================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(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, 2000
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)
DELAWARE 22-3282551
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
64 OLD HIGHWAY 22, CLINTON, NJ 08809
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 730-7630
Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the registrant's classes of common
equity stock, as of May 12, 2000: Common stock, no par value: 3,704,708 shares
outstanding
Transitional Small Business Disclosure Format: Yes No X .
--- ---
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) (unaudited)
March 31, December 31,
ASSETS 2000 1999
------ -------- ------------
Cash and due from banks ............................. $ 19,464 $15,121
Federal funds sold .................................. 3,500 0
-------- --------
Total cash and cash equivalents ........ 22,964 15,121
-------- --------
Securities:
Available for sale, at fair value ................ 39,510 40,099
Held to maturity, at amortized cost
(aggregate fair value of $31,946
and $32,270 in 2000 and 1999,
respectively) ................................. 34,016 34,250
-------- --------
Total securities ....................... 73,526 74,349
-------- --------
Loans held for sale - SBA loans ..................... 3,839 3,745
Loans held for sale - ARM loans ..................... 0 36,362
Loans held to maturity .............................. 282,179 281,376
-------- --------
Total loans ..................................... 286,018 321,483
Plus: Deferred Costs, net ..................... 1,051 1,049
Less: Allowance for loan losses ............... 2,387 2,173
-------- --------
Net loans .............................. 284,682 320,359
-------- --------
Premises and equipment, net ......................... 11,906 12,370
Accrued interest receivable ......................... 3,314 2,862
Cash surrender value of insurance policies .......... 2,218 2,203
Other real estate owned ............................. 758 1,505
Other assets ........................................ 10,347 10,200
-------- --------
Total Assets ........................... $409,715 $438,969
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
2 of 27
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) (unaudited)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ -------- -----------
LIABILITIES:
Deposits
Demand:
Non-interest bearing ........................ $ 58,613 $ 65,079
Interest bearing ............................ 115,716 104,343
Savings ....................................... 36,697 37,910
Time, $100,000 and over ....................... 71,275 71,102
Time, under $100,000 .......................... 95,038 79,104
-------- --------
Total time ................................. 166,313 150,206
-------- --------
Total Deposits ......................... 377,339 357,538
-------- --------
Borrowed funds ................................ 0 53,000
Obligation under capital lease ................ 3,876 4,096
Accrued interest payable ...................... 1,046 1,199
Accrued expenses and other liabilities ........ 1,851 1,344
-------- --------
Total liabilities ...................... 384,112 417,177
-------- --------
Shareholders' Equity:
Common stock, no par value 7,500,000
shares authorized, 3,861,568 shares
issued and 3,704,708 outstanding in
2000 and 1999 .................................. 26,224 26,224
Treasury stock, at cost, 156,860 shares
outstanding in 2000 and 1999,
respectively ................................... (1,762) (1,762)
Preferred Stock Class A, 10% cumulative
and convertible, 103,500 and 0 shares
issued and outstanding in 2000 and 1999,
respectively ................................... 4,929 0
Retained Deficit ................................. (2,899) (1,856)
Accumulated other comprehensive loss, net
of tax benefit ................................. (889) (814)
-------- --------
Total Shareholders' Equity ............. 25,603 21,792
-------- --------
Total Liabilities and Shareholders'
Equity ............................... $409,715 $438,969
======== ========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
3 of 27
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND SHARE AMOUNTS) For the three months
ended March 31,
-----------------------
2000 1999
--------- ---------
Interest Income:
Interest on loans ............................... $ 5,928 3,750
Interest on securities .......................... 1,163 670
Interest on Federal funds sold .................. 10 169
--------- ---------
Total interest income ........................ 7,101 4,589
Interest Expense on deposits ....................... 3,641 1,949
Interest Expense on borrowings ..................... 584 43
--------- ---------
Total Interest Expense ............................. 4,225 1,992
--------- ---------
Net Interest Income .......................... 2,876 2,597
Provision for loan losses .......................... 246 61
--------- ---------
Net Interest Income After Provision for
Loan Losses ................................ 2,630 2,536
Other Income:
Service charges on deposits ..................... 268 169
(Loss) gain on sale of loans .................... (133) 1,116
Net gain on sale of securities .................. 1 121
Other income .................................... 407 284
--------- ---------
Total Other Income ........................... 543 1,690
Other Expenses:
Salaries and employee benefits .................. 2,301 1,802
Occupancy, furniture and equipment
expense ....................................... 684 451
Other operating expenses ........................ 1,913 1,179
--------- ---------
Total Other Expenses ......................... 4,898 3,432
--------- ---------
(Loss) income before provision for
income taxes .............................. (1,725) 794
(Benefit) provision for income taxes ............... (709) 293
--------- ---------
Net (loss) income .................. $ (1,016) $ 501
========= =========
Basic (Loss) earnings per Share .................... $ (0.27) $ 0.13
Diluted (Loss) earnings per Share .................. $ (0.27) $ 0.13
Weighted Average Shares Outstanding - Basic ........ 3,704,708 3,724,801
Weighted Average Shares Outstanding - Diluted ...... 3,704,708 3,747,597
--------- ---------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
4 of 27
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
For the three months ended
March 31,
--------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------- ----------
Net (loss) income ............................... $ (1,016) $ 501
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating
activities
Provision for loan losses ..................... 246 61
Depreciation and amortization ................. 314 166
Deferred taxes ................................ 0 (51)
Net gain on sale of securities ................ (1) (121)
Loss (gain) on sale of loans .................. 133 (1,116)
Stock Grants, from Treasury ................... 0 183
Increase in accrued interest receivable ....... (452) (44)
Increase in cash surrender value of
life insurance .............................. (15) (82)
Loss on sale of fixed assets .................. 8 0
Decrease (increase) in other assets ........... 56 (1,609)
Increase (decrease) in accrued interest
payable ..................................... (153) 101
Increase in accrued expenses and other
liabilities ................................. 315 3,826
-------- --------
Net cash provided by operating
activities ............................. (565) (1,586)
======== ========
Investing activities:
Purchases of securities held to maturity ........ 0 (6,000)
Purchases of securities available for sale ...... (45) (3,835)
Maturities and principal payments on
securities held to maturity ................... 234 794
Maturities and principal payments on
securities available for sale ................. 487 1,937
Proceeds from sale of securities available
for sale ...................................... 28 1,070
Proceeds from sale of loans ..................... 40,742 3,280
Net increase in loans ........................... (5,444) (6,679)
Increase in deferred costs - construction
in process .................................... 0 (254)
Increase in capital expenditures ................ (89) (4,168)
Cash payment - CMA acquisition .................. 0 (1,700)
Proceeds from sale of ORE property .............. 747 0
Proceeds from sale of assets .................... 18 0
-------- --------
Net cash provided by (used in)
investing activities ........................ 36,678 (12,154)
======== ========
Financing activities:
Increase in deposits ............................ 19,801 38,340
Decrease in borrowings .......................... (53,000) 0
Proceeds from Preferred Stock Offering, net ..... 4,929 0
Treasury stock purchases ........................ 0 (51)
Cash dividends .................................. 0 (184)
-------- --------
Net cash (used in) provided by financing
activities .................................. (28,270) 38,105
======== ========
Decrease in cash and cash equivalents ............... 7,843 24,365
======== ========
Cash and cash equivalents at beginning of year ...... 15,121 32,488
-------- --------
Cash and cash equivalents at end of period .......... $ 22,964 $ 56,853
======== ========
Supplemental disclosures: Interest paid ......... $ 4,378 $ 1,891
Income taxes paid ..... (581) 800
Change in capital
lease assets ........ (248) 3,401
-------- --------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
5 of 27
<PAGE>
UNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND DECEMBER 31,1999
(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 intercompany 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, 1999, included in the
Company's annual report on Form 10-KSB.
The results of operations for the period presented are not necessarily
indicative of the results of operations 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 INCOME
Total comprehensive (loss) income for the three months ended March 31,
2000 and 1999 was ($1.1) million and $434 thousand.
(3) LOANS
Loans outstanding by classification as of March 31, 2000 and December 31,
1999 are as follows:
(IN THOUSANDS) March 31, 2000 December 31, 1999
-------------- -----------------
Commercial & industrial ............. $ 56,343 $ 43,441
Loans secured by real estate:
Non-residential properties ..... 51,329 52,312
Residential properties ......... 142,098 178,132
Construction ................... 10,204 17,818
Consumer loans ...................... 26,132 29,780
--------- ---------
Total loans ......................... $ 286,106 $ 321,483
========= =========
SBA loans held-for-sale, totaling $3.8 million at March 31, 2000 and $3.7
million at December 31, 1999, respectively, are included in the commercial and
industrial totals. $36.4 million of ARM loans held-for -sale are included in
residential loans at December 31, 1999
As of March 31, 2000 and December 31, 1999, the Bank's recorded investment
in impaired loans, defined as nonaccrual loans, was $1,617,000 and $1,412,000,
respectively, and the related valuation allowance was $403,000 and $219,000,
respectively. This valuation allowance is included in the allowance for loan
losses in the accompanying balance sheets. The average impaired loans, defined
as non-accrual loans, for the three months ended March 31, 2000 was $1,515,000
and $1,472,000 for the year-ended December 31, 1999 respectively. At March 31,
2000, $1,112,000 in loans was past due greater than 90 days but still accruing
interest as compared to $166,000 at December 31, 1999. The $1.1 million includes
$239 thousand of loans that matured prior to March 31, 2000 and were renewed
within the first days of April 2000. An additional $175 thousand of the loans
past due 90 days made payments that brought them current or were paid-off also
within the first few days of April 2000. The net amount of loans past due 90
days or more and still accruing interest is $686 thousand. Subsequent to March
31, 2000, $210 thousand of the loans 90 days or more past due and still accruing
interest were transferred to the non-accrual status. Management has evaluated
the loans 90 days or more past due and still accruing interest and determined
that they are both well collateralized and in the process of collection.
6 of 27
<PAGE>
(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 first quarter
ended March 31, 2000 and 1999 and for the year ended 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended the Year Ended Three Months Ended
March 31, 2000 December 31, 1999 March 31, 1999
------------------ ----------------- ------------------
<S> <C> <C> <C>
Balance at beginning of year ........................ $ 2,173 $ 1,825 $ 1,825
Provision charged to expense ........................ 246 1,743 61
Loans charged-off ................................... (43) (1,433) (203)
Recoveries on loans previously charged-off .......... 11 38 2
------- ------- -------
Balance at end of year .............................. $ 2,387 $ 2,173 $ 1,685
======= ======= =======
</TABLE>
(5) EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and dilutive
(loss) earnings per share.
<TABLE>
<CAPTION>
Weighted Earnings
Net Average Per
(in thousands, except share data amounts) Income Shares Share
-------- --------- ------
<S> <C> <C> <C>
For the quarter-ended March 31, 2000
Basic earnings per share -
Income available to common shareholders ....................................... $ (1,016) 3,704,708 $(0.27)
Effect of dilutive securities- stock options, warrants, and convertible
preferred stock *
Diluted earnings per share - Income available to -------- --------- ------
Common shareholders plus assumed conversions .................................. $ (1,016) 3,704,708 $(0.27)
======== ========= ======
* DILUTIVE EPS DOES NOT INCLUDE THE EFFECT OF STOCK OPTIONS OR THE
EFFECT OF CONVERTIBLE PREFERRED STOCK, DUE TO THE NET LOSS
POSITION. INCLUSION WOULD BE ANTI-DILUTIVE.
For the quarter ended March 31, 1999
Basic earnings per share -
Income available to common shareholders ................................... $ 501 3,724,801 $ 0.13
Effect of dilutive securities- stock options and warrants 22,796
Diluted earnings per share - Income available to
-------- --------- ------
Common shareholders plus assumed conversions ............................. $ 501 3,747,597 $ 0.13
======== ========= ======
</TABLE>
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<PAGE>
(6) REGULATORY CAPITAL
A significant measure of the strength of a financial institution is its
capital base. 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, 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 the Company's 1999 branch expansion the New Jersey
Department of Banking and Insurance imposed a tier 1 capital to total assets
ratio of 6%. Due to losses incurred during 1999, the Company and the Bank failed
to meet their federal minimum regulatory capital ratios at both September 30,
1999 and December 31, 1999 and the Bank failed to meet the New Jersey Department
of Banking and Insurance's 6% leverage requirement at June 30, 1999. Because the
Bank failed to satisfy the federal 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. At December 31, 1999, the Company's average asset
leverage ratio was 4.35%, the Company's total risk based capital ratio was 6.88%
and the Company's Tier 1 risk based capital ratio was 6.17%. The Bank's ratios
were 4.01%, 6.33%, and 5.62%, respectively. Minimum required ratios under both
FRB and FDIC regulations are 4%, 8%, and 4%, respectively. Because of the
capital ratios, in the fourth quarter of 1999, the Company and the Bank entered
into memoranda of understanding with the state and federal regulators. The
memoranda required the Company and the Bank to raise capital, establish
procedures to update the regulators every 30 days on the Company's progress,
adopt certain policies and review the Company's management. The Company is
prohibited from paying a dividend to its shareholders, and the Bank is
prohibited from paying a dividend to the Company, if, after giving effect to the
dividend, either the Company or the Bank would not meet all minimum capital
ratios. In addition, even if a proposed dividend would not leave the Company
undercapitalized, the Company must notify its regulators in writing 30 days
prior to any proposed dividend.
On March 13, 2000, the Company completed an offering of shares of a
newly-created class of preferred stock. The offering was undertaken without
registration with the Securities and Exchange Commission to a limited number of
sophisticated investors. The preferred stock bears a cumulative dividend rate of
10%, and is convertible into shares of the Company's common stock at an assumed
value of $7.25 per common share. The Company also has rights to force conversion
of its preferred stock into common stock starting in March 2002 at an assumed
common stock price of $7.25 per share. The Company obtained $5.2 million in
proceeds from this offering. The Company issued 103,500 shares of the preferred
stock, which are convertible into 713,793 shares of the Company's common stock
at a conversion rate of 6.8966. The accounting, legal and consulting costs to
issue the preferred stock totaled $.3 million and were applied against the
proceeds. The Bank received $4.2 million of the proceeds from the Company in
March 2000.
In connection with the memorandum of understanding, and because the Bank was
deemed "undercapitalized" pursuant to the FDIC's prompt corrective action
regulations at September 30, 1999, the Company and the Bank submitted a capital
plan to the FDIC and the New Jersey Department of Banking and Insurance in the
fourth quarter of 1999. Under this plan, in addition to the sale of preferred
stock previously discussed, the Company contemplated selling assets as a way to
enhance its capital ratios both through the reduction of assets and through
income earned on the sale. Pursuant to this portion of the Bank's capital plan,
the Bank sold $36.4 million in adjustable rate one-to-four family mortgages
(ARM's) on March 7, 2000. The purchase price for these mortgages, which were
sold servicing released and without recourse was $35.6 million. This resulted in
a loss of $ 733 thousand in the first quarter, $439 thousand net of taxes).
8 of 27
<PAGE>
As a result of the preferred stock offering and the reduction of assets
through the ARM loan sale, both the Company and the Bank exceed the minimum
federal capital adequacy requirements at March 31, 2000. However, the Bank does
not exceed the New Jersey Department of Banking and Insurance's 6% leverage
requirement at March 31, 2000.
The COMPANY'S actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective Action
Actual Adequacy Purposes Provisions
------------------ ------------------- -------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 2000
Total capital
(to Risk Weighted Assets) ........... $ 24,633 8.52% => $ 23,117 8.00% < $ 28,896 10.00%
-------- ----- ------- ----- -------- -----
Tier I Capital
(to Risk Weighted Assets) ........... $ 22,246 7.70% => $ 11,558 4.00% => $ 17,338 6.00%
-------- ----- ------- ----- -------- -----
Tier I Capital
(to Average Assets) ................. $ 22,246 5.20% => $ 17,106 4.00% => $ 21,382 5.00%
-------- ----- ------- ----- -------- -----
AS OF DECEMBER 31, 1999
Total capital
(to Risk Weighted Assets) ............ $ 21,056 6.88% < $ 24,481 8.00% < $ 30,602 10.00%
Tier I Capital
(to Risk Weighted Assets) .......... $ 18,883 6.17% => $ 12,241 4.00% => $ 18,361 6.00%
Tier I Capital
(to Average Assets) ................. $ 18,883 4.35% => $ 17,348 4.00% < $ 21,685 5.00%
------------------
The BANK'S actual capital amounts and ratios are presented in the following table.
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective Action
Actual Adequacy Purposes Provisions
------------------- ------------------- -------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 2000-
Total capital
(to Risk Weighted Assets) .......... $ 23,049 8.02% => $ 23,005 8.00% < $ 28,756 10.00%
Tier I Capital
(to Risk Weighted Assets) .......... $ 20,662 7.19% => $ 11,502 4.00% => $ 17,254 6.00%
Tier I Capital (a)
(to Average Assets) ................. $ 20,662 4.88% => $ 16,941 4.00% < $ 21,177 5.00%
AS OF DECEMBER 31, 1999-
Total capital
(to Risk Weighted Assets) .......... $ 19,388 6.33% < $ 24,520 8.00% < $ 30,651 10.00%
Tier I Capital
(to Risk Weighted Assets) ........... $ 17,215 5.62% => $ 12,260 4.00% < $ 18,390 6.00%
(a)
Tier I Capital
(to Average Assets) ................. $ 17,215 4.01% => $ 17,181 4.00% < $ 21,476 5.00%
------------------
(a) In connection with the branch expansion the New Jersey Department of
Banking and Insurance imposed a tier 1 capital to total assets ratio of 6%.
(7) OTHER INCOME
The other income components for the quarters ended March 31, 2000 and 1999 are
as follows:
<CAPTION>
OTHER INCOME Three Months Ended Three Months Ended
(IN THOUSANDS) March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
SBA Fees ......................................................... $201 $134
Loan fees ........................................................ 82 32
Income from cash surrender value of life insurance ............... 32 83
Non-deposit account transaction charges .......................... 48 21
Miscellaneous .................................................... 44 14
---- ----
Total other income ............................................... $407 $284
==== ====
</TABLE>
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<PAGE>
(8) OTHER OPERATING EXPENSES
The other operating expense components for the three months ended March 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES Three Months Three Months
Ended Ended
(IN THOUSANDS) March 31, 2000 March 31, 1999 *
-------------- ----------------
<S> <C> <C>
Professional Services ........................ $ 288 $ 168
Office Expense ............................... 236 366
Advertising Expense .......................... 277 113
Communication Expense ........................ 241 104
Bank Services ................................ 268 153
FDIC Insurance ............................... 47 31
Director Fees ................................ 37 87
Non-Loan Losses .............................. (14) 22
Loan Processing and Collection Expense ....... 288 43
Amortization of Intangibles .................. 120 34
Other Expense ................................ 125 58
------- -------
Total Other Operating Expenses ............... $ 1,913 $ 1,179
======= =======
</TABLE>
------------------
* On February 18, 1999, Unity Bank acquired Certified Mortgage
Associates (CMA) under the purchase accounting method. CMA's first
quarter 2000 expenses totaled $975,000 compared to $415,000 for the
first quarter of 1999, for the period of February 18, 1999 to March
31, 1999.
(9) LITIGATION
The Company may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business.
An officer of Certified Mortgage Associates, Inc., the Bank's mortgage
banking subsidiary, has commenced an action alleging, among other things, that
he has been constructively terminated following his suspension and subsequent
reinstatement to his current position. The individual has returned to work and
is performing his duties in accordance with his Employment Agreement. The
complaint seeks damages for breach of his Employment Agreement that would arise
only if he had been terminated "without cause", in the amount of $5.4 million
and for unspecified damages for mental distress he has suffered as a result of
the alleged change of his employment status. The complaint also seeks
unspecified damages for defamation unrelated to the employment claims and
damages in the amount of $272,000 representing the diminution in value of his
stock in the Company, plus interest, arising from an alleged late registration
of shares delivered to the individual in connection with the sale of his
interest in CMA to the Bank in 1999.
Based upon information and documents provided to it by the Bank, CMA, and
their respective officers and employees in the course of its investigation to
date, the Bank's counsel believes (i) that the claims against the Bank for
constructive termination and for termination without cause are without merit and
that the Bank has various affirmative defenses against these claims; and (ii)
that the Bank has affirmative claims against the individual arising from the
performance of his duties.
The Bank is presently engaged in settlement discussions with the individual
officer and hopes to conclude a settlement of all of the asserted claims prior
to the time that any Answer is filed. Counsel is unable to predict whether any
settlement will be reached or the outcome of any litigation in the event that
the matter goes to trial.
However, the Bank, based upon the opinion of its counsel, believes it is
not probable that the outcome of the employment-related claims will result in a
material loss to the Bank based upon the facts and information that have been
provided to it, to date. The Bank, based upon the opinion of its counsel, has
not been able to determine whether the claims for defamation and the loss in the
value of the stock are probable of having any materially adverse impact upon the
Bank until further investigation has been completed.
10 of 27
<PAGE>
UNITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the 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.
OVERVIEW AND STRATEGY
Unity Bancorp, Inc. (the "Parent Company") is incorporated in Delaware and
is a bank holding company under the Bank Holding Company Act of 1956, as
amended. Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when
consolidated with the Parent Company, the "Company") was granted a charter by
the New Jersey Department of Banking and Insurance and commenced operations on
September 13, 1991. The Bank provides a full range of commercial and retail
banking services through 17 branch offices located in Hunterdon, Somerset,
Middlesex, and Union counties in New Jersey. These services include the
acceptance of demand, savings, and time deposits; extension of consumer, real
estate, Small Business Administration and other commercial credits, as well as
personal investment advisory services through the Bank's wholly-owned
subsidiary, Unity Financial Services, Inc. Unity Investment Company, Inc. is
also a wholly owned subsidiary of the Bank, used to hold part of the Bank's
investment portfolio. In the first quarter of 1999, the Bank acquired Certified
Mortgage Associates, Inc. ("CMA") under the purchase accounting method and,
accordingly, the results of operations for the first quarter of 1999 contains
only income and expenses realized and incurred after the CMA acquisition date of
February 18, 1999. This wholly-owned subsidiary of the Bank originates loans
funded by investors and simultaneously transfers the residential mortgages to
the investors.
As a result of the Company's and the Bank's federal capital ratios falling
below required levels during 1999 and a liquidity situation that began in 1999,
the Company's emphasis in the first quarter of 2000 was to restore it's capital
ratios to acceptable levels and to stabilize its liquidity. To accomplish this,
the Company sold $36.4 million of adjustable rate mortgages, realizing a loss of
$733 thousand (after tax of $439 thousand), and raised $4.9 million of capital
in the first quarter of 2000 through the issuance of preferred shares. This
reduction of assets and raising of capital restored the federal capital ratios
to above minimum requirements. The proceeds of the loan sale were applied
against other borrowings, and with an increase in deposits through offering
higher rates, the borrowings were paid-off in the first quarter of 2000.
As a result of the capital offering and loan sale, the Company and the Bank
now exceed the "well capitalized" designation in all federal capital ratios
except for total capital to risk weighted average assets at March 31, 2000. The
Bank is still subject to an order from the New Jersey Commissioner of Banking
and Insurance, under which it is required to maintain a leverage capital ratio
of 6% or else it is prohibited from paying dividends to the Company. The Bank
does not meet this 6% requirement at March 31, 2000.
The Company is now focusing its efforts on achieving profitable results,
while maintaining its objective to continue to increase its' capital ratios and
to maintain positive liquidity.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest earned on its
interest-earning assets and the interest paid on funds borrowed to support those
assets, such as deposits. Net interest margin is a function of the difference
between the weighted average rate received on interest-earning assets as
compared with that of interest-bearing liabilities. Net income is also affected
by the amounts of noninterest income, which includes gains on sales of loans,
including loans originated under the Small Business Administration's Guaranteed
Loan Program, and noninterest expenses.
11 of 27
<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2000
COMPARED TO THE QUARTER ENDED MARCH 31, 1999
NET INCOME
The Company incurred a loss of $1.0 million or $0.27 loss per basic and
diluted share for the first quarter of 2000 compared to net income of $501
thousand, or $0.13 earnings per basic and diluted share for the first quarter of
1999. Basic and diluted earnings per share for the first quarter of 2000 were
calculated on 3,704,708 weighted average shares outstanding compared to the
first quarter of 1999's basic and diluted weighted average shares outstanding of
3,724,801 and 3,747,597, respectively. The dilutive effect was not applied to
the first quarter of 2000's weighted average shares outstanding as it would have
resulted in an antidilutive earnings per share.
The $1.0 million loss largely reflects the $439 thousand after tax loss on
the sale of the mortgage loans, related to the capital plan. The loss also
reflects the growth in non-interest expense due to the opening of nine new
branches over the course of 1999, the costs of administering the expanding loan
portfolios, and the costs to monitor non-performing loans. In addition,
contributing to the loss was an increase in the provision for loan losses.
Offsetting these losses was a $180 thousand after tax settlement with a vendor
that reduced non-interest expense in the first quarter of 2000.
The changes in the components of net income included a $.3 million increase
in net interest income, a $185 thousand increase in the provision for loan
losses, a $1.1 million decrease in noninterest income, a $1.5 million increase
in noninterest expense, and a $1.0 million decrease in the provision for income
taxes.
NET INTEREST INCOME
Net interest income increased $.3 million (10.7%) to $2.9 million for the
first quarter of 2000 from $2.6 million for the first quarter of 1999.
The $.3 million net interest income 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 $154.1 million (66.9%) in average
earning assets for the first quarter of 2000 totaling $384.6 million over the
prior year's $230.6 million. The increases in average earning assets occurred
across the entire balance sheet, with most increases in the loan and investment
portfolios. Average loans increased $139.5 million (181.3%) to $310.3 million in
the first quarter of 2000 from the $171.1 million recorded in the first quarter
of 1999. Growth in the loan portfolio was primarily comprised of $101.9 million
of residential adjustable rate mortgages (ARM) originated between April 30, 1999
and December 31, 1999 by the Bank's CMA subsidiary, partially offset by $37.0
million in mortgages sold in the first quarter of 2000, 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. These ARM and home
equity loans have a lower yield than commercial loans causing the loan portfolio
yield to decrease to 7.64% in the first quarter of 2000 from 8.76% in the first
quarter of 1999. The offsetting benefit to these lower rates is that the ARM
loans have a lower risk-based capital risk factor of 50% as compared to 100% for
commercial loans. This reduced the Bank's risk-based capital needs by
approximately $2.6 million. Average investments increased $30.9 million (72.6%)
to $73.5 million in the first quarter of 2000 from the $42.6 million recorded in
the first quarter of 1999. Growth in the investment portfolio was the result of
increased deposits from the Top Banana product introduced at the end of the
first quarter of 1999. The yield on investments increased from 6.08% for the
three months ended March 31, 1999 to 6.46% for the three months ended March 31,
2000. As a result of the increase in mortgages and home equity loans at lower
yields exceeding investments at a higher yield, the first quarter of 2000 yield
on earning assets decreased to 7.41% for the first quarter of 2000 from 7.98%
for the first quarter of 1999, partially offsetting the volume related gains in
interest income.
12 of 27
<PAGE>
Increases in interest-earning assets were primarily funded through an
increase of $168.4 million (70.8%) in average deposits and borrowings to $406.2
million for the first quarter of 2000 from $237.8 million for the first quarter
of 1999. Average deposits increased $132.3 million (55.7%) to $369.8 million for
the first quarter of 2000 from $237.5 million in the first quarter of 1999.
Average borrowings increased $36.1 million to $36.4 million for the first
quarter of 2000 from $0.3 million in the first quarter of 1999. There were no
borrowings at March 31, 2000, down $53.0 million from December 31, 1999 as a
result of the borrowings being re-paid from the proceeds from the March 7, 2000
held-for-sale ARM loan sale and increased deposits.
The cost of interest bearing liabilities increased to 4.88% for the first
quarter of 2000 from 4.15% for the first quarter of 1999 and the total cost of
funds, including non-interest bearing deposits, increased to 4.16% for the first
quarter of 2000 from 3.35% for the first quarter of 1999. The increase in
average interest-bearing liabilities and the cost of funds reflects the
Company's decision to offer higher, promotional rates of interest to attract new
customers to the new branch locations and the cost of the Federal Home Loan Bank
of New York borrowings, which were paid-off in March 2000. The promotional rates
of interest were offered both on time deposits and through the Top Banana
premium money market product, which paid an introductory rate of 6.05%. Although
this money market product was discontinued at September 30, 1999, the product
was again offered in December 1999 in order to ease liquidity and provide
funding for committed loans. These higher rate products and the liquidity needs
caused a shift in the deposit portfolio toward higher rate deposit products and
away from non-interest bearing deposits. Although the average balance of
non-interest bearing deposits increased $14.2 million (31.0%) to a total of
$60.0 million for the first quarter of 2000 from $45.8 million for the first
quarter of 1999, non-interest bearing deposits as a percentage of the deposit
portfolio decreased to 16.2% for the first quarter of 2000 from 19.3% for the
first quarter of 1999. (Refer to the section titled Deposits and Borrowings for
the average balance deposit schedule.) As a result of these factors, net
interest margin declined to 3.02% during the first quarter of 2000 from 4.52% in
the first quarter of 1999.
The following table reflects the components of net interest income, setting
forth for the periods presented herein, (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average yields earned
on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) net interest spread which is the average yield on
interest-earning assets less the average rate on interest-bearing liabilities
and (5) 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%.
13 of 27
<PAGE>
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31 March 31
2000 1999
------------------------------------------------------------
Average Rate/ Average Rate/
Quarters Ended March 31 Balance Interest Yield Balance Interest Yield
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Taxable loans
(net of unearned income) ................................. $310,260 $5,928 7.64% $171,127 $3,748 8.76%
Tax-exempt securities .................................... 3,372 80 9.49% 1,572 29 7.38%
Taxable investment securities ............................ 70,103 1,107 6.32% 41,007 618 6.03%
Interest-bearing deposits ................................ 110 3 10.91% 3,176 33 4.16%
Federal funds sold ....................................... 706 10 5.67% 13,573 169 4.98%
------------------- --------------------
Total Interest-earning assets ............................ 384,551 $7,128 7.41% 230,455 $4,597 7.98%
Non-interest earning assets .............................. 47,946 36,391
Allowance for loan losses ................................ (2,265) (1,825)
-------- --------
TOTAL AVERAGE ASSETS ..................................... $430,232 $265,021
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES
NOW deposits ............................................. $108,891 $1,153 4.24% $ 47,540 $ 366 3.08%
Savings deposits ......................................... 19,449 89 1.83% 14,767 72 1.95%
Money market deposits .................................... 18,118 128 2.83% 19,000 144 3.03%
Time deposits ............................................ 163,429 2,271 5.56% 108,089 1,367 5.06%
Other debt ............................................... 36,356 584 6.43% 2,571 43 6.69%
------------------- --------------------
Total interest-bearing liabilities ....................... 346,243 $4,225 4.88% $191,967 $1,992 4.15%
Noninterest-bearing liabilities .......................... (353) 3,552
Demand deposits .......................................... 59,948 45,791
Shareholders' equity ..................................... 22,335 23,711
-------- --------
TOTAL AVERAGE LIABILITIES
AND SHAREHOLDERS' EQUITY ................................ $430,232 $265,021
------ ------
Net interest income ...................................... $2,903 $2,605
----- ------
Net interest rate spread ................................. 2.53% 3.83%
Net interest income/margin
on average earning assets .............................. 3.02% 4.52%
</TABLE>
The following table presents the major factors by category that contributed
to the changes in net interest income for the quarter ended March 31, 2000 and
1999. Amounts have been computed on a fully tax-equivalent basis, assuming a
Federal income tax rate of 34%.
<TABLE>
<CAPTION>
Quarters Ended March 31
(Dollar Amounts in Thousands 2000 versus 1999 Increase
on a Fully Tax Equivalent Basis) (Decrease) Due to Change in
--------------------------------
Volume Rate Net
------- ------- -------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Taxable loans
(net of unearned income) ............................. $ 3,047 $ (867) $ 2,180
Tax-exempt securities ................................ 33 19 52
Taxable investment securities ........................ 438 51 489
Interest-bearing deposits ............................ (32) 2 (30)
Federal funds sold ................................... (160) 1 (159)
------- ------- -------
Total Interest-earning assets ........................ $ 3,326 $ (794) $ 2,532
INTEREST-BEARING LIABILITIES:
NOW deposits ......................................... $ 479 $ 255 $ 734
Savings deposits ..................................... 23 (6) 17
Money market deposits ................................ (7) (9) (16)
Time deposits ........................................ 700 204 904
Other debt ........................................... 603 (8) 595
------- ------- -------
Total interest-bearing liabilities ................... $ 1,798 $ 436 $ 2,234
------- ------- -------
Net interest income .................................. $ 1,528 $(1,229) $ 298
======= ======= =======
</TABLE>
14 of 27
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $246 thousand for the first quarter
of 2000, compared with the first quarter of 1999's provision of $61 thousand.
The increase in the provision is primarily attributable to the growth in the
loan portfolio as well as the 1999 increase in the specific reserve factors used
to determine reserve levels on certain types of loans, and the analysis of the
estimated potential losses inherent in the loan portfolio based upon the review
of particular loans, the credit worthiness of particular borrowers, and general
economic conditions. The increase in the specific reserve factors was offset by
a shift in the composition of the loan portfolio toward loans secured by
residential properties and away from commercial and commercial mortgage loans.
Residential loans are generally considered less risky than commercial and
commercial mortgage loans. Residential loans increased to 49.7% of total loans
at March 31, 2000 as compared to 15.6% at March 31, 1999. In addition, the ratio
of non-performing loans to total loans decreased to 0.95% at March 31, 2000 from
1.84% at March 31, 1999 and increased from 0.49% at December 31, 1999. The
changes in the loan portfolio totals were the primary reason for the ratio
changes.
Subsequent to the filing of the Company's March 31, 2000 quarterly report
on Form 10-QSB, management, in conjunction with the Bank's federal regulators,
reviewed the adequacy of the Company's allowance for loan losses with regard to
a portfolio of purchased home equity loans secured by properties outside of the
Bank's market area. Management concluded, in conjunction with the Bank's federal
regulators, that an additional provision with regard to these loans was
appropriate and that the provisions should have been made effective for the
quarter ended March 31, 2000. The additional provision increased the Bank's
provision for loan losses in the first quarter by $46,000.
NON-INTEREST INCOME
Non-interest income, consisting of service charges on deposits, gains on
sales of securities and loans and non-interest income decreased $1.1 million, or
67.9%, to $543 thousand for the first quarter of 2000 from $1.7 million for the
first quarter of 1999. This $1.1 million decrease is primarily a result of a
$1.2 million decrease in loan sale gains. The decrease in loan sale gain is
primarily from the $731 thousand loss on sale of held-for-sale ARM loans and a
$674 decrease in the gain on mortgage loan sales, totaling $231 thousand for the
first quarter of 2000 compared to $905 thousand for the first quarter of 1999.
The mortgage loan sale gains are the result of loans simultaneously funded by
purchasing investors at the time of closing by the Bank's mortgage subsidiary,
CMA. The decline in mortgage loan sale gains are the result of a decline in
originations due to a rising rate environment. During a rising rate environment,
re-financings are less likely to occur.
GAIN ON LOAN SALES Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999
(IN THOUSANDS) Gain (Loss) Gain (Loss)
-------------- --------------
Mortgage loan sales ...................... $ 231 $ 905
SBA guaranteed portion of loan sales ..... 367 211
Held for sale - (loss) ................... (731) --
------- ------
Total gain (loss) on loan sales .......... $ (133) $1,116
======= ======
The gain on sale of SBA loans reflects the participation in the SBA's
guaranteed loan program. Under the SBA program, the SBA guarantees between 75%
to 90% of the principal of a qualifying loan. The guaranteed portion of the loan
is then sold into the secondary market. SBA loan sales, all without recourse,
totaled $5.1 million in the first quarter of 2000, compared to $2.5 million in
the first quarter of 1999.
During the first quarter of 2000, the Bank sold adjustable rate mortgage
loans with a then-current book value of $36.4 million to a third party investor,
servicing released and without recourse, for a purchase price of $35.6 million.
These loans had been classified as held-for-sale at year-end 1999 and resulted
in a $733 thousand loss, $439 thousand after tax, at time of sale.
15 of 27
<PAGE>
In addition to the loan sales, other income, representing SBA servicing
fees, loan fees, income on cash surrender value of life insurance, non-deposit
account transaction charges, and other fee income increased $123 thousand
(43.3%) to $407 thousand for the first quarter of 2000 compared to $284 thousand
for the first quarter of 1999. The increases were of $66.5 thousand (49.6%) in
SBA fees, $49.9 thousand (154.0%) in loan fees primarily associated with the
mortgage originations, $27.2 thousand (128.9%) in non-deposit account
transaction charges primarily as a result of automated teller machine charges to
non-customers of the Bank, $29.7 thousand (212.1%) in miscellaneous income and a
$50.2 thousand (60.9%) decrease in income on cash surrender value of insurance.
The decrease in cash surrender value income is the result of the cancellation of
$3.8 million of policies during the fourth quarter of 1999.
The following is a summary of other income for the quarters ended March 31,
2000 and 1999:
OTHER INCOME Quarter Ended Quarter Ended
For the quarters ended March 31, March 31,2000 March 31,1999
------------- -------------
(IN THOUSANDS)
SBA Fees ...................................... $ 200.6 $ 134.1
Loan fees ..................................... 82.3 32.4
Income from cash surrender value of life
insurance ................................... 32.2 82.4
Non-deposit account transaction charges ....... 48.3 21.1
Miscellaneous ................................. 43.7 14.0
-------- ---------
Total other income ............................ $ 407.1 $ 284.0
======== =========
Service charges on deposits increased $99 thousand (56.6%) to $268 thousand
for the first quarter of 2000 compared to $169 thousand for the first quarter of
1999. The additional deposit service charges were primarily the result of a
service charge rate increase enacted in January 2000.
Security gains decreased $120 thousand (99.2%) from the first quarter of
1999's $121 thousand to the first quarter of 2000's $1 thousand, a 24.3%
decrease. The decrease is the result of the Company having nominal equity
security sales during the first quarter of 2000, as compared to the first
quarter of 1999.
NON-INTEREST EXPENSE
Other non-interest expense increased $1.5 million (42.7%), to $4.9 million
for the first quarter of 2000 from $3.4 million for the first quarter of 1999.
The $1.5 million non-interest expense increase consisted of a $.5 million
(27.8%) salaries and benefits increase to $2.3 million from $1.8 million, a $.2
million (40.0%) occupancy, furniture, and equipment expenses increase to $.7
million from $.5 million, and a $.7 million (58.3%) other operating expenses
increase to $1.9 million from $1.2 million for the first quarter of 2000
compared to the first quarter of 1999, respectively. Included in occupancy,
furniture, and equipment expense was a $300 thousand settlement received from a
vendor in the first quarter of 2000.
The following table presents a breakdown of other operating expenses for the
quarter ended March 31, 2000 and 1999:
OTHER OPERATING EXPENSES Quarter Ended Quarter Ended
For the quarter ended March 31, March 31,2000 March 31,1999
------------- -------------
(IN THOUSANDS)
Professional Service ....................... 288 168
Office Expense ............................. 236 366
Advertising Expense ........................ 277 113
Communication Expense ...................... 241 104
Bank Services .............................. 268 153
FDIC Insurance ............................. 47 31
Director Fees .............................. 37 87
Non-Loan Losses ............................ (14) 22
Loan Expense ............................... 288 43
Amortization of Intangibles ................ 119 34
Other Expense .............................. 126 58
----- -----
Total Other Expense ........................ 1,913 1,179
===== =====
16 of 27
<PAGE>
These other operating expense increases in professional services, office
expense, communication expense, bank services and FDIC insurance are the result
of the growth in the branch network and total deposits as six additional
branches were opened after March 31, 1999 and expenses incurred in operating the
Bank's mortgage subsidiary, CMA, which was acquired during February 1999. The
increase in loan expense is related to the cost of administering the expanding
loan portfolio. Goodwill amortization expenses relating to the acquisition of
CMA totaled $116.3 thousand in the first quarter of 2000 and $30.8 thousand in
the first quarter of 1999. There were $3.1 thousand in goodwill amortization
expenses incurred in the both first quarters of 2000 and 1999, relating to the
acquisition of the Bank's first branch from the Resolution Trust Corporation.
CMA was acquired under the purchase accounting method and, accordingly, the
prior period only reflects expenses incurred after the February 18, 1999
acquisition. Total other operating expenses incurred in connection with CMA were
$975 thousand compared to $415 thousand for the first quarter of 1999, for the
period of February 18, 1999 to March 31, 1999. The increase in advertising
expense is the result of increased marketing efforts to support the seventeen
branch network.
INCOME TAX EXPENSE
For the first quarter of 2000, a tax benefit of $709 thousand was
recognized relating to the first quarter of 2000 loss as compared to a $293
thousand tax provision for federal and state taxes in the first quarter of 1999.
This represents an effective tax rate of 41.1% and 36.9% for the first quarter
of 2000 and the first quarter of 1999. The effective tax rates are the result of
applicable tax rates computed against each legal entity's net income before
taxes.
FINANCIAL CONDITION AT MARCH 31, 2000
Total assets decreased $29.3 million (6.7%) to $409.7 million at March 31,
2000 compared to total assets of $439.0 million at December 31, 1999. Net loans
decreased $35.6 million (11.0%) to $284.7 million at March 31,2000 compared to
$320.3 million at December 31,1999. Cash and equivalents increased $7.8 million
(51.8%) to $23.0 million at March 31, 2000 from $15.1 million at December
31,1999. The securities portfolio, including securities held-to-maturity and
available-for-sale, decreased $823 thousand (1.1%) to $73.5 million at March
31,2000, compared to $74.3 million at December 31,1999. Other real estate owned
decreased $747 thousand as one property was sold during the first quarter of
2000 without incurring any additional loss.
Total deposits and borrowings decreased $33.2 million (8.1%) to $377.3
million at March 31, 2000 from total deposits and borrowings of $410.5 million
at December 31,1999. The decrease was the result of paying-off the $53 million
of borrowings with the proceeds from the sale of the held-for-sale ARM loans and
the $19.8 million (5.5%) increase in deposits totaling $377.3 million at March
31, 2000 compared to $357.5 million at December 31, 1999. These deposit
increases primarily reflect increases in the Top Banana premium rate money
market account, and jumbo certificates of deposit from municipalities in the
Bank's market area. Deposits were obtained primarily from the Company's market
areas. The Company did not have any brokered deposits and, as such, neither
solicited nor offered premiums for such deposits.
LOAN PORTFOLIO
Net loans decreased $35.6 million (11.0%) to $284.7 million at March
31, 2000 compared to $320.3 million at December 31, 1999. The decrease in the
loan portfolio is primarily the result of the sale of $36.4 million of
adjustable rate one-to-four family residential mortgages (ARMs). (See the
following tables for major category classification and changes for the first
quarter of 2000.) $6.5 million of the $12.9 million increase in the commercial
and industrial category is due to the growth in the SBA portfolio. The SBA
portfolio is increasing as the Bank has identified that the increasing
competition for commercial and non-residential loans make these loan types
difficult to grow at desired rates of return. The increase in the SBA portfolio
reflects the non-guaranteed portion of these loans which the Bank does not
generally sell into the secondary market.
17 of 27
<PAGE>
The loan portfolio consists of commercial and industrial loans, real estate
loans and consumer loans. Commercial and industrial loans are made for the
purpose of providing working capital, financing the purchase of equipment or
inventory and for other business purposes. Included in the commercial and
industrial loans are the SBA loans. Real estate loans consist of loans secured
by commercial or residential property and loans for the construction of
commercial or residential property. Consumer loans are made for the purpose of
financing the purchase of consumer goods, home improvements, and other personal
needs, and are generally secured by the personal property being purchased. The
Company originates loans under SBA programs that generally provides for SBA
guarantees between 75% and 90% of the principal of a qualifying loan. The
guaranteed portion of the SBA loan is sold in the secondary market and the
non-guaranteed portion generally remains in the portfolio. The loans are
primarily to businesses and individuals located in the trade area. The Company
has not made loans to borrowers outside of the United States. Commercial lending
activities are focused primarily on lending to small business borrowers.
The following tables sets forth (a) the classification of loans by major
category, excluding unearned, deferred costs, and the allowance for loan loss
for March 31, 2000 and 1999 and December 31, 1999, (b) the changes in the major
categories comparing March 31, 2000 to December 31, 1999, and (c) the
contractual maturities at March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
CLASSIFICATION BY March 31, 2000 December 31, 1999 March 31, 1999
MAJOR CATEGORY ------------------------ -------------------------- -----------------------
(IN THOUSANDS) % of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial & industrial ........ $ 56,343 19.7% $ 43,441 13.5% $ 43,322 25.3%
Real Estate
Non-residential properties ... 51,329 17.9% 52,312 16.3% 60,558 35.4%
Residential properties ....... 142,098 (a) 49.7% 178,132 (b) 55.4% 26,746 15.6%
Construction ................. 10,204 3.6% 17,818 5.5% 15,415 9.0%
Consumer ....................... 26,044 9.1% 29,780 9.3% 25,099 14.7%
-------- ----- -------- ----- -------- -----
Total Loans .................... $286,018 100.0% $321,483 100.0% $171,140 100.0%
======== ===== ======== ===== ======== =====
(a) includes $66.0 million of originated ARMs and $50.2 million of purchased HEL.
(b) includes $99.1 million of originated ARMs and $54.6 million of purchased HEL
<CAPTION>
CHANGES IN LOAN PORTFOLIO BY MAJOR CATEGORY March 31, 2000 vs.
December 31, 1999
----------------------
(IN THOUSANDS) Change $ Change %
----------------------
<S> <C> <C>
Commercial & industrial ......................................... $12,902 29.7%
Loans secured by real estate:
Non-residential properties .................................... ($983) -1.9%
Residential properties - (includes $36.4 million
of ARM's sold on March 7, 2000 .............................. ($36,034) -20.2%
Construction .................................................. ($7,614) -42.7%
Loans to individuals ............................................ ($3,736) -12.5%
--------
Total Loans ..................................................... ($35,465) -11.0%
========
</TABLE>
ASSET QUALITY
The principal earning assets are loans. Inherent in the lending function is
the possibility a customer may not perform in accordance with the contractual
terms of the loan. A borrower's inability to repay the loan can create the risk
of past due loans, restructured loans, nonaccrual loans, and potential problem
loans.
Non-performing loans are (a) loans that are not accruing interest
(non-accrual loans) as a result of principal or interest being in default for a
period of 90 days or more and that are not well collateralized and (b) loans
past due 90 days or greater, still accruing interest that are well
collateralized. Well collateralized means that the collateral is equal to the
outstanding loan principal and interest due amounts. Management has evaluated
these loans past due 90 days or greater, still accruing interest and determined
that they are both well collateralized and in the process of collection. When a
loan is classified as nonaccrual, interest accruals discontinue and all past due
interest previously recognized as income is reversed and charged against current
period income. Until the loan becomes current, any payments received from the
borrower are applied totally to outstanding principal until such time as
management determines that the financial condition of the borrower and other
factors merit recognition of a portion of such payments as interest income.
18 of 27
<PAGE>
Credit risk is minimized by ensuring loan diversification and adhering to
credit administration policies and procedures. Due diligence on loans begins at
the initial time of discussion of the origination of a loan with a borrower.
Documentation, including a borrower's credit history, materials establishing the
value and liquidity of potential collateral, the purpose of the loan, the source
of funds for repayment of the loan, and other factors are analyzed before a loan
is submitted for approval. The loan portfolio is also subject to periodic
internal review for credit quality and an outside firm is used to conduct
internal reviews.
The following table sets forth information concerning non-accrual loans and
non-performing assets for the quarters ended March 31, 2000 and 1999, along with
year-to-date December 31, 1999:
<TABLE>
<CAPTION>
NONPERFORMING LOANS Quarter Ended Quarter Ended Year Ended
(IN THOUSANDS) March 31, 2000 March 31, 1999 December 31, 1999
-------------- -------------- -----------------
<S> <C> <C> <C>
NONACCRUAL BY CATEGORY
Real Estate ........................................ 214 1,601 720
Consumer ........................................... 0 6 0
Commercial ......................................... 1,403 26 692
Lease Financing Receivable ......................... 0 0 0
----- ----- -----
Total .............................................. 1,617 1,633 1,412
===== ===== =====
PAST DUE 90 OR MORE AND STILL ACCRUING INTEREST
Real Estate ........................................ 448 1,056 159
Consumer ........................................... 14 7 7
Commercial ......................................... 650 415 0
Lease Financing Receivable ......................... 0 0 0
----- ----- -----
Total .............................................. * 1,112 1,478 166
===== ===== =====
TOTAL NON PERFORMING LOANS ......................... 2,729 3,111 1,578
OREO Property ...................................... 758 0 1,505
Other Asset - (1) .................................. 0 1,131 0
TOTAL NONPERFORMING ASSETS ......................... 3,487 4,242 3,083
===== ===== =====
NONPERFORMING LOANS TO TOTAL LOANS ................. * .95% 1.84% 0.49%
NONPERFORMING ASSETS TO TOTAL ASSETS ............... * .85% 1.42% 0.70%
ALLOWANCE FOR LOANS LOSSES AS A
PERCENTAGE OF NON-PERFORMING LOANS ............... * 87.47% 54.13% 137.71%
-----------------
* $239 thousand of these loans had matured prior to March 31, 2000 and were
renewed within the first days of April 2000. $175 thousand of these loans
made payments that brought them current or paid-off within the first days
of April 2000, leaving a net $686 thousand. Had this activity occurred by
March 31, 2000, the ratios would have been as follows: Nonperforming to
total loans of .81%; Non-performing assets to total assets of .75%; and
Allowance for loan losses as a percentage of non-performing loans of
103.11%
(1) reflects the value of an impaired asset associated with an unauthorized
overdraft
Nonaccrual loans slightly increased $0.2 million from $1.4 million at
year-end 1999 to $1.6 million at March 31, 2000. The loans past due 90 days or
more and still accruing interest are well collateralized and in the process of
collection. These 90 days or more past due loans increased $1.0 million from
$166 thousand at December 31, 1999 to $1.1 million at March 31, 2000. The $1.0
million increase includes $239 thousand of loans that had matured prior to March
31, 2000 and were renewed within the first days of April 2000. An additional
$175 thousand of the loans past due 90 days and still accruing interest made
payments that brought them current or were paid-off also within the first few
days of April 2000. The net amount of the loans 90 days or more past due and
still accruing interest is $686 thousand, which is an increase of $322 thousand
from December 31, 1999. Subsequent to March 31, 2000, $210 thousand of loans 90
days or more past due and still accruing interest were transferred to the
non-accrual status.
</TABLE>
19 of 27
<PAGE>
The $758.0 thousand OREO property was a nonaccrual loan that was foreclosed
upon in the fourth quarter of 1999. OREO is carried at the lower of cost or
market, less estimated selling costs at March 31, 2000. The other asset, related
to an unauthorized overdraft that occurred in the fourth quarter of 1998 was a
part of the OREO property balance at December 31, 1999 with a carrying value of
$746 thousand. This $746 thousand asset represented equity in a house owned by
the spouse of the debtor, who had turned the residence over to the Bank. This
property was subsequently sold in March 2000 without the Bank incurring any
additional loss.
At March 31, 2000, there were no concentrations of loans to any borrowers
or group of borrowers exceeding 10% of the total loan portfolio and there were
no foreign loans. There were no other loans, other than those identified as
non-performing, that causes management to be uncertain as to the ability of the
borrowers to comply with the present loan repayment terms as of March 31, 2000.
ALLOWANCE FOR LOAN LOSSES
The Company attempts to maintain an allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. Loan
losses are charged directly to the allowance for loan losses when they occur and
any subsequent recovery is credited to the allowance for loan losses. Risks
within the loan portfolio are analyzed on a continuous basis by management, by
an independent loan review function (provided by an outside firm) and by the
audit committee. A risk system, consisting of multiple grading categories, is
utilized as an analytical tool to assess risk and the appropriate level of loss
reserves. Along with the risk system, management further evaluates risk
characteristics of the loan portfolio under current and anticipated economic
conditions and considers such factors as the financial condition of the
borrowers, past and expected loan loss experience, and other factors management
feels deserve recognition in establishing an adequate reserve. This risk
assessment process is performed at least quarterly, and, as adjustments become
necessary, they are realized in the periods in which they become known.
Additions to the allowance for loan losses are made by provisions charged to
expense and the allowance for loan losses is reduced by net charge-offs (i.e.,
loans judged to be not collectable are charged against the reserve, less any
recoveries on such loans). Although management attempts to maintain the
allowance for loan loss at a level deemed adequate to provide for potential
losses, future additions to the allowance for loan losses may be necessary based
upon certain factors including changes in market conditions. In addition,
various regulatory agencies periodically review the adequacy of the allowance
for loan losses. These agencies have in the past and may in the future require
the Bank to make additional adjustments based on their judgments about
information available to them at the time of their examination.
The allowance for loan losses totaled $2.4 million, $2.2 million, and $1.7
million at March 31, 2000, December 31, 1999, and March 31, 1999, respectively.
During 1999, the specific reserve factors on certain loan types that were
used to determine reserve levels were increased. This increase of specific
reserve factors on certain loans were offset during 1999 by a shift in the
composite of the portfolios toward loans secured by residential properties and
away from commercial and commercial mortgage loans. Residential loans are
generally considered less risky than commercial and commercial mortgage loans.
Residential loans increased to 49.7% of total loans at March 31, 2000 as
compared to 15.6% at March 31, 1999. In addition, the ratio of non-performing
loans to total loans decreased 47.8% to 0.96% at March 31, 2000 from 1.84% at
March 31, 1999 and increased from 0.49% at December 31, 1999. This was primarily
from the changes in the total loan portfolio at each period.
The following is a reconciliation summary of the allowance for loan losses
for March 31, 2000 and 1999 and December 31, 1999:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSS ACTIVITY Quarter Ended Year Ended Quarter Ended
(IN THOUSANDS) March 31,2000 December 31, 1999 March 31, 1999
------------- ----------------- --------------
<S> <C> <C> <C>
Balance at beginning of year .................... $ 2,173 $ 1,825 $ 1,825
Charge-offs:
Real estate ................................. 0 871 4
Consumer .................................... 43 130 0
Commercial and industrial ................... 0 432 199
Total Charge-offs ............................... 43 1,433 203
Recoveries:
Real estate ................................. 0 2 0
Consumer .................................... 10 20 2
Commercial and industrial ................... 1 16 0
Total recoveries ................................ 11 38 2
------- ------- -------
Total net charge-offs ........................... 32 1,395 201
------- ------- -------
Provision charged to expense .................... 246 1,743 61
------- ------- -------
Balance of allowance at end of year ............. $ 2,387 $ 2,173 $ 1,685
======= ======= =======
Ratio of net charge-offs to average loans
outstanding ................................. 0.01% 0.59% 0.12%
Ratio of allowance to total loans, net of
guaranteed SBA loans held for sale .......... 0.85% 0.68% 1.01%
\
</TABLE>
20 of 27
<PAGE>
The ratio of allowance to total loans decreased to 0.85% for the first
quarter of 2000 compared to 1.01% for the first quarter of 1999, but increased
as compared to the 0.68% for the year ended 1999. The decrease of the ratio of
allowance to total loans between quarters was due to the shift in the portfolio
mix toward residential loans. The increase in loans of $114.9 million (67.1%)
between the first quarter of 2000 and the first quarter of 1999 primarily
consisted of the residential mortgage increase of $115.4 million. Residential
loans increased to 49.7% of total loans at March 31, 2000 as compared to 15.6%
at March 31, 1999. Residential mortgage loans have a general reserve rate of
.25% and, as a result, decreased the overall ratio of allowance to loans. In
addition, purchased loans, totaling $50.2 million, are carried at the amount of
undiscounted estimated future cash collections and therefore have no allowance
account allocated to them. The increase over year-end 1999 was due to a net
increase in the allowance of $168 thousand, as a result of provisions totaling
$200 thousand and net charge-offs of $32 thousand.
INVESTMENT SECURITY PORTFOLIO
The investment security portfolio is maintained for asset-liability risk
control purposes and to provide an additional source of funds. The portfolio is
comprised of U.S. Treasury securities, obligations of U.S. Government and
government sponsored agencies, selected state and municipal obligations,
corporate securities and equity securities. Management determines the
appropriate security classification of available-for-sale or held-to-maturity at
the time of purchase.
At the end of the first quarter of 2000, the investment portfolio remained
virtually unchanged, decreasing $823 thousand from monthly payments and totaled
$73.5 million, comprised of $39.5 million in securities available for sale and
$34.0 million in securities held-to-maturity. At March 31, 2000, no investment
securities were classified as trading securities.
DEPOSITS AND BORROWINGS
Deposits are the primary source of funds.
Deposits and borrowings decreased $33.2 million (8.1%) to $377.3 million at
March 31, 2000 from $410.5 million at December 31, 1999. This decrease was the
result of paying-off the $53 million of borrowings with $36.4 million of
proceeds from the held-for-sale ARM loans sold in the first quarter of 2000 and
increasing deposits $19.8 million during the quarter. To satisfy liquidity needs
that arose late in 1999 and that continued through the first quarter of 2000,
higher rates were offered on time deposits and the Top Banana premium rate money
market accounts to attract deposits. Time deposits increased $16.1 million
(10.7%) to $166.3 million from $150.2 million, interest-bearing demand deposits,
which include the Top Banana premium rate money market account, increased $11.4
million (10.9%) to $115.7 million from $104.3 million, noninterest-bearing
demand deposits decreased $6.5 million (10%) to $58.6 million from $65.1
million, and savings deposits decreased $1.2 million (3.2%) to $36.7 million
from $37.9 million at March 31, 2000 compared to December 31, 1999.
The result of the promotional activities, the increased reliance on time
deposits over $100 thousand, and the borrowings, which were outstanding from
December 31, 1999 to March 7, 2000, was to increase the cost of funds (including
non-interest bearing demand deposits) to 4.16% for the quarter ended March 31,
2000 as compared to 3.35% for the quarter ended March 31, 1999 and 3.82% at year
end 1999.
21 of 27
<PAGE>
INTEREST RATE SENSITIVITY
The principal objectives of the 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 the business focus, operating environment, capital, and
liquidity requirements, and actively manage risk within the Board approved
guidelines. The Company seeks to reduce the vulnerability of the operations to
changes in interest rates, and actions in this regard are taken under the
guidance of the Asset/Liability Management Committee ("ALCO") of the Board of
Directors. The ALCO reviews the maturities and repricing of loans, investments,
deposits and borrowings, cash flow needs, current market conditions, and
interest rate levels.
The Company utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models to measure the impact of longer-term asset and
liability mismatches beyond two years. 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 of 200 basis points. The economic value of equity is likely to
be different as interest rates change. Like the simulation model, results
falling outside prescribed ranges require action by the ALCO. The Company's
variance in the economic value of equity, as a percentage of assets with rate
shocks of 200 basis points, is a decline of 2.88% in a rising rate environment
and an increase of 2.06% in a falling rate environment. Both variances are
within the board approved guidelines of +/- 3.00%. This is an improvement from
December 31, 1999 where the economic value of equity with rate shocks of 200
basis points was not within the board's approved guidelines of +/- 3.00%. At
December 31, 1999, there was a decline of 3.16% in a rising rate environment and
an increase of 2.68% in a falling rate environment.
The acquisition of longer-term CDs, the sale of $36 million of residential
mortgages, and subsequent reduction in short-term Federal Home Loan Bank - NY
borrowings with the cash proceeds contributed to the improvement in long-term
market risk measures.
OPERATING, INVESTING, AND FINANCING CASH
Cash and cash equivalents decreased $33.9 million to $23.0 million at March
31, 2000 from $56.9 million at March 31, 1999. Net cash provided by operating
activities decreased $2.2 million, totaling $.6 million at March 31, 2000
compared to $1.6 million at March 31, 1999. This was primarily due to the $1.5
million decrease in net income. Net cash used in investing activities increased
$48.8 million to $36.7 million in the first quarter of 2000, compared to $(12.2)
million during the prior year. This was primarily from an increase in the
proceeds of loan sales of $37.5 million, a net decrease in securities investing
activities of $5.3 million, a decrease in capital expenditures of $4.1 million
and a decrease in acquisition purchases of $1.7 million. The capital
expenditures of 1999 were related to the new branches and the acquisition was of
CMA. Net cash provided by financing activities decreased $66.4 million to
($28.7) million at March 31, 2000, compared to $38.1 million a year earlier.
This was primarily attributed to a $53.0 million borrowing payoff, a $18.5
million deposit decrease and $4.9 million in preferred stock proceeds.
22 of 27
<PAGE>
LIQUIDITY
The Company's liquidity is a measure of its ability to fund loans,
withdrawals or maturities of deposits and other cash outflows in a
cost-effective manner.
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 average assets ratio is less than
six percent. At March 31, 2000, as a result of the proceeds from the preferred
stock offering, the Bank Holding Company had $1.8 million in cash. Marketable
securities, valued at fair market value, totaled $362 thousand.
CONSOLIDATED BANK
Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
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.
Total deposits amounted to $377.3 million, as of March 31, 2000. The
Company has paid-off the $53.0 million in borrowings from the FHLB of New York
that were outstanding at December 31, 1999. These borrowings at December 31,
1999 augmented the Company's liquidity. At March 31, 2000, $24.4 million was
available for borrowing from the FHLB of New York.
As of March 31, 2000, deposits included $55.9 million 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 liquidity. At March 31, 2000, the Bank had no
commitments to fund residential mortgage loans through the CMA subsidiary.
To increase liquidity, the higher rate Top Banana money market accounts
were again offered in December 1999. Although these accounts may increase
interest expense, the accounts will help the Bank meet its liquidity needs.
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. 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, 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.
23 of 27
<PAGE>
In connection with the Company's 1999 branch expansion the New Jersey
Department of Banking and Insurance imposed a tier 1 capital to total assets
ratio of 6%. Due to losses incurred during 1999, the Company and the Bank failed
to meet their federal minimum regulatory capital ratios at both September 30,
1999 and December 31, 1999 and the Bank failed to meet the New Jersey Department
of Banking and Insurance's 6% leverage requirement at June 30, 1999. Because the
Bank failed to satisfy the federal 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. At December 31, 1999, the Company's average asset
leverage ratio was 4.35%, the Company's total risk based capital ratio was 6.88%
and the Company's Tier 1 risk based capital ratio was 6.17%. The Bank's ratios
were 4.01%, 6.33%, and 5.62%, respectively. Minimum required ratios under both
FRB and FDIC regulations are 4%, 8%, and 4%, respectively. Because of the
capital ratios, in the fourth quarter of 1999, the Company and the Bank entered
into memoranda of understanding with the state and federal regulators. The
memoranda required the Company and the Bank to raise capital, establish
procedures to update the regulators every 30 days on the Company's progress,
adopt certain policies and review the Company's management. The Company is
prohibited from paying a dividend to its shareholders, and the Bank is
prohibited from paying a dividend to the Company, if, after giving effect to the
dividend, either the Company or the Bank would not meet all minimum capital
ratios. In addition, even if a proposed dividend would not leave the Company
undercapitalized, the Company must notify its regulators in writing 30 days
prior to any proposed dividend.
On March 13, 2000, the Company completed an offering of shares of a
newly-created class of preferred stock. The offering was undertaken without
registration with the Securities and Exchange Commission to a limited number of
sophisticated investors. The preferred stock bears a cumulative dividend rate of
10%, and is convertible into shares of the Company's common stock at an assumed
value of $7.25 per common share. The Company also has rights to force conversion
of its preferred stock into common stock starting in March 2002 at an assumed
common stock price of $7.25 per share. The Company obtained $5.2 million in
proceeds from this offering. The Company issued 103,500 shares of the preferred
stock, which are convertible into 713,793 shares of the Company's common stock
at a conversion rate of 6.8966. The accounting, legal and consulting costs to
issue the preferred stock totaled $.3 million and were applied against the
proceeds. The Bank received $4.2 million of the proceeds from the Company in
March 2000.
In connection with the memorandum of understanding, and because the Bank
was deemed "undercapitalized" pursuant to the FDIC's prompt corrective action
regulations at September 30, 1999, the Company and the Bank submitted a capital
plan to the FDIC and the New Jersey Department of Banking and Insurance in the
fourth quarter of 1999. Under this plan, in addition to the sale of preferred
stock previously discussed, the Company contemplated selling assets as a way to
enhance its capital ratios both through the reduction of assets and through
income earned on the sale. Pursuant to this portion of the Bank's capital plan,
the Bank sold $36.4 million in adjustable rate one-to-four family mortgages
(ARM's) on March 7, 2000. The purchase price for these mortgages, which were
sold servicing released and without recourse was $35.6 million. This resulted in
a loss of $ 733 thousand loss in the first quarter, $439 thousand net of taxes).
As a result of the preferred stock offering and the reduction of assets
through the ARM loan sale, both the Company and the Bank exceed the minimum
federal capital adequacy requirements at March 31, 2000. However, the Bank does
not meet the New Jersey Department of Banking and Insurance's 6% leverage
requirement at March 31, 2000.
24 of 27
<PAGE>
The COMPANY'S actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 2000
Total capital
(to Risk Weighted Assets) ................ $ 24,633 8.52% => $ 23,117 8.00% < $ 28,896 10.00%
-------- ---- -------- ---- -------- -----
Tier I Capital
(to Risk Weighted Assets) ................ $ 22,246 7.70% => $ 11,558 4.00% => $ 17,338 6.00%
-------- ---- -------- ---- -------- -----
Tier I Capital
(to Average Assets) ...................... $ 22,246 5.20% => $ 17,106 4.00% => $ 21,382 5.00%
-------- ---- -------- ---- -------- -----
AS OF DECEMBER 31, 1999
Total capital
(to Risk Weighted Assets) ................ $ 21,056 6.88% < $ 24,481 8.00% < $ 30,602 10.00%
Tier I Capital
(to Risk Weighted Assets) ................ $ 18,883 6.17% => $ 12,241 4.00% => $ 18,361 6.00%
Tier I Capital
(to Average Assets) ...................... $ 18,883 4.35% => $ 17,348 4.00% < $ 21,685 5.00%
The BANK'S actual capital amounts and ratios are presented in the following
table.
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 2000-
Total capital
(to Risk Weighted Assets) ................ $ 23,049 8.02% => $ 23,005 8.00% < $ 28,756 10.00%
Tier I Capital
(to Risk Weighted Assets) ................ $ 20,662 7.19% => $ 11,502 4.00% => $ 17,254 6.00%
Tier I Capital (a)
(to Average Assets) ...................... $ 20,662 4.88% => $ 16,941 4.00% < $ 21,177 5.00%
AS OF DECEMBER 31, 1999-
Total capital
(to Risk Weighted Assets) ................ $ 19,388 6.33% < $ 24,520 8.00% < $ 30,651 10.00%
Tier I Capital
(to Risk Weighted Assets) ................ $ 17,215 5.62% => $ 12,260 4.00% < $ 18,390 6.00%
Tier I Capital (a)
(to Average Assets) ...................... $ 17,215 4.01% => $ 17,181 4.00% < $ 21,476 5.00%
</TABLE>
-----------------
(a) In connection with the branch expansion the New Jersey Department of
Banking and Insurance imposed a tier 1 capital to total assets ratio of 6%.
Shareholders' equity increased $3.9 million (17.7%) to $25.7 at March 31,
2000 compared to $21.8 million at December 31, 1999. This increase was the
result of the $4.9 million net preferred stock offering proceeds, the $989
thousand net loss for the first quarter of 2000, and the $74 thousand
accumulated other comprehensive loss.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the operations. Unlike most
industrial companies, nearly all the assets and liabilities are monetary. As a
result, interest rates have a greater impact on performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
25 of 27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned, hereunto duly authorized.
UNITY BANCORP, INC.
Dated: June 23, 2000 By: /s/ ROBERT J. VAN VOLKENBURGH
----------------------------------
Robert J. Van Volkenburgh,
Chairman of the Board
By: /s/ KEVIN KILLIAN
----------------------------------
Kevin Killian,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26 of 27
