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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 SEPTEMBER 30, 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 November 14, 2000: Common stock, no par value: 3,706,708
shares outstanding
Transitional Small Business Disclosure Format:
Yes No X
--- ---
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(In thousands, except share amounts) (unaudited)
September 30, December 31,
ASSETS 2000 1999
------ ------------- ------------
<S> <C> <C>
Cash and due from banks $ 21,863 $ 15,121
Federal funds sold 59,000 0
-------- --------
Total cash and cash equivalents 80,863 15,121
-------- --------
Securities :
Available for sale, at fair value 38,125 40,099
Held to maturity, at amortized cost (aggregate fair
value of $31,665 and $32,270 in 2000 and 1999,
respectively) 33,288 34,250
-------- --------
Total securities 71,413 74,349
-------- --------
Loans held for sale - SBA loans 5,041 3,745
Loans held for sale - ARM loans 0 36,362
Loans held to maturity 227,400 281,376
-------- --------
Total loans 232,441 321,483
Plus: Deferred Costs, net 1,110 1,049
Less: Allowance for loan losses 2,545 2,173
-------- --------
Net loans 231,006 320,359
-------- --------
Premises and equipment, net 10,779 12,370
Accrued interest receivable 3,048 2,862
Cash surrender value of insurance policies 2,266 2,203
Other real estate owned 300 1,505
Other assets 7,909 10,200
-------- --------
Total Assets $407,584 $438,969
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
2 of 37
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(In thousands, except share amounts) (unaudited)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------------ ------------
<S> <C> <C>
LIABILITIES:
Deposits
Demand:
Non-interest bearing $ 58,497 $ 65,079
Interest bearing 120,622 104,343
Savings 35,244 37,910
Time, $100,000 and over 49,272 71,102
Time, under $100,000 115,037 79,104
--------- ---------
Total time 164,309 150,206
--------- ---------
Total Deposits 378,672 357,538
--------- ---------
Borrowed funds 0 53,000
Obligation under capital lease 3,295 4,096
Accrued interest payable 1,339 1,199
Accrued expenses and other liabilities 2,058 1,344
--------- ---------
Total liabilities 385,364 417,177
--------- ---------
Shareholders' Equity:
Common stock, no par value 7,500,000 shares authorized,
3,863,568 shares issued and 3,706,708 outstanding in 2000
3,861,568 shares issued and 3,704,708 outstanding in 1999 26,234 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 (6,456) (1,856)
Accumulated other comprehensive loss, net of tax benefit (725) (814)
--------- ---------
Total Shareholders' Equity 22,220 21,792
--------- ---------
Total Liabilities and Shareholders' Equity $ 407,584 $ 438,969
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
3 of 37
<PAGE>
<TABLE>
<CAPTION>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (unaudited)
(In thousands, except share and share amounts) For the three months ended For the nine months ended
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans $ 5,685 $ 5,532 $ 17,309 $ 13,257
Interest on securities 1,145 1,217 3,461 2,938
Interest on Federal funds sold 227 10 356 514
-------- -------- -------- --------
Total interest income 7,057 6,759 21,126 16,709
Interest Expense on deposits 4,087 3,230 11,683 8,052
Interest Expense on borrowings 27 484 702 605
-------- -------- -------- --------
Total Interest Expense 4,114 3,714 12,385 8,657
-------- -------- -------- --------
Net Interest Income 2,943 3,045 8,741 8,052
Provision for loan losses 90 867 426 1,528
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses 2,853 2,178 8,315 6,524
Other Income:
Service charges on deposits 307 215 848 561
Gain on sale of loans (352) 328 1,038 3,686
Net gain on sale of securities 0 (33) 5 194
Other income 599 588 1,644 1,187
-------- -------- -------- --------
Total Other Income 554 1,098 3,535 5,628
Other Expenses:
Salaries and employee benefits 2,239 2,043 7,184 6,578
Occupancy, furniture and equipment expense 583 682 1,944 1,717
Other operating expenses 4,662 3,350 8,936 6,546
-------- -------- -------- --------
Total Other Expenses 7,484 6,075 18,064 14,841
-------- -------- -------- --------
Loss before income taxes (4,077) (2,799) (6,214) (2,689)
Benefit for income taxes (757) (1,118) (1,639) (1,134)
-------- -------- -------- --------
Net loss ($ 3,320) ($ 1,681) ($ 4,575) ($ 1,555)
-------- -------- -------- --------
Preferred stock dividends - Paid and Unpaid (131) 0 (288) 0
-------- -------- -------- --------
Net loss available to common shareholders ($ 3,451) ($ 1,681) ($ 4,863) ($ 1,555)
======== ======== ======== ========
Per Common Share:
Basic loss per Share ($0.93) ($0.45) ($1.31) ($0.42)
Diluted loss per Share ($0.93) ($0.45) ($1.31) ($0.42)
Weighted Average Shares Outstanding - Basic 3,706,709 3,721,223 3,705,825 3,729,763
Weighted Average Shares Outstanding - Diluted 3,706,709 3,721,223 3,705,825 3,729,763
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
4 of 37
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
For the nine months ended
SEPTEMBER 30,
-------------------------
(In thousands, except per share amounts) 2000 1999
--------- ---------
<S> <C> <C>
Net loss $ (4,575) $ (1,555)
Adjustments to reconcile net loss to net cash
used in operating activities
Goodwill write-off 2,246 0
Provision for loan losses 426 1,528
Depreciation and amortization 938 881
Net gain on sale of securities (5) (194)
Gain on sale of loans (1,038) (3,686)
Contractual stock grants 10 424
Increase in accrued interest receivable (186) (1,664)
Increase in cash surrender value of life insurance (63) (123)
Loss on sale of fixed assets 7 0
Other Real Estate Owned Writedown 143 0
Net gain on sale of Other Real Estate Owned (25) 0
Decrease (increase) in other assets 45 (2,802)
Increase (decrease) in accrued interest payable 140 685
Increase (decrease) in accrued expenses and other liabilities 714 394
--------- ---------
Net cash used in operating activities (1,223) (6,112)
========= =========
Investing activities:
Purchases of securities held to maturity 0 (17,494)
Purchases of securities available for sale (145) (39,840)
Maturities and principal payments on securities held to maturity 962 2,400
Maturities and principal payments on securities available for sale 2,151 4,583
Proceeds from sale of securities available for sale 62 14,421
Proceeds from sale of loans 106,621 16,381
Proceeds from Bank Owned Life Insurance Contract Cancellation 0 2,132
Purchase of loans 0 (56,071)
Net increase in loans (16,656) (106,969)
Increase in capital expenditures (166) (5,191)
Cash payment - CMA acquisition 0 (1,700)
Proceeds from sale of ORE property 1,087 0
Proceeds from sale of equipment 11 0
--------- ---------
Net cash provided by (used in) investing activities 93,927 (187,348)
========= =========
Financing activities:
Increase in deposits 21,134 151,055
(Decrease) increase in borrowings (53,000) 30,000
Proceeds from Preferred Stock Offering, net 4,929 0
Treasury stock purchases 0 (984)
Cash dividends on preferred stock (25) 0
Cash dividends on common stock 0 (632)
--------- ---------
Net cash (used in) provided by financing activities (26,962) 179,439
========= =========
Increase (decrease) in cash and cash equivalents 65,742 (14,021)
========= =========
Cash and cash equivalents at beginning of year 15,121 32,488
--------- ---------
Cash and cash equivalents at end of period $ 80,863 $ 18,467
========= =========
Supplemental disclosures: Interest paid $ 12,245 $ 7,793
Income taxes paid 15 776
Transfer of loans to Other
Real Estate Owned 299 0
(Decrease) increase in capital
lease assets (858) 3,184
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
5 of 37
<PAGE>
UNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 LOSS
Total comprehensive loss for the three months ended September 30, 2000
and 1999 was $3.1 million and $1.9 million. Total comprehensive loss for
the nine months ended September 30, 2000 and 1999 was $4.5 million and $2.1
million.
(3) LOANS
Loans outstanding, net of deferred cost, by classification as of
September 30, 2000 and December 31, 1999 are as follows:
(In thousands) September 30, 2000 December 31, 1999
------------------ -----------------
Commercial & industrial $ 61,718 $ 43,441
Loans secured by real estate:
Non-residential properties 48,187 52,312
Residential properties 91,746 178,132
Construction 9,737 17,818
Consumer loans 21,053 29,780
--------- ---------
Total loans $ 232,441 $ 321,483
========= =========
SBA loans held-for-sale, totaling $5.0 million at September 30, 2000
and $3.7 million at December 31, 1999, respectively, are included in the
commercial and industrial totals. ARM loans held-for-sale totaled $0 at
September 30, 2000 and $36.4 million at December 31, 1999 and are included
in residential loans at December 31, 1999.
As of September 30, 2000 and December 31, 1999, the Bank's recorded
investment in impaired loans, defined as nonaccrual loans, was $3,378,000
and $1,412,000, respectively, and the related valuation allowance was
$352,000 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 September 30, 2000 was $2,532,000, for the nine months ended
September 30, 2000 was $2,105,000, and $1,472,000 for the year-ended
December 31,1999 respectively. At September 30, 2000, $842,000 in loans
were past due greater than 90 days but still accruing interest as compared
to $166,000 at December 31, 1999. 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.
(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.
7 of 37
<PAGE>
An analysis of the change in the allowance for loan losses for the
nine months ended September 30, 2000 and 1999 and the year ended 1999 is as
follows:
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended Nine Months Ended The Year Ended
September 30, 2000 September 30, 1999 December 31, 1999
------------------ ------------------ -----------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,173 $ 1,825 $ 1,825
Provision charged to expense 426 1,528 1,743
Loans charged-off (90) (1,130) (1,433)
Recoveries on loans previously charged-off 36 14 38
------- ------- -------
Balance at end of year $ 2,545 $ 2,237 $ 2,173
======= ======= =======
</TABLE>
(5) EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and
diluted (loss) earnings per share.
<TABLE>
<CAPTION>
Weighted Earnings
Net Average Loss Per
(In thousands, except share data amounts) Income Shares Share
--------- ---------- ---------
<S> <C> <C> <C>
For the quarter ended September 30, 2000
Net Income $ (3,320)
Unpaid preferred stock dividends in arrears (131)
---------
Basic loss per share -
Loss available to common shareholders $ (3,451) 3,706,709 $(0.93)
Effect of dilutive securities- stock options,
warrants, and convertible preferred stock *
Diluted loss per share - Loss available to --------- --------- ------
Common shareholders plus assumed conversions $ (3,451) 3,706,709 $(0.93)
========= ========= ======
* 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 nine months ended September 30,2000
Net Loss $ (4,575)
Distribution of preferred stock dividends (25)
Unpaid preferred stock dividends in arrears (263)
---------
Basic loss per share -
Loss available to common shareholders $ (4,863) 3,705,825 $(1.31)
Effect of dilutive securities- stock options,
warrants, and convertible preferred stock *
Diluted loss per share - Loss available to --------- --------- ------
Common shareholders plus assumed conversions $ (4,863) 3,705,825 $(1.31)
========= ========= ======
For the quarter ended September 30, 1999
Basis loss per share -
Loss available to common shareholders $ (1,681) 3,721,223 $ (.045)
Effect of dilutive securities - stock options and warrants
Diluted loss per share - Loss available to --------- --------- ------
Common shareholders plus assumed conversions $ (1,681) 3,721,223 $ (.045)
========= ========= =======
For the nine months ended September 30, 1999
Basic earnings per share -
Income available to common shareholders $ (1,555) 3,729,763 $(0.42)
Effect of dilutive securities- stock options and warrants
Diluted earnings per share - Income available to --------- --------- ------
Common shareholders plus assumed conversions $ (1,555) 3,729,763 $(0.42)
========= ========= ======
</TABLE>
The conversion of the preferred stock into 713,793 share of common stock
will be considered dilutive and included in the calculation of diluted
earnings per share under the treasury stock when the Company records a
quarterly basic earnings per share in excess of $0.18. The conversion of
preferred stock into 713,793 shares of common stock will be assumed for
purposes of computing diluted EPS whenever the amount of the dividend
declared in or accumulated for the current period per common share
obtainable on conversion is less than basic EPS.
8 of 37
<PAGE>
(6) REGULATORY CAPITAL AND PREFERRED DIVIDENDS IN ARREARS
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
financial institution 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 institutions 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% requirement on the Bank. 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. Because among other things the Bank failed
to meet these minimum requirements, in the fourth quarter of 1999, the
Company and the Bank entered into memoranda of understanding with the state
and federal regulators.
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 common. 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.
On March 7, 2000, the Bank sold servicing released and without
recourse $36.4 million in adjustable rate one-to-four family mortgages
(ARM's), realizing $35.6 million in net proceeds and incurring a $439
thousand pre-tax loss. On September 29, 2000, the Bank sold, servicing
released and without recourse, $44.8 million, including $1.9 million in
premium, in home equity loans originally purchased during 1999, realizing
$43.6 million in proceeds and incurring a $1.2 million pre-tax loss. The
proceeds will be used in conjunction with the fourth quarter 2000 sale of
five branches, which is expected to result in a $4.0 million pre-tax gain.
As a result of the preferred stock offering and the reduction of
assets through both loan sales, both the Company and the Bank exceed the
minimum federal capital adequacy requirements at September 30, 2000.
However, the Bank does not exceed the New Jersey Department of Banking and
Insurance's 6% leverage requirement at September 30, 2000.
Because among other things of the Bank's and Company's continued
losses through the first two quarters of 2000, both the Bank and Company
entered into stipulations and agreements with each of their respective
primary regulators, i.e. the Board of Governors of the Federal Reserve
System with regard to the Company and the FDIC and the New Jersey
Department of Banking and Insurance with regard to the Bank, on July 18,
2000. Under these agreements, the Bank and the Company are required to take
a number of affirmative steps, including the hiring of an outside
consulting firm to undertake a review of each of their management
structures, adopting strategic and capital plans which will increase the
Bank's Tier 1 capital ratio to at least 6% as required by the New Jersey
Department of Banking and Insurance order, reviewing and adopting various
updated policies and procedures, adopting programs
9 of 37
<PAGE>
with regard to the resolution of certain criticized assets, and providing
ongoing reporting to the various regulatory agencies with regard to the
Bank's and Company's progress in meeting the requirements of the
agreements. The agreements also require the Bank to establish a compliance
committee to oversee the Bank's and Company's efforts in meeting all of the
requirements of the agreements, and prohibit the Bank from paying dividends
to the Company and the Company from paying dividends, on either its common
or its preferred shares, without prior regulatory approval. The Company had
previously suspended dividend payments on its common shares, and failed to
make the July 15, 2000 $131,000 dividend payment on shares of its Class A
Preferred Stock. The Bank and the Company believe they have fully completed
all requirements and continue to comply with the regulatory agreements.
The COMPANY'S actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
------------------------- ---------------------------- -----------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000
Total capital
(to Risk Weighted Assets) $ 24,584 9.70% => $ 20,268 8.00% < $25,335 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 22,039 8.70% => $ 10,134 4.00% => $15,201 6.00%
Tier I Capital
(to Average Assets) $ 22,039 5.37% => $ 16,430 4.00% => $20,538 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%
</TABLE>
The BANK'S actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
------------------------- ---------------------------- -----------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000-
Total capital
(to Risk Weighted Assets) $ 22,444 9.29% => $ 19,328 8.00% < $ 24,159 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 19,899 8.24% => $ 9,664 4.00% => $ 14,496 6.00%
Tier I Capital
(to Average Assets) $ 19,899 4.83% => $ 16,472 4.00% < $ 20,590 5.00%
Tier I Capital (a)
(to Average Assets) $ 19,899 4.83% < $ 24,708 6.00% < $ 20,590 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%.
10 of 37
<PAGE>
(7) OTHER INCOME
The other income components for the nine months and quarters ended
September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
OTHER INCOME Three Months Three Months Nine Months Nine Months
(In thousands) Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
SBA Fees $175 $125 $ 576 $ 404
Loan fees 82 304 280 340
Income from cash surrender value of life insurance 31 25 95 182
Non-deposit account transaction charges 62 43 178 100
Miscellaneous 249 91 515 161
---- ---- ------ ------
Total other income $599 $588 $1,644 $1,187
==== ==== ====== ======
</TABLE>
(8) OTHER OPERATING EXPENSES
The other operating expense components for the nine months and
quarters ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES Three Months Three Months Nine Months Nine Months
(In thousands) Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Professional Services $ 302 $ 305 $ 965 $ 761
Office Expense 502 573 1,316 1,418
Advertising Expense 162 233 607 547
Communication Expense 190 249 662 525
Bank Services 274 219 766 579
FDIC Insurance 111 57 202 121
Director Fees 11 21 86 200
Non-Loan Losses 32 794 25 824
Loan Processing and Collection Expense 348 576 970 933
Amortization of Intangibles 120 119 359 274
Goodwill writedown 2,246 0 2,246 0
Other Expense 364 204 732 364
------ ------ ------ ------
Total Other Operating Expenses $4,662 $3,350 $8,936 $6,546
====== ====== ====== ======
</TABLE>
(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.
During the third quarter, the employment of three officers of the
Bank's mortgage banking subsidiary, Certified Mortgage Associates, Inc. was
terminated. One of the officers filed suit against the Company, the Bank
and certain related parties of the Company. This suit was settled in
September, 2000, and the Company, and each of the three officers, exchanged
full releases. The Company incurred total expenses in this matter of
$257,622. The Company has filed claims with its liability carrier seeking
recovery for all, or a portion, of these expenses. The carrier is
processing this claim, although it has not accepted liability for the
Company's claims.
(10) GOODWILL WRITEDOWN
Also in the third quarter, the Company wrote off approximately $2.25
million of the goodwill recognized in the 1999 acquisition of CMA. During
the third quarter, the former shareholders of CMA left the employment of
the Company, and their employment agreements were terminated. In addition,
certain other sales employees left CMA. Based upon these departures, CMA's
performance during 2000 and CMA's future prospects, the Company determined
to discontinue CMA's mortgage origination business during the fourth
quarter of 2000. The Company will write down an additional $981 thousand in
goodwill in the fourth quarter. Although these goodwill write-offs
contributed to the Company's third quarter loss and will affect the
Company's fourth quarter results, they will not negatively affect the
Company's regulatory capital calculations, which exclude intangible assets.
The current write down of this goodwill will save the Company amortization
expense in future periods, as the goodwill was originally to be amortized
over eight and ten year periods.
(11) CESSATION OF COMPENSATION AGREEMENTS
In August 2000, Robert J. Van Volkenburgh, the Company's Chairman and
Chief Executive Officer, resigned to pursue other business opportunities.
It is the Company's position, supported by advice of legal counsel, that
the employment agreement and supplemental retirement plan between the
Company and Mr. Van Volkenburgh are no longer in effect, and that therefore
the Company has no obligations to Mr. Van Volkenburgh under these
agreements. During the third quarter, the Company reversed a previously
accrued compensation expense of $167 thousand established in connection
with the supplemental retirement plan. In connection with his resignation,
Mr. Van Volkenburgh and the Company exchanged limited releases, which do
not prohibit claims by Mr. Van Volkenburgh under the employment agreement
and supplemental retirement plan. Mr. Van Volkenburgh has made no demand
under either of these agreements.
(12) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". The interpretation
clarifies certain issues with respect to the application of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
(APB Opinion No. 25). The interpretation results in a number of changes in
the application of APB Opinion No. 25 including the accounting for
modifications to equity awards as well as extending APB Opinion No. 25
accounting treatment to options granted to outside directors for their
services as directors. The provisions of the interpretation were effective
July 1, 2000 and apply prospectively, except for certain modifications to
equity awards made after December 15, 1998. The initial adoption of the
interpretation did not have a significant impact on the company's financial
statements.
In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment to FASB Statement No.
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<PAGE>
133". Statement No 138 amends certain aspects of Statement No. 133 to
simplify the accounting for derivatives and hedges under Statement No. 133.
Statement No 138 is effective upon the company's adoption of Statement 133
(January 1, 2001). The initial adoption of Statement No.138 is not expected
to have a material impact on the company's financial statements.
In September 2000, the FASB issued SFAS No.140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (A Replacement of FASB Statement 125)." SFAS No. 140 supersedes
and replaces the guidance in SFAS No. 125 and, accordingly, provides
guidance on the following topics: securitization transactions involving
financial assets; sales of financial assets such as receivables, loans and
securities; factoring transactions; wash sales; servicing assets and
liabilities; collateralized borrowing arrangements; securities lending
transactions; repurchase agreements; loan participations; and
extinguishment of liabilities. While most of the provisions of SFAS No.140
are effective for transactions entered into after March 31, 2001, companies
with fiscal year ends that hold beneficial interest from previous
securizations will be required to make additional disclosures in their
December 31, 2000 financial statements. The initial adoption of SFAS No.
140 is not expected to have a material impact on the Company's financial
statements.
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.
This report contains certain "forward-looking statements" as defined under
Section 21E of the Securities Exchange Act of 1934. The Company desires to take
advantage of the "safe harbor" provisions of Section 21E and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all such forward-looking statements. These
forward-looking statements, which are included in Management's Discussion and
Analysis, describe future plans or strategies and may include the Company's
expectations of future financial results. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors, which could
effect actual results, include, but are not limited to; (i) change in general
market interest rates; (ii) general economic conditions, both in the United
States generally, and in the Company's market area; (iii) legislative/regulatory
changes; (iv) monetary and fiscal policies of the U.S. Treasury and the Federal
Reserve; (v) changes in the quality or composition of the Company's loan and
investment portfolios; (vi) demand for loan products; (vii) deposit flows;
(viii) competition; and (ix) demand for financial services in the Company's
markets. These factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements.
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
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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.
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 and the Bank entered into Memoranda of Understanding with their
primary regulatory agencies. However, due to continued losses through the first
two quarters of 2000, among other reasons, the Company and the Bank entered into
stipulations and agreements with each of their respective regulators as of July
18, 2000. Under these agreements, the Bank and the Company are each required to
take a number of affirmative steps, including hiring an outside consulting firm
to undertake a review of their management structures, adopting strategic and
capital plans which will increase the Bank's leverage ratio to 6% or above,
reviewing and adopting various updated policies and procedures, adopting
programs with regard to the resolution of certain criticized assets, and
providing ongoing reporting to the various regulatory agencies with regard to
the Bank's and Company's progress in meeting the requirements of the agreements.
The agreements also require the Bank and Company to establish a compliance
committee to oversee the efforts in meeting all requirements of the agreements,
and prohibit the Bank from paying a dividend to the Company and the Company from
paying dividends on its common and preferred stock, without regulatory approval.
The Bank and the Company believe they are in compliance with the requirements of
the agreements.
To bolster the Company's capital ratios and to reposition the Company for
future, profitable operation, the Company undertook a number of steps during the
first three quarters of 2000. In the first quarter, the Company consummated a
private placement of approximately $4.9 million (net of offering expenses) in
preferred stock to sophisticated investors. In addition, the Company sold $36.4
million in adjustable rate, one-to-four family mortgage loans, recognizing a
loss of $733,000 (after tax $439,000). These two transactions brought the
Company and the Bank into full compliance with all minimum Federal regulatory
capital requirements, although the Bank still failed to satisfy the 6%
capital-to-asset ratio required by an order of the New Jersey Banking and
Insurance ("NJDOBI"). In the third quarter of 2000, the Bank sold $44.8 million
in book value of purchased home equity loans, realizing a pre-tax loss of $1.2
million. The loans were sold, servicing released and without recourse. In
addition, the Company entered into agreements to sell five branches, subject to
regulatory approval. The transactions, which are expected to close late in
December, 2000, are expected to yield the Company a pre-tax gain of $4,000,000.
The proceeds from the third quarter loan sale will be used, along with the
Bank's excess Federal funds sold, to fund the deposit sale. It is anticipated
that the gain on the sale of the five branches, along with the reduction in
assets accompanying the sale, will bring the Bank into compliance with the 6%
tangible capital to average assets ratio mandated by the NJDOBI by March 31,
2001, nine months before required under the regulatory agreements. It is
anticipated that the tangible capital to period end asset ratio will be 6% at
December 31,2000.
Also in the third quarter, the Company wrote off approximately $2.25
million of the goowill recognized in the 1999 acquisition of CMA. During the
third quarter, the former shareholders of CMA left the employment of the
Company, and their employment agreements were terminated. In addition, certain
other sales employees left CMA. Based upon these departures, CMA's performance
during 2000 and CMA's future prospects the Company determined to discontinue
CMA's mortgage origination business during the fourth quarter of 2000. The
Company will write down an additional $981 thousand in goodwill in the fourth
quarter. Although these goodwill write-offs contributed to the Company's third
quarter loss and will affect the Company's fourth quarter results, they will not
negatively affect the Company's regulatory capital calculations, which exclude
intangible assets. The current write down of this goodwill will save the Company
amortization expense in future periods, as the goodwill was originaly to be
amortized over eight and ten year periods.
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<PAGE>
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 non-interest income, which includes gains on sales of loans
including loans originated under the Small Business Administration's Guaranteed
Loan Program, and loans originated and simultaneously sold by CMA, and
non-interest expenses. In addition, during the third quarter of 2000, the
Company's results of operation were impacted by a number of non-recurring items,
such as the loss on loan sale and goodwill write-down discussed above.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999
NET INCOME
The Company incurred a net loss of $4.6 million or $1.31 loss per basic and
diluted common share for the first nine months of 2000, compared to net loss of
$1.5 million, or $0.42 loss per basic and diluted share for the first nine
months of 1999. Basic and diluted loss per share for September 30, 2000 was
based on the net loss available to common shareholders, equaling the net loss
for the period less the paid and unpaid preferred stock dividends.
The $4.6 million loss largely reflects the write-down of $2.246 million in
goodwill associated with the purchase of CMA, the $720 thousand after tax loss
on the sale of home equity loans on September 29, 2000, and the $439 thousand
after tax loss on the sale of the adjustable rate mortgage loans. The loss also
reflects the growth in non-interest expense due to the opening of nine new
branches over the course of 1999, the decrease in net interest margin
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and spread, the costs of administering the expanding loan portfolios, and the
costs to monitor non-performing loans.
The changes in the components of net income, comparing the nine months
ended September 30, 2000 to September 30, 1999, included a $.6 million increase
in net interest income, a $1.1 million decrease in the provision for loan
losses, a $2.1 million decrease in noninterest income, a $3.1 million increase
in noninterest expense, and a $.5 million increase in tax benefit.
NET INTEREST INCOME
Net interest income increased $.6 million (8.6%) to $8.7 million for the
first nine months of 2000 from $8.1 million for the first nine months of 1999.
The $.6 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 $82.8 million (28.4%) in average
earning assets for the first nine months of 2000, totaling $374.2 million
compared to the prior year's $291.4 million. The increase in average earning
assets occurred primarily in the loan and investment portfolios. Average loans
increased $81.4 million (38.3%) to $293.9 million in the first nine months of
2000 from the $212.5 million recorded in the first nine months 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 and $56.0 million of purchased home equity
loans, partially offset by $37.0 million in ARM mortgages sold in the first nine
months of 2000. The September 29, 2000 home equity loan sale had an immaterial
impact on the year-to-date loan average. Partially off-setting the increase in
average loans was a decrease in the average yield on the loan portfolio to 7.85%
in the first nine months of 2000 from 8.32% during the comparable period of
1999. The reduction in yield reflects the Bank's greater proportion of loans
secured by one-to-four family mortgages. Average investments increased $10.5
million (16.9%) to $72.7 million in the first nine months of 2000 from the $62.2
million recorded in the first nine months of 1999. Growth in the investment
portfolio was the result of increased deposits from the Top Banana product
introduced at the end of the second quarter of 1999. The yield on investments
increased from 6.04% for the nine months ended September 30, 1999 to 6.48% for
the nine months ended September 30, 2000. As a result of the increase in
mortgages and home equity loans at lower yields, the first nine months of 2000
yield on earning assets decreased to 7.56% as compared to 7.66% for the first
nine months of 1999, partially offsetting the volume related gains in interest
income.
Increases in interest-earning assets were primarily funded through an
increase of $83.6 million (27.1%) in average deposits and borrowings to $392.4
million for the first nine months of 2000 from $308.8 million for the first nine
months of 1999. Average deposits increased $81.8 million (27.6%) to $377.8
million for the first nine months of 2000 from $296.0 million in the first nine
months of 1999. Average other borrowed funds increased $1.8 million to $14.6
million for the first nine months of 2000 from $12.8 million in the first nine
months of 1999. There were no borrowings at September 30, 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 ARM loan sale and increased deposits.
The cost of interest-bearing liabilities increased to 4.97% for the first
nine months of 2000 from 4.42% for the first nine months of 1999 and the total
cost of funds, including non-interest bearing deposits, increased to 4.21% for
the first nine months of 2000 from 3.74% for the first nine months 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%. These
higher rate products and the first quarter's
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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 $12.0 million (25.1%)
to a total of $59.9 million for the first nine months of 2000 from $47.9 million
for the first nine months of 1999, non-interest bearing deposits as a percentage
of the deposit portfolio decreased to 15.9% for the first nine months of 2000
from 16.2% for the first nine months of 1999. As a result of these factors, net
interest margin declined to 3.14% during the first nine months of 2000 from
3.70% in the first nine months of 1999. The net interest spread, being the
difference between interest-earning assets and interest- paying liabilities,
decreased to 2.59% from 3.24% for the nine-month period ending September 30,
2000 and September 30, 1999 respectively. (Refer to the section titled Deposits
and Borrowings for the average balance deposit schedule.)
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%.
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<PAGE>
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
--------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Taxable loans
(net of unearned income) $293,904 $17,310 7.85% $212,547 $13,257 8.32%
Tax-exempt securities 3,294 238 9.63% 1,877 114 8.07%
Taxable investment securities 69,455 3,297 6.33% 60,305 2,703 5.98%
Interest-bearing deposits 127 7 7.35% 2,424 160 8.80%
Federal funds sold 7,380 355 6.41% 14,213 514 4.82%
-------- ------- --------- -------
Total Interest-earning assets $374,160 $21,207 7.56% $291,366 $16,748 7.66%
Non-interest earning assets 46,448 47,590
Allowance for loan losses (2,379) (1,927)
--------- ----------
TOTAL AVERAGE ASSETS $418,229 $337,029
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
NOW deposits $116,577 $ 3,836 4.39% $ 84,477 $ 2,470 3.90%
Savings deposits 19,375 264 1.82% 16,677 230 1.84%
Money market deposits 16,892 356 2.81% 17,841 395 2.95%
Time deposits 164,996 7,227 5.84% 129,052 4,957 5.12%
Other debt 14,599 702 6.41% 12,832 605 6.29%
-------- ------- -------- -------
Total interest-bearing liabilities $332,439 $12,385 4.97% $260,879 $ 8,657 4.42%
Other non-interest bearing liabilities 2,341 4,579
Demand deposits 59,944 47,926
Shareholders' equity 23,505 23,645
--------- ----------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $418,229 $337,029
-------- -------
Net interest income $ 8,882 $ 8,091
-------- ------
Net interest rate spread 2.59% 3.24%
-------- -------
Net interest income/margin on average earning assets 3.14% 3.70%
Cost of Funds - Interest Expense vs Deposits $392,383 $12,385 4.21% $308,805 $ 8,657 3.74%
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $426 thousand for the first nine
months of 2000, compared with the first nine months of 1999's $1.528 million.
The decrease in the provision is primarily attributable to 2000's decrease in
the portfolio, as compared to 1999's growth in the loan portfolio and the third
quarter 1999 provision for one loan that was subsequently foreclosed and whose
ORE property was sold. Also contributing to the decrease was 1999's increase in
the specific reserve factors used to determine reserve levels on certain types
of loans (for 2000, the specific reserve factors have remained the same as
1999's). Refer to the Asset Quality section for related allowance for loan loss
discussion.
NON-INTEREST INCOME
Non-interest income, consisting of service charges on deposits, gains on
sales of securities and loans and other non-interest income decreased $2.1
million, or 62.5%, to $3.5 million for the first nine months of 2000 from $5.6
million for the first nine months of 1999. This $2.1 million decrease is
primarily a result of a $2.6 million decrease in loan sale gains. The decrease
in loan sale gain is primarily from the $1.5 million decrease in mortgage loan
sales; the $1.2 million loss on sale of purchased home equity loans; the $.7
million loss on sale of held-for-sale ARM loans; and a $.9 million increase in
the gain on SBA loan sales, totaling $1.0 million for the first nine months of
2000,compared to $3.7 million for the first nine months 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 is
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<PAGE>
primarily the result of a decline in originations, due to a rising rate
environment, along with a decrease in production. During a rising rate
environment, re-financings are less likely to occur.
<TABLE>
<CAPTION>
GAIN ON LOAN SALES, nine months ended SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
(In thousands) GAIN (LOSS) GAIN (LOSS)
------------------ ---------------------
<S> <C> <C>
Mortgage loan sales $ 1,148 $ 2,663
SBA guaranteed portion of loan sales 1,814 953
Held for sale - ARM Loans (731) 0
Purchased HE loan sales (1,202) 0
Home Equity loan sales 9 0
Commercial loan sales 0 70
------------- -------
Total gain (loss) on loan sales $ 1,038 $ 3,686
============= =======
</TABLE>
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 $25.7 million for the first nine months of 2000, compared to $12.7
million for the first nine months 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.
On September 29, 2000, the Bank sold, servicing released and without
recourse, $44.8 million of home equity loans originally purchased during 1999,
realizing $43.6 million in proceeds and incurring a $1.2 million pre-tax loss.
In addition to the loan sales, other income, increased $457 thousand
(38.5%) to $1.6 million for the first nine months of 2000 compared to $1.2
million for the first nine months of 1999. The increases consisted of $172.3
thousand (42.8%) in SBA fees, $78 thousand (78.0%) in non-deposit account
transaction charges, $354 thousand (219.9%) in miscellaneous income, partially
offset by a $87 thousand (52.2%) decrease in income on cash surrender value of
insurance, and a $60 thousand (82.4%) decrease in loan fees. The loan fees are
primarily associated with mortgage originations, the non-deposit account
transaction charges are primarily the result of automated teller machine charges
to non-customers of the Bank, miscellaneous income is primarily the result of
loan referral fees and fees associated with the new debit card product. 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 nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
OTHER INCOME NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,2000 SEPTEMBER 30,1999
----------------- -----------------
<S> <C> <C>
(In thousands)
SBA Fees $ 576 $ 404
Loan fees 280 340
Income from cash surrender value of life insurance 95 182
Non-deposit account transaction charges 178 100
Miscellaneous 515 161
------- -------
Total other income $ 1,644 $ 1,187
======= =======
</TABLE>
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<PAGE>
Service charges on deposits increased $287 thousand (51.2%) to $848
thousand for the first nine months of 2000 compared to $541 thousand for the
first nine months of 1999. The additional deposit service charges were primarily
the result of a service charge rate increase enacted in January 2000.
Security gains decreased $189 thousand from the first nine months of 2000's
$5 thousand compared to the first nine months of 1999's $194 thousand. The
decrease is the result of the Company having nominal security sales during the
first nine months of 2000, as compared to the first nine months of 1999.
NON-INTEREST EXPENSE
Other non-interest expense increased $3.2 million (21.7%), to $18.1 million
for the first nine months of 2000 from $14.8 million for the first nine months
of 1999. The increase consisted of a $606 thousand (9.21%) salaries and benefits
increase to $7.2 million from $6.6 million, a $227 thousand (13.22%) occupancy,
furniture, and equipment expenses increase to $1.9 million from $1.7 million,
and a $2.3 million (36.5%) other operating expenses increase to $8.9 million
from $6.5 million for the first nine months of 2000 compared to the first nine
months of 1999, respectively. Offsetting the increase in salaries and benefits
was a $167 thousand reversal of an accrued liability for the supplement
retirement plan of the former chairman who resigned in August 2000. Included in
other operating expenses is the $2.2 million goodwill write-down. 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 nine months ended September 30, 2000 and 1999:
OTHER OPERATING EXPENSES Nine month Ended Nine month Ended
September 30,2000 September 30,1999
---------------------- ---------------------
(In thousands)
Professional Service $ 965 $ 761
Office Expense 1,316 1,418
Advertising Expense 607 547
Communication Expense 662 525
Bank Services 766 579
FDIC Insurance 202 121
Director Fees 86 200
Non-Loan Losses 25 824
Loan Expense 970 933
Amortization of Intangibles 359 274
Goodwill writedown 2,246 0
Other Expense 732 364
------ ------
Total Other Expense $8,936 $6.546
====== ======
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 loan
portfolio that expanded in 1999. Goodwill amortization expenses relating to the
acquisition of CMA totaled $349 thousand in the first nine months of 2000 and
$264 thousand in the first nine months of 1999. There were $9.5 thousand in
goodwill amortization expenses incurred in the both first nine months 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. The increase in advertising expense is the
result of increased marketing efforts to support the seventeen branch network.
INCOME TAX EXPENSE
For the first nine months of 2000, a tax benefit of $1.6 million was
recognized relating to the first nine months of 2000 loss as compared to a $1.1
million tax benefit for federal and state taxes in the first nine months of
1999. This represents an effective tax rate of 26.4% and 42.1% for the first
nine months of 2000
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<PAGE>
and the first nine months of 1999. The effective tax rates are the result of
applicable tax rates computed against each legal entity's taxable net income
before taxes. September 2000's lower effective tax rate is due to the goodwill
being written off without current tax benefit, due to the net operating loss
position of the Company.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000
COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1999
NET INCOME
The Company incurred a net operating loss of $3.3 million or $0.93 loss per
basic and diluted common share for the third quarter of 2000 compared to a net
loss of $1.7 million or $0.45 loss per basic and diluted common share for the
third quarter of 1999. Basic and diluted loss per common share for September 30,
2000 were based on the net loss available to common shareholders, equaling the
net operating loss for the period less the unpaid preferred stock dividend.
The $3.3 million operating loss largely reflects several events, which
occurred in the third quarter, including a write-off of $2.246 million in
goodwill associated with the Company's purchase of its CMA subsidiary in
February of 1999 and a $720 thousand after tax loss incurred in connection with
the sale of home equity loans. In addition, the loss reflects a significant
increase in non-interest expense as the full cost of the Company's branch
expansion was recognized during 2000 and a decrease in net interest margin and
spread as the Company's cost of funds increased while its average yield on its
loan portfolio did not.
The changes in the components of net income included a $.1 million decrease
in net interest income, a $.8 million decrease in the provision for loan losses,
a $.5 million decrease in non-interest income, a $1.4 million increase in
non-interest expense, and a $.4 million decrease in the provision for income
taxes.
NET INTEREST INCOME
Net interest income decreased $.1 million (3.3%) to $2.9 million for the
third quarter of 2000 compared to $3.0 million for the third quarter of 1999.
The $.1 million net interest income decrease was the result of an increase
in interest expense in excess of interest income. The growth in interest income
was primarily attributable to an increase of $15.1 million (4.3%) in average
earning assets for the third quarter of 2000 totaling $368.3 million over the
prior year's $353.2 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 $8.4 million (3.1%) to $282.6 million in the
third quarter of 2000 from the $274.2 million recorded in the third quarter of
1999. Growth in the loan portfolio was primarily comprised of $111.7 million of
residential adjustable rate mortgages (ARM) originated between April 30, 1999
and June 30, 2000 by the Bank's CMA subsidiary, and $56.0 million of purchased
home equity loans, partially offset by $37.0 million in mortgages sold in the
first quarter of 2000, and $44.8 million of purchased home equity loans sold in
September 2000. These ARM and home equity loans have a lower yield than
commercial loans, causing the loan portfolio yield to remain at 7.69% in the
third quarter of 2000, as compared to 7.67% in the third quarter of 1999.
Average investments decreased $5.1 million (6.75%) to $71.1 million in the third
quarter of 2000 from the $76.9 million recorded in the third quarter of 1999,
primarily through amortization payments. The yield on investments increased from
6.23% for the three months ended September 30, 1999 to 6.53% for the nine months
ended September 30, 2000. The yield on Federal funds sold (FFS) increased from
5.49% to 6.54% for the nine months ending September 30, 1999 and 2000,
respectively. As a result of the mortgages and home equity loans at lower yields
offsetting the increases on FFS and investments at higher yields, the yield on
earning assets remained virtually the same at 7.69% for the third quarter of
2000 compared to 7.67% for the third quarter of 1999.
20 of 37
<PAGE>
Increases in interest-earning assets were primarily funded through an
increase of $8.7 million (2.3%) in average deposits and borrowings to $386.5
million for the third quarter of 2000 from $377.8 million for the third quarter
of 1999. Average deposits increased $37.4 million (10.8%) to $382.8 million for
the third quarter of 2000 from $345.4 million in the third quarter of 1999.
Average borrowings decreased $28.8 million to $3.7 million for the third quarter
of 2000 from $32.4 million in the third quarter of 1999. There were no
borrowings at September 30, 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 $3.7 million average
other debt for the third quarter 2000 represents the capital lease obligations.
Of the third quarter 1999's $32.3 million average other debt, $4.0 million
represented capital lease obligations and $28.4 million represented average
borrowings at FHLB.
The cost of interest-bearing liabilities increased to 5.02% for the third
quarter of 2000 from 4.53% for the third quarter of 1999 and the total cost of
funds, including non-interest bearing deposits, increased to 4.26% for the third
quarter of 2000 from 3.93% for the third 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. 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%. 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 $8.7 million (17.5%)
to a total of $58.5 million for the third quarter of 2000 from $49.8 million for
the third quarter of 1999, average non-interest bearing deposits as a percentage
of the deposit portfolio increased to 15.3% for the third quarter of 2000 from
14.4% for the third quarter of 1999. As a result of these factors, net interest
margin declined to 3.23% during the third quarter of 2000 from 3.46% in the
third quarter of 1999. The net interest spread, being the difference between
interest earning assets and interest paying liabilities, decreased to 2.68% at
September 30, 2000 from 3.14% at September 30, 1999. (Refer to the section
titled Deposits and Borrowings for the average balance deposit schedule.)
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%.
21 of 37
<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
September 30 September 30
2000 1999
----------------------------- ------------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
--------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Taxable loans, (net of unearned income) $282,640 $ 5,656 8.05% $274,170 $5,533 8.07%
Tax-exempt securities 3,173 79 9.93% 2,444 42 6.94%
Taxable investment securities 68,537 1,091 6.37% 74,407 1,155 6.21%
Interest-bearing deposits 149 2 5.38% 1,419 32 9.02%
Federal funds sold 13,817 226 6.54% 729 10 5.49%
---------- -------- --------- -------
Total Interest-earning assets $368,316 $ 7,084 7.69% $353,168 $6,772 7.67%
Non-interest earning assets 45,201 55,367
Allowance for loan losses (2,494) (2,275)
---------- ---------
TOTAL AVERAGE ASSETS $411,024 $406,260
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
NOW deposits $121,171 $ 1,350 4.46% $105,687 $1,021 3.86%
Savings deposits 19,769 84 1.70% 18,953 81 1.71%
Money market deposits 16,111 113 2.81% 17,813 127 2.85%
Time deposits 167,265 2,540 6.07% 153,121 2,001 5.23%
Other debt 3,659 27 2.95% 32,425 484 5.97%
---------- -------- --------- -------
Total interest-bearing liabilities $327,974 $ 4,114 5.02% $328,000 $3,714 4.53%
Non-interest-bearing liabilities 2,096 4,849
Demand deposits 58,526 49,840
Shareholders' equity 22,429 23,570
----------- ----------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $411,024 $406,260
----------- --------
Net interest income $ 2,970 $3,058
------ ---------
Net interest rate spread 2.68% 3.14%
Net interest income/margin on average earning assets 3.23% 3.46%
Cost of Funds - Interest Expense vs Deposits $386,500 $12,385 4.26% $377,841 $8,657 3.93%
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $90 thousand for the third quarter of
2000, compared with the third quarter of 1999's provision of $867 thousand. The
decrease in the provision is primarily attributable to the large provision in
the third quarter of 1999, related to our 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 1999 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. During 2000, the Company reviewed
its methodology and reserve factors and believes they are adequate and that
significant changes are not required. Refer to the Asset Quality section for
related allowance for loan loss discussion.
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<PAGE>
NON-INTEREST INCOME
Non-interest income, consisting of service charges on deposits, gains on
sales of securities and loans and other non-interest income decreased $.5
million, or 49.5%, to $.5 million for the third quarter of 2000 from $1.1
million for the third quarter of 1999. This $.5 million decrease is primarily a
result of a $.7 million decrease in loan sale gains. The decrease in loan sale
gain is primarily from the $1.2 million loss on the sale of purchased home
equity loans, offset by a $364 thousand increase in the gain on SBA guaranteed
portion of loan sales, and a $144 thousand increase in mortgage loan sale gains.
Mortgage loan sale gains totaled $230 thousand in the current period, compared
to $86 thousand in the prior year period, and SBA guaranteed portion loan sale
gains totaled $611 thousand compared to $247 thousand for the third quarters of
2000 and 1999 respectively. 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. In the third quarter of 1999, CMA sold loans
primarily to the Bank, resulting in the very low gain on sale. During 2000, CMA
has primarily sold its loans into the secondary market. The increase in SBA sale
gains is the result of increased volume of loans sold at a higher premium.
<TABLE>
<CAPTION>
GAIN ON LOAN SALES Quarter Ended Quarter Ended
September 30, 2000 September 30, 1999
(In thousands) Gain Gain
------------------ ---------------------
<S> <C> <C>
Mortgage loan sales $ 230 $ 86
SBA guaranteed portion of loan sales 611 247
Home equity loan sales (1,202) 0
Other loan sales 9 5
------- -----
Total gain (loss) on loan sales $ (352) $ 328
======= =====
</TABLE>
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 $9.1 million in the third quarter of 2000, compared to $3.8 million in
the third quarter of 1999.
In addition to the gains on loan sales, Other Income increased $11 thousand
(1.9%) to $599 thousand for the third quarter of 2000 compared to $588 thousand
for the third quarter of 1999. The increases were $50 thousand in SBA fees; $18
thousand in miscellaneous income; a $6 thousand increase in income on cash
surrender value of insurance; and a $222 thousand decrease in loan fees. The
decrease in loan fees is from a decrease in lending activities in a rising-rate
environment. The loan fees are primarily associated with mortgage originations,
the non-deposit account transaction charges are primarily the result of
automated teller machine charges to non-customers of the Bank, and miscellaneous
income is primarily the result of loan referral fees and fees associated with
the new debit card product. The increase in cash surrender value income is the
result of increased earning rates.
The following is a summary of other income for the quarters ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
OTHER INCOME Quarter Ended Quarter Ended
September 30, 2000 September 30,1999
------------------ -----------------
<S> <C> <C>
(In thousands)
SBA Fees $ 174 $ 124
Loan fees 82 304
Income from cash surrender value of life insurance 31 25
Non-deposit account transaction charges 62 44
Miscellaneous 250 91
----- -----
Total other income $ 599 $ 588
===== =====
</TABLE>
23 of 37
<PAGE>
Service charges on deposits increased $92 thousand (43.3%) to $307 thousand
for the third quarter of 2000 compared to $215 thousand for the third quarter of
1999. The additional deposit service charges were primarily the result of a
service charge rate increase enacted in January 2000.
Security losses decreased $33 thousand from the third quarter 1999's $33
thousand loss to the third quarter 2000's $0 thousand. The decrease is the
result of the Company having no security sales during the third quarter of 2000,
as compared to the third quarter of 1999.
NON-INTEREST EXPENSE
Other non-interest expense increased $1.4 million (23.2%), to $7.5 million
for the third quarter of 2000 from $6.1 million for the third quarter of 1999.
The $1.4 million non-interest expense increase consisted of a $196 thousand
(9.6%) salaries and benefits increase to $2.2 million from $2.0 million, a $99
thousand (14.5%) occupancy, furniture, and equipment expenses decrease to $.6
million from $.7 million, and a $1.3 million (39.2%) other operating expenses
increase to $4.7 million from $3.4 million for the third quarter of 2000
compared to the third quarter of 1999, respectively.
The following table presents a breakdown of other operating expenses for
the quarters ended September 30, 2000 and 1999:
OTHER OPERATING EXPENSES Quarter Ended Quarter Ended
September 30,2000 September 30,1999
---------------------- ----------------------
(In thousands)
Professional Service $ 302 $ 305
Office Expense 502 573
Advertising Expense 162 233
Communication Expense 190 249
Bank Services 274 219
FDIC Insurance 111 57
Director Fees 11 21
Non-Loan Losses 32 794
Loan Expense 348 576
Amortization of Intangibles 120 119
Goodwill write-off 2,246 0
Other Expense 364 204
------ ------
Total Other Expense $4.662 $3,350
====== ======
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 nine 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.
September 30, 1999's advertising expense is higher due to promotional activities
related to the new branch openings in that time period. September 1999's
non-loan loss relates to the write-offs of the kiting reported in the prior
year's reports.
INCOME TAX EXPENSE
For the third quarter of 2000, a tax benefit of $757 thousand was
recognized relating to the third quarter of 2000 loss as compared to a $1.1
million tax benefit for federal and state taxes in the third quarter of 1999.
This represents an effective tax rate of 18.6% and 39.9% for the third quarter
of 2000 and the third quarter of 1999. The effective tax rates are the result of
applicable tax rates computed against each legal entity's taxable net income
before taxes. September 2000's lower effective tax rate is due to the goodwill
being written off without tax benefit.
FINANCIAL CONDITION AT SEPTEMBER 30, 2000
Total assets decreased $29.1 million (6.6%) to $409.8 million at September
30, 2000 compared to total assets of $439.0 million at December 31, 1999. Net
loans decreased $89.4 million (27.9%) to $231.0 million at September 30, 2000
compared to $320.3 million at December 31,1999. Cash and equivalents increased
$65.7 million (434.8%) to $80.9 million at September 30, 2000 from $15.1 million
at December
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<PAGE>
31, 1999. The securities portfolio, including securities held-to-maturity and
available-for-sale, decreased $2.9 million (4.0%) to $71.0 million at September
30, 2000, compared to $74.3 million at December 31, 1999. Other real estate
owned decreased $1.2 million as one property with a $747 thousand carrying value
was sold during the first quarter of 2000 without incurring any additional loss,
another property was written down $143 thousand during the second quarter of
2000, and sold in the third quarter with a $613 thousand carrying value that
incurred a $127 thousand loss. Another property was added during the second
quarter with a $142 thousand carrying value, and another was added in the third
quarter with a $158 thousand carrying value.
Total deposits and borrowings decreased $31.9 million (7.8%) to $378.7
million at September 30, 2000 from $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 $21.1 million (5.9%)
increase in deposits totaling $378.7 million at September 30, 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, increases in
longer-term certificates of deposits of less than $100 thousand through a new
campaign, and a decrease in short-term jumbo certificates of deposit from
municipalities in the Bank's market area. A new eleven month, 7% certificate of
deposit was introduced in early June 2000 which has brought in $30.6 million in
long term, under $100,000 time deposits. This product was introduced to replace
short term jumbo CD's thereby reducing the Bank's interest rate sensitivity and
dependency on municipal deposits.. The $100,000 and over time deposit total
decreased $21.8 million from December 1999's $71.1 million to September 2000's
$49.3 million and the under $100,000 time deposit total increased $35.9 million
from December 1999's $79.1 million to September 2000's $115.0 million. The
interest bearing deposits increased $16.0 million from December 1999's $104.3
million to September's $120.3 million primarily as a result of the Top Banana
money market campaign. 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 $89.4 million (27.9%) to $231.0 million at September
30, 2000 compared to $320.3 million at December 31,1999. The decrease in the
loan portfolio is primarily the result of the third quarter sale of $44.8
million of home equity loans originally purchase during 1999, and $36.4 million
of adjustable rate one-to-four family residential mortgages (ARMs) that occurred
in the first quarter. (See the following tables for major category
classification and changes for the first quarter of 2000.) While the total loan
portfolio net declined from December 31, 1999 to September 30, 2000, the
portfolio was also restructured as the Company de-emphasized its reliance on
real estate related lending and enhanced its commercial and industrial lending,
primarily through its participation in the SBA guaranteed loan program. Loans
secured by residential real estate declined from $178.1 million, or 55.4% of the
total loan portfolio at December 31, 1999, to $92.6 million, or 39.7% of the
loan portfolio at September 30, 2000. This decline primarily reflects the loan
sales discussed above, as well as new originations through the Bank's CMA
subsidiary being sold into the secondary market, rather than being held in
portfolio by the Bank. Commercial and industrial loans increased from $43.4
million, or 13.5% of the loan portfolio at December 31, 1999, to $61.8 million,
or 26.5% of the loan portfolio at September 30, 2000. The increase in commercial
and industrial loans primarily represents the unguaranteed portion of SBA loan
originations, which the Company holds in portfolio as it sells off the
guaranteed portion into the secondary market. $10.2 million of the $18.4 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 makes commercial and non-residential loans difficult
to grow at desired rates of return. The increase in the SBA portfolio reflects
the non-guaranteed portion of these loans that the Bank does not generally sell
into the secondary market.
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
25 of 37
<PAGE>
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
provide 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 T major
category, excluding unearned, deferred costs, and the allowance for loan loss
for September 30, 2000 and 1999 and December 31, 1999, and (b) the changes in
the major categories comparing September 30, 2000 to December 31, 1999:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999 December 31, 1999
CLASSIFICATION BY --------------------- --------------------- ----------------------
MAJOR CATEGORY % of % of % of
(In thousands) Amount Total Amount Total Amount Total
-------- ------ -------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 61,829 26.5% $ 46,799 14.9% $ 43,441 13.5%
Real Estate
Non-residential properties 48,232 20.6% 56,729 18.0% 52,312 16.3%
Residential properties 92,615 39.7% 163,487 51.9% 178,132 55.4%
Construction 9,752 4.2% 15,993 5.1% 17,818 5.5%
Consumer 21,123 9.0% 31,733 10.1% 29,780 9.3%
-------- ------ -------- ------ --------- ------
Total Loans $233,551 100.0% $314,741 100.0% $321,483 100.0%
======== ===== ======== ===== ======== =====
</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 more, still accruing interest and 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 more, 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 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.
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.
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<PAGE>
The following table sets forth information concerning non-accrual loans and
non-performing assets at September 30, 2000 and 1999, along with December 31,
1999:
<TABLE>
<CAPTION>
NONPERFORMING LOANS, in thousands September 30, September 30, December 31,
2000 1999 1999
------------- ------------- ------------
NONACCRUAL BY CATEGORY
<S> <C> <C> <C>
Real Estate $ 1,462 $ 1,379 $ 720
Consumer 48 38 0
Commercial 1,868 130 692
-------- -------- --------
Total nonaccrual loans $ 3,378 $ 1,547 $ 1,412
======== ======== ========
PAST DUE 90 OR MORE AND STILL ACCRUING INTEREST
Real Estate $ 325 $ 602 $ 159
Consumer 20 11 7
Commercial 497 1,387 0
-------- -------- --------
Total past due 90 or more and still accruing $ 842 $ 2,000 $ 166
-------- -------- --------
TOTAL NON PERFORMING LOANS $ 4,220 $ 3,547 $ 1,578
======== ======== ========
OREO Property 300 0 1,505
Other Asset - (1) 0 344 0
-------- -------- --------
TOTAL NON-PERFORMING ASSETS $ 4,520 $ 3,973 $ 3,083
======== ======== ========
Total Loans $233,551 $316,058 $321,483
NON-PERFORMING LOANS TO TOTAL LOANS 1.81% 1.12% 0.49%
Total Assets $407,584 $437,585 $438,969
NON-PERFORMING ASSETS TO TOTAL ASSETS 1.11% 0.91 0.70%
ALLOWANCE FOR LOANS LOSSES AS A
PERCENTAGE OF NON-PERFORMING LOANS 60.31% 63.07% 137.71%
</TABLE>
(1) reflects the value of an impaired asset associated with an unauthorized
overdraft
Nonaccrual loans increased $2.0 million from $1.4 million at year-end 1999
to $3.4 million at September 30, 2000. Loans past due 90 days or more, and still
accruing, increased $.7 million from $166 thousand at December 31, 1999 to $842
thousand at September 30, 2000. The Company's total non-performing assets
increased to $4.5 million at September 30, 2000 from $3.1 million at December
31, 1999.
The ratio of non-performing loans to total loans increased to 1.81% at
September 30, 2000 from 1.12% at September 30, 1999 and increased from 0.49% at
December 31, 1999. The decrease of the loan portfolio, as a result of the
September 29, 2000, $44.8 million loan sale and the increase in non-performing
loans were the reasons for the ratio's increase. The non-performing loan totals
$4.2 million, $3.5 million and $1.6 million at September 30, 2000, September 30,
1999 and December 31, 1999 respectively. The allowance for loan losses, as a
percent of non-performing loans are 60.31%, 63.07% and 137.71% at September 30,
2000, September 30, 1999 and December 31, 1999 respectively.
The increase in non-performing loans is primarily due to a few relatively
high dollar loans that went into default and slower than expected resolutions of
loans in this catagory. Management has recently increased the resources
allocated to the completion of loan resolutions to address this problem.
The $300 thousand OREO property at September 30, 2000 consists of a
nonaccrual loan that was foreclosed upon in the second quarter of 2000 and a
nonaccrual loan that was foreclosed upon in the third quarter of 2000, with
carrying values of $142 thousand and $158 thousand respectively. OREO is carried
at the lower of cost or market, less estimated selling costs. The September 1999
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.
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<PAGE>
At September 30, 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
September 30, 2000.
ALLOWANCE FOR LOAN LOSSES
The Company attempts to maintain an allowance for loan losses at a
sufficient level to provide for probable 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 $2.5 million, $2.2 million, and $2.2
million at September 30, 2000, December 31, 1999, and September 30, 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.
In addition, the ratio of non-performing loans to total loans increased to 1.81%
at September 30, 2000 from 1.12% at September 30, 1999 and increased from .49%
at December 31, 1999. The September 30, 2000 increase from September 30, 1999 is
primarily due to the decrease in the loan portfolio. The September 30, 2000
increase from December 31, 1999 is due to the increase in non-performing loans
and decrease in loans outstanding.
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<PAGE>
The following is a reconciliation summary of the allowance for loan losses
for September 30, 2000 and 1999 and December 31, 1999:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSS ACTIVITY Nine months Ended Nine months Ended Year Ended
(In thousands) September 30, 2000 September 30, 1999 December 31, 1999
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,173 $ 1,825 $ 1,825
Charge-offs:
Real estate 19 764 871
Consumer 15 39 130
Commercial and industrial 56 327 432
------- ------- -------
Total Charge-offs 90 1,130 1,433
Recoveries:
Real estate 16 3 2
Consumer 12 11 20
Commercial and industrial 8 0 16
Total recoveries 36 14 38
------- ------- -------
Total net charge-offs 54 1,116 1,395
------- ------- -------
Provision charged to expense 426 1,528 1,743
------- ------- -------
Balance of allowance at end of year $ 2,545 $ 2,237 $ 2,173
======= ======= =======
Ratio of net charge-offs to average loans outstanding 0.02% 0.14% 0.75%
Ratio of allowance to total loans,
net of guaranteed SBA loans held for sale 1.11% 1.00% 0.72%
</TABLE>
The ratio of allowance to total loans increased to 1.11% for the first nine
months of 2000 compared to 1.00% for the first nine months of 1999 and increased
as compared to the 0.72% for the year ended 1999. The increase of the ratio of
allowance to total loans between quarters is because of the decrease in the loan
portfolio. The increase in the allowance for loan loss over year-end 1999 is due
to a net increase of $372 thousand, as a result of provisions totaling $426
thousand and net charge-offs totaling $54 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 third quarter of 2000, the investment portfolio decreased
$2.9 million from monthly payments and maturities and totaled $71.4 million,
comprised of $38.1 million in securities available for sale and $33.3 million in
securities held-to-maturity. At September 30, 2000, no investment securities
were classified as trading securities.
DEPOSITS AND BORROWINGS
Deposits are the Company's primary source of funds. Total deposits and
borrowings decreased $31.9 million (7.8%) to $378.7 million at September 30,
2000 from $410.5 million at December 31, 1999. This decrease was the result of
paying-off the $53 million of borrowings with the proceeds from the
held-for-sale ARM loans sold in the first quarter of 2000. These deposit
increases primarily reflect increases in the Top Banana premium rate money
market account, increases in certificates of deposits through a new promotional
campaign, and a decrease in jumbo certificates of deposit from municipalities in
the Bank's market area. Time deposits increased $14.1 million (9.4%) to $164.3
million from $150.2 million, interest-bearing demand deposits, which include the
Top Banana premium rate money market account, increased $16.3 million (15.6%) to
$120.1 million from $104.3 million, noninterest-bearing demand deposits
decreased $6.6 million (10.1%) to $58.5 million from $65.1 million, and savings
deposits decreased $2.7 million (7.3%) to $35.2 million from $37.9 million at
September 30, 2000 compared to December 31, 1999.
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
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<PAGE>
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 continues to improve with a decline of -1.64% in a
rising rate environment and an increase of +.78% 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. This is also
an improvement from June 30, 2000 where there was a decline of 2.37% in a rising
rate environment and an increase of 1.64% in a falling rate environment.
The improvement in the variance of market risk with a +2% rate shock this
quarter has been achieved through a shorter duration asset structure resulting
from the sale of a fixed rate home equity loan portfolio. Proceeds from the sale
contributed to a Fed Funds Sold position of $59 million at September 30, 2000, a
substantial portion of the balance sheet not subject to market risk. However,
previously announced branch sales will reduce asset-based liquidity by year-end
2000 as the federal funds sold are used to fund deposit sales, and risk measures
are expected to increase modestly upon completion of the transaction.
OPERATING, INVESTING, AND FINANCING CASH
Cash and cash equivalents increased $62.4 million to $80.92 million at
September 30, 2000 from $18.5 million at September 30, 1999. Net cash used in
operating activities for the nine months ended September 30, 2000 decreased $4.9
million, totaling $1.2 million compared to $6.1 million at September 30, 1999.
This was primarily due to a $2.6 million decrease in loan sale gains, a $1.1
million decrease in provision expense, a $3.0 million increase in net loss, a
$1.5 million decrease in interest receivable and a $2.8 decrease in other
assets. Net cash used in investing activities for the nine months ended
September 30, 2000 increased $281.2 million to $93.9 million, compared to
$(187.3) million during the prior year. This was primarily due to a $90.3
million decrease in net loans, a $90.2 million increase in loan sales, a $56.1
million decrease in loan purchases, a $39.0 million decrease in net security
purchases, and a $5.0 million decrease in capital expenditures. The capital
expenditures of 1999 were related to the new branches and the acquisition of
CMA. Net cash provided by financing activities for the nine months ended
September 30, 2000 decreased $206.4 million to ($27.0) million compared to
$179.4 million a year earlier. This was primarily attributed to an effective $83
million decrease in borrowings between the two periods, a $129.9 million deposit
decrease and $4.9 million in preferred stock proceeds.
30 of 37
<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 pursuant to the terms of the agreements among the Company, the
Bank and the regulators. At September 30, 2000 the Bank Holding Company had $1.6
million in cash. Marketable securities, valued at fair market value, totaled
$316 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
Bank's principal sources of funds are deposits, scheduled amortization and
prepayments of loan principal, sales and maturities of investment securities and
funds provided by operations. While scheduled loan payments and maturing
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Total deposits amounted to $378.7 million, as of September 30, 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 September 30, 2000, $27.6 million was
available for borrowing from the FHLB of New York.
As of September 30, 2000, deposits included $38.1 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. To reduce the Bank's interest rate
sensitivity and dependence on municipal short-term deposits, a new eleven month
certificate of deposit product was introduced in early June 2000, bringing $30.6
million of these deposits into the Bank to augment liquidity and diminish
interest rate sensitivity through longer deposit duration by replacing jumbo
CD's with these deposits.
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 financial institution 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 institutions 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% requirement on the Bank.. 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
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<PAGE>
deemed to be "undercapitalized" under the Prompt Corrective Action provisions of
the Federal Deposit Insurance Act and the regulations of the FDIC. Because the
Bank failed to meet these minimum requirements among other things, in the fourth
quarter of 1999, due, among other things, to the capital deficiencies, the
Company and the Bank entered into memoranda of understanding with the state and
federal regulators.
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 common. 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.
On March 7, 2000, the Bank sold servicing released and without recourse
$36.4 million in adjustable rate one-to-four family mortgages (ARM's) assets,
realizing $35.6 million in net proceeds and incurring a $439 thousand pre-tax
loss. On September 29, 2000, the Bank sold, servicing released and without
recourse, $44.8 million, including $1.9 million in premium, in Home Equity Loans
originally purchased during 1999, realizing $43.6 million in proceeds and
incurring a $1.2 million pre-tax loss. The proceeds will be used in conjunction
with the fourth quarter 2000 sale of five branches, which is expected to result
in a $4.0 million pre-tax gain.
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 September 30, 2000. However, the Bank
does not exceed the New Jersey Department of Banking and Insurance's 6% leverage
requirement at September 30, 2000.
Because of the Bank's and Company's continued losses through the first two
quarters of 2000, among other things, both the Bank and Company entered into
stipulations and agreements with each of their respective primary regulators,
i.e. the Board of Governors of the Federal Reserve System with regard to the
Company and the FDIC and the New Jersey Department of Banking and Insurance with
regard to the Bank, on July 18, 2000. Under these agreements, the Bank and the
Company are required to take a number of affirmative steps, including the hiring
of an outside consulting firm to undertake a review of each of their management
structures, adopting strategic and capital plans which will increase the Bank's
Tier 1 capital ratio to at least 6% as required by the New Jersey Department of
Banking and Insurance order, reviewing and adopting various updated policies and
procedures, adopting programs with regard to the resolution of certain
criticized assets, and providing ongoing reporting to the various regulatory
agencies with regard to the Bank's and Company's progress in meeting the
requirements of the agreements. The agreements also require the Bank to
establish a compliance committee to oversee the Bank's and Company's efforts in
meeting all of the requirements of the agreements, and prohibit the Bank from
paying dividends to the Company and the Company from paying dividends, on either
its common or its preferred shares, without prior regulatory approval. The
Company had previously suspended dividend payments on its common shares, and
failed to make the July 15, 2000 $131,000 dividend payment on shares of its
Class A Preferred Stock. The Bank and Company believe they have fully completed
all requirements and continue to comply with the regulatory agreements.
32 of 37
<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 SEPTEMBER 30, 2000
Total capital
(to Risk Weighted Assets) $ 24,584 9.70% => $ 20,268 8.00% < $ 25,335 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 22,039 8.70% => $ 10,134 4.00% => $ 15,201 6.00%
Tier I Capital
(to Average Assets) $ 22,039 5.37% => $ 16,430 4.00% => $ 20,538 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%
</TABLE>
The BANK'S actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ ------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ------ --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000-
Total capital
(to Risk Weighted Assets) $ 22,444 9.29% => $ 19,328 8.00% < $ 24,159 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 19,899 8.24% => $ 9,664 4.00% => $ 14,496 6.00%
Tier I Capital
(to Average Assets) $ 19,899 4.83% => $ 16,472 4.00% < $ 20,590 5.00%
Tier I Capital (a)
(to Average Assets) $ 19,899 4.83% < $ 24,708 6.00% < $ 20,590 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 $.4 million (2.0%) to $22.2 at September 30,
2000 compared to $21.8 million at December 31, 1999. This increase was the
result of the $4.929 million net preferred stock offering proceeds, the $4.575
million net operating loss for the first nine months of 2000, contractual stock
grants of $10 thousand, preferred stock dividends paid of $25 thousand, and the
$89 thousand decrease in accumulated other comprehensive loss for the first nine
months of 2000.
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.
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<PAGE>
ITEM 1. LEGAL PROCEEDINGS
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.
During the third quarter, the employment of three officers of the Bank's
mortgage banking subsidiary, Certified Mortgage Associates, Inc. was
terminated. One of the officers filed suit against the Company, the Bank
and certain related parties of the Company. This suit was settled in
September, 2000, and the Company, and each of the three officers,
exchanged full releases. The Company incurred total expenses in this
matter of $257,622. The Company has filed claims with its liability
carrier seeking recovery for all, or a portion, of these expenses. The
carrier is processing this claim, although it has not accepted liability
for the Company's claims.
In August 2000, Robert J. Van Volkenburgh, the Company's Chairman and
Chief Executive Officer, resigned to pursue other business
opportunities. It is the Company's position, supported by advice of
legal counsel, that the employment agreement and supplemental retirement
plan between the Company and Mr. Van Volkenburgh are no longer in
effect, and that therefore the Company has no obligations to Mr. Van
Volkenburgh under these agreements. During the third quarter, the
Company reversed a previously accrued compensation expense of $167
thousand established in connection with the supplemental retirement
plan. In connection with his resignation, Mr. Van Volkenburgh and the
Company exchanged limited releases, which do not prohibit claims by Mr.
Van Volkenburgh under the employment agreement and supplemental
retirement plan. Mr. Van Volkenburgh has made no demand under either of
these agreement.
ITEM 2. CHANGE IN SECURITIES - Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Under the terms of the Company's agreements with the Federal Reserve and
the New Jersey Department of Banking and Insurance the Company is not
permitted to pay dividends on its outstanding securities without the
prior approval of the Federal Reserve and the Department. The Company
has not obtained these approvals, and so has failed to pay the July 15
and October 15 dividends on its outstanding Class A Preferred Stock. The
dividends for each quarterly period, which are cumulative, are
approximately $131,000 per quarter.
ITEM 4. SUBMISSION OF MATERS TO A VOTE OF SECURITY HOLDERS - Not Applicable
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
-------- -----------------------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
DATE ITEM REPORTED
-------------------- -------------
08/01/2000 5 - Agreement s with Regulators
08/18/2000 5 - Resignation of Robert Van Volkenburg
10/17/2000 5 - Loan and Branch Sale
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: November 14, 2000 By:/s/ KEVIN KILLIAN
---------------------------------
Kevin Killian
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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