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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT, PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934,
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3282551
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(State of other jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification)
64 OLD HIGHWAY 22, CLINTON, NEW JERSEY 08809
- ---------------------------------------- ----------
(Address of principal executive offices) (zip code)
(908) 730-7630
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all 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 May 13, 1999: Common Stock, No Par Value: 3,861,568 shares
outstanding
Transitional Small Business Disclosure Format (check one):
YES X NO
--- ---
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<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CONDITION
(in thousands, except share amounts) (unaudited)
March 31, December 31,
1999 1998
--------- ------------
ASSETS
Cash And Due From Banks .......................... 27,703 15,388
Federal Funds Sold ............................... 29,150 17,100
-------- --------
Total Cash And Cash Equivalents ............... 56,853 32,488
-------- --------
Securities
Available For Sale, At Fair Value ............ 22,371 21,490
Held To Maturity, At Amortized Cost .......... 24,646 19,439
Aggregate Fair Value Of $24,040 and $19,089
-------- --------
Total Securities .............................. 47,017 40,929
-------- --------
Loans, Held For Sale ............................. 2,566 3,569
Loans, Held To Maturity .......................... 168,268 163,570
-------- --------
Loans, Total ..................................... 170,834 166,570
Less: (Deferred Costs) / Unearned Income ......... (273) (222)
Less: Loan Loss Reserve .......................... 1,684 1,825
-------- --------
Net Loans ..................................... 169,423 164,967
-------- --------
Premises And Equipment ........................... 8,560 4,559
Accrued Interest Receivable ...................... 1,207 1,163
Cash Surrender Value Of Insurance ................ 6,082 6,000
Other Assets ..................................... 9,148 4,506
-------- --------
TOTAL ASSETS .................................. 298,290 254,612
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand ........................................... 45,325 50,120
Demand Interest .................................. 75,923 40,585
Savings .......................................... 32,661 34,320
Time, $100,000 And Over .......................... 27,271 28,164
Time, Under $100,000 ............................. 84,020 73,671
-------- --------
Time, Total ...................................... 111,291 101,835
-------- --------
Total Deposits ................................ 265,200 226,830
-------- --------
Obligation Under Capital Lease ................... 3,401 304
Accrued Interest Payable ......................... 509 408
Accrued Expenses And Other Liabilities ........... 1,423 694
-------- --------
TOTAL LIABILITIES ............................. 270,533 228,266
-------- --------
Shareholder's Equity
Common Stock, $0.00 par, 7,500,000 authorized; ... 25,332 23,146
Issued Shares of 3,861,568 and 3,759,251
Outstanding Shares of 3,776,935 and 3,668,197
Treasury Stock, at cost; ......................... (1,070) (1,202)
Outstanding Shares of 84,633 and 91,054
Retained Earnings ................................ 3,694 4,534
Accumulated other comprehensive loss ............. (199) (132)
-------- --------
TOTAL SHAREHOLDERS' EQUITY ....................... 27,757 26,346
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ....... 298,290 254,612
======== ========
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
(in thousands, except per share data)
Three Months Ended
March 31,
----------------------
1999 1998
--------- ---------
Loan Interest ........................................ 3,750 3,039
Securities ........................................... 670 807
Federal Funds Sold ................................... 169 246
--------- ---------
TOTAL INTEREST INCOME ................................ 4,589 4,092
--------- ---------
Interest Expense On Deposits ......................... 1,992 1,747
--------- ---------
NET INTEREST INCOME .................................. 2,597 2,345
--------- ---------
Loan Loss Reserve .................................... 61 204
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS .... 2,536 2,141
--------- ---------
Service Charges On Deposits .......................... 169 201
Gain On Sale Of Loans ................................ 322 370
Gain On Sale Of Securities ........................... 121 73
Other Income ......................................... 1,078 177
--------- ---------
TOTAL OTHER INCOME ................................... 1,690 821
--------- ---------
Salaries ............................................. 1,802 1,202
Occupancy ............................................ 451 259
Other Operating Expense .............................. 1,179 951
--------- ---------
TOTAL OTHER EXPENSES ................................. 3,432 2,412
--------- ---------
INCOME (LOSS) BEFORE TAXES ........................... 794 550
Provision For Income Taxes ........................... 293 210
NET INCOME ........................................... 501 340
--------- ---------
Basic Earnings per Share ............................. $ 0.13 $ 0.11
========= =========
Diluted Earnings per Share ........................... $ 0.13 $ 0.11
========= =========
Weighted Average Shares O/S--Basic ................... 3,724,801 3,139,941
Weighted Average Shares O/S--
Effect of dilutive securities stock options ........ 22,796 257,105
Weighted Average Shares -- Diluted ................... 3,747,597 3,397,046
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the three months
ending March 31,
-------------------
1999 1998
------ ------
Net Income .............................................. 501 340
Other Comprehensive Income
Unrealized loss on securities ....................... (108) (158)
Tax Benefit ......................................... 41 60
---- ----
Net unrealized loss, net of reclass adjustment ...... (67) (98)
---- ----
Other comprehensive loss, net of tax ................ (67) (98)
---- ----
Comprehensive Income ................................ 434 242
==== ====
Disclosure, reclassification amount, net of tax:
Unrealized holding gains (losses) arising
during the period ................................ 8 (53)
less: reclassification adjustment for gains
in net income ............................... 75 45
---- ----
(67) (98)
==== ====
<PAGE>
<TABLE>
UNITY BANCORP, INC. AND SUBSIDIARY
<CAPTION>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (Unaudited)
For the three months
ended March 31,
--------------------
1999 1998
------- ------
<S> <C> <C>
Operating activities:
Net income ........................................................... 501 340
Adjustments to reconcile net income to net cash provided
by / (used in) operating activities
Provision for possible loan losses ................................. 61 204
Depreciation and amortization ...................................... 166 147
Net gain on sale of securities ..................................... (121) (73)
Gain on sale of loans .............................................. (322) (370)
Stock Grants ....................................................... 183 0
Amortization of securities premiums, net ........................... 0 8
Deferred tax benefit ............................................... (51) 0
Decrease (increase) in accrued interest receivable ................. (44) 31
Increase in other assets ........................................... (4,338) (306)
Increase in Deferred Costs -- Construction in Process .............. (254) 0
Increase in Bank Owned Life Insurance .............................. (82) 0
(Decrease) / Increase in accrued interest payable .................. 101 25
Increase / (Decrease) in accrued expenses and other liabilities .... 3,826 181
------- -------
Net cash provided by (used in) operating activities ........... (374) 187
======= =======
Investing activities:
Purchases of securities held to maturity ............................. (6,000) (25.,888)
Purchases of securities available for sale ........................... (3,835) 0
------- -------
Total Purchases of Securities .................................... (9,835) (18,212)
------- -------
Maturities and principal payments on securities held to maturity ..... 794 1,000
Maturities and principal payments on available for sale .............. 1,937 6.676
Proceeds from sale of securities available for sale .................. 1,070 3,793
------- -------
Total Maturities, payments, and sales ............................ 3,801 11,469
------- -------
Proceeds from sale of loans .......................................... 2,486 4,625
Net increase in loans ................................................ (6,679) (4,297)
Capital expenditures ................................................. (4,168) (275)
------- -------
Net cash used in investing activities .............................. (14,395) (14,366)
======= =======
Financing activities:
Increase in deposits ................................................. 38,340 9,299
Proceeds from issuance of common stock, net .......................... 2,186 389
Stock Dividends ...................................................... (1,157) 0
Treasury stock purchases ............................................. (51) (522)
Cash Dividends ....................................................... (184) (100)
------- -------
Net cash provided by financing activities .......................... 39,134 9,066
======= =======
(Decrease) Increase in cash and cash equivalents ...................... 24,365 (5,113)
======= =======
Cash and cash equivalents at beginning of year ........................ 32,488 32,617
======= =======
Cash and cash equivalents at end of period ............................ 56,853 27,504
======= =======
Supplemental disclosures:
Interest paid ........................................................ 1,891 1,716
Income taxes paid .................................................... 800 100
</TABLE>
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts of Unity
Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, 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
the Company's customary accounting practices and has not been audited.
Certain information and footnote disclosures required under generally accepted
accounting principles have been condensed or omitted pursuant to the SEC rules
and regulations. These interim financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended December 31, 1998.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the year.
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary,
Unity Bank (the "Bank", or when consolidated with the Parent Company, the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The Bank was incorporated in the State of New Jersey on July 27, 1990. The
Bank was subsequently granted a charter by the New Jersey Department of
Banking and commenced operations on September 13, 1991 after purchasing the
deposits of two existing branches of another financial institution through
the Resolution Trust Corporation. The Bank currently operates twelve
branches in Hunterdon, Middlesex, Somerset and Union counties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Amounts requiring the use of significant
estimates include the allowance for loan losses and the fair value
disclosures of financial instruments. Actual results could differ from
those estimates.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company classifies its securities into three categories: (1) held to
maturity, (2) available for sale and (3) trading. Securities which the
Company has the ability and intent to hold until maturity are classified as
held to maturity. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts.
Securities which are held for an indefinite period of time which management
intends to use as part of its asset/liability strategy, or that may be sold
in response to changes in interest rates, changes in prepayment risk,
increased capital requirements or other similar factors, are classified as
available for sale and are carried at market value. Differences between a
security's amortized cost and market value is charged/credited directly to
shareholders' equity, net of income tax effect. The cost of securities sold
is determined on a specific identification basis. Gains and losses on sales
of securities are recognized in the statements of income on the date of
sale.
The Company has not classified any of its securities as trading.
LOANS & LOANS HELD FOR SALE --
Interest is credited to operations primarily based upon the principal
amount outstanding. When management believes there is sufficient doubt as
to the ultimate collectibility of interest on any loan, interest accruals
are discontinued and all past due interest, previously recognized as income
is reversed and charged against current period earnings.
Loan origination fees, net of direct loan origination costs, are deferred
and are recognized over the estimated life of the related loans as an
adjustment of the loan yield, in accordance with Statement of Financial
Accounting Standards 91.
The Company evaluates its loans for impairment. A loan is considered
impaired when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment of a loan is measured
based on the present value of expected future cash flows, net of estimated
costs to sell, discounted at the loans effective interest rate. Impairment
can also be measured based on a loan's observable market price or the fair
of collateral if the loan is collateral dependent. If the measure of the
impaired loan is less than the recorded investment in the loan, the Company
establishes a valuation allowance, or adjusts existing valuation
allowances, with a corresponding charge or credit to the provision for loan
losses.
Loans held for sale are SBA loans and are reflected at the lower of
aggregate cost or market value.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR LOAN LOSSES --
The allowance for loan losses is maintained at a level management considers
adequate to provide for potential loan losses. The allowance is increased
by provisions charged to expense and reduced by net charge-offs. The level
of the allowance is based on management's evaluation of potential losses in
the loan portfolio, after consideration of prevailing economic conditions
in the Company's market area. Credit reviews of the loan portfolio,
designed to identify potential charges to the allowance, are made during
the year by management and a loan review consultant. A risk system,
consisting of multiple grading categories, is utilized as an analytical
tool to assess risk and the appropriate level of loss reserves. Along with
the risk system, management further evaluates risk characteristics of the
loan portfolio under current and anticipated economic conditions and
considers such factors as the financial condition of the borrowers, past
and expected loan loss experience, and other factors management feels
deserve recognition in establishing an adequate reserve. This risk
assessment process is performed at least quarterly, and, as adjustments
become necessary, they are realized in the periods in which they become
known. Although management attempts to maintain the allowance at a level
deemed adequate to provide for potential losses, future additions to the
allowance may be necessary based upon certain factors including changes in
market conditions. In addition, various regulatory agencies periodically
review the adequacy of the Company's allowance for loan losses. These
agencies may require the Company to make additional provisions based on
their judgments about information available to them at the time of their
examination.
PREMISES AND EQUIPMENT --
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALE AND SERVICING OF SMALL
BUSINESS ADMINISTRATION (SBA) LOANS --
The Company originates loans to customers under an SBA program that
generally provides for SBA guarantees of 70% to 90% of each loan. The
Company generally sells the guaranteed portion of each loan to a third
party and retains the unguaranteed portion in its own portfolio. To
calculate the gain (loss) on sale, the Company's investment in an SBA loan
is allocated among the retained portion of the loan, excess servicing
retained and the sold portion of the loan, based on the relative fair
market value of each portion. The gain on the sold portion of the loan is
recognized. The carrying value of the retained portion of the loan is
reduced, which increases the future yield. The excess servicing fees are
reflected as an asset and are classified in loans for financial reporting
purposes. The asset is amortized over an estimated life using a method
approximating the effective interest method; in the event future
prepayments are significant and future expected cash flows are inadequate
to cover the unamortized excess servicing asset, additional amortization
would be recognized.
Serviced loans sold to other financial institutions are not included in the
accompanying consolidated balance sheets. The total amount of such loans
serviced, but owned by outside investors, amounted to approximately $
50,029,000 and $38,353,000 at March 31, 1999 and 1998, respectively.
INCOME TAXES --
Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates, applicable to future
years, to differences between the financial reporting and the tax basis of
existing assets and liabilities.
CASH AND CASH EQUIVALENTS --
Cash and cash equivalents includes cash on hand, amounts due from banks and
Federal funds sold.
NET INCOME PER SHARE --
The Bank adopted SFAS No. 128, "Earnings per Share" effective December 15,
1997. In accordance with this new accounting standard, basic earnings per
share is computed based on the weighted average number of shares
outstanding for the periods presented. Diluted earnings per share is
computed based on the weighted average number of shares outstanding for the
period presented adjusted for the effect of the stock options and warrants
outstanding, if dilutive. The Bank restated previously reporting earnings
per share for 1996 and 1995 as required by this new accounting standard.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME --
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income," in June 1997. This statement is effective
for years beginning after December 15, 1997. Statement No. 130 requires
entities that present a complete set of financial statements to include the
components of comprehensive income. Comprehensive income consists of net
income or loss for the current period and revenues, expenses, gains, and
losses that have been previously excluded from the income statement and
were only reported as a component of equity. The effect of adopting
Statement No. 130 is not material to the Company's results of operations or
financial position.
RECLASSIFICATIONS --
Certain reclassifications have been made to prior years' amounts to conform
with the current year presentation.
(3) LOANS
Total loans outstanding by classification as of March 31, 1999 and 1998 are
as follows: (in thousands)
March 31, March 31,
1999 1998
--------- ---------
Commercial & industrial ............. 43,322 24,715
Loans secured by real estate:
Non-residential properties .... 60,558 62,279
Residential properties ........ 26,746 27,533
Construction .................. 15,415 12,091
Lease financing ..................... 0 0
Loans to individuals ................ 25,099 7,514
------- --------
171,140 134,132
======= ========
As of March 31, 1999 and 1998, the Bank's recorded investment in impaired
loans, defined as nonaccrual loans, was $1,483,000 and $2,290,000
respectively, and the related valuation allowance was $1,685,000 and
$1,322,000, respectively. This valuation allowance is included in the
allowance for possible loan losses in the accompanying balance sheet. At
March 31, 1999, $1,478,000 in loans were past due greater than 90 days but
still accruing interest as compared to March 1998 of $1,071,000.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES:
The allowance for possible loan losses is based on estimates. Ultimate
losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become known, they are reflected in
operations in the periods in which they become known.
An analysis of the change in the allowance for possible loan losses for the
first quarter of 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 ........................ 61 204
Loans charged-off ................................... 203 204
Recoveries on loans previously charged-off .......... 2 0
----- -----
Balance at end of period, March 31 .................. 1,685 1,322
===== =====
(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 is accounted for as a purchase and the company will recognize
$3,924,000 in goodwill, which it will amortize over eight years.
(6) SHAREHOLDERS' EQUITY
The Board of Directors, on November 23, 1998, approved a 5% stock dividend
payable January 8, 1999 to shareholders of record as of December 21, 1998.
All share and per share information for all periods presented in these
financial statements has been adjusted to give effect for the stock
dividend.
The Board of Directors declared a cash dividend on January 28, 1999.
Shareholders of record on February 5, 1999, received a $.05 per share cash
dividend paid on February 16, 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.
(7) REGULATORY CAPITAL:
The Parent Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Parent Company's and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Parent Company's and
the Bank's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Parent Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital to average assets (as defined). Management believes, as of
March 31, 1999 that the Parent Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of March 31, 1999, the most recent notification from the Federal Reserve
Bank categorized the Parent Company as well capitalized and the most recent
notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Parent Company
and the Bank must maintain minimum total risk-based; Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
institution's category.
The Company achieved a 11.87% Tier I Leverage Ratio at March 31, 1999
compared to the federally-mandated minimum Tier I Capital Ratio of 4.0%, as
compared to a 13.89% Ratio at December 31, 1998. The Bank achieved a 8.27%
Tier I Leverage Ratio at March 31, 1999 compared to the federally-mandated
minimum Tier I Capital Ratio of 4.0%, as compared to a 8.84% Ratio at
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.
(8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
None
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This financial review presents management's discussion and analysis of the
Company's financial condition and results of operations. It should be read in
conjunction with the consolidated condensed financial statements and the
accompanying notes.
FINANCIAL CONDITION
The Company's total assets increased $43.7 million to $298.3 million at
March 31, 1999, or 17.2% above year end 1998 total assets of $254.6. This was
primarily the result of a new, high-yielding Money Market deposit product, which
totaled $41.0 million at March 31, 1999.
Net loans increased $4.5 million to $169.4 at March 31, 1999, or 2.7%
compared to $164.9 at December 31, 1998. The Company funded approximately $6.7
million in loans, which was offset by loan payments, payoffs and SBA loan sales
totaling $2.5 million.
The Company's securities portfolio, including securities held to maturity
and available for sale, grew to $47.0 million at March 31, 1999, or 14.9%
compared to $40.9 million at December 31, 1998. As of March 31, 1999
Shareholders' Equity totaled $27.8 million compared to $26.3 million at December
31, 1998, a $1.4 million, 5% increase.
The growth in the Company's total assets, securities and deposits was a
result of the Company's branch expansion, continued penetration of its existing
markets, emphasis on customer service, competitive rate structures, selective
marketing and growing product line, including the previously mentioned money
market product.
On February 18, 1999 the Company, through its Bank subsidiary acquired
Certified Mortgage Associates Inc. ("CMA"), a Marlboro, New Jersey based
correspondent mortgage banker.
Other assets increased by $3.0 million for the capitalization of leases
associated with the branch expansion program, the recording of $3.9 million for
the intangible asset as a result of the CMA purchase, and the $4.0 million
transfer of the construction-in-process costs to premises and equipment relating
to the new branches that opened in the first quarter, for a total of $4.6
million, as compared to December 31, 1998. Premises and equipment increased $4.0
million or 87.8% as compared to December 31, 1998 primarily as the result of the
transfer of the aforementioned transfer of construction-in-process costs.
Federal Funds and Cash and Due from Banks increased $12.0 million or 70.5% and
$12.3 million or 80.0% respectively as a result of additional deposits.
Total deposits increased $38.4 million or 16.9% primarily from the
high-yield, money market campaign. This product increased the interest bearing
demand deposits to $75.9 million, a $35.3 million or 87.0% increase as compared
to December 31, 1998. Time deposits increased $9.5 million to $111.2 million as
compared to December 31, 1998. Non-interest bearing demand balances decreased
$4.8 million or -9.6% as compared to December 31, 1998. The decrease in demand
deposit balances is attributed to transfers among other deposits and normal
check processing. Promotional activities contributed to the increase in time
deposits as well as the Company's continued penetration of existing markets.
Deposits are obtained primarily from the market areas, which the Company serves.
As of March 31, 1998 the Company did not have any brokered deposits and neither
solicited not offered premiums for such deposits.
Obligations under Capital Lease increased $3.1 million at March 31, 1999
compared to December 31, 1998 as a result of capitalizing the leases associated
with the new branches that opened in 1999. Accrued interest payable increased
slightly to $509 thousand; a $101 thousand or 24.8% increase at March 31, 1999
compared to December 31, 1998, primarily as a result of the high-yielding, money
market product. Accrued Expenses and Other Liabilities increased $729 thousand
or 105.4% to $1.4 million at March 31, 1999, primarily from the liability
balances recorded with the acquisition of CMA mortgage company.
The Company's Shareholders' Equity increases were attributable to retention
of earnings, issuance of stock award and exercised of stock options and
warrants, but was subsequently offset by treasury stock purchases as of March
31, 1999. $1.1 million of this increase was the result of purchasing CMA, which
was a stock and cash acquisition.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Continued
The Company's non-accrual loans decreased by $814 thousand from year end 1998 to
$1.5 million at March 31, 1999. This net decrease was attributable to the sale
of a $617 thousand loan, additional non-accrual loans, partially offset by $47
thousand in payments received and charge-offs totaling $150 thousand. At March
31, 1999, $1.5 million in loans were contractually past due greater than 90
days, but still accruing interest, compared to $1.6 million for the year ending
December 31, 1998. In Management's best judgment, all non-performing assets are
either fully collateralized or reserved based on circumstances known at this
time.
OPERATING, INVESTING AND FINANCING CASH
As of March 31, 1999, cash and cash equivalents increased $24.4 million to
$56.9 million. Net cash provided by / (used in) operating activities totaled
($374) thousand, compared to $187 thousand at March 31, 1998, a change of $(561)
thousand. This was primarily due to the increase in capitalized costs associated
with the new branches being put into service. Net cash used in investing
activities at March 31, 1999 remained almost equal to March 31, 1998 of $14.4
million. Net cash provided by financing activities totaled $39.1 million,
compared to $9.0 million at March 31, 1998. The current period change was
primarily attributed to a $29.0 million deposit increase, as a result of the
high-yield, money market product; a $1.7 million increase of common stock as a
result of the CMA acquisition with a $1.2 million adjustment for the 5% stock
dividend; and a $.5 million decrease of treasury stock purchases.
The Company achieved a 11.87% Tier I Leverage Ratio at March 31, 1999
compared to the federally-mandated minimum Tier I Capital Ratio of 4.0%, as
compared to a 13.89% Ratio at December 31, 1998. This decrease was primarily due
to the capitalization of lease and intangibles associated with the acquisition
of CMA.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Continued
RESULTS OF OPERATIONS
NET INCOME
For the three months ended March 31, 1999, the Company earned net income of $501
thousand, or $.13 basic earnings per share, compared to net income of $340
thousand, or $.11 basic earnings per share, earned for the comparable period of
1998. Basic earnings per share were calculated on 3,724,801 weighted average
shares outstanding at March 31, 1999 compared to 2,990,420 weighted average
shares outstanding a year earlier, adjusted for the 3 for 2 stock split declared
April 24, 1998 and the 5% stock dividend paid in 1999.
The changes in the components of net income included a $395 thousand, or 18.45%,
increase in net interest income after provision for loan losses (compared to a
$354 thousand, or 19.8% increase for the comparable 1998 period), and a $869
thousand, or 105.85% increase in non-interest income (compared to a $256
thousand, or 45.4% increase for the comparable 1998 period). These items were
partially offset by an increase in non-interest expenses of $1.0 million, or
42.29% (compared to a $381 thousand, or 18.7% increase for the comparable 1998
period), as the Company continued its branch expansion and increased staff
required to support and deliver its new products introduced in 1998.
NET INTEREST INCOME
The Company's interest income increased by $497 thousand, or 12.15%, to $4.6
million for the three months ended March 31, 1999 from $4.1 million for the
comparable period of 1998. The increase was attributed to an additional $61.8
million in average earning assets totaling $230.6 million at March 31, 1999, a
36.6% increase over the prior year's $168.9 million. Interest expenses increased
by $245 thousand, or 14.02%, to $2.0 million for the three months ended March
31, 1999 from $1.7 million for the comparable period of 1998. This increase in
interest expense was primarily attributable to the $57.4 million, or 35.3%,
increase in the Company's interest bearing deposits from $162.5 million as of
March 31,1998 to $219.9 million as of March 31, 1999. As interest income
increased more rapidly than interest expense, the Company experienced a growth
in its net interest margin to 4.51% for the three months ended March 31, 1998
from 4.49% for the same period ended March 31, 1998.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses decreased by $143 thousand to $61
thousand for the three months ended March 31, 1999 from $204 thousand for the
comparable period of 1998. The decrease in provision between periods is
primarily the result of the adequacy of the Company's 1998 provisions to
delinquent, non-accrual loans and total loans, a small net loan growth in the
first quarter of 1999, and the charging-off of bad loans in 1998 of $329
thousand and 1999 of $202 thousand.
The loan loss reserve as a percent of loan of total loans, net of loans held for
sale remained at 1% as of March 31, 1999 as compared to March 31, 1998. The
allowance is a result of Management's analysis of the estimated inherent losses
in the Bank's loan portfolio. Management determines provisions as necessary to
maintain the allowance for loan losses at targeted levels as measured against
total loans and/or past due accounts and Management's analysis of current
economic conditions.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- continued
NON-INTEREST INCOME
Service charges on deposits decreased $32 thousand to $169 thousand for the
three months ended March 31, 1999, a 15.9% decrease over $201 thousand reported
March 31, 1998. The majority of the decrease is due to new deposit products that
waive service charges during the promotional stage of the account, accounts
maintaining minimum balances to avoid service charges, and customers that better
manage their accounts and balances.
The Company's gain on sale of loans decreased by $48 thousand to $322 thousand
for the three months ended March 31, 1999 from $370 thousand for the comparable
period of 1998. This decrease in the gain on sale of loans reflects the market's
decrease in the premium paid on SBA loans. The Company has been designated a
"preferred lender" for the states of New Jersey, Delaware, New York and
Pennsylvania. Under the SBA program, the SBA guarantees up to 90% of the
principal of a qualifying loan. The Company then sells the guaranteed portion of
the loan into the secondary market. The Company sold $2.5 million in SBA loans
as of March 31, 1999 compared to $2.6 million sold in this same period in 1998.
Gains on the sales of securities increased $48 thousand to $121 thousand for the
period ended March 31, 1999 compared to $73 thousand for March 1998. Proceeds
from the sales of securities totaled $1.0 million compared to $3.8 million at
March 31, 1998.
Other income, which primarily consists of mortgage origination fees from the
mortgage subsidiary, CMA, totaling $794 thousand, SBA servicing fee income,
increased 509.0%, to $1,078 thousand for the three month period ended March 31,
1999 compared to $177 thousand for March 1998 due to the new mortgage subsidiary
and a larger portfolio of loans serviced.
NON-INTEREST EXPENSE
The Company's total other expenses increased by $1.0 million, or 42.3% to $3.4
million for the quarter ended March 31, 1999 from $2.4 million for the
comparable period of 1998 and 1998's increase of $381 thousand.
Salaries and employee benefits increased $600 thousand, or 49.9% to $1.8 million
from $1.2 million in 1998. This was due to additional staffing required to
support the increased level of activity on new products developed in 1998,
staffing required for the opening of new branches in 1998 and 1999, the
acquisition of a mortgage origination company, and building the Company's
infrastructure to meet the current needs and to prepare for the future, along
with increases in commissions paid associated with the increased volume in loan
sales.
Occupancy expense increased $192 thousand or 74.1% to $451 thousand at March 31,
1999. This was primarily attributable to the new branches opened in 1998 and
1999.
Other operating expenses which includes items such as deposits and loan
expenses, advertising, professional services, office expenses and other
miscellaneous expenses increased slightly to $228 thousand for the first quarter
1999, totaling $1.2 million at March 31, 1999. This was the result of containing
costs while incurring additional costs relating to the growth in the customer
base, branch expansion, the acquisition of the mortgage origination company,
product development and marketing.
INCOME TAX EXPENSE
The income tax provision, which includes both Federal and State taxes, for March
31, 1999 and 1998 was $293 thousand and $210 thousand respectively, representing
a 36.9% and a 38.1% effective tax rate in each period.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
PART II -- OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any such pending claims or lawsuits.
ITEM 2. CHANGE IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
As of December 31, 1998, the Bank had recorded a net impaired other asset of
$1,100,000, which is included in other assets on the balance sheet. This balance
remains as of March 31, 1999. There was no such asset in March 1998. This
impaired asset relates to the Bank's discovery that it had been the victim of an
unauthorized overdraft to a single customer, subsequent to the close of the
third quarter of 1998. Although the Bank is still investigating this occurrence,
it appears that the total amount of the overdraft may range form $680,000 to
$1,400,000. The Bank is pursuing all legal actions available to recover this
overdraft, and it appears that assets may be available to satisfy the Bank's
claim, at least in part. At this time, the Bank has established a $300,000
reserve in November 1998 in connection with this situation. This results in the
Bank's loss exposure of between $380,000 and $1,100,000 before consideration of
any assets which may be available to pay off the Bank. Management continues to
investigate this matter and take all steps possible to safeguard the Bank's
interests.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number (27) Financial Data Schedule
(b) Reports on Form 8-K -- Dated:
February 18, 1999 Acquisition of Certified Mortgage Associates;
March 22, 1999 Announcing Stock Repurchase Program;
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
PART II -- OTHER INFORMATION -- Continued
ITEM 7. READINESS FOR YEAR 2000
OVERVIEW
The Company continues its commitment to be Y2K compliant. Currently, the Company
remains on schedule with its Year 2000 testing, in accordance to the FFIEC
schedule, having completed testing with our main data servicer and item
processor with success. The Company assessed our risks on it's lending portfolio
and continues to perform due diligence to ensure all new and existing borrowers
meet the appropriate guidelines, as necessary, as put forth by the regulators.
Many conversions to Year 2000 compliant equipment and software have been
completed.
SUMMARY
The Company utilizes software and related technologies throughout its business
that will be affected by the century date change in the year 2000 ("Y2K").
During 1997, a committee comprised of the entire senior management team and
other key associates was formed to determine the full scope and related costs of
this problem to ensure that the Company's systems continue to meet its internal
needs and those of its customers.
The first phase of this project, the assessment phase, has been completed. The
Y2K committee has identified all hardware, software, systems and processes that
might be affected by the century date change. It has evaluated the criticality
of all systems. A plan of action for all items was developed which includes
tests and alternatives. Possible worst case scenarios were discussed to help
determine the criticality of an item. For example, if the Company's primary
accounting software does not read the century date change correctly, it is
possible that borrowers and depositor accounts will have miscalculations and
balance errors. The entire internal bookkeeping process could be affected to the
point were the Company would halt operations until a remedy was put in place.
Thus the Company's primary accounting system is considered to be a mission
critical item and was assigned as mission critical. On the positive side, the
accounting system's vendor has represented to the Company that its software is
Y2K compliant. The vendor has obtained Y2K compliance certification from an
independent testing organization and the software has also been reviewed by an
appropriate party. In addition, a lending subcommittee was formed to evaluate
the risk that the Y2K problem might have on all of the Company's borrowers who
have indebtedness in excess of $250,000. This evaluation, now substantially
complete, was undertaken to assess borrowers' ability to repay loans in the year
2000 and beyond. Overall, the Company believes hat the Y2K issue poses a low
risk to a large majority of its borrowers. The project is currently in its last
testing stage. Written testing plans have been prepared for all items assigned
as mission critical verses not mission critical. Testing has been completed on
most all of these applications. Testing has been completed on most all of these
applications. The vendor has provided the Company with a copy of its internal
test of the system for Y2K compatibility. To date the Company has advanced the
system's operating date to January 3, 2000 and has reviewed the results. In
addition, the results of the many internal tests provided by the vendor are
being reviewed for their adequacy.
The Company's primary processor, NCR, certified that they are compliant. The
system date of the upgraded software has been successfully advanced in the year
2000, although further testing still remains.
The final phase of this project is to administer the contingency plans where
testing has uncovered weaknesses. This phase has been completed with success.
For instance, many old personal computers (PC's ) and their software have been
replaced with Y2K compliant PC's and software.
The Company believes it has committed sufficient resources to this project to
ensure its success. Costs incurred to date have not been material. The Company
has no programmers on staff and is reliant on the vendors of purchased software
to upgrade their products to be Y2K compliant, if necessary. To date, the Y2K
project is on schedule and future costs are not expected to be material.
<PAGE>
UNITY BANCORP, INC. AND SUBSIDIARY
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:
----------------------------------
John F. Tremblay,
President
By:
----------------------------------
Kevin Killian,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
