
Other Expense 204 123 81
------- ------ ------
Total Other Operating Expense $ 3,350 $1,042 $2,308
</TABLE>
(1) Includes a $786 thousand write-down of uncollected assets associated with
the check-kiting scheme.
The increases in professional services, office expense, communication
expense, bank services and FDIC insurance is the result of the addition of ten
new branches, our growth in assets and expenses incurred operating our CMA
subsidiary. Total other operating expenses incurred in connection with CMA were
$520 thousand for the three months ended September 30, 1999.There were no
expenses incurred in connection with CMA for the same period in 1998.The
increase in advertising expense is the result of increased marketing efforts and
the increase in loan processing expense is the result of additional volume and
collection activity.
INCOME TAX EXPENSE
For the three months ended September 30, 1999, we recognized a tax benefit
of $1.1 million related to the loss recognized for the three-month period, as
compared to an income tax provision of $388 thousand for the three months ended
September 30, 1998.
11
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
NET INCOME (LOSS)
For the nine months ended September 30, 1999, we incurred a net loss of
$1.6 million, or a loss of $0.42 per share on a diluted basis, compared to net
income of $1.6 million, or $0.48 per share, for the nine months ended September
30, 1998.The loss incurred for the nine months ended September 30, 1999 largely
reflects the growth in our non-interest expense due to the opening of ten new
branches, non-interest expenses of $3.6 million associated with the operation of
our CMA subsidiary and amortization of the goodwill created in our purchase of
CMA. For the nine months ended September 30, 1999, our non-interest expenses
increased by $7.2 million, or 94.7%, to $14.8 million from $7.6 million for the
nine months ended September 30, 1998. Because we acquired CMA using purchase
accounting, we recognized goodwill expenses of $265 thousand during the 1999
period. There $9 thousand goodwill amortization expenses incurred in 1998,
relating to the acquisition of the Banks's first branch from the Resolution
Trust Corporation (RYC). Also contributing to the loss was an increase in our
provision for loan losses. Our provision for loan losses increased for the nine
months ended September 30, 1999 by $1.1 million, or 222.4%, over the comparable
period of 1998, to $1.5 million compared to $474 thousand. The increase in our
provision for loan losses is largely the result of growth in our loan portfolio,
an increase in reserve factors we use to determine reserve levels and increased
charge-offs incurred during the nine month period ended September 30, 1999, as
well as our analysis of the estimated potential losses inherent in our loan
portfolio. These increases were partially offset by an increase in net interest
income of $528 thousand.
Included in our non-interest expense items was a non-recurring write-down
of $786 thousand regarding an uncollected balance the bank has been carrying as
an asset and which derived from a previously disclosed check-kiting scheme. In
light of the passage of time without significant recoveries from the company's
ongoing litigation against the other financial institution involved in the
scheme and the company's view of the assets currently available from the debtor
and his affiliates to satisfy the company's claims, management elected to record
this write-down. The company intends to pursue all legal remedies available to
obtain recoveries of uncollected amounts. The remaining balance of this asset is
$344 thousand, which represents equity in a house owned by the spouse of the
debtor, who has agreed to turn the residence over to us.
NET INTEREST INCOME
Our net interest income increased by $528 thousand, or 7.0% to $8.1 million
for the nine months ended September 30, 1999 from $7.5 million for the nine
months ended September 30, 1998.
The increase was the result of an increase in interest income in excess of
interest expense. The growth in interest income was primarily attributable to an
increase of $85.2 million in average earning assets for the current nine-month
period totaling $291.4 million over the prior year's nine-month period totaling
$206.2 million. The increases in average earning assets occurred across the
entire balance sheet, with increases in the securities portfolio and the loan
portfolio. Growth in the loan portfolio was primarily comprised of $82.2 million
of adjustable rate mortgages originated between April 30, 1999 and September 30,
1999 by the bank's CMA subsidiary and $56.0 million of purchased home equity
loans, of which $25.7 million were purchased on May 27, 1999 and $30.3 million
were purchased on July 12, 1999.
12
<PAGE>
As a result of the increase in mortgages and home equity loans in our portfolio,
the nine month yield on earning assets decreased from 8.38% at September 30,
1999 to 7.66% at September 30, 1999. These loans generally have lower yields
than our commercial loans.
Increases in interest-earning assets were primarily funded through an
increase of $105.7 million, or 52.0% in average deposits and borrowings to
$308.8 million for the nine months ended September 30, 1999 from $203.1 million
for the comparable period of 1998. Our rate on interest bearing liabilities
remained the same to 4.42% for the nine months ended September 30, 1999 from
4.42% for the comparable period of 1998.
13
<PAGE>
Nine Months Ended
September 30, 1999 v. 1998
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands - September 30, 1999 September 30. 1998
Interest Amounts and Interest --------------------------------------------------------------
Rates/Yields on a Fully Tax Average Rate/ Average Rate/
Equivalent Basis) Balance Interest Yield Balance Interest Yield
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Taxable loans
(net of unearned income) $212,547 $13,257 8.32% $135,928 $9,672 9.49%
Tax-exempt securities 1,877 114 8.07 1,633 97 7.92%
Taxable investment securities 60,305 2,703 5.98 51,479 2,572 6.66%
Interest-bearing deposits 2,424 160 8.80 5,408 132 3.25%
Federal funds sold 14,213 514 4.82 11,714 483 5.50%
-------- ------- -------- ------
Total interest-earning assets 291,366 16,748 7.66 206,162 12,956 8.38%
Noninterest-earning assets 53,512 17,994
Allowance for loan losses 1,927 1,339
-------- --------
Total average assets $346,805 $225,495
======== ========
Liabilities and
Shareholders' Equity
Interest-bearing liabilities:
NOW deposits $84,477 2,470 3.90% $34,525 $ 693 2.68%
Savings deposits 16,677 230 1.84 13,371 236 2.35%
Money market deposits 17,841 395 2.95 18,441 481 3.48%
Time deposits 129,052 4,957 5.12 96,159 3,972 5.51%
Other debt 12,832 605 6.29 323 17 7.02%
-------- ------- -------- ------
Total interest-bearing liabilities 260,879 8,657 4.42 162,819 5,399 4.42%
Noninterest-bearing liabilities 14,355 1,743
Demand deposits 47,926 40,283
Shareholders' equity 23,645 20,650
-------- --------
Total average liabilities
and shareholders' equity $346,805 $225,495
======== ========
Net interest income 8,091 7,557
Net interest rate spread 3.24% 3.96%
Net interest income/margin
on average earning assets 3.70% 4.89%
</TABLE>
14
<PAGE>
The following table presents by category the major factors that contributed
to the changes in net interest income for each of the nine-month periods ended
September 30, 1999 and 1998.Amounts have been computed on a fully tax-equivalent
basis, assuming a federal income tax rate of 34%.
Nine Months Ended September 30
1999 versus 1998 Increase (Decrease)
(Dollar Amounts in Thousands on a Due to Change in:
Fully Tax-Equivalent Basis) ------------------------------------
Volume Rate Net
------ ------- ------
Interest-Earning Assets
Interest income:
Taxable loans
(net of unearned income) $5,452 $(1,867) $3,585
Tax-exempt securities 14 2 17
Taxable investment securities 441 (310) 131
Interest bearing deposits (73) 101 28
Federal funds sold 103 (72) 31
------ ------- ------
Total interest income $5,938 $(2,146) $3,792
====== ======= ======
Interest-Bearing Liabilities
Interest expense:
NOW deposits $1,003 $774 $1,777
Savings deposits 58 (64) (6)
Money market deposits (16) (70) (86)
Time deposits 1,359 (374) 985
Other debt 658 (70) 588
Total interest expense 3,062 196 3,258
------ ------- ------
Net interest income $2,875 $(2,341) $ 534
====== ======= ======
PROVISION FOR LOAN LOSSES
Our provision for loan losses for the nine months ended September 30, 1999
totaled $1.5 million, an increase of $1.1 million over the provision of $474
thousand for the nine months ended September 30, 1998.The increase in our
provision for the nine months ended September 30, 1999 over the comparable prior
year period reflects both the increase in our loan portfolio, an increase in the
reserve factors we use to determine reserve levels and increased charge-offs
incurred during the nine months ended September 30, 1999, as well as our
analysis of the estimated potential losses inherent in the loan portfolio based
upon our review of particular loans, the credit worthiness of particular
borrowers and general economic conditions. For the nine months ended September
30, 1999, our average loans totaled $212.5 million, an increase of $76.6
million, or 56.4% over average total loans of $135.9 million for the nine months
ended September 30, 1998.In addition, during this period, our ratio of
non-accrual loans to total loans decreased to .49% from 1.38% at September 30,
1998.
15
<PAGE>
OTHER INCOME
Our other income, which consists of service charges on deposits, gains on
sales of securities and loans and other income increased by $2.4 million, or
77.0%, to $5.6 million for the nine months ended September 30, 1999 from $3.1
million for the nine months ended September 30, 1998.This increase primarily
represents an increase of $2.0 million in the gain on sale of loans attributable
to $2.7 million in gains on sales of loans by our CMA subsidiary partially
offset by a decline of $700 thousand on sales of SBA loans compared to the prior
period. SBA loan sales were negatively impacted by lower market prices. In
addition, our other income, representing SBA servicing fees and other fee
income, increased by $567 thousand to $1.2 million, or 91.5% for the nine months
ended September 30, 1999 from $620 thousand for the comparable period of 1998.
OTHER EXPENSES
Our other non-interest expense increased $7.2 million, or 95.1%, to $14.8
million for the nine months ended September 30, 1999 from $7.6 million for the
comparable period of 1998.We experienced increases of $2.8 million in salaries
and benefits, which increased to $6.6 million from $3.7 million, $952 thousand
in occupancy expenses which increased to $1.7 million from $765 thousand, and
$3.4 million in other operating expenses which increased to $6.5 million from
$3.1 million during the current nine months compared to the nine months ended
September 30, 1998.These increases were substantially attributable to the
increase in our branch network, as we opened ten additional branches over the
past year, and the acquisition of CMA during February. This acquisition was
accounted for as a purchase and the prior period does not reflect any operating
expenses associated with CMA. Increases reflect the increased lease and other
occupancy expenses associated with these branches, as well as increases in
salary expenses to hire personnel to operate the branches. In addition, our
salary expense increased because of the need to hire additional administrative
staff to oversee and administer the growth in our loan portfolio.
Other expenses were also impacted by the write-down related to the
Check-Kiting of $786 thousand, which was previously discussed.
16
<PAGE>
The following table presents the breakout of other operating expenses for
the nine month period ended September 30, 1999 and 1998:
Nine Months Ended September 30, 1999 vs. 1999
<TABLE>
<CAPTION>
(Dollars in Thousands)
September 30, 1999 September 30, 1998 Increase/(Decrease)
------------------ ------------------ -------------------
<S> <C> <C> <C>
Professional services $ 761 $ 495 $ 266
Office expense 1,418 771 647
Advertising expense 547 279 268
Communication expense 525 188 337
Bank services 579 374 205
FDIC insurance 121 87 34
Director fees 200 211 (11)
Other losses 824(1) 22 802
Loan processing expense 933 317 616
Goodwill 274 9 265
Other expense 364 349 15
------- ------ ------
Total other expense $ 6,546 $3,102 $3,444
======= ====== ======
</TABLE>
(1) Includes a $786 thousand write-down of uncollected assets associated with
the check-kiting scheme.
The increases in professional services, office expense, communication
expense, bank services and FDIC insurance is the result of the addition of ten
new branches, our growth in assets and expenses incurred operating our CMA
subsidiary. Total other operating expenses incurred in connection with CMA were
$762 thousand for the nine months ended September 30, 1999.There were no
expenses incurred in connection with CMA for the same period in 1998.The
increase in advertising expense is the result of increased marketing efforts and
the increase in loan processing expense is the result of additional volume and
collection activity.
INCOME TAX EXPENSE
For the nine months ended September 30, 1999, we recognized a tax benefit
of $1.1 million related to the loss recognized for the nine-month period, as
compared to an income tax provision of $1.0 million for the nine months ended
1998.
17
<PAGE>
FINANCIAL CONDITION AT SEPTEMBER 30, 1999
Our total assets at September 30, 1999 increased to $437.6 million, an
increase of $183.0 million, or 71.9%, over assets of $254.6 million at December
31, 1998.Net loans increased $148.8 million to $313.8 million, or 90.2%, from
$165.0 million at December 31, 1998.Our securities portfolio increased $35.1
million to $76.1 million at September 30, 1999 from $40.9 million at December
31, 1998.Our growth in assets was primarily the result of our branch expansion
and related promotional activities, which increased our total deposits.
At September 30, 1999, our total deposits increased $151.1 million to
$377.9 million, or 66.6%, from total deposits of $226.9 million at December 31,
1998. These increases primarily reflect increases in our premium rate money
market account and jumbo certificates of deposit from municipalities in our
market area.
LOAN PORTFOLIO
At September 30, 1999, our net loans totaled $313.8 million, an increase of
$148.8 million, or 90.2%, from $165.0 million at December 31, 1998.The increase
in the loan portfolio reflects our branch expansion, the purchase of home equity
loans, as well as our decision to originate adjustable rate one-to-four family
residential mortgages for our portfolio through our CMA subsidiary. The $148.8
million increase in loans was comprised of $80.1 million of ARMS, $54.6 million
of home equity loans, $10.1 million of consumer loans and $4.0 million of other
commercial loans.
At September 30, 1999, the composition of our portfolio changed so that
residential, one-to-four family mortgages, including $54.6 million in home
equity loans, account for 51.9% of the total portfolio, compared to 15.9% at
December 31, 1998.Commercial and industrial loans account for 14.9% of the
portfolio at September 30, 1999, compared to 24.9% at December 31, 1998.Loans
secured by non-residential properties account for 18.0 % of the portfolio at
September 30, 1999, compared to 35.9% of the portfolio at December 31, 1998. Due
to the increasing competition for commercial and non-residential loans, we
anticipate that the portion of our portfolio consisting of one-to-four family
residential home mortgages will continue to increase as loans in process close,
however, we are no longer originating residential mortgages for our portfolio.
The following table sets forth the classification of our loans by major
category at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and industrial $ 46,799 14.9 $ 41,502 24.9
Real Estate
Non-residential Properties 56,729 18.0 59,845 35.9
Residential Properties 163,487 51.9 26,565 15.9
Construction 15,993 5.1 16,218 9.8
Consumer 31,733 10.1 22,440 13.5
-------- ----- -------- -----
TOTAL LOANS $314,741 100.0% $166,570 100.0%
======== ===== ======== =====
</TABLE>
18
<PAGE>
ASSET QUALITY
Our principal interest earning assets are our loans. Inherent in the
lending function is the possibility that a customer may not perform in
accordance with the contractual terms of the loan. A borrower's inability to
repay a loan can create the risk of non-accrual loans, past due loans,
restructured loans and potential problem loans.
19
<PAGE>
The following table sets forth information concerning our non-accrual loans
and non-performing assets as of September 30, 1999 and December 31, 1998:
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
(Dollars in Thousands)
Nonaccrual loans by category
Real Estate 1,379 2,297
Installment 38 0
Commercial 130 0
------ ------
Total 1,547 2,297
Past due 90 days or more and still
accruing interest
Real Estate 602 790
Installment 11 7
1,387 803
Commercial ------ ------
Total 2,000 1,600
Total Non-Performing Loans $3,547 $3,897
====== ======
REO Property 82 0
------ ------
Total Non-Performing Assets $3,629 $3,897
====== ======
Nonaccrual loans to total loans 0.49% 1.38%
Non-performing assets to total assets 0.83% 1.53%
Allowance for loan losses as a 63.07% 46.83%
percentage of non-performing loans (a)
- ----------
(a) includes loans greater than 90 days past due that are still accruing
interest
Our non-accrual loans decreased by $660 thousand from $2.3 million at
December 31, 1998 to September 30, 1999, when they totaled $1.6 million. The
decrease in non-accrual loans is substantially a result of a $617 thousand
nonaccrual loan that was replaced by a new loan to new borrowers. The loans past
due 90 days or more and still accruing interest are well collateralized and in
the process of collection subsequent to September 30, 1999 a non-accrual loan
with a balance of $810 thousand was reclassified as an REO property.
ALLOWANCE FOR LOAN LOSSES
We attempt to maintain an allowance for loan losses at a sufficient level
to provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur and any subsequent recovery is
credited to the allowance. Our allowance for loan losses totaled $2.2 million at
September 30, 1999 compared to $1.8 million at December 31, 1998. The increase
in the allowance is due to the continued increase in our loan portfolio, an
increase in the reserve factors that we use to determine reserve levels and
increased charge-offs incurred during the year to date, as well as our analysis
of the estimated potential losses inherent in the loan portfolio based upon our
review of particular loans, the credit worthiness of particular borrowers and
general economic conditions.
20
<PAGE>
The following is a summary of the reconciliation for the allowance of loan
losses for the nine months ended September 30, 1999 and the year ended December
31, 1998:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
September 30 December 31
1999 1998
------------ -----------
(Dollars in Thousands)
Balance at Beginning of Period $1,825 $1,322
CHARGE-OFFS
Real Estate 764 254
Consumer 39 15
Commercial and industrial 327 60
------ ------
Total charge-offs $1,130 $ 329
Recoveries
Real Estate 3 23
Consumer 11 5
Total recoveries 14 28
------ ------
Total net charge-offs $1,116 $ 301
Provision charged to expense 1,528 804
Balance of allowance at end of period $2,237 $1,825
Ratio of net charge-offs to average
loans outstanding 0.53% 0.21%
Ratio of allowance to total loans,
net of loans held for sale 0.72% 1.12%
The following table sets forth for each of our major loan categories,
the amount and percentage of the allowance for loan losses attributed to such
category and a percentage of total loans represented by such category as of
September 30, 1999 and December 31, 1998:
September 30, December 31,
1999 1998
--------------------- --------------------
% of % of
Amount All loans Amount All Loans
------ --------- ------ ---------
(Dollars in Thousands)
Balance Applicable to:
Commercial & industrial $ 959 14.7% $ 741 24.9%
Real estate:
Non-residential properties 393 18.0 663 35.9
Residential properties 390 51.1 96 15.9
Construction 221 5.1 160 9.8
Consumer 274 10.1 165 13.50
------ ----- ------ -----
Total $2,237 100.0% $1,825 100.0%
====== ===== ====== =====
21
<PAGE>
We maintain an investment security portfolio for asset-liability risk
control purposes and to provide an additional source of funds. The portfolio is
comprised of US Treasury securities, obligations of US Government and
Government-sponsored agencies, selected state and municipal obligations,
corporate securities and equity securities. Management determines the
appropriate security classification (i.e., available for sale, held to maturity
or trading) at the time of purchase. At September 30, 1999, our investment
security portfolio totaled $76.1 million, including $41.5 million in securities
available for sale and $34.5 million of securities held to maturity. This
represented an increase of $35.1 million over total investments securities of
$40.9 million at December 31, 1998. At September 30, 1999, no investment
securities were classified as trading securities. The increase in investment
securities represents the investing of new deposits in excess of loan demand
during the first two quarters of the year.
A comparative summary of securities available for sale and held to maturity
at September 30, 1999 and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 6,986 $ 6,930 $ 243 $ 244
U.S. Govt. agencies 10,150 9,997 4,371 4,401
Mortgage - backed securities 20,365 19,768 14,910 14,771
State and municipal 656 660 931 945
Corporate Debt securities 964 917 0 0
Federal Home Loan Bank stock 3,546 2,546 630 630
Other Corporate stocks 1,034 713 612 499
------- ------- ------- -------
Total $42,701 $41,530 $21.697 $21,490
======= ======= ======= =======
Held to maturity
U.S. Govt. agencies $20,244 $19,303 $ 3,757 $ 3,402
Mortgage - backed securities 14,289 13,565 15,182 15,188
Other 00 00 500 499
------- ------- ------- -------
Total $34,533 $32,868 $19,439 $19,089
======= ======= ======= =======
</TABLE>
22
<PAGE>
The following table sets forth the maturity distribution of our
available for sale portfolio at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Available for sale
Due in one year or less 224 225 516 517
Due after one year through
five years 9,440 9,373 658 671
Due after five years through
ten years 6,000 5,878 0 0
Due after ten years 3,092 3,028 4,371 4,401
Mortgage-backed securities 20,365 19,767 14,910 14,771
Corporate stock 3,580 3,259 1,242 1,129
--------- -------- --------- -------
Total 42,701 41,530 21,697 21,490
========= ======== ========= =======
</TABLE>
23
<PAGE>
The following tables sets forth the maturity distribution of our held to
maturity portfolio at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Held to maturity
Due in one year or less 0 0 1,507 1,506
Due after one year through
five years 11,500 11,191 1,500 1,425
Due after five years through
ten years 7,244 6,663 1,250 970
Due after ten years 1,500 1,449 0 0
Mortgage-backed securities 14,289 13,565 15,182 15,188
--------- -------- --------- -------
Total 34,533 32,868 19,439 19,089
========= ======== ========= =======
</TABLE>
DEPOSITS
Deposits are our primary source of funds. For the nine months ended
September 30, 1999, our total deposits increased by $151.1 million, or 66.6%, to
$377.9 million at September 30, 1999 from $226.9 million at December 31, 1998.
Because of promotional efforts in connection with our new branches, our interest
paying demand deposits, which include our premium rate money market account,
increased by $63.0 million to $103.6 million at September 30, 1999 from $40.6
million at December 31, 1998, and our time deposits of over $100 thousand
increased by $56.8 million to $85.0 million at September 30, 1999 from $28.2
million at December 31, 1998. In addition, our time deposits of less than $100
thousand increased by $23.5 million to $97.2 million at September 30, 1999 from
$73.7 million at December 31, 1998. The result of these promotional activities
and increased reliance on time deposits of over $100 thousand was to increase
our cost of funds (including non-interest bearing deposits) to 3.74% for the
nine months ended September 30, 1999 from 3.55% for the year ended December 31,
1998. In conjunction with the post promotion period, we have ended our premium
money market account program and have scaled back our rates on our retail time
deposits to match market rates.
24
<PAGE>
The following table sets forth the average of various types of deposits for
the nine months ended September 30, 1999 and the year ended December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------- -----------------------------------------------
Average Average
Amount % Rate Amount % Rate
--------- ------- ---------- --------- ------- ----------
(Dollars in thousands)
Average Balance:
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $47,926 16.2% 0.00% $41,250 20.0% 0.00%
NOW deposits 84,477 28.6% 3.90 36,162 17.5% 2.68
Savings deposits 16,677 5.6% 1.84 13,811 6.7% 2.35
Money market deposits 17,841 6.0% 2.95 18,557 9.0% 3.48
Time deposits 129,052 43.6% 5.12 96,969 46.9% 5.51
-------- ----- -------- -----
Total $295,973 100.0% $206,749 100.0%
======== ===== ======== =====
</TABLE>
INTEREST RATE SENSITIVITY
The principal objectives of our asset and liability management function
are to establish prudent risk management guidelines, evaluate and control the
level of interest rate risk in balance sheet accounts, determine the level of
appropriate risk given our business focus, operating environment, capital, and
liquidity requirements, and actively manage risk within the Board approved
guidelines. We seek to reduce the vulnerability of our 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 our maturities and repricing of loans, investments, deposits and
borrowings, cash flow needs, current market conditions, and interest rate
levels.
We use various techniques to evaluate risk levels on both a short and
long-term basis. One of the monitoring tools is the "gap" ratio. A gap ratio as
a percentage of assets is calculated to determine the maturity and repricing
mismatch between interest rate-sensitive assets and interest rate-sensitive
liabilities. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-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 rate-sensitive liabilities exceeds interest rate-sensitive assets,
and lower rates should result in higher net interest income.
The following table sets forth the gap ratio at September 30, 1999.
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. As an
example, the rate on NOW accounts is expected to increase just 1/3 of a 1% of
the change in Federal Funds rate. Accordingly, 1/3 or 33% of the balances are
represented on the table as repricing within six months.
25
<PAGE>
Repricing of mortgage-related investments are shown by contractual
amortization and estimated prepayments based on the most recent 3-month constant
prepayment rate. 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. At September 30, 1999, these
simulations show that with a 300 basis point increase in interest rates, our net
interest income would show a 13.8% decline; and with a decline of 300 basis
points in interest rates, our net interest income would increase 11.4%.These
variances in net interest income are not within our board-approved guidelines of
+/-7%.
Finally, to measure the impact of longer-term asset and liability
mismatches beyond two years, we utilize 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 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 rate shocks 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 bank's variance in the
economic value of equity as a percentage of assets with rate shocks of 200 basis
points is a decline of 3.14% in a rising rate environment and an increase of
2.4% in a falling rate environment. The decline of 3.14% in the EVPE in a rising
interest rate environment is not within board-approved guidelines of +/-3%.
The Company is taking several specific actions to correct the above
matters. Investment portfolio cash flows are utilized to pay down short-term
borrowings. Core deposit growth will replace short-term large CD balances.
Competitive rates are being offered on longer term certificates of deposit. The
Company is focusing on floating rate SBA loan origination.
26
<PAGE>
<TABLE>
<CAPTION>
Six Months More Than One More Than Two
Under Six Through One Year Through Years Through
Months Year Two Years Five Years
--------- ------------ ------------ --------------
(Dollars in Thousands)
Assets:
<S> <C> <C> <C> <C>
Cash and other asset -- -- -- --
Federal funds sold -- -- -- --
Interest bearing deposits -- -- -- --
Investment securities 10,064 4,790 12,197 28,082
Loans 78,107 23,199 28,565 144,660
TOTAL ASSETS: 88,171 27,989 40,762 172,742
Liabilities and Shareholder's Equity:
Noninterest demand -- -- -- --
NOW deposits 5,768 -- -- 8,216
Savings deposits 17,074 -- 2,820 12,202
Money market deposits 13,826 -- 6,912 6,913
Time deposits 137,098 15,194 25,832 3,631
Top banana account 58,498 -- -- --
Borrowings 30,000 -- -- --
Other liabilities -- -- -- --
Shareholders' Equity -- -- -- --
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 262,264 15,194 35,564 30,962
GAP (174,093) 12,795 5,198 141,780
Cumulative gap (174,093) (161,298) (156,100) (14,320)
Cumulative gap to total assets (39.8)% (36.9)% (35.7)% (3.3)%
<CAPTION>
More Than
Five Years More Than Ten
through Ten Years and Not
Years Repricing Total
----------- ------------- -----
(Dollars in Thousands)
Assets:
<S> <C> <C> <C>
Cash and other asset -- 29,934 29,934
Federal funds sold -- -- --
Interest bearing deposits -- 15,566 15,566
Investment securities 12,289 8,642 76,064
Loans 30,128 11,362 316,021
TOTAL ASSETS: 42,417 65,504 437,585
Liabilities and Shareholder's Equity:
Noninterest demand -- 56,778 56,778
NOW deposits 3,496 -- 17,480
Savings deposits 3,192 -- 35,288
Money market deposits -- -- 27,651
Time deposits 465 -- 182,220
Top banana account -- -- 58,498
Borrowings -- -- 30,000
Other liabilities -- 5,745 5,745
Shareholders' Equity -- 23,925 23,925
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 7,153 86,448 437,585
GAP 35,264 (20,944)
Cumulative gap 20,944 --
Cumulative gap to total assets 4.8% 0.0%
</TABLE>
LIQUIDITY
Bank Holding Company
The principal source for funds for the holding company are dividends
paid by the bank. The bank is currently restricted from paying dividends to the
holding company because its Tier 1 capital to total assets ratio is less than
six percent. See "Capital." The holding company will retain approximately $2.1
million from the offering to augment its capital, to fund additional
investments, and to have funds available to make dividend payments on the
preferred stock
27
<PAGE>
during the first year of issuance. In addition, at September 30, 1999 the
company had $2.2 million in cash and $713 thousand in marketable securities,
valued at fair market value.
Bank
Liquidity is a measure of our ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. Our
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.
Our total deposits amounted to $377.9 million, as of September 30,
1999.We have augmented liquidity from our deposit portfolio with borrowings from
the FHLB of New York. At September 30, 1999, the balance of these borrowings
were $30 million. At September 30, 1999, we could have borrowed an additional
$15 million from the FHLB of New York.
We currently hold municipal deposits totaling $67.9 million, primarily
from two municipalities. These deposits are of short duration, and are very
sensitive to price competition. If these deposits were to be withdrawn, in whole
or in part, it would negatively impact our liquidity. At September 30, 1999, we
also had commitments to fund approximately $30 million in residential mortgage
loans through our CMA subsidiary.
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Our federal regulators have classified and defined capital into
the following components: (1) Tier 1 capital, which includes tangible
shareholders' equity for common stock and qualifying preferred stock, and (2)
Tier 2 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 1 capital. Minimum capital levels are regulated by risk-based capital
adequacy guidelines which require a bank to maintain certain capital as a
percent of 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 1 capital as a percentage of risk-adjusted assets of 4.0% and
combined Tier 1 and Tier 2 capital as a percentage of risk-adjusted assets of
8.0%.
In addition to the risk-based guidelines, our regulators require that a
bank which meets the regulator's highest performance and operation standards
maintain a minimum leverage ratio (Tier 1 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.
In connection with our branch expansion the New Jersey Department of
Banking and Insurance imposed a Tier 1 capital to total assets ratio of 6%.At
September 30, 1999, the bank's leverage ratio of Tier 1 capital to average
assets was 4.28%, less than the 6% required by the
28
<PAGE>
New Jersey Department of Banking and Insurance. The bank may not pay dividends
to the holding company when its ratio is less than six percent. In addition, at
September 30, 1999, the company's and the bank's total capital to risk weighted
assets were 7.20% and 6.22%, respectively. A minimum rate of 8% is required by
the Federal Reserve and FDIC.
Because the bank failed to satisfy the minimum total risk-based capital
requirement of 8% at September 30, it was deemed to be "undercapitalized" under
the Prompt Corrective Action provisions of the Federal Deposit Insurance Act and
the regulations of the FDIC. Because of this designation, the bank is required
to submit a capital plan to the FDIC by December 15. In addition, the bank is
generally prohibited from making capital distributions to the Holding Company,
paying management fees to any entity that controls the bank or increasing its
average assets until the capital plan has been approved. We have retained the
services of an investment banking firm to review capital augmentation plans.
29
<PAGE>
The following table summarizes the holding company's risk based and
leverage capital ratios at September 30, 1999, as well as the required minimum
regulatory capital ratios:
Adequately Well
Sept. Dec. Capitalized Capitalized
1999 1998 Requirements Provisions
---- ---- ------------ ----------
(Dollars in thousands)
Total capital ratio 7.20% 14.85% 8.00% 10.00%
Tier I capital ratio 6.48% 13.89% 4.00% 6.00%
Leverage ratio 4.74% 10.87% 4.00% 5.00%
The following table summarizes the bank's risk based and leveraged
capital ratios at September 30, 1999, as well as the required minimum regulatory
capital ratios.
Adequately Well
Sept. December Capitalized Capitalized
1999 1999 Requirements Provisions
---- --------- ------------ ----------
(Dollars in Thousands)
Total capital ratio 6.22% 9.80% 8.00% 10.00%
Tier I capital ratio 5.50% 8.84% 4.00% 6.00%
Leverage ratio 4.28% 7.09% 4.00% 5.00%
30
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item I. Legal Proceedings
During the fourth quarter of 1998, we discovered that we had been the
victim of an illegal check kiting scheme to a single customer. During the
quarter September 30, 1999, in light of the passage of time without significant
recoveries from the Company's ongoing litigation against the other financial
institution involved in the scheme and our view of the assets currently
available from the debtor and his affiliates to satisfy the Company's claims,
management elected to record a write down of $766 thousand, against this asset.
The remaining balance of the asset is $344 thousand, which represents equity in
a house owned by the spouse of the debtor, who has agreed to turn the residence
over to us.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10 - Employment Agreement
Exhibit
Number (27) Financial Data Schedule
Reports on Form 8-K
Dated: July 29, 1999, 2nd Quarter Results Press Release
July 27, 1999 Registrant issued a press release on July 21, 1999
announcing that a cash dividend was declared by the Board of
Directors of the Registrant for the 19th consecutive quarter
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITY BANCORP, INC.
Date:
By: /s/ ROBERT VAN VOLKENBURGH
------------------------------------------
Robert Van Volkenburgh
Chairman of the Board
By: /s/ KEVIN KILLIAN
------------------------------------------
Kevin Killian,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
EMPLOYMENT AGREEMENT
This Employment Agreement (the Agreement") made as of this ____ day of
October, 1999, by and between ANTHONY J. FERARO, an individual residing at 458 A
Quail Ridge Drive, Manchester, Missouri 63021 ("Employee") and UNITY BANK, a New
Jersey state bank, with its principal place of business located at 64 Old
Highway 22, Clinton, New Jersey 08809 ("Employer").
WHEREAS, Employer wishes to employ Employee as its Executive Vice President
and Chief Operating Officer;
WHEREAS, the Employee agrees to be employed pursuant to the terms and
conditions of this Agreement; and
WHEREAS, Employer is the wholly owned subsidiary of Unity Bancorp, Inc., a
New Jersey corporation (the "Company").
NOW, THEREFORE, in consideration of the premises and covenants contained
herein, and with the intent to be legally bound hereby, the parties hereto
hereby agree as follows:
1. EMPLOYMENT. Employer hereby agrees to employ the Employee, and the
Employee hereby accepts such employment, upon the terms and conditions set forth
herein.
2. POSITION AND DUTIES. The Employee shall be employed as Executive Vice
President and Chief Operating Officer of the Employer, to perform such services
in that capacity as are usual and customary for comparable institutions and as
shall from time to time be established by the Chief Executive Officer or the
Board of Directors of the Employer. Employee agrees that he will devote his full
business time and efforts to his duties hereunder.
3. CASH COMPENSATION. Employer shall pay to the Employee compensation for
his services as follows:
<PAGE>
(a) Base Salary. The Employee shall be entitled to receive, commencing upon
the date of this Agreement, an annual base salary (the "Base Salary") of
$250,000 which shall be payable in installments in accordance with Employer's
usual payroll method. Annually thereafter, on or prior to the anniversary date
of this Agreement, the Board of Directors shall review the Employee's
performance, the status of Employer and such other factors as the Board of
Directors or a committee thereof shall deem appropriate, and may, but shall not
be obligated to, adjust the Base Salary accordingly.
(b) Performance Bonus. The Employee and Employer shall jointly negotiate
mutually acceptable performance criteria for the period ending March 31, 2000.
Upon satisfaction of these criteria, the Employee shall be entitled to receive a
cash bonus in the amount of $125,000. The Employee and Employer shall review
Employee's performance by April 25, 2000 to determine whether Employee has
satisfied the performance criteria, and Employer shall promptly pay the
performance bonus thereafter.
(c) Override Commission. In addition to the Base Salary and any bonus paid
to Employee hereunder, the Employer agrees to pay Employee a commission equal to
25 basis points of the guaranteed portion of all Small Business Administration
loans originated after January 1, 2000, and closed by Employer during the term
of this Agreement, up to a maximum commission of $75,000 per year; provided that
such loans bear interest rates and have terms comparable to loans actually sold
in the secondary market.
(d) Relocation Expenses. Upon the presentation by Employee to Employer of
receipts sufficient to establish expenses incurred, Employer shall reimburse
Employee for all necessary expenses incurred in relocating to New Jersey for the
purpose of commencing employment under this Agreement, up to a maximum
reimbursement of $10,000.
4. OTHER BENEFITS.
(a) Fringe Benefits. Employee shall be entitled to participate in such
benefit programs as are made available generally to employees of Employer.
2
<PAGE>
(b) Life Insurance. Employer shall obtain for the benefit of Employee life
insurance on the life of Employee in the amount of two and one-half times
Employee's annual Base salary.
(c) Stock Options. Employer and Employee shall negotiate a mutually
acceptable plan for the grant of options to Employee to purchase the common
stock of the Company, which grant will be effective on the first anniversary of
this Agreement.
5. TERM. The initial term of this Agreement shall be two years, commencing
upon the date hereof and continuing until the second anniversary hereof;
provided, however, that on each annual anniversary, the term of this Agreement
shall be extended by one twelve month period, unless within ninety days prior to
an anniversary date of this Agreement, either the Employee or Employer shall
have provided the other with written notice of its intention to cease extending
the term of this Agreement.
6. TERMINATION.
(a) Cause. As used in this Agreement, the term "Cause" shall mean any of
the following actions: the Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation or final cease-and-desist order or a material breach of any provision
of this Agreement.
(b) Termination With Cause. Employer shall have the right to terminate the
Employee for Cause, upon written notice to him of such determination, specifying
the alleged Cause. In the event of such termination, the Employee shall not be
entitled to any further benefits under this Agreement; provided, however, that
nothing contained herein shall excuse Employer from paying all benefits earned
or accrued up to the date of such termination.
(c) Termination Without Cause. If Employer terminates the Employee's
employment hereunder without Cause during the first year of this Agreement, the
Employee shall be entitled to receive his then current Base Salary for twelve
(12) months. If any such
3
<PAGE>
termination occurs during the second year of this Agreement, the Employee shall
be entitled to receive his then current Base Salary, pro rated, for a period of
nine (9) months. Thereafter, if Employee's employment is terminated without
Cause, Employee will be entitled to receive his then current Base Salary, pro
rated, for a period of three (3) months. Any such payments may be made over such
period in periodic payments in the same manner in which the Employee's salary
was paid through the time of such termination, or by a lump sum payment of the
discounted present value of all Base Salary payments through such period. The
determination of the method of payment shall be made by Employer. In determining
the discounted present value of any lump sum payments provided for hereunder,
Employer shall use an interest rate equal to the three (3) year U.S. Treasury
constant maturity rate for the month preceding the termination of Employee's
employment, as shown in Federal Reserve Statistical Release H.15. In addition,
to the extent Employee participated in Employer's hospital, health, medical and
life insurance programs as of the date of such termination, Employer shall
continue to provide employee with such benefits through such payment period. If
the Employee obtains new employment and such new employment provides for
hospital, health, medical and life insurance, and other benefits, in a manner
substantially similar to the benefits payable by Employer hereunder, Employer
may permanently terminate the duplicative benefits it is obligated to provide
hereunder.
(d) Death or Disability. This Agreement shall terminate upon Employee's
death or his disability, as defined herein. Upon Employee's death or his
disability, the obligation of Employer hereunder to pay Employee the
compensation called for under Section 3 hereof shall terminate, and Employer's
only obligation shall be to pay Employee any and all benefits to which Employee
was entitled at the time of such death or disability under any benefit plans of
Employer then in place. For purposes of this Agreement, the term "disability"
shall mean Employee's inability to substantially perform his material duties as
prescribed in this Agreement due to his incapacity or disability, physical or
mental, for a period of six (6) consecutive months, which, following a written
request by either Employer or Employee, shall be determined by
4
<PAGE>
agreement between the parties hereto and, if the parties cannot agree, by a
panel (the "Panel") of three (3) physicians, one of whom will be selected by
Employer, one by Employee and the third will be selected by the first two
physicians so selected. Executive shall be entitled to receive his full salary
and benefits under this Agreement until the date of the Panel's determination.
The Panel's determination shall be conclusive.
7. CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined),
Employee shall have the right, within sixty (60) days, upon written notice to
the Employer, to terminate his employment hereunder and the provisions of
Section 7(c) shall apply as if the Employee had been terminated.
(b) A "Change in Control" shall mean:
(1) a reorganization, merger, consolidation or sale of all or
substantially all of the assets of the Company, or a similar
transaction in which the Company is not the resulting entity;
(2) individuals who constitute the Incumbent Board (as herein
defined) of the Company cease for any reason to constitute a
majority thereof;
(3) the occurrence of any transaction requiring the approval of the
Board of Governors of the Federal Reserve System under 12 C.F.R.
ss.225.41 et seq., except a transaction by any party owning 10%
or more of the Company's outstanding stock as of the date hereof;
or
(4) an event of a nature that would be required to be reported in
response to Item I of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or
(5) Without limitation, a change in control shall be deemed to have
occurred at such time as (i) any "person" (as the term is used in
Section 13(d) and 14(d) of the Exchange Act) other than the
Company is or becomes a "beneficial owner" (as defined in Rule
13-d under the Exchange Act) directly or indirectly, of
securities of the Company representing 25% or more of the
Company's outstanding securities ordinarily having the right to
vote at the
5
<PAGE>
election of directors, excluding any securities purchased by
Employer's employee stock ownership plan and trust, or any other
employee benefit plans established by Employer from time to time
in determining whether such person is the beneficial owner of
more than 25% of Employer's securities; or
(6) A proxy statement soliciting proxies from stockholders of the
Company is disseminated by someone other than the current
management of the Company, seeking stockholder approval of a plan
of reorganization, merger or consolidation of the Company or
similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then
subject to the plan or transaction are exchanged or converted
into cash or property or securities not issued by the Company;
(7) A tender offer is made for 25% or more of the voting securities
of the Company and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Company
have tendered or offered to sell their shares pursuant to such
tender offer and such tendered shares have been accepted by the
tender offeror.
For these purposes, "Incumbent Board" means the Board of Directors of the
Company on the date hereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by members or stockholders was approved by the same
nominating committee serving under an Incumbent Board, shall be considered as
though he were a member of the Incumbent Board.
(c) Upon Employee's termination of his employment pursuant to Section 7(c),
Employee shall be entitled to receive a lump sum payment equal to his then
current Base Salary. In addition, Employer shall be obligated to maintain all
policies of insurance then covering Employee for a term of one (1) year after
such termination
6
<PAGE>
8. COVENANT NOT TO COMPETE. Employee agrees that during the term of his
employment hereunder and for a period of one (1) year after the termination of
his employment, he will not in any way, directly or indirectly, manage, operate,
control, accept employment or a consulting position with or otherwise advise or
assist or be connected with or own or have any other interest in or right with
respect to (other than through ownership of not more than five percent (5%) of
the outstanding shares of a corporation whose stock is listed on a national
securities exchange or on the National Association of Securities Dealers
Automated Quotation System) any enterprise which competes with Employer in the
business of banking in the geographic areas in which Employer conducts its
business on the date of Employee's termination. In the event that this covenant
not to compete shall be found by a court of competent jurisdiction to be invalid
or unenforceable as against public policy, such court shall exercise discretion
in reforming such covenant to the end that Employee shall be subject to a
covenant not to compete that is reasonable under the circumstances and
enforceable by Employer. Employee agrees to be bound by any such modified
covenant not to compete.
9. MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and interpreted
under the substantive law of the State of New Jersey.
(b) Severability. If any provision of this Agreement shall be held to be
invalid, void, or unenforceable, the remaining provisions hereof shall in no way
be affected or impaired, and such remaining provisions shall remain in full
force and effect.
7
<PAGE>
(c) Entire Agreement; Amendment. This Agreement sets forth the entire
understanding of the parties with regarding to the subject matter contained
herein and supersedes any and all prior agreements, arrangements or
understandings relating to the subject matter hereof and may only be amended by
written agreement signed by both parties hereto or their duly authorized
representatives.
(d) Notices hereunder shall be sent by Certified Mail, Return Receipt
Requested, to the address set forth for each party on the first page of this
Agreement. Notices to Employer shall be directed to the attention of the
Chairman of the Board.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UNITY BANK
By:/s/ ROBERT VAN VOLKENBURGH
--------------------------
Robert Van Volkenburgh, Chairman
EMPLOYEE:
/s/ ANTHONY J. FERARO
--------------------------
Anthony J. Feraro
8
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrants Unaudited September 30, 1999 interim financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 6,892
<INT-BEARING-DEPOSITS> 11,575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,530
<INVESTMENTS-CARRYING> 34,533
<INVESTMENTS-MARKET> 32,868
<LOANS> 316,021
<ALLOWANCE> 2,237
<TOTAL-ASSETS> 437,585
<DEPOSITS> 377,915
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 2,180
<LONG-TERM> 3,564
0
0
<COMMON> 26,224
<OTHER-SE> (2,298)
<TOTAL-LIABILITIES-AND-EQUITY> 437,585
<INTEREST-LOAN> 13,257
<INTEREST-INVEST> 2,938
<INTEREST-OTHER> 514
<INTEREST-TOTAL> 16,709
<INTEREST-DEPOSIT> 8,657
<INTEREST-EXPENSE> 8,657
<INTEREST-INCOME-NET> 8,052
<LOAN-LOSSES> 1,528
<SECURITIES-GAINS> 194
<EXPENSE-OTHER> 6,546
<INCOME-PRETAX> (2,689)
<INCOME-PRE-EXTRAORDINARY> (2,689)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,555)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
<YIELD-ACTUAL> .346
<LOANS-NON> 1,547
<LOANS-PAST> 2,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,825
<CHARGE-OFFS> 1,130
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 2,237
<ALLOWANCE-DOMESTIC> 2,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
