SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-12431
UNITY BANCORP, INC.
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(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 22-3282551
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
64 Old Highway 22, Clinton, NJ 08809
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(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (908) 730-7630
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
Title of each class: Common Stock, No Par Value
Indicate by check mark whether the Issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The aggregate market value of the voting stock held by non-affiliates of
the Issuer, as of March 27, 2000, was $13,495,512.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of March 27, 2000, was 3,704,708.
For the fiscal year ended December 31, 1999, the Issuer had total revenues
of $29.3 million.
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DOCUMENTS INCORPORATED BY REFERENCE
10-KSB ITEM DOCUMENT INCORPORATIED
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Item 9. Directors and Executive Officers Proxy Statement for 2000 Annual
of the Company; Compliance with Meeting of Shareholders to be filed
Section 16(a) of the Exchange Act no later than April 30, 2000
Item 10. Executive Compensation Proxy Statement for 2000 Annual
Meeting of Shareholders to be filed
no later than April 30, 2000
Item 11. Security Ownership of Certain Proxy Statement for 2000 Annual
Beneficial Owners and Management Meeting of Shareholders to be filed
no later than April 30, 2000
Item 12. Certain Relationships and Related Proxy Statement for 2000 Annual
Transactions Meeting of Shareholders to be filed
no later than April 30, 2000
PART I
Item 1. DESCRIPTION OF BUSINESS
GENERAL
Unity Bancorp, Inc. (the "Company" or "Registrant") is a one-bank holding
company incorporated under the laws of the State of Delaware to serve as a
holding company for Unity Bank (the "Bank"). The Company was organized at the
direction of the Board of Directors of the Bank for the purpose of acquiring all
of the capital stock of the Bank. Pursuant to the New Jersey Banking Act of 1948
(the "Banking Act"), and pursuant to approval of the shareholders of the Bank,
the Company acquired the Bank and became its holding company on December 1,
1994. The only significant activity of the Company is ownership and supervision
of the Bank.
The Bank opened for business on September 16, 1991. The Bank received its
charter from the New Jersey Department of Banking and Insurance on September 13,
1991. The Bank is a full-service commercial bank, providing a wide range of
business and consumer financial services through its main office and seventeen
(17) branches located in Berkeley Heights, Clinton, Colonia, Cranford, East
Brunswick, Edison, Flemington, Kenilworth, Linden, North Plainfield,
Springfield, Scotch Plains, South Plainfield, Union and Whitehouse, New Jersey.
The Bank's primary service area encompasses the Route 22/Route 78 corridor
between the Bank's Clinton, New Jersey main office and its Linden, New Jersey
branch. This service area includes communities in Essex, Hunterdon, Middlesex,
Morris, Somerset, Union and Warren Counties, New Jersey.
On February 18, 1999, the Company, through the Bank, acquired Certified
Mortgage Associates, Inc. ("CMA"), a Marlboro, New Jersey based correspondent
mortgage banker. CMA originates one-to-four family home mortgages for re-sale
into the secondary market.
The Company is subject to the supervision and regulation of the Board of
Governors of the Federal Reserve System (the "FRB"). The Bank is a New Jersey
chartered commercial bank whose deposits are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The operations of the Company and the Bank are subject to the supervision and
regulation of FRB, FDIC and the New Jersey Department of Banking and Insurance
(the "Department").
Due to losses incurred during 1999, the Company and the Bank failed to
meet their minimum regulatory capital ratios at both September 30, 1999 and
December 31, 1999. At December 31, 1999, the Company's Tier 1 risk based capital
ratio was 6.17%, the Company's total risk based capital ratio was 6.88% and the
Company's leverage ratio was 4.35%. The Bank's ratios were 5.62%, 6.33%, and
4.01%, respectively. Minimum required ratios under both FRB and FDIC regulations
are 4%, 8% and 4%, respectively. Because of their capital ratios, the Company
and the Bank have entered into memoranda of understanding with their state and
federal regulators. The memoranda require the Company and the Bank to raise
capital, establish procedures to update the regulators every 30 days on the
Company's progress, adopt certain policies and review the Company's management.
The Company is prohibited from paying a common dividend to its shareholders, and
the Bank is prohibited from paying a dividend to the Company, if, after giving
effect to the dividend, either the Company or the Bank would not meet all
minimum capital ratios. In addition, even if a proposed dividend would not leave
the Company undercapitalized, the Company must notify its regulators in writing
30 days prior to any proposed dividend.
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During the first quarter of 2000, the Company undertook 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 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 $4.9 million in net
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.
In connection with the memorandum of understanding, and because the Bank
was deemed "undercapitalized" pursuant to the FDIC's prompt corrective action
regulations at September 30, 1999, the Company and the Bank submitted a capital
plan to the FDIC and the New Jersey Department of Banking and Insurance. Under
this capital plan, in addition to the sale of preferred stock discussed above,
the Company contemplated selling assets as a way to enhance its capital ratios
both through the reduction of assets and through income earned on the sale.
Pursuant to this portion of the Bank's capital plan, the Bank sold $36.3 million
in adjustable rate one-to-four family mortgages on March 7, 2000. The purchase
price for these mortgages, which were sold servicing released, was $35.6
million.
The principal executive offices of the Company are located at 64 Old
Highway 22, Clinton, New Jersey 08809, and the telephone number is (908)
730-7630.
BUSINESS OF THE COMPANY
The Company's primary business is ownership and supervision of the Bank.
The Company, through the Bank, conducts a traditional and community-oriented
commercial banking business, and offers services including personal and business
checking accounts and time deposits, money market accounts and regular savings
accounts. The Company structures its specific services and charges in a manner
designed to attract the business of the small and medium sized business and
professional community as well as that of individuals residing, working and
shopping in its service area. The Company engages in a wide range of lending
activities and offers commercial, consumer, mortgage, home equity and personal
loans.
SERVICE AREA
The Company's primary service area is defined as the neighborhoods served
by the Bank's offices. The Bank's main office, located in Clinton, in
combination with its Flemington and Whitehouse offices serves the greater area
of Hunterdon County. The Bank's North Plainfield office serves those communities
located in the northern, eastern and central parts of Somerset County, and the
southernmost communities of Union County. The Bank's Springfield, Scotch Plains,
Linden, Union , Cranford, Kenilworth, Berkeley Heights, and Springfield offices
serve the majority of the communities in Union County, and the southwestern
communities of Essex County. The offices in East Brunswick, South Plainfield,
Edison, and Colonia Township extend the Company's service area into Middlesex
County.
The Company has a secondary service area along the Route 78/Route 22
corridor between its two Hunterdon County offices and its offices located in
Union County. In addition to the previously mentioned Interstate highways, the
Bank's primary and secondary service areas also have access to a major network
of other roads which includes Route 287 and Route 202.
COMPETITION
The Company is located in an extremely competitive area. The Company's
service area is already serviced by major regional banks, large thrift
institutions and by a variety of credit unions. Most of the Company's
competitors have substantially more capital and therefore greater lending limits
than the Company. The Company's competitors generally have established positions
in the service area and have greater resources than the Company with which to
pay for advertising, physical facilities, personnel and interest on deposited
funds. The Company relies upon the competitive pricing of its loans, deposits
and other services as well as its ability to provide local decision making and
personal service in order to compete with these larger institutions.
EMPLOYEES
The Company employs 152 full-time and 17 part-time employees. None of the
Company's employees are represented by any collective bargaining units. The
Company believes that its relations with its employees are good.
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SUPERVISION AND REGULATION
GENERAL - SUPERVISION AND REGUALTION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not stockholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank. Over the past several years, a number
of legislative proposals have been debated in Congress concerning modernization
of the nation's financial system. Many of these proposals would substantially
alter the current regulatory framework, particularly as it relates to bank
holding companies and their powers. Management of the Company is unable to
predict, at this time, which, if any, of these legislative proposals may
ultimately be adopted and the impact of any such regulatory proposals on the
business of the Company.
GENERAL BANK HOLDING COMPANY REGULATION
General. As a bank holding company registered under the Bank Holding
Company Act of 1956, as amended, (the "BHCA"), the Company is subject to the
regulation and supervision of the FRB. The Company is required to file with the
FRB annual reports and other information regarding its business operations and
those of its subsidiaries. Under the BHCA, the Company's activities and those of
its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the FRB determines to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
The BHCA requires, among other things, the prior approval of the FRB in
any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any other bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any bank (unless it owns a majority of such bank's voting shares), or (iii)
merge or consolidate with any other bank holding company. The FRB will not
approve any acquisition, merger, or consolidation that would have a
substantially anti-competitive effect, unless the anti- competitive impact of
the proposed transaction is clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The FRB also
considers capital adequacy and other financial and managerial resources and
future prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing acquisitions
or mergers.
In late 1999, the BHCA was substantially amended to enhance the powers of
banks and bank holding companies. These provisions became effective on March 11,
2000. See "Recent Regulatory Enactments and Proposals." Prior to these
amendments, the BHCA prohibited a bank holding company, with certain limited
exceptions, from (i) acquiring or retaining direct or indirect ownership or
control of more than 5% of the outstanding voting stock of any company which is
not a bank or bank holding company, or (ii) engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries; unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the FRB is required to weigh the expected benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default. Under a policy of the FRB with respect
to bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions and
to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The FRB also has the authority under the BHCA to
require a bank holding company to terminate any activity or to relinquish
control of a non-bank subsidiary upon the FRB's determination that such activity
or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies. The FRB has
adopted risk-based capital guidelines for bank holding companies. The risk-based
capital guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks and bank holding companies,
to account for off-balance sheet exposure, and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and off-balance sheet
items are assigned to broad risk categories each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
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The risk-based guidelines apply on a consolidated basis to bank holding
companies with consolidated assets of $150 million or more. The minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least 4% of the total
capital is required to be "Tier I," consisting of common stockholders' equity
and certain preferred stock, less certain goodwill items and other intangible
assets. The remainder, "Tier II Capital," may consist of (a) the allowance for
loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying
preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory
convertible securities, and (f) qualifying subordinated debt. Total capital is
the sum of Tier I and Tier II capital less reciprocal holdings of other banking
organizations' capital instruments, investments in unconsolidated subsidiaries
and any other deductions as determined by the FRB (determined on a case-by-case
basis or as a matter of policy after formal rule-making).
Bank holding company assets are given risk-weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk-weighting and performing, guaranteed portions of unsold SBA
loans, which carry a 20% risk-weighting. Most investment securities (including,
primarily, general obligation claims of states or other political subdivisions
of the United States) are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% risk-weight, and direct obligations of the
U.S. Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% risk-weighing.
Transaction related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50%
risk-weighing. Short term commercial letters of credit have a 20% risk-weighing
and certain short-term unconditionally cancelable commitments have a 0%
risk-weighing.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the stated minimum.
GENERAL BANK REGRULATION
As a New Jersey-chartered commercial bank, the Bank is subject to the
regulation, supervision, and control of the Department. As an FDIC-insured
institution, the Bank is subject to regulation, supervision and control of the
FDIC, an agency of the federal government. The regulations of the FDIC and the
Department impact virtually all activities of the Bank, including the minimum
level of capital the Bank must maintain, the ability of the Bank to pay
dividends, the ability of the Bank to expand through new branches or
acquisitions and various other matters.
Insurance of Deposits. The Bank's deposits are insured up to a maximum of
$100,000 per depositor under the SAIF of the FDIC. Pursuant to the Federal
Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA") the FDIC has
established a risk-based assessment system. Premium assessments under this
system are based upon: (i) the probability that the insurance fund will incur a
loss with respect to the institution; (ii) the likely amount of the loss; and
(iii) the revenue needs of the insurance fund. To effectuate this system, the
FDIC has developed a matrix that sets the assessment premium for a particular
institution in accordance with its capital level and overall rating by the
primary regulator.
Dividend Rights. Under the Banking Act, a bank may declare and pay
dividends only if, after payment of the dividend, the capital stock of the bank
will be unimpaired and either the bank will have a surplus of not less than 50%
of its capital stock or the payment of the dividend will not reduce the bank's
surplus.
RECENT REGULATORY ENACTMENTS AND PROPOSALS
On November 12, 1999, the President signed the Gramm-Leach-Bliley
Financial Modernization Act of 1999 into law. The Modernization Act will, among
other things:
o allow bank holding companies meeting management, capital and
Community Reinvestment Act standards to engage in a
substantially broader range of nonbanking activities than
currently is permissible, including insurance underwriting and
making merchant banking investments in commercial and
financial companies;
o allow insurers and other financial services companies to
acquire banks or bank holding companies;
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o remove various restrictions that currently apply to bank
holding company ownership of securities firms and mutual fund
advisory companies; and
o establish the overall regulatory structure applicable to bank
holding companies that also engage in insurance and securities
operations.
This part of the Modernization Act will become effective on March 11,
2000. The Modernization Act also modifies other current financial laws,
including laws related to financial privacy and community reinvestment. The new
financial privacy provisions will generally prohibit financial institutions,
including us, from disclosing nonpublic personal financial information to third
parties unless customers have the opportunity to "opt out" of the disclosure.
ITEM 2. DESCRIPTION OF PROPERTY
The Company presently conducts its business through its main office
located at 64 Old Highway 22, Clinton, New Jersey, and its seventeen branch
offices. The following table sets forth certain information regarding the
Company's properties as of December 31, 1999.
Leased Date Leased Lease 1999 Annual
Location Or Owned or Acquired Expiration Rental Fee
-------- -------- ----------- ---------- ----------
Clinton, NJ Leased 1996 2006 $ 423,520
Flemington, NJ Leased 1998 2003 55,725
North Plainfield, NJ Owned 1991 -- --
Springfield, NJ-1 Leased 1998 2003 27,000
Springfield, NJ-2 Leased 1999 2024 122,352
Scotch Plains, NJ Leased 1996 2006 68,750
Union, NJ Leased 1996 2006 57,600
Linden, NJ Owned 1991 -- --
Cranford, NJ Leased 1999 2024 84,000
Kenilworth, NJ Leased 1999 2024 60,000
Berkeley Heights, NJ Leased 1999 2024 73,000
East Brunswick, NJ Leased 1999 2024 72,000
South Plainfield, NJ Leased 1999 2024 78,000
Edison, NJ Leased 1999 2024 90,000
Colonia, NJ Leased 1995 2005 30,780
Whitehouse, NJ Owned 1998 -- --
Highland Park, NJ Leased 1999 2024 65,000
Bridgewater, NJ Leased 1999 2024 16,270
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims to
enforce liens, claims involving the making and servicing of real property loans,
and other issues incident to the Bank's business. The Company is not involved in
any proceeding in which a claim for damages made against the Company or any
subsidiary exceeds 10% of the current assets of the Company.
An officer of Certified Mortgage Associates, Inc., the Bank's mortgage
banking subsidiary, has commenced an action alleging, among other things, that
he has been constructively terminated following his suspension and subsequent
reinstatement to his current position. The individual has returned to work and
is performing his duties in accordance with his Employment Agreement. The
complaint seeks damages for breach of his Employment Agreement that would arise
only if he had been terminated "without cause", in the amount of $5.4 million
and for unspecified damages for mental distress he has suffered as a result of
the alleged change of his employment status. The complaint also seeks
unspecified damages for defamation unrelated to the employment claims and
damages in the amount of $272,000 representing the diminution in value of his
stock in the Company, plus interest, arising from an alleged late registration
of shares delivered to the individual in connection with the sale of his
interest in CMA to the Bank in 1999.
Based upon information and documents provided to it by the Bank, CMA, and
their respective officers and employees in the course of its investigation to
date, the Bank's counsel believes (i) that the claims against the Bank for
constructive termination and for termination without cause are without merit and
that the Bank has various affirmative defenses against these claims; and (ii)
that the Bank has affirmative claims against the individual arising from the
performance of his duties.
The Bank is presently engaged in settlement discussions with the
individual officer and hopes to conclude a settlement of all of the asserted
claims prior to the time that any Answer is filed. Counsel is unable to predict
whether any settlement will be reached or the outcome of any litigation in the
event that the matter goes to trial.
However, the Bank, based upon the opinion of its counsel, believes it is
not probable that the outcome of the employment-related claims will result in a
material loss to the Bank based upon the facts and information that have been
provided to it, to date. The Bank, based upon the opinion of its counsel, has
not been able to determine whether the claims for defamation and the loss in the
value of the stock are probable of having any materially adverse impact upon the
Bank until further investigation has been completed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the Registrant's shareholders
during the fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing on September 21, 1998, the Company's Common Stock began trading
on the NASDAQ National Market under the symbol "UNTY". Previously, the Company's
Common Stock had traded on the American Stock Exchange under the symbol "UBI".
As of December 31, 1999, there were 599 stockholders of record of the Common
Stock.
The following table sets forth the high and low bid prices of the Common
Stock, as reported on the NASDAQ National Market for 1999 and the fourth quarter
of 1998. The NASDAQ high and low bid prices reflect inter-dealer quotations,
without retail mark-up, mark-down or commissions and do not necessarily
represent actual transactions. For the first three quarters of 1998, the table
sets forth the high and low sales prices for the Common Stock on the American
Stock Exchange. The table also sets forth cash dividends paid on the Common
Stock.
Cash
High Low Dividend
---- --- --------
1999:
4th Quarter............................... $ 8.50 4.75 0.06
3rd Quarter............................... 11.75 6.38 0.06
2nd Quarter............................... 12.00 9.63 0.06
1st Quarter............................... 11.00 9.31 0.06
1998:
4th Quarter.............................. 12.125 10.250 0.05
3rd Quarter.............................. 14.625 11.750 0.05
2nd Quarter ............................. 18.250 13.188 0.05
1st Quarter.............................. 16.625 12.750 0.05
The Company began paying a cash dividend in the first quarter of 1995 and
declared a quarterly dividend each quarter until the fourth quarter of 1999.
However, as is discussed under Item 1 "Description of Business - General," the
Company is currently prohibited from paying dividends because it does not meet
the minimum capital requirements to which it is subject. In addition, under the
memorandum of understanding the Company has entered into with its state and
federal regulators, the Company must provide the New Jersey Department of
Banking and Insurance and the Federal Reserve Bank of New York with 30 days
advance notice of any proposed dividends.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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SELECTED CONSOLIDATED FINANCIAL DATA
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The following is selected consolidated financial information. Per share
information has been restated to reflect the three for two stock split on common
stock in 1998 and the 5% stock dividend, paid in 1999.
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<TABLE>
<CAPTION>
(Dollar amounts stated in thousands,
per share data stated in actual) At or for the Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS
Interest income $ 23,688 $ 17,480 $ 15,025 $ 10,860 $ 7,770
Interest expense 12,738 7,165 6,312 4,756 3,334
Net interest income 10,950 10,315 8,713 6,104 4,436
Provision for loan losses 1,743 804 497 417 229
Other income 5,606 4,407 3,043 2,404 1,385
Other expenses 20,578 10,499 7,985 6,403 3,978
Tax expense (benefit) (2,387) 1,282 1,259 644 609
Net income (loss) (3,378) 2,137 2,015 1,044 1,005
PER SHARE DATA
Net income (loss) (basic) (0.91) 0.67 0.65 0.47 0.53
Net income (loss) (diluted) (0.91) 0.64 0.64 0.46 0.53
Book value 5.88 7.01 6.39 5.82 4.47
Cash dividend 0.24 0.20 0.20 0.18 0.19
SELECTED BALANCE SHEET DATA
Total assets 438,969 254,612 213,782 172,688 121,804
Loans, net of deferred costs and unearned income 322,532 166,792 134,176 97,827 59,059
Allowance for loan losses 2,173 1,825 1,322 886 562
Investment securities 74,349 40,929 41,308 37,153 36,161
Deposits 357,538 226,860 192,414 153,555 110,998
Borrowings 53,000 -- -- -- --
Shareholders' equity 21,792 26,346 19,990 17,990 8,476
PERFORMANCE RATIOS
Return on average assets (0.94)% 0.93% 1.05% 0.73% 1.03%
Return on average equity (14.33)% 10.17% 10.78% 9.37% 12.82%
Efficiency ratio(1) 124.29% 71.32% 67.92% 75.26% 64.78%
Net interest margin (2) 3.49% 4.91% 4.72% 4.47% 4.70%
Net interest spread (3) 3.01% 3.99% 3.60% 3.55% 3.90%
Dividend payout (4) N/A 23.61% 14.73% 34.37% 22.81%
ASSET QUALITY RATIOS
Allowance for loan losses to non-performing loans 137.71% 46.83% 88.38% 103.02% 165.29%
Net charge-offs to average loans 0.59% 0.21% 0.05% 0.12% 0.11%
Allowance for loan losses to total 0.68% 1.12% 1.01% 0.93% 1.01%
loans, net of loans held for sale
Nonperforming Assets to Total Assets 0.70% 1.97% 0.70% 0.54% 0.66%
Nonperforming loans to total loans 0.49% 2.34% 1.11% .95% 1.37%
Nonperforming loans plus other real estate owned to
total loans 0.96% 3.01% 0.70% 0.68% 0.13%
CAPITAL RATIOS - CONSOLIDATED
Total risk-based capital ratio 6.88% 14.85% 14.28% 17.24% 11.48%
Tier 1 risk-based capital ratio 6.17% 13.89% 13.29% 16.43% 10.77%
Leverage ratio 4.35% 10.87% 9.51% 11.09% 7.34%
CAPITAL RATIOS - CONSOLIDATED BANK
Total risk-based capital ratio 6.33% 9.80% 11.03% 11.32% 11.37%
Tier 1 risk-based capital ratio 5.62% 8.84% 10.13% 10.51% 10.66%
Leverage ratio 4.01% 7.09% 7.35% 7.09% 7.21%
</TABLE>
(1) Efficiency ratio is total non-interest expense divided by the sum of net
interest income and non-interest income.
(2) The net interest margin is calculated by dividing net interest income by
average interest earning assets.
(3) The net interest spread is the difference between the weighted average
yield on interest earning assets and the weighted average cost of interest
bearing liabilities.
(4) Dividends paid plus net income after tax, divided by net income after tax.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the consolidated financial
statements and the notes relating thereto included herein. When necessary,
reclassifications have been made to prior period's data throughout the following
discussion and analysis for purposes of comparability with prior period data.
OVERVIEW AND STRATEGY
Unity Bancorp, Inc. (the "Parent Company") is a bank holding company
incorporated in Delaware under the Bank Holding Company Act of 1956, as amended.
Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when consolidated with
the Parent Company, the "Company") was granted a charter by the New Jersey
Department of Banking and Insurance and commenced operations on September 13,
1991. The Bank provides a full range of commercial and retail banking services
through 17 branch offices located in Hunterdon, Somerset, Middlesex, and Union
counties in New Jersey. These services include the acceptance of demand,
savings, and time deposits; extension of consumer, real estate, Small Business
Administration and other commercial credits, as well as personal investment
advisory services through the Bank's wholly-owned subsidiary, Unity Financial
Services, Inc. FCB 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 prior period does not
reflect any information related to CMA. This wholly-owned subsidiary of the Bank
originates and sells residential mortgages.
Over the course of 1999, the Bank incurred certain losses, which when
combined with the Company's asset growth, caused the Company's and the Bank's
capital ratios to fall below levels required under federal regulation. Due to
the Company's and the Bank's capital position, the Company and the Bank entered
into memoranda of understanding with their respective regulators. Under these
memoranda, the Company was required to produce a capital plan which would bring
the Company and the Bank into full compliance with federal regulatory capital
standards, institute a reporting process under which the Company and the Bank
would make monthly reports to their respective regulators regarding their
progress under the capital plan and other requirements under the memoranda,
review the management of the Company and the Bank, and the Company is prohibited
from paying a dividend to its common shareholders and the Bank is prohibited
from paying a dividend to the Company if, after giving effect to the dividend,
either the Company or the Bank would not meet all minimum federal capital
requirements. In addition, even if the proposed dividend would not leave the
Company undercapitalized, the Company must notify its regulators in writing
thirty days prior to any proposed dividend.
In furtherance of the Company's capital plan, the Company has undertaken a
private placement of shares of a new class of series A preferred stock,
recognizing net proceeds of approximately $4.9 million after accounting for
expenses of the offering. The Company issued 103,500 shares of the class A
preferred stock, which has a cumulative 10% dividend, payable quarterly, and is
convertible into shares of the Company's common stock at an assumed price of
$7.25 per share (i.e., each share of the class A preferred stock may be
converted into 6.8965 shares of the Company's common stock). Under the class A
preferred stock, the Company may be required to issue 713,793 shares of its
common stock if all preferred shares are converted. At December 31, 1999, the
Company had 3,704,708 common shares outstanding.
In addition, 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, resulting in an after tax loss of $891 thousand relating to the
mark-to-market valuation of the loans at year end.
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As a result of the capital offering and loan sale, the Company and the
Bank meet all minimum federal capital requirements. The Bank is still subject to
an order from the New Jersey Commissioner of Banking and Insurance, under which
it is required to maintain a leverage capital ratio of 6% or else it is
prohibited from paying dividends to the Company. The Bank does not meet this 6%
requirement.
In March 2000, the Company and the Bank were required to provide their
respective regulators with an amended and updated capital plan. Management is
currently preparing the amended and updated plan.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest earned on its
interest-earning assets and the interest paid on funds borrowed to support those
assets, such as deposits. Net interest margin is a function of the difference
between the weighted average rate received on interest-earning assets as
compared with that of interest-bearing liabilities. Net income is also affected
by the amounts of noninterest income, which includes gains on sales of loans,
including loans originated under the Small Business Administration's Guaranteed
Loan Program, and noninterest expenses.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
COMPARED TO DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET INCOME
The Company incurred a loss of $3.4 million, or $0.91 loss per basic share
and $0.91 loss per diluted share for 1999, compared to net income of $2.1
million, or $0.67 earnings per basic share and $0.64 earnings per share diluted
for 1998. Basic and diluted earnings per share for 1999 were calculated on
3,723,448 weighted average shares outstanding compared to 1998's basic and
diluted weighted average shares outstanding of 3,198,813 and 3,358,844,
respectively. The dilutive effect was not applied to 1999's weighted average
shares outstanding as it would have resulted in an antidilutive earnings per
share.
The loss largely reflects the growth in non-interest expense due to the
opening of nine new branches, a realized valuation loss as a result of
reclassifying certain loans from held-to-maturity to held-for-sale, the
write-down of an impaired asset and legal costs associated with an unauthorized
overdraft that was detected in the fourth quarter of 1998, the costs associated
with the collection of non-performing loans, the costs of maintaining expanding
loan portfolios, and the costs to reduce non-performing loans. Also contributing
to the loss was an increase in the provision for loan losses.
The changes in the components of net income included a $0.6 million
increase in net interest income before provision for loan losses, a $0.9 million
increase in the provision for loan losses, a $1.2 million increase in
noninterest income, a $10.1 million increase in noninterest expense, and a $3.7
million decrease in the provision for income taxes. Non-interest expenses
increased $10.1 million (96.0%) to $20.6 million for 1999 from $10.5 million for
1998. The provision for loan losses increased $0.9 million (116.8%) to $1.7
million compared to $0.8 million for 1998. These increased expenses were
partially offset by an increase in other income of $1.2 million (27.2%), from
$4.4 million for 1998 to $5.6 million for 1999. This increase was primarily from
the gains on sales of loans that increased $0.7 million (27.9%) to $3.1 million
for 1999 compared to $2.4 million in 1998. Taxes decreased $3.7 million as a
result of the current year loss.
Included in non-interest expense items was a write-down of $786 thousand
and legal costs of $150 thousand relating to a check-kiting scheme which was
detected in the fourth quarter of 1998. In light of the passage of time without
significant recoveries from the Company's ongoing litigation against the other
financial institution involved in the scheme and the Company's view of the
assets currently available from the debtor and his affiliates to satisfy the
Company's claims, management recorded this write-down in the third quarter of
1999. The remaining balance of this asset is $746 thousand, which represents
equity in a
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<PAGE>
house owned by the spouse of the debtor, who has turned the residence over to
the Bank. The asset is now recorded as Other Real Estate Owned and was sold in
March 2000 without causing additional loss. Also, included in non-interest
expense was a $102.5 thousand settlement for termination of five leases or
subleases.
For the year ended December 31, 1998, net income totaled $2.1 million, or
$0.67 earnings per basic share compared to earnings totaling $2.0 million, or
$0.65 per share, for the year 1997. Net income improved $0.1 million, or 6.05%,
as a result of a $1.3 million (15.8%), increase in net interest income after
provision for loan losses, a $1.3 million (44.8%) increase in non-interest
income, offset by an increase in non-interest expenses of $2.5 million (31.5%).
NET INTEREST INCOME
Net interest income increased $0.6 million, or 6.2% to $10.9 million for
1999 from $10.3 million for 1998.
The increase was the result of an increase in interest income in excess of
interest expense. The growth in interest income was primarily attributable to an
increase of $105.2 million (49.9%) in average earning assets for 1999 totaling
$315.9 million over the prior year's $210.7 million. The increases in average
earning assets occurred across the entire balance sheet, with most increases in
the loan portfolio. Average loans equaled $237.8 million in 1999, which
represented an increase of $93.9 million (65.3%) from the $143.9 million
recorded in 1998. 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, of which $25.7 million were purchased on May 27,
1999 and $30.3 million were purchased on July 12, 1999. The ARM loans have a
lower yield than commercial loans, thus contributing to the loan portfolio yield
decreasing to 8.02% in 1999 from 9.28% in 1998. The offsetting benefit to these
lower yields is that the ARM loans have a lower risk-based capital risk factor
of 50% as compared to 100% for commercial loans. This reduced the Bank's
risk-based capital needs by approximately $4 million. As a result of the
increase in mortgages in the portfolio, the 1999 yield on average earning assets
decreased to 7.52% for 1999 from 8.32% for 1998, partially offsetting the volume
related gains in interest income.
Increases in interest-earning assets were primarily funded through an
increase of $126.2 million (61.0%) in average deposits and borrowings to $333.2
million for 1999 from $207.0 million for 1998. Average deposits increased $106.3
million to $313.0 million for 1999 from $206.7 million in 1998. Average
borrowings increased $19.8 million to $20.2 million for 1999 from $0.3 million
in 1998.
During 1999, the cost of interest bearing liabilities increased to 4.51%
for 1999 from 4.32% for 1998 and the total cost of funds, including non-interest
bearing deposits, increased to 3.82% for 1999 from 3.46% for 1998. The increase
in 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, as well as a shift in the deposit structure toward
time deposits and the money market product. The promotional rates of interest
were offered both on time deposits and through the money market product, which
paid an introductory rate of 6.05%. Although this product was discontinued at
September 30, 1999, the product was again offered in December 1999 in order to
ease liquidity and provide funding for committed loans. These higher rate
products and the liquidity needs caused a shift in the deposit portfolio toward
higher rate products and away from non-interest bearing deposits. Although the
average balance of non-interest bearing deposits increased $9.5 million (23.0%)
to a total of $50.7 million for 1999 from $41.2 million for the prior year
period, non-interest bearing deposits as a percentage of the deposit portfolio
decreased to 16.2% for the current year from 20.0% for the prior year. (Refer to
the section titled Deposits and Borrowings for the average balance deposit
schedule). As a result of these factors, net interest margin declined to 3.49%
during 1999 from 4.91% in 1998.
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<PAGE>
For 1998, net interest income increased $1.6 million, or 18.4%, to $10.3
million for 1998 from $8.7 million for 1997. The increase was attributed to an
increase of $25.6 million in average earning assets to $210.7 million, a 13.8%
increase over the prior year's $185.1 million. Interest expense increased $853
thousand, or 13.5%, to $7.2 million for 1998 from $6.3 million for the
comparable period of 1997. This increase was attributed to an additional $26.5
million in average interest bearing deposits to $165.8 million, a 19.0% increase
over the prior year's $139.3 million. The net interest margin increased to 4.91%
for 1998 compared to 4.72% for 1997 due to an increase in investment yields,
lower costing deposits and an improved mix of earning assets with higher
yielding loans increasing to 68.3% of earning assets in 1998 from 62.4% in 1997.
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%.
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1999 1998 1997
Average Rate/ Average Rate/ Average Rate/
Year Ended December 31 Balance Interest Yield Balance Interest Yield Balance Interest Yield
- ---------------------------------- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS:
Taxable loans
(net of unearned income) $237,799 $19,067 8.02% $143,940 $13,355 9.28% $115,558 $11,227 9.72%
Tax-exempt securities 2,214 200 9.03% 1,615 112 6.94% 998 58 5.81%
Taxable investment securities 63,279 3,804 6.01% 49,044 3,182 6.49% 40,021 2,460 6.15%
Interest-bearing deposits 1,934 171 8.84% 4,140 231 5.58% 16,418 636 3.87%
Federal funds sold 10,630 514 4.84% 11,925 638 5.35% 12,101 661 5.46%
-------------------- ------------------- --------------------
Total Interest-earning assets $315,856 $23,756 7.52% $210,664 $17,518 8.32% $185,096 $15,042 8.13%
Non-interest earning assets 47,196 20,525 8,153
Allowance for loan losses (1,995) (1,409) (1,065)
-------------------------------------------------------------------------------------------
TOTAL AVERAGE ASSETS $361,057 $229,780 $192,184
-------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY:
INTEREST-BEARING LIABILITIES
NOW deposits $ 87,884 $ 3,441 3.92% $ 36,162 $ 591 1.63% $ 15,945 $ 351 2.20%
Savings deposits 17,260 315 1.83% 13,811 312 2.26% 28,534 892 3.13%
Money market deposits 18,053 529 2.93% 18,557 928 5.00% 9,163 293 3.20%
Time deposits 139,187 7,212 5.18% 96,969 5,311 5.48% 85,128 4,732 5.56%
Other debt 20,159 1,241 6.16% 319 23 7.21% 568 44 7.75%
-------------------- ------------------- --------------------
Total interest-bearing liabilities $282,543 $12,738 4.51% $165,818 $ 7,165 4.32% $139,338 $ 6,312 4.53%
Noninterest-bearing liabilities 4,280 1,692 822
Demand deposits 50,663 41,250 33,330
Shareholders' equity 23,571 21,020 18,694
Net interest income $11,018 $10,353
Total average liabilities
and shareholders' equity $361,057 $229,780 $192,184
======== ======== ========
Net interest rate spread 3.01% 3.99% 3.60%
Net interest income/margin
On average earning assets 3.49% 4.91% 4.72%
</TABLE>
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<PAGE>
The following table presents the major factors by category that
contributed to the changes in net interest income for each of the years ended
December 31, 1999, and 1998 as compared to each respective period. Amounts have
been computed on a fully tax-equivalent basis, assuming a Federal income tax
rate of 34%.
<TABLE>
<CAPTION>
Year Ended December 31 Year Ended December 31
(Dollar Amounts in Thousands 1999 versus 1998 Increase 1998 versus 1997 Increase
on a Fully Tax Equivalent Basis) (Decrease) Due to Change in (Decrease) Due to Change in
Volume Rate Net Volume Rate Net
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Taxable loans
(net of unearned income) $ 8,707 $ (2,995) $ 5,712 $ 2,757 $ (629) $ 2,128
Tax-exempt securities 42 46 88 36 18 54
Taxable investment securities 924 (302) 622 555 167 722
Interest-bearing deposits (123) 63 (60) (476) 71 (405)
Federal funds sold (69) (55) (124) (10) (13) (23)
---------------------------------- -----------------------------------
Total Interest-earning assets $ 9,481 $ (3,243) $ 6,238 $ 2,862 $ (386) $ 2,476
INTEREST-BEARING LIABILITIES:
NOW deposits $ 845 $ 2,005 $ 2,850 $ 445 $ (205) $ 240
Savings deposits 78 (75) 3 (460) (120) (580)
Money market deposits (25) (374) (399) 300 335 635
Time deposits 2,312 (411) 1,901 658 (79) 579
Other debt 1,431 (213) 1,218 (19) (2) (21)
---------------------------------- -----------------------------------
Total interest-bearing liabilities $ 4,641 $ 932 $ 5,573 $ 924 $ (71) $ 853
---------------------------------- -----------------------------------
Net interest income $ 4,840 $ (4,175) $ 665 $ 1,938 $ (315) $ 1,623
================================== ===================================
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $1.7 million for 1999, a 116.8%
increase over the prior year's provision of $0.8 million. The increase in the
provision is primarily attributable to the growth in the loan portfolio of
$155.9 million (93.0%) and the 1999 net charge-offs of $1.4 million, primarily
related to one borrower. In addition, the change is attributable to an increase
in the reserve factors used to determine reserve levels on certain types of
loans, as well as 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. These factors were
partially offset during 1999 by a shift in the composition 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. For 1999, average loans totaled
$237.8 million, an increase of $93.9 million (65.3%) over average total loans of
$143.9 million for 1998. In addition, during 1999, the ratio of non-performing
loans to total loans decreased to 0.49% at December 31, 1999 from 2.34% at
December 31, 1998.
The provision for loan losses totaled $0.8 million for 1998, a 61.8%
increase over the prior year's provision of $0.5 million. The increased
provision is the result of loan growth of $32.6 million (24.3%) for 1998 and
1998 net charge-offs of $0.3 million.
NON-INTEREST INCOME
Non-interest income consists of service charges on deposits, gains on
sales of securities and loans and it increased $1.2 million, or 27.2%, to $5.6
million for 1999 from $4.4 million for 1998. This increase is a result of a $0.7
million increase in loan sale gains and a $0.7 million increase in other income.
The $0.7 million increase in loan sale gain is primarily from an increase in the
gain on mortgage loan sales of $2.4 million less a held for sale valuation loss
of $1.4 million and a decrease in SBA loan sale gains of $0.3 million.
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1999 1998 1997
GAIN ON LOAN SALES GAIN GAIN GAIN
(In thousands)
Mortgage loan sales $ 3,059 $ 600 $ 266
SBA guaranteed portion of loan sales 1,324 1,721 1,429
SBA non-guaranteed portion of loan sales 94 73 --
Commercial loan sales 70 -- --
------- ------ ------
Total from sales $ 4,547 $2,394 $1,695
------- ------ ------
Held for sale valuation loss (1,484) -- --
-------
Total gain on loan sales $ 3,063 $2,394 $1,695
======= ====== ======
Mortgage loan sale gains increased $2.4 million (400%), totaling $3.0
million for 1999 compared to $0.6 million for 1998. 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. Included in the total
amount of the mortgage loan sales gains are gains on loans sold by the Bank
totaling $113 thousand in 1999, compared to 1998's $600 thousand based on
mortgage loans sold of $8.1 million in 1999 as compared to $41.3 million
mortgage loans sold in 1998.
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. Sales without recourse totaled $24.3
million in SBA loans in 1999 which was comprised of $19.1 million of guaranteed
SBA loans and $5.2 million in non-guaranteed SBA loans. In 1998, sales without
recourse totaled $20.6 million in SBA loans, comprised of $16.8 million of
guaranteed SBA loans and $3.8 million in non-guaranteed SBA loans.
Commercial loan sale gains were $70 thousand in 1999, based on $3.0
million loans sold without recourse. There were no such sales in 1998.
$37.8 million of ARM loans were reclassified at December 31, 1999 from
held-to-maturity to held-for-sale at a valuation of $36.4 million. Based on
December 31, 1999 market values, this resulted in an after tax realized
valuation loss of $891 thousand. $36.3 million in adjustable rate one-to-four
family mortgages (ARM's) were sold on March 7, 2000. The purchase price for
these mortgages, which were sold servicing released and without recourse was
$35.6 million, resulting in an after tax loss of $439 thousand in 2000.
In addition to the loans sales, other income, representing SBA servicing
fees, loan fees, income on cash surrender value of life insurance, non-deposit
account transaction charges, and other fee income increased $0.7 million (83.5%)
to $1.6 million for 1999 compared to $0.9 million for 1998. The primary
increases were loan fees of $323 thousand (459.5%) primarily associated with the
mortgage originations, income on cash surrender value of insurance of $248
thousand, and non-deposit account transaction charges of $112 thousand primarily
as a result of automated teller machine charges to non-customers of the Bank.
<TABLE>
<CAPTION>
OTHER INCOME 1999 1998 1997
(In thousands)
<S> <C> <C> <C>
SBA Fees $ 671 $ 635 $ 449
Loan fees 394 70 26
Income from cash surrender value of life insurance 248 0 0
Non-deposit account transaction charges 144 32 61
Miscellaneous 115 120 55
------- ------ ------
Total other income $ 1,572 $ 857 $ 591
======= ====== ======
</TABLE>
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<PAGE>
Both service charges on deposits and gains on security sales decreased
$0.1 million from the prior year. Deposit service charges decreased from 1998's
$901 thousand to 1999's $778 thousand, a 13.74% decrease and security gains
decreased from 1998's $255 thousand to 1999's $193 thousand, a 24.3% decrease.
The decrease in deposit service charges was primarily the result of customers
maintaining appropriate balances.
For 1998, other income, which consists of non-deposit account transaction
charges, gains on sale of securities and loans and other income, increased $1.4
million, or 44.8% to $4.4 million for the year ended December 31, 1998 from $3.0
million for 1997. Service charges on deposits increased $144 thousand to $901
thousand for 1998, a 19.0% increase over $757 thousand in 1997. The majority of
the increase was due to the growth in demand accounts, which included higher
volumes of transactions processed, improvement in return check fee collection
ratios and the repricing of transaction fees in March 1998 and additional income
generated by ATM service charges. Gains on sale of loans increased $699
thousand, or 41.2%, to $2.4 million for 1998 from $1.7 million for 1997. This
increase in the gain on sale of loans reflects increased 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 sold into the secondary market. Sales without recourse totaled $20.6
million in SBA loans in 1998 which was comprised of $16.8 million of guaranteed
SBA loans and $3.8 million in non-guaranteed SBA loans compared to $13.7 million
sold in 1997. The 1998 sales of the non-guaranteed portion produced $60 thousand
of income after expenses. There were no sales of non-guaranteed portions of SBA
loans in 1997. Proceeds from sales of securities amounted to $26.2 million for
1998. Net gains on sales of securities were $255 thousand for 1998. There were
no sales in 1997. Other non-interest income, which consists primarily of SBA
servicing fee income, increased $266 thousand, or 45.0%, to $857 thousand for
1998 due to a larger portfolio of loans serviced.
OTHER NON-INTEREST EXPENSE
Other non-interest expense increased $10.1 million, or 96.0%, to $20.6
million for 1999 from $10.5 million for 1998. Salaries and benefits increased
$4.0 million to $8.7 million from $4.7 million, occupancy expenses increased
$1.4 million to $2.4 million from $1.0 million, other operating expenses
increased $4.7 million to $9.4 million to $4.7 million for 1999 compared to
1998. These increases were substantially attributable to the growth in the
branch network, as ten additional branches were opened, the acquisition of CMA
during February 1999, the write-down and legal costs associated with a
check-kiting scheme that occurred in the fourth quarter of 1998, the costs
associated with the collection of 1998 reported non-performing loans of $3.9
million and the costs of administering the expanding loan portfolios. The branch
network growth increased lease, other occupancy, and operating expenses
associated with these new branches, as well as associated increases in salary
expenses to hire personnel to operate the new branches. In addition, salary
expense increased because of the need to hire additional administrative staff to
oversee and administer the branches. The prior period does not reflect any
operating expenses associated with CMA as CMA was acquired under the purchase
accounting method. Total non-interest expense associated with CMA for 1999 was
$4.8 million.
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The following table presents a breakdown of other operating expenses for
the year ended December 31, 1999, 1998 and 1997:
(In thousands) 1999 1998 1997
------ ------ ------
Professional Service $1,386 $ 887 $514
Office Expense 1,986 1,042 809
Advertising Expense 881 370 272
Communication Expense 767 240 212
Bank Services 802 491 427
FDIC Insurance 192 116 100
Director Fees 236 298 271
Non-Loan Losses (1)848 (2)370 16
Loan Expense 1,265 430 192
Amortization of Intangibles 393 13 13
Other Expense 729 462 223
------ ------ ------
Total Other Expense $9,485 $4,719 $3,049
====== ====== ======
(1) Losses includes a 1999 $786 thousand write-down of uncollected
assets associated with the check-kiting scheme and professional
services include associated legal costs of $150 thousand.
(2) Losses includes a 1998 $300 thousand write-down of uncollected
assets associated with the check kiting scheme and professional
services include associated legal costs of $120 thousand.
The increases in professional services, office expense, communication
expense, bank services and FDIC insurance is the result of the addition of ten
new branches, growth in assets, and expenses incurred in operating the Bank's
mortgage subsidiary, CMA. Goodwill amortization expenses relating to the
acquisition of CMA totaled $380.8 thousand during the 1999 period. There were
$12.5 thousand in goodwill amortization expenses incurred in 1999 and 1998,
relating to the acquisition of the Bank's first branch from the Resolution Trust
Corporation. Included in other expense for 1999 is a $102.5 thousand settlement
for termination of five leases or subleases. CMA was acquired under the purchase
accounting method and, accordingly, the prior period does not reflect any
information related to CMA. Total other operating expenses incurred in
connection with CMA were $1.2 million for 1999. The increase in advertising
expense is the result of increased marketing efforts.
For 1998, other operating expenses, which includes items such as data
processing expenses, advertising, professional fees, office expenses and other
miscellaneous expenses, increased $1.7 million, or 54.8%, to $4.7 million in
1998 from $3.0 million in 1997, largely due to the increasing customer base,
branch expansion, product development and marketing. Increases in other
operating expenses reflect increased item processing and servicing charges
related to the expanding deposit base, combined with office expenses due to new
locations and expenses associated with the listing of common stock on the
American Stock Exchange and the change in listing the common stock to NASDAQ.
INCOME TAX EXPENSE
For 1999, a tax benefit of $2.4 million was recognized relating to the
1999 loss as compared to a $1.3 tax provision for federal and state taxes in
both 1998 and 1997. This represents an effective tax rate of 41.4%, 37.5% and
38.5% for 1999, 1998, and 1997. The effective tax rates are the result of
applicable tax rates computed against each legal entity's net income before
taxes.
16 of 62
<PAGE>
FINANCIAL CONDITION AT DECEMBER 31, 1999
Total assets increased $184.4 million (72.4%) to $439.0 million at
December 31, 1999 compared to total assets of $254.6 million at December 31,
1998. Net loans increased $155.4 million (94.2%) to $320.3 million at December
31, 1999 compared to $165.0 million at December 31, 1998. The securities
portfolio, including securities held to maturity and available for sale,
increased $33.4 million (81.7%) to $74.3 million at December 31, 1999, compared
to $40.9 million at December 31, 1998. For the first half of the year,
significant deposit growth resulted from branch expansion. The deposit growth
primarily funded loan and investment purchases. For the second half of the year,
the growth in assets was a result of residential mortgage loans, which were
funded through both deposit growth and FHLB borrowings.
Total deposits and borrowings increased $183.6 million (80.9%) to $410.5
million at December 31, 1999 from total deposits and borrowings of $226.9
million at December 31, 1998. These increases primarily reflect increases in
premium rate money market account, jumbo certificates of deposit from
municipalities in the Bank's market area and other borrowings from the Federal
Home Loan Bank. 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 increased $155.4 million (94.2%) to $320.3 million at December
31, 1999 compared to $165.0 at December 31, 1998. The increases in the loan
portfolio reflects originations of $101.9 million of adjustable rate one-to-four
family residential mortgages (ARMs) for the loan portfolio through the CMA
subsidiary and the purchase of $56.0 million of home equity loans (HELs). $37.8
million of ARM loans were reclassified at December 31, 1999 from
held-to-maturity to held-for-sale at the valuation amount of $36.4 million. The
origination of the ARMs and the purchase of the HELs caused the composition of
loans to change so that residential, one-to-four family mortgages account for
more than 50% of the portfolio. (See the following tables for major category
classification and changes over the past five years.) Residential mortgages are
no longer being originated for the portfolio. Due to the increasing competition
for commercial and non-residential loans, it is anticipated that the SBA
portfolio will continue to grow. Residential mortgages are no longer being
originated for the portfolio.
The loan portfolio consists of commercial and industrial loans, real
estate loans and consumer loans. Commercial and industrial loans are made for
the purpose of providing working capital, financing the purchase of equipment or
inventory and for other business purposes. Real estate loans consist of loans
secured by commercial or residential property and loans for the construction of
commercial or residential property. Consumer loans are made for the purpose of
financing the purchase of consumer goods, home improvements, and other personal
needs, and are generally secured by the personal property being purchased. The
Company originates loans under SBA programs that generally provides for SBA
guarantees between 75% and 90% of the principal of a qualifying loan. The
guaranteed portion of the SBA loan is sold in the secondary market and the
non-guaranteed portion generally remains in the portfolio. The loans are
primarily to businesses and individuals located in the trade area. The Company
has not made loans to borrowers outside of the United States. Commercial lending
activities are focused primarily on lending to small business borrowers.
17 of 62
<PAGE>
The following table sets forth the classification of loans by major
category, excluding unearned, deferred costs, and the allowance for loan loss
for the past five years at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------------- ----------------- ----------------- ----------------- ------------------
% of % of % of % of % of
(In thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
--------------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 43,441 13.5% $ 41,502 24.9% $ 20,347 15.2% $17,965 18.4% $ 9,125 15.4%
Real Estate
Non-residential properties 52,312 16.3% 59,845 35.9% 66,526 49.6% 41,674 42.6% 23,612 40.0%
Residential properties 178,132(a) 55.4% 26,565 16.0% 28,891 21.5% 23,044 23.6% 16,034 27.1%
Construction 17,818 5.5% 16,218 9.7% 13,014 9.7% 10,223 10.4% 5,705 9.7%
Lease financing 0 0.0% 0 0.0% 0 0.0% 17 0.0% 83 0.1%
Consumer 29,780 9.3% 22,440 13.5% 5,419 4.0% 4,924 5.0% 4,549 7.7%
---------------------------------------------------------------------------------------------------
Total Loans $321,483 100.0% $166,570 100.0% $134,197 100.0% $97,847 100.0% $59,108 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
(a) includes $99.1 million remaining of the $101.9 originated ARMs and
$54.6 million of purchased HEL.
<CAPTION>
The following table sets forth the changes in the loan portfolio for the
past five years at December 31:
1999 1998 1997 1996 1995
--------------------- ----------------- ----------------- ----------------- ------------------
(In thousands) Amount Change % Amount Change % Amount Change % Amount Change % Amount Change %
--------------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial $ 43,441 4.7% $ 41,502 104.0% $ 20,347 13.3% $17,965 96.9% $ 9,125 31.3%
Loans secured by real
estate:
Non-residential properties 52,312 -12.6% 59,845 -10.0% 66,526 59.6% 41,674 76.5% 23,612 57.2%
Residential properties 178,132 (a) 570.6% 26,565 -8.1% 28,891 25.4% 23,044 43.7% 16,034 68.5%
Construction 17,818 9.9% 16,218 24.6% 13,014 27.3% 10,223 79.2% 5,705 341.2%
Lease financing 0 0 0 -100.0% 17 -79.5% 83 -75.2%
Loans to individuals 29,780 32.7% 22,440 314.1% 5,419 10.1% 4,924 8.2% 4,549 37.5%
---------------------------------------------------------------------------------------------------
Total Loans $321,483 93.0% $166,570 24.1% $134,197 37.2% $97,847 65.5% $59,108 62.3%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
(a) includes $99.1 million remaining of the $101.9 originated ARMs and
$54.6 million of purchased HEL.
The following table shows the contractual loan maturities:
<TABLE>
<CAPTION>
(In thousands) Real Estate - Non-Residential Properties Commercial & Industrial
1999 1998 Change % 1999 1998 Change %
--------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 Year $ 26,553 $34,235 $ (7,682) -22.4% $17,439 $20,509 $(3,070) -15.0%
1 to 5 Years 21,408 23,351 (1,943) -8.3% 15,422 12,115 3,307 27.3%
After 5 Years 4,351 2,259 2,092 92.6% 10,580 8,878 1,702 19.2%
--------------------------------- -------------------------------
Total $ 52,312 $59,845 $ (7,533) -12.6% $43,441 $41,502 $ 1,939 4.7%
================================= ===============================
<CAPTION>
Real Estate - Residential Properties Consumer
1999 1998 Change % 1999 1998 Change %
--------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 Year $ 12,497 $12,923 $ (426) -3.3% $ 3,449 $ 4,757 $(1,308) -27.5%
1 to 5 Years 59,632 6,533 53,099 812.8% 24,917 16,965 7,952 46.9%
After 5 Years 106,003 7,109 98,894 1,391.1% 1,414 718 696 96.9%
--------------------------------- -------------------------------
Total $178,132 $26,565 $ 151,567 570.6% $29,780 $22,440 $ 7,340 32.7%
================================= ===============================
<CAPTION>
Real Estate - Construction Total Portfolio
1999 1998 Change % 1999 1998 Change %
--------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 Year $ 13,176 $13,900 $ (724) -5.2% $73,114 $86,324 $(13,210) -15.3%
1 to 5 Years 4,642 2,318 2,324 100.3% 126,021 61,282 64,739 105.6%
After 5 Years 0 0 0 0.0% 122,348 18,964 103,384 545.2%
--------------------------------- --------------------------------
Total $ 17,818 $16,218 $ 1,600 9.9% $321,483 $166,570 $154,913 93.6%
================================= ===============================
</TABLE>
18 of 62
<PAGE>
ASSET QUALITY
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 nonaccrual loans, past due loans, restructured loans and potential problem
loans.
Non-performing loans are 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 loans past due 90 days or greater, still accruing interest.
Management has evaluated these non-performing loans and determined that they are
both well collateralized and in the process of collection. When a loan is
classified as nonaccrual, interest accruals discontinue and all past due
interest previously recognized as income is reversed and charged against current
period income. Until the loan becomes current, any payments received from the
borrower are applied totally to outstanding principal until such time as
management determines that the financial condition of the borrower and other
factors merit recognition of a portion of such payments as interest income.
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 the origination of a loan with a borrower.
Documentation, including a borrower's credit history, materials establishing the
value and liquidity of potential collateral, the purpose of the loan, the source
of funds for repayment of the loan, and other factors are analyzed before a loan
is submitted for approval. The loan portfolio is also subject to periodic
internal review for credit quality and an outside firm is used to conduct
internal reviews.
The following table sets forth information concerning non-accrual loans
and non-performing assets at December 31 for the past five years:
(In thousands) Dec-99 Dec-98 Dec-97 Dec-96 Dec-95
Nonaccrual by category
Real Estate 720 2,297 861 639 0
Consumer 0 0 82 3 78
Commercial 692 0 0 10 0
Lease Financing Receivable 0 0 0 17 0
- ------------------------------------------------------------------------------
Total 1,412 2,297 943 669 78
==============================================================================
Past Due 90 or more and still accruing
interest
Real Estate 159 790 206 156 578
Consumer 7 7 0 28 0
Commercial 0 803 346 77 111
Lease Financing Receivable 0 0 0 0 41
- ------------------------------------------------------------------------------
Total 166 1,600 552 261 730
==============================================================================
- ------------------------------------------------------------------------------
Total Non Performing Loans 1,578 3,897 1,495 930 808
==============================================================================
OREO Property 1,505 0 0 0 0
Other Asset - (1) 0 1,131 0 0 0
- ------------------------------------------------------------------------------
Total NonPerforming Assets 3,083 5,028 1,495 930 808
==============================================================================
NonPerforming loans to total loans 0.49% 2.34% 1.11% 0.95% 1.37%
NonPerforming assets to total assets 0.70% 1.97% 0.70% 0.54% 0.66%
Allowance for loans losses as a
percentage of non-performing loans 137.71% 46.83% 88.43% 95.27% 69.55%
(1) reflects the value of an impaired asset associated with an unauthorized
overdraft
19 of 62
<PAGE>
Nonaccrual loans decreased $0.9 million from $2.3 million at year end 1998
to $1.4 million at December 31, 1999. The decrease in nonaccrual loans is
substantially a result of charge-offs and a $617 thousand nonaccrual loan that
was replaced by a new loan to new borrowers. The loans past due 90 days or more
and still accruing interest are well collateralized and in the process of
collection. These loans decreased from $1.6 million at December 31, 1998 to $166
thousand at December 31, 1999 as a result of collection efforts. In the fourth
quarter of 1999, a nonaccrual loan was foreclosed upon and reclassified as OREO
property with a carrying value of $759 thousand. The other asset - check kiting
that occurred in the fourth quarter of 1998 is now a part of the OREO property
balance. The remaining balance of this asset is $746 thousand, which represents
equity in a house owned by the spouse of the debtor, who has turned the
residence over to the Bank. This property was subsequently sold in March 2000
without incurring any additional loss. Both OREO properties are carried at the
lower of cost or market, less estimated selling costs at December 31, 1999.
For 1998, nonaccrual loans increased $1.4 million from $943 thousand at
year end 1997 to $2.3 million at December 31, 1998. The increase in nonaccrual
loans is substantially the result of the decision to place two real estate
secured loans on nonaccrual status due to delinquent payments. This increased
the ratio of non-performing loans to total loans to 2.34% at December 31, 1998
from 1.11% at December 31, 1997. The interest income that would have been
recorded had these nonaccrual loans performed under the original contract terms
was $227 thousand for 1998 and $92 thousand for 1997. At December 31, 1998, $1.6
million in loans were contractually past due greater than 90 days but still
accruing interest, compared to $552 thousand for the year ending December 31,
1997. The increase in loans past due more than 90 days, along with the increase
in nonaccrual loans, in addition to the $1.3 million check-kiting other asset
increased the 1998 non-performing asset to total asset ratio to 1.97% from 0.70%
at December 31, 1997.
At the dates indicated in the above table, there were no concentration of
loans to any borrowers or group of borrowers exceeding 10% of the total loan
portfolio and there were no foreign loans.
There were no other loans, other than those shown above, that causes
management to be uncertain as to the ability of the borrowers to comply with the
present loan repayment terms as of December 31, 1999.
ALLOWANCE FOR LOAN LOSSES
The Company attempts to maintain an allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. Loan
losses are charged directly to the allowance when they occur and any subsequent
recovery is credited to the allowance. Risks within the loan portfolio are
analyzed on a continuous basis by management, by an independent loan review
function 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 are made by provisions charged to
expense whereas the allowance 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 at a level
deemed adequate to provide for potential losses, future additions to the
allowance may be necessary based upon certain factors including changes in
market conditions. In addition, various regulatory agencies periodically review
the adequacy of the 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.
20 of 62
<PAGE>
Allowance for loan losses totaled $2.2 million, $1.8 million, $1.3
million, $886 thousand and $562 thousand at December 31, 1999, 1998, 1997, 1996,
and 1995, respectively. The 1999 increase in the allowance is due to the
continued increase in the loan portfolio, an increase in the reserve factors on
certain loan types that were used to determine reserve levels, increased
charge-offs incurred during the year, as well as 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. These factors were partially 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 related loans.
The following is a reconciliation summary of the allowance for loan losses
for the past five years:
(In thousands) 1999 1998 1997 1996 1995
- -------------- ---- ---- ---- ---- ----
Balance at beginning of year $1,825 $1,322 $ 886 $562 $380
Charge-offs:
Real estate 871 254 55 -- 49
Consumer 130 15 3 6 1
Commercial and industrial 432 60 10 44 --
Leasing financing -- -- -- 43 --
------ ------ ------ ---- ----
Total Charge-offs 1,433 329 68 93 50
Recoveries:
Real estate 2 23 6 -- 3
Consumer 20 5 -- -- --
Commercial and industrial 16 -- -- -- --
Total recoveries 38 28 6 -- 3
------ ------ ------ ---- ----
Total net charge-offs 1,395 301 62 93 47
------ ------ ------ ---- ----
Provision charged to expense 1,743 804 498 417 229
------ ------ ------ ---- ----
Balance of allowance at end of year $2,173 $1,825 $1,322 $886 $562
====== ====== ====== ==== ====
Ratio of net charge-offs to
average loans outstanding 0.59% 0.21% 0.05% 0.12% 0.11%
Ratio of allowance to total loans,
net of guaranteed SBA loans held
for sale 0.68% 1.12% 1.01% 0.93% 1.01%
The ratio of allowance to total loans decreased to .68% in 1999 from 1.12%
in 1998, respectively, due to the shift in the portfolio mix. The 1999 increase
in loans of $154.9 million was primarily due to the residential mortgage
increase of $151.6 million. Residential mortgage loans have a general reserve
rate of .25% and, as a result, decreased the overall ratio of allowance to
loans. In addition, purchased loans are carried at the amount of undiscounted
estimated future cash collections and therefore have no allowance account
allocated to them.
The following table sets forth, for each of the major lending areas, the
amount of the allowance for loan losses attributable to such category and the
percentage of total loans represented by such category, as of December 31, of
each year:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------------------- ----------------- ----------------- ----------------- ------------------
% of % of % of % of % of
(In thousands) Amount All Loans Amount All Loans Amount All Loans Amount All Loans Amount All Loans
--------------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Applicable to:
Commercial & Industrial $ 738 13.5% $ 741 24.9% $ 267 15.2% $ 152 18.4% $ 96 15.4%
Real Estate:
Non-residential properties 404 16.3% 663 35.9% 555 49.6% 336 42.6% 187 40.0%
Residential properties 461 55.4% 96 16.0% 340 21.5% 247 23.6% 92 27.1%
Construction 316 5.5% 160 9.7% 107 9.7% 82 10.4% 121 9.7%
Lease Financing 0 0.0% 0 0.0% 0 0.0% 4 0.0% 1 0.1%
Consumer 254 9.3% 165 13.5% 53 4.0% 65 5.0% 65 7.7%
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total $ 2,173 100.0% $ 1,825 100.0% $ 1,322 100.0% $ 886 100.0% $ 562 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
21 of 62
<PAGE>
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 December 31, 1999, the investment security portfolio totaled $74.3
million, comprised of $40.1 million in securities available for sale and $34.3
million in securities held to maturity. The portfolio increased $33.4 million;
the available for sale portfolio increased $18.6 million and the held for
maturity portfolio increased $14.8 million. The increase in investment
securities represents the investing of new deposits in excess of loan demand
during the first two quarters of the year. At December 31, 1999, no investment
securities were classified as trading securities.
At December 31, 1998, $19.4 million of investment securities were
classified as held to maturity and $21.5 million were classified as available
for sale. At December 31, 1998, no investment securities were classified as
trading securities. Total investment securities were $40.9 million, relatively
unchanged from 1997, when the balance was $41.3 million. The portfolio remained
unchanged due to economic conditions of lower interest rates and management's
decision to grow the loan portfolio.
The following table sets forth the security portfolio summary for the past
two years:
(In thousands) 1999 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
AVAILABLE FOR SALE
Due in one year or less $ 246 $ 246 $ 516 $ 518
Due after one year through five years 9,443 9,322 658 671
Due after five years through ten years 6,000 5,788 0 0
Due after ten years 2,661 2,602 4,371 4,401
Mortgage-backed securities 19,808 19,090 14,910 14,771
Corporate stocks 3,255 3,051 1,242 1,129
------- ------- ------- -------
Total available for sale $41,412 $40,099 $21,697 $21,490
======= ======= ======= =======
HELD TO MATURITY
Due in one year or less $ 0 $ 0 $ 1,507 $ 1,506
Due after one year through five years 13,500 13,027 1,500 1,425
Due after five years through ten years 5,245 4,674 1,250 970
Due after ten years 1,500 1,416 0 0
Mortgage-backed securities 14,005 13,153 15,182 15,188
------- ------- ------- -------
Total held to maturity $34,250 $32,270 $19,439 $19,089
======= ======= ======= =======
22 of 62
<PAGE>
The following table sets forth the security maturity distribution for the past
two years:
<TABLE>
<CAPTION>
1999 1998
(In thousands) Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
Available for sale
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Under 1 year $ -- $ -- -- $ 243 $ 244 5.01%
1-5 years 6,988 6,897 5.10% 0 0 0
U.S. Government Agencies Under 1 year 45 45 6.20% 4,309 4,339 6.11%
Over 10 years 1,697 1,680 6.20% -- -- --
U.S. Government sponsored Under 1 year -- -- -- 5,105 5,008 5.28%
Agencies and corporations 1-5 years 2,000 1,969 6.32% 0 0
5-10 years 6,973 6,736 6.43% 9,867 9,826 6.11%
Over 10 years 18,835 18,142 6.47% -- -- --
State and municipal Under 1 year 201 201 4.19% 273 274 4.04%
1-5 years 454 456 4.41% 658 671 4.35%
Other Under 1 year 580 376 0.00% 612 498 0.00%
1-5 years 2,675 2,675 6.50% 630 630 4.00%
Over 10 years 964 922 6.41% -- -- --
------------------- ------------------
Total $41,412 $40,099 6.09% $21,697 $21,490 5.62%
=================== ==================
Held to maturity
U.S. Government Agencies Under 1 year $ -- $ -- -- $ 2,750 $ 2,395 2.97%
5-10 years -- -- -- 1,007 1,007 4.74%
U.S. Government sponsored Under 1 year -- -- -- 593 594 6.00%
agencies and corporations 1-5 years 13,500 13,027 5.74% 0 0
5-10 years 5,667 5,082 5.39% 543 544 5.98%
Over 10 years 15,083 14,161 6.49% 14,046 14,050 6.46%
Other 1-5 years -- -- -- 500 499 4.30%
------------------- ------------------
Total $34,250 $32,270 6.02% $19,439 $19,089 5.80%
=================== ==================
</TABLE>
DEPOSITS AND BORROWINGS
Deposits are the primary source of funds. Deposits and borrowings
increased $183.7 million (81.0%) to $410.5 million at December 31, 1999 from
$226.9 million at December 31, 1998. Because of promotional efforts in
connection with the new branches in the first two quarters of 1999 and to
satisfy liquidity needs late in the year, interest paying demand deposits, which
include the premium rate money market account, increased $63.8 million to $104.3
million (157.1%) at December 31, 1999 from $40.6 million at December 31, 1998.
Borrowings increased and totaled $53.0 million at December 31, 1999 as a result
of the need to provide funding for committed loans. Time deposits increased
$48.4 million to $150.2 million at December 31, 1999 from $101.8 million at
December 31, 1998. Time deposits of less than $100 thousand increased $5.4
million (7.4%) to $79.1 million at December 31, 1999 from $73.7 million at
December 31, 1998. Time deposits of more than $100 thousand increased $42.9
million (152.5%) to $71.1 million at December 31, 1999 from $28.2 million at
December 31, 1998. The result of the promotional activities, the increased
reliance on time deposits over $100 thousand, and the borrowings was to increase
the cost of funds (including non-interest bearing demand deposits) to 3.82% for
1999 from 3.46% for 1998.
For 1998, deposit balances grew $34.4 million, or 17.9%, to $226.9 million
at December 31, 1998, compared to year-end 1997 deposits of $192.4 million. This
growth was achieved through the combination of expansion of the branch network,
emphasis on customer service, competitive rate structures and selective
marketing. The Company attempts to establish a comprehensive relationship with
business borrowers, seeking deposits as well as lending relationships. From
December 31, 1997 to December 31, 1998, the level of noninterest-bearing demand
deposits increased from $41.4 million, or 21.4% of total deposits, to $50.1
million, or 22.1% of total deposits. In addition, time deposits increased from
$75.9 million at
23 of 62
<PAGE>
December 31, 1997 to $101.8 million at December 31, 1998, an increase of $11.6
million, or 11.4%. Between 1997 and 1998, interest bearing demand deposits
increased from $29.9 million to $40.6 million, a $10.7 million or 35.8%
increase. Between 1997 and 1998, savings and money market deposits increased
from $61.1 million to $74.9 million, a $13.8 million or 22.6% increase. There
are no foreign deposits.
The following are the deposits' average and period-end amounts for the
last three years at and for the years ended December 31:
Year Ended December 31, 1999 1998 1997
(In Thousands) Amount % Amount % Amount %
AVERAGE BALANCE:
NOW deposits $ 87,884 28.1% $ 36,162 17.5% $ 15,945 9.3%
Savings deposits 17,260 5.5% 13,811 6.6% 28,534 16.6%
Money market deposits 18,053 5.8% 18,557 9.0% 9,163 5.3%
Time deposits 139,187 44.4% 96,969 46.9% 85,128 49.5%
Demand deposits 50,663 16.2% 41,250 20.0% 33,330 19.4%
--------------- --------------- ---------------
Total deposits $313,047 100.0% $206,749 100.0% $172,100 100.0%
=============== =============== ===============
At December 31, 1999 1998 1997
(In Thousands) Amount % Amount % Amount %
ENDING BALANCE:
NOW deposits $104,343 29.2% $ 40,585 17.9% $ 29,897 15.5%
Savings deposits 18,448 5.2% 15,098 6.7% 11,938 6.2%
Money market deposits 19,462 5.4% 19,222 8.4% 19,261 10.0%
Time deposits 150,206 42.0% 101,835 44.9% 90,224 46.9%
Demand deposits 65,079 18.2% 50,120 22.1% 41,094 21.4%
--------------- --------------- -----------------
Total deposits $357,538 100.0% $226,860 100.0% $192,414 100.0%
=============== =============== =================
The following shows the change in deposit product balances for the past two
years:
Year Ended December 31, 1999 1998
(In Thousands) Amount % Amount %
CHANGE IN DEPOSITS:
NOW deposits $ 63,758 157.1% $ 10,688 35.7%
Savings deposits 3,350 22.2% 3,160 26.5%
Money market deposits 240 1.2% (39) -0.2%
Time deposits 48,371 47.5% 11,611 12.9%
Demand deposits 14,959 29.8% 9,026 22.0%
-------- --------
Total deposits $130,678 57.6% $ 34,446 17.9%
================= =================
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<PAGE>
The following is the maturity distribution of time deposits for the last two
years:
Time Deposit Maturities 3 Over 3 Over
(In thousands) Months Through Through Over
Or less 1 year 3 years 3 years Total
------- ------ ------- ------- -----
At December 31, 1999
$100,000 or more $50,498 $17,151 $ 2,949 $ 504 $71,102
Less than $100,000 $19,710 $34,846 $22,586 $1,962 $79,104
At December 31, 1998
$100,000 or more $18,748 $ 7,685 $ 1,731 $ 0 $28,164
Less than $100,000 $24,784 $36,665 $11,020 $1,202 $73,671
INTEREST RATE SENSITIVITY
The principal objectives of the asset and liability management function
are to establish prudent risk management guidelines, evaluate and control the
level of interest rate risk in balance sheet accounts, determine the level of
appropriate risk given the business focus, operating environment, capital, and
liquidity requirements, and actively manage risk with 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 uses various techniques to evaluate risk levels on both a
short and long-term basis. One of the monitoring tools is the "gap" ratio. A gap
ratio, as a percentage of assets, is calculated to determine the maturity and
repricing mismatch between interest rate-sensitive assets and interest
rate-sensitive liabilities. A gap is considered positive when the amount of
interest rate-sensitive assets repricing exceeds the amount of interest
rate-sensitive liabilities repricing in a designated time period. A positive gap
should result in higher net interest income with rising interest rates, as the
amount of the assets repricing exceed the amount of liabilities repricing.
Conversely, a gap is considered negative when the amount of interest
rate-sensitive liabilities exceeds interest rate-sensitive assets, and lower
rates should result in higher net interest income.
The following table sets forth the gap ratio at December 31, 1999.
Assumptions regarding the repricing characteristics of certain assets and
liabilities are critical in determining the projected level of rate sensitivity.
Certain savings and interest checking accounts are less sensitive to market
interest rate changes than other interest bearing sources of funds. Core
deposits, such as demand interest, savings, and money market deposits, are
allocated based on their expected repricing in relation to changes in market
interest rates. As an example, the rate on demand interest accounts is expected
to increase just 1/3 of 1% of the change in the Federal Funds rate. Accordingly,
1/3 or 33% of the balances is represented on the table as repricing within six
months.
Repricing of mortgage-related investments are shown by contractual
amortization and estimated prepayments based on the most recent 3-month constant
prepayment rate. Callable agency securities are shown based upon their
option-adjusted spread modified duration date ("OAS"), rather than the next call
date or maturity date. The OAS date considers the coupon on the security, the
time to next call date, the maturity date, market volatility, and current rate
levels. Fixed rate loans are allocated based on expected amortization.
Other models are also used in conjunction with the static gap table, which
is not able to capture the risk to changing spread relationships over time, the
effects of projected growth in the balance sheet, or dynamic decisions such as
the modification of investment maturities as a rate environment unfolds. For
these reasons, a simulation model is used, where numerous interest rate
scenarios and balance sheets are
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<PAGE>
combined to produce a range of potential income results. Net interest income is
managed within guideline ranges for interest rates rising or falling by 300
basis points. Results outside of guidelines require action by the ALCO to
correct the imbalance. Simulations are typically created over a 12-24 month time
horizon. At December 31, 1999 these simulations show that with a 300 basis point
increase in interest rates, net interest income would show a 8.67% decline in
the first 12 months. A 8.67% decline in net interest income would have resulted
in a reduction of $949.4 million in pre-tax income. A decline of 300 basis
points in interest rates would increase net interest income 12.8% or a $1401.6
million pre-tax income increase. These variances in net interest income are not
within the board-approved guidelines of +/- 7%.
Finally, to measure the impact of longer-term asset and liability
mismatches beyond two years, the Company utilizes Modified Duration of Equity
and Economic Value of Portfolio Equity ("EVPE") models. The modified duration of
equity measures the potential price risk of equity to changes in interest rates.
A longer modified duration of equity indicates a greater degree of risk to
rising interest rates. Because of balance sheet optionality, an EVPE analysis is
also used to dynamically model the present value of asset and liability cash
flows, with rate shocks of 200 basis points. The economic value of equity is
likely to be different as interest rates change. Like the simulation model,
results falling outside prescribed ranges require action by the ALCO. The
Company's variance in the economic value of equity, as a percentage of assets
with rate shocks of 200 basis points, is a decline of 3.16% in a rising rate
environment and an increase of 2.68% in a falling rate environment. The decline
of 3.16% in the EVPE in a rising rate environment is not within board approved
guidelines of +/- 3.00%.
The Company is taking several specific actions to bring the interest rate
risk ratios within board approved levels. Investment portfolio cash flows are
utilized to pay down short-term borrowings. The Company is seeking to grow core
deposits to replace short-term large CD balances. Competitive rates are being
offered on longer term certificates of deposits. The Company is focusing on
floating rate SBA loan originations.
<TABLE>
<CAPTION>
More than More than More than More than
Six months one year two years five years ten years
Under six Through Through through through ten and not
(In thousands) Months one year two years five years Years repricing Total
- -------------- ------ -------- --------- ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash & due from banks $ -- $ -- $ -- $ -- $ -- $ 15,121 $ 15,121
Investment securities 9,739 1,503 17,050 22,189 15,702 8,166 74,349
Loans 74,276 19,898 27,045 153,747 30,967 16,600 322,533
Other assets 0 0 0 0 0 26,966 26,966
--------- --------- --------- --------- ------- -------- ---------
Total Assets $ 84,015 $ 21,401 $ 44,095 $ 175,936 $46,669 $ 66,853 $ 438,969
========= ========= ========= ========= ======= ======== =========
Liabilities and
Shareholders' Equity
Non interest demand $ -- $ -- $ -- $ -- $ -- $ 65,079 $ 65,079
Interest demand 80,002 0 6,709 14,371 3,261 0 104,343
Savings deposits 18,466 0 3,265 12,974 3,205 0 37,910
Time deposits 90,485 31,719 24,445 3,194 363 0 150,206
Other debt 53,000 0 0 0 0 0 53,000
Other liabilities 0 0 0 0 0 6,639 6,639
Shareholders' Equity 0 0 0 0 0 21,792 21,792
Liabilities and
--------- --------- --------- --------- ------- -------- ---------
Shareholders' Equity $ 241,953 $ 31,719 $ 34,419 $ 30,539 $ 6,829 $ 93,510 $ 438,969
========= ========= ========= ========= ======= ======== =========
Gap $(157,938) $ (10,318) $ 9,676 $ 145,397 $39,840 $(26,657) $ (0)
Cumulative Gap $(157,938) $(168,256) $(158,580) $ (13,183) $26,657 $ (0) $ (0)
Cumulative Gap to total assets -36.0% -38.3% -36.1% -3.0% 6.1% 0.0% 0.0%
</TABLE>
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<PAGE>
OPERATING, INVESTING, AND FINANCING
For December 31, 1999, cash and cash equivalents decreased $17.4 million
to $15.1 million at December 31, 1999 from $32.5 million at December 31, 1998.
Net cash used in operating activities increased $5.6 million, totaling $6.5
million at December 31, 1999 compared to $0.9 million at December 31, 1998. This
was primarily due to the net loss of $3.3 million, tax receivables of $2.9
million and increased interest receivable of $2.0 million. Net cash used in
investing activities increased $155.0 million to $192.7 million in 1999,
compared to $37.7 million during the prior year. This was primarily from an
increase in loan activities of $125.0 million and a net increase in securities
investing activities of $33.4 million. Net cash provided by financing activities
increased $143.3 million to $181.8 million at December 31,1999, compared to
$38.5 million provided a year earlier, primarily attributed to a $96.3 million
deposit decrease and a $53.0 borrowing increase.
For December 31, 1998, cash and cash equivalents decreased $129 thousand
from December 31, 1997 to $32.5 million. Net cash used in operating activities
totaled $0.9 million, compared to 1997's provided by of $0.9. This was primarily
due to the $1.6 million increase in other assets. Net cash used in investing
activities decreased $2.7 million to $37.7 million in 1998, compared to $40.4
million during the prior year. This was primarily from an initial $6 million
funding of company owned life insurance policies used to fund benefit plans for
certain members of executive management (of which all but one policy was
cancelled in 1999), a decrease in loan activities of $4.2 million and a net
decrease in securities investing activities of $4.6 million. Net cash provided
by financing activities totaled $38.4 million, compared to $38.7 million
provided a year earlier, primarily attributed to a $4.4 million deposit decrease
and a net $4.1 million stock increase.
LIQUIDITY
The Company's liquidity is a measure of its ability to fund loans,
withdrawals or maturities of deposits and other cash outflows in a
cost-effective manner.
Bank Holding Company
The principal source for funds for the holding company are dividends paid
by the Bank. The Bank is currently restricted from paying dividends to the
holding company because its tier 1 capital to average assets ratio is less than
six percent. Because of the capital ratios, the Company and the Bank have agreed
to enter into a memoranda of understanding with its regulators. The memoranda
require the Company to raise capital, establish procedures to provide updates to
the regulators every 30 days on the progress, adopt certain policies and review
management. In addition, the Company must notify its regulators in writing 30
days prior to any proposed declaration of dividends on its common stock. At
December 31, 1999 the holding company had $0.6 million in cash and $376 thousand
in marketable securities, valued at fair market value.
Consolidated Bank
Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, sales and maturities of investment securities and funds
provided by operations. While scheduled loan payments and maturing investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
Total deposits and borrowings amounted to $410.5 million, as of December
31, 1999. The Company has augmented liquidity from the deposit portfolio with
$53 million in borrowings from the FHLB of New York. At December 31, 1999, $982
thousand from the FHLB of New York was available for borrowing.
As of December 31, 1999, deposits included $42.7 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
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<PAGE>
whole or in part, it would negatively impact liquidity. At December 31, 1999,
the Bank had commitments to fund approximately $17.8 million in residential
mortgage loans through the CMA subsidiary.
To increase liquidity, the higher rate money market accounts were again
offered in December 1999. Although these accounts may increase interest expense,
they will help the Bank meet its liquidity needs.
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines
which require a bank to maintain certain capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, regulators require that a bank
which meets the regulator's highest performance and operation standards maintain
a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of
4%. For those banks with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be
proportionately increased. Minimum leverage ratios for each bank are evaluated
through the ongoing regulatory examination process.
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%. Due
to losses incurred during 1999, the Company and the Bank failed to meet their
minimum regulatory capital ratios at both September 30, 1999 and December 31,
1999. Because the Bank failed to satisfy the minimum total risk-based capital
requirement of 8% at September 30, it was deemed to be "undercapitalized" under
the Prompt Corrective Action provisions of the Federal Deposit Insurance Act and
the regulations of the FDIC. At December 31, 1999, the Company's average asset
leverage ratio was 4.35%, the Company's total risk based capital ratio was 6.88%
and the Company's Tier 1 risk based capital ratio was 6.17%. The Bank's ratios
were 4.01%, 6.33%, and 5.62%, respectively. Minimum required ratios under both
FRB and FDIC regulations are 4%, 8%, and 4%, respectively. Because of the
capital ratios, the Company and the Bank have entered into memoranda of
understanding with the state and federal regulators. The memoranda require the
Company and the Bank to raise capital, establish procedures to update the
regulators every 30 days on the Company's progress, adopt certain policies and
review the Company's management. The Company is prohibited from paying a common
dividend to its shareholders, and the Bank is prohibited from paying a dividend
to the Company, if, after giving effect to the dividend, either the Company or
the Bank would not meet all minimum capital ratios. In addition, even if a
proposed dividend would not leave the Company undercapitalized, the Company must
notify its regulators in writing 30 days prior to any proposed dividend.
During the first quarter of 2000, the Company undertook 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 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
gross 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 6.8965 per share. The Bank is expected to
receive approximately $4.0 million of the proceeds from the Company in March
2000.
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<PAGE>
In connection with the memorandum of understanding, and because the Bank
was deemed "undercapitalized" pursuant to the FDIC's prompt corrective action
regulations at September 30, 1999, the Company and the Bank submitted a capital
plan to the FDIC and the New Jersey Department of Banking and Insurance. Under
this plan, in addition to the sale of preferred stock previously discussed, the
Company contemplated selling assets as a way to enhance its capital ratios both
through the reduction of assets and through income earned on the sale. Pursuant
to this portion of the Bank's capital plan, the Bank sold $36.4 million in
adjustable rate one-to-four family mortgages (ARM's) on March 7, 2000. The
purchase price for these mortgages, which were sold servicing released and
without recourse was $35.6 million. $37.8 million of ARM loans were reclassified
at December 31, 1999 from held to maturity to held for sale in the amount of
$36.4 million. This resulted in an after tax realized valuation loss of $891
thousand.
As a result of the March 2000 preferred stock offering and the sale of
loans previously discussed, the Company and Bank now meet all of the minimum
federal capital requirements.
The following table summarizes the holding company's risk based and
leverage capital ratios at December 31, 1999 and 1998, as well as the required
minimum regulatory capital ratios:
Adequately Well
Company Dec. Dec. Capitalized Capitalized
1999 1998 Requirements Provisions
- --------------------------------------------------------------------------------
Total risk-based capital ratio 6.88% 14.85% 8.00% 10.00%
Tier 1 risk-based capital ratio 6.17% 13.89% 4.00% 6.00%
Leverage ratio 4.35% 10.87% 4.00% 5.00%
The following table summarizes the Bank's risk based and leveraged capital
ratios at December 31, 1999 and 1998, as well as the required minimum regulatory
capital ratios.
Adequately Well
Bank Dec. Dec. Capitalized Capitalized
1999 1998 Requirements Provisions
- --------------------------------------------------------------------------------
Total risk-based capital ratio 6.33% 9.80% 8.00% 10.00%
Tier 1 risk-based capital ratio 5.62% 8.84% 4.00% 6.00%
Leverage ratio(1) 4.01% 7.09% 4.00% 5.00%
(1) The New Jersey Department of Banking and Insurance has imposed a tier 1
capital to average asset ratio of 6%.
Shareholders' equity decreased $4.6 million (17.3%) to $21.8 at December
31, 1999 compared to $26.3 million at December 31, 1998. This decrease was the
result of the $3.4 million net loss, $0.9 million dividends paid, $0.5 million
treasury stock net purchase, $0.7 million accumulated other comprehensive loss,
and $1.1 million net stock issuance, primarily relating to the CMA acquisition.
For 1998, shareholders' equity increased $6.3 million (31.5%) to $26.3
million at December 31, 1998 compared to $20.0 million at December 31, 1997.
This increase was the result of the $2.1 million net income, $0.5 million
dividends paid, $5.6 million warrant conversion, $1.7 million treasury stock
purchase, $0.1 million accumulated other comprehensive loss, and $0.9 million of
dividend reinvestment plan, grants, options and cumulative FAS 133
implementation effect
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<PAGE>
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.
COMMON STOCK PRICES/DIVIDEND PAID
The table below shows by quarter the range of high, low and quarter-end closing
sale prices for Unity Bancorp, Inc. common stock and the cash dividends paid per
common share.
Cash
1999 Dividends
Quarter High Low Close Paid
- -------------------------------------------------------------------------
First $11.00 $9.31 $10.00 $0.06
Second $12.00 $9.63 $11.75 $0.06
Third $11.75 $6.38 $ 6.88 $0.06
Fourth $ 8.50 $4.75 $ 6.00 $0.06
Unity Bancorp, Inc. authorized a 5% stock dividend, made on January 8,
1999 to shareholders of record as of December 21, 1998.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is filed herewith.
UNITY BANCORP, INC.
FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
TOGETHER WITH
INDEPENDENT AUDITORS' REPORT
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Unity Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Unity Bancorp,
Inc. and subsidiary as of December 31, 1999 and the related consolidated
statements of operations, comprehensive (loss) income, changes in shareholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying financial statements of Unity Bancorp, Inc, as of
December 31, 1998 and for each of the years in the two year period ended
December 31, 1998 were audited by other auditors whose report thereon dated
January 22, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Unity Bancorp, Inc. and
subsidiary as of December 31, 1999 and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Short Hills , New Jersey
March 22, 2000
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Unity Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Unity Bancorp,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1998 and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unity Bancorp, Inc. and
subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, in conformity with generally accepted accounting principles in the United
States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 22, 1999
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Cash and due from banks $15,121 $15,388
Federal funds sold 0 17,100
-------- --------
Total cash and cash equivalents 15,121 32,488
-------- --------
Securities (Note 3):
Available for sale, at fair value 40,099 21,490
Held to maturity, at amortized cost (aggregate fair value of $32,270
and $19,089 in 1999 and 1998, respectively) 34,250 19,439
-------- --------
Total securities 74,349 40,929
-------- --------
Loans held for sale - SBA loans 3,745 3,569
Loans held for sale - ARM loans 36,362 --
Loans held to maturity 281,376 163,001
-------- --------
Total loans (Notes 4 and 5) 321,483 166,570
Plus: Deferred Costs 1,049 222
Less: Allowance for loan losses 2,173 1,825
-------- --------
Net loans 320,359 164,967
-------- --------
Premises and equipment, net (Note 6) 12,370 4,559
Accrued interest receivable 2,862 1,163
Cash surrender value of insurance policies (Note 10) 2,203 6,000
Other real estate owned 1,505 0
Other assets (Note 11) 10,200 4,506
-------- --------
Total Assets $438,969 $254,612
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
<S> <C> <C>
LIABILITIES:
Deposits (Note 7)
Demand:
Non-interest bearing $65,079 $50,120
Interest bearing 104,343 40,585
Savings 37,910 34,320
Time, $100,000 and over 71,102 28,164
Time, under $100,000 79,104 73,671
-------- --------
Total time 150,206 101,835
-------- --------
Total Deposits 357,538 226,860
-------- --------
Borrowed funds (Note 7) 53,000 0
Obligation under capital leases (Note 12) 4,096 304
Accrued interest payable 1,199 408
Accrued expenses and other liabilities 1,344 694
-------- --------
Total liabilities 417,177 228,266
-------- --------
Commitments and contingencies (Note 12)
Shareholders' Equity (Notes 8 and 13):
Common stock, no par value 7,500,000 shares authorized,
3,861,568 shares issued and 3,704,708 outstanding in 1999;
3,759,251 shares issued and 3,668,197 outstanding in 1998 26,224 23,146
Treasury stock, at cost, 156,860 and 91,054 shares outstanding
in 1999 and 1998, respectively (1,762) (1,202)
Retained (deficit) earnings (1,856) 4,534
Accumulated other comprehensive loss, net of tax benefit (814) (132)
-------- --------
Total Shareholders' Equity 21,792 26,346
-------- --------
Total Liabilities and Shareholders' Equity $438,969 $254,612
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands, except share and share amounts)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest on loans $ 19,067 $ 13,355 $ 11,227
Interest on securities 4,107 3,487 3,137
Interest on Federal funds sold 514 638 661
----------- ---------- ----------
Total Interest Income 23,688 17,480 15,025
Interest Expense on deposits 11,497 7,142 6,268
Interest Expense on borrowings 1,241 23 44
----------- ---------- ----------
Total Interest Expense 12,738 7,165 6,312
----------- ---------- ----------
Net Interest Income 10,950 10,315 8,713
Provision for loan losses (Note 5) 1,743 804 497
----------- ---------- ----------
Net Interest Income After Provision for Loan Losses 9,207 9,511 8,216
Other Income:
Service charges on deposits 778 901 757
Gain on sale of loans, net 3,063 2,394 1,695
Net gain on sale of securities (Note 3) 193 255 --
Other income (Note 17) 1,572 857 591
----------- ---------- ----------
Total Other Income 5,606 4,407 3,043
Other Expenses:
Salaries and employee benefits 8,710 4,743 3,927
Occupancy expense (Note 12) 2,383 1,037 1,009
Other operating expenses (Note 16) 9,485 4,719 3,049
----------- ---------- ----------
Total Other Expenses 20,578 10,499 7,985
----------- ---------- ----------
(Loss) income before (benefit) provision for income
taxes (5,765) 3,419 3,274
(Benefit) provision for income taxes (Note 11) (2,387) 1,282 1,259
----------- ---------- ----------
Net (Loss) Income $ (3,378) $ 2,137 $ 2,015
=========== ========== ==========
Basic (Loss) Earnings per Share (Note 9) $ (0.91) $ 0.67 $ 0.65
Diluted (Loss) Earnings per Share (Note 9) $ (0.91) $ 0.64 $ 0.64
Weighted Average Shares Outstanding - Basic (Note 9) 3,723,448 3,198,813 3,114,726
Weighted Average Shares Outstanding - Diluted (Note 9) 3,723,448 3,358,844 3,148,708
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (loss) income $ (3,378) $ 2,137 $ 2,015
Other comprehensive (loss) income
Unrealized (loss) gain on securities (1,106) (266) 36
Tax benefit (provision) 424 101 (14)
----------- ---------- ----------
Unrealized (loss) gain, net of reclassification adjustmen (682) (165) 22
Cumulative effect of change in accounting principle, net of
tax 0 71 0
----------- ---------- ----------
Other comprehensive (loss) income (682) (94) 22
----------- ---------- ----------
Comprehensive (loss) income $ (4,060) $ 2,043 $ 2,037
=========== ========== ==========
Disclosure of reclassification amount, net of tax
Unrealized holding (losses) gains arising during the period $ (566) $ (7) $ 22
Less: reclassification adjustment for gains in net income 116 158 0
----------- ---------- ----------
Comprehensive (loss) income $ (682) $ (165) $ 22
=========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements
37 of 62
<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Treasury Earnings Comprehensive Shareholders'
Stock Stock (Deficit) Income (Loss) Equity
------------ ----------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 16,867 $ 0 $ 1,183 $ (60) $ 17,990
Cash dividends - $0.10 per
share -- -- (297) -- (297)
Issuance of common stock, net 260 -- -- -- 260
Net income - 1997 -- -- 2,015 -- 2,015
Other comprehensive income,
net of taxes -- -- -- 22 22
-------- ------- ------- ----- --------
BALANCE, December 31, 1997 17,127 0 2,901 (38) 19,990
======== ======= ======= ===== ========
Cash dividends - $0.20 per
share -- -- (504) -- (504)
Issuance of common stock:
Warrant Conversion 5,649 -- -- -- 5,649
Dividend Reinvestment Plan (10) 195 -- -- 185
Grants 60 208 -- -- 268
Options 320 60 -- -- 380
Purchase of Treasury Stock,
gross -- (1,665) -- -- (1,665)
Net income - 1998 -- -- 2,137 -- 2,137
Cumulative effect of
Implementation of FASB 133
on unrealized gain on
securities available for
sale, net of taxes -- -- -- 71 71
Other comprehensive loss,
net of taxes -- -- -- (165) (165)
-------- ------- ------- ----- --------
BALANCE, December 31, 1998 23,146 (1,202) 4,534 (132) 26,346
======== ======= ======= ===== ========
Cash dividends - $0.24 per
share -- -- (854) -- (854)
Stock dividend 2,158 -- (2,158) -- 0
Issuance of Common Stock:
Stock Issuance - CMA
Acquisition 1,100 -- -- -- 1,100
Warrant Costs (43) -- -- -- (43)
Grants (137) 423 -- -- 286
Purchase of treasury stock -- (983) -- -- (983)
Net loss - 1999 -- -- (3,378) -- (3,378)
Other comprehensive loss,
Net of taxes -- -- -- (682) (682)
-------- ------- ------- ----- --------
BALANCE, December 31, 1999 $ 26,224 $(1,762) $(1,856) $(814) $ 21,792
======== ======= ======= ===== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
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<PAGE>
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (loss) income ($ 3,378) $ 2,137 $ 2,015
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Provision for possible loan losses 1,743 804 497
Depreciation and amortization 1,590 447 433
Deferred tax provision (benefit) 496 (262) (202)
Net gain on sale of securities (193) (255) 0
Gain on sale of loans (3,063) (2,394) (1,695)
Stock Grants 286 268 0
(Increase) Decrease in accrued interest receivable (1,699) 185 (295)
Increase in other assets (3,752) (1,857) (210)
Increase (decrease) in accrued interest payable 791 (85) (41)
Increase in accrued expenses and other liabilities 650 113 374
-------- ------- -------
Net cash (used in) provided by operating activities (6.529) (899) 876
======== ======= =======
Investing activities:
Purchases of securities held to maturity (17,494) (14,064) (10,020)
Purchases of securities available for sale (39,596) (86,763) (17,000)
Maturities and principal payments on securities held to
maturity 2,683 18,523 12,101
Maturities and principal payments on securities available
for sale 5,175 56,596 10,814
Proceeds from sale of securities available for sale 14,899 26,243 0
Purchases of loans (56,070) 0 0
Proceeds from sale of loans 27,343 20,626 13,682
Net increase in loans (126,523) (51,149) (48,397)
Redemption (Purchase) of Bank Owned Life Insurance 3,895 (6,000) 0
Increase in deferred costs - construction in process 0 (1,001) 0
Capital expenditures (5,291) (732) (1,611)
Cash payment - CMA acquisition (1,700) 0 0
-------- ------- -------
Net cash used in investing activities (192.679) (37,721) (40,431)
======== ======= =======
Financing activities:
Increase in deposits 130,678 34,446 38,859
Increase in borrowings 53,000 0 0
Proceeds from issuance of common stock, net 0 6,019 260
Treasury stock purchases (983) (1,665) 0
Treasury stock DRIP dividends 0 195 0
Cash dividends (854) (504) (395)
-------- ------- -------
Net cash provided by financing activities 181,841 38,491 38,724
======== ======= =======
Decrease in cash and cash equivalents (17,367) (129) (831)
======== ======= =======
Cash and cash equivalents at beginning of year 32,488 32,617 33,448
-------- ------- -------
Cash and cash equivalents at end of period $ 15,121 $ 32,488 $ 32,617
======== ======= =======
Supplemental disclosures : Interest paid $ 11,947 $ 7,250 $ 6,311
Income taxes paid 775 1,476 1,283
-------- ------- -------
Transfer to
other real estate owned:
from other assets 746 0 0
-------- ------- -------
from loans 759 0 0
-------- ------- -------
Change In capital lease assets 3,691 (38) (62)
-------- ------- -------
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
39 of 62
<PAGE>
UNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Unity Bancorp, Inc. (the "Parent Company") and its
wholly-owned subsidiary, Unity Bank (the "Bank", or when consolidated with
the Parent Company, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
Unity Bancorp, Inc. (the "Parent Company") is a bank holding company
incorporated in Delaware 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 commenced operations on
September 13, 1991. The Bank provides a full range of commercial and
retail banking services through 17 branch offices located in Hunterdon,
Somerset, Middlesex, and Union counties in New Jersey. These services
include the acceptance of demand, savings, and time deposits; extension of
consumer, real estate, Small Business Administration and other commercial
credits, as well as personal investment advisory services through the
Bank's wholly-owned subsidiary, Unity Financial Services, Inc. Unity
Investment Services, 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")
accounted for under the purchase method of accounting. This wholly-owned
subsidiary of the Bank originates residential mortgages funded by the
purchasing investor and simultaneously sells residential mortgages.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates in the
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Amounts requiring the use of significant
estimates include the allowance for loan losses, the carrying of loans
held for sale and other real estate owned, and the fair value disclosures
of financial instruments. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from
banks and Federal funds sold.
Securities
The Company classifies its securities into three categories: (1)
held to maturity, (2) available for sale and (3) trading. Securities are
classified as securities held to maturity based on management's intent and
ability to hold them to maturity. Such securities are stated at cost,
adjusted for unamortized purchase premiums and discounts on a method that
approximates a level yield. Securities that are bought and held
principally for the purpose of resale in the near term are classified as
trading securities, which are carried at market value. Realized gains and
losses from trading activity and gains and losses from marking the
portfolio to market value are included in trading revenue. Securities not
classified as securities held to maturity or trading securities are
classified as securities available for sale and are stated at fair value.
Unrealized gains and losses on securities available for sale are excluded
from results of operations and are reported as a separate component of
shareholders' equity, net of taxes. Securities classified as available for
sale include securities that may be sold in response to changes in
interest rates, changes in prepayment risks, the need to increase
regulatory capital or other similar requirements. The cost of securities
sold is
40 of 62
<PAGE>
determined on a specific identification basis. Gains and losses on sales
of securities are recognized in the statements of operations on the date
of sale. The company has not classified any of its securities as trading.
The Company adopted Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging in the third
quarter of 1998 and, as result, reclassified certain securities from the
held-to-maturity to available for sale classification. The Company has no
derivatives or hedging products.
Loans Held To Maturity, Loans Held For Sale,
and Sale and Servicing of Small Business Administration (SBA) Loans
Loans held to maturity are stated at the unpaid principal balance,
net of unearned discounts and net deferred loan origination fees and
costs. Purchased loans are carried at the amount of undiscounted estimated
future cash collections that are both reasonably estimatable and probable.
Interest is credited to operations primarily based upon the
principal amount outstanding. When management believes there is sufficient
doubt as to the ultimate collectibility of interest on any loan, interest
accruals are discontinued and all past due interest, previously recognized
as income is reversed and charged against current period earnings. Loans
are returned to an accrual status when doubt of collectability is removed
and the loan is brought current as to principal and interest
Loan origination fees, net of direct loan origination costs, are
deferred and are recognized over the estimated life of the related loans
as an adjustment of the loan yield.
The Company evaluates its loans for impairment. A loan is considered
impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Company has defined
impaired loans to be all non-accrual loans. Impairment of a loan is
measured based on the present value of expected future cash flows, net of
estimated costs to sell, discounted at the loan's effective interest rate.
Impairment can also be measured based on a loan's observable market price
or the fair value of collateral if the loan is collateral dependent. If
the measure of the impaired loan is less than the recorded investment in
the loan, the Company establishes a valuation allowance, or adjusts
existing valuation allowances, with a corresponding charge or credit to
the provision for loan losses.
Loans held for sale are SBA loans, and for 1999, certain ARM loans,
and are reflected at the lower of aggregate cost or market value.
The Company originates loans to customers under an SBA program that
generally provides for SBA guarantees of 70% to 90% of each loan. The
Company generally sells the guaranteed portion of each loan to a third
party and retains the non-guaranteed portion in its own portfolio.
To calculate the gain (loss) on sale, the Company's investment in an
SBA loan is allocated among the retained portion of the loan, retained
servicing and the sold portion of the loan, based on the relative fair
market value of each portion. The gain on the sold portion of the loan is
recognized. The retained servicing is reflected as an asset and is
classified in loans for financial reporting purposes. As of December 31,
1999 and 1998, the amount of this asset was approximately $1,400,000 and
$1,200,000, respectively.
Serviced loans sold to other financial institutions are not included
in the accompanying consolidated balance sheets. The total amount of such
loans serviced, but owned by outside investors, amounted to approximately
$65,712,000 and $44,684,000 at December 31, 1999 and 1998, respectively.
41 of 62
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management
considers adequate to provide for potential loan losses. The allowance is
increased by provisions charged to expense and reduced by net charge-offs.
The level of the allowance is based on management's evaluation of
potential losses in the loan portfolio, after consideration of prevailing
economic conditions in the Company's market area. Credit reviews of the
loan portfolio, designed to identify potential charges to the allowance,
are made during the year by management and a loan review consultant. A
risk rating system, consisting of multiple grading categories, is utilized
as an analytical tool to assess risk and the appropriate level of loss
reserves. Along with the risk system, management further evaluates risk
characteristics of the loan portfolio under current and anticipated
economic conditions and considers such factors as the financial condition
of the borrowers, past and expected loan loss experience, and other
factors management feels deserve recognition in establishing an adequate
reserve. This risk assessment process is performed at least quarterly,
and, as adjustments become necessary, they are realized in the periods in
which they become known. Although management attempts to maintain the
allowance at a level deemed adequate to provide for potential losses,
future additions to the allowance may be necessary based upon certain
factors including changes in market conditions. In addition, various
regulatory agencies periodically review the adequacy of the Company's
allowance for loan losses. These agencies may require the Company to make
additional provisions based on their judgments about information available
to them at the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets, ranging from one to twenty
years.
Other Real Estate Owned
Other real estate owned is recorded at the fair value at the date of
acquisition, with a charge to the allowance for loan losses for any excess
over fair value. Subsequently, other real estate owned is carried at the
lower of cost or fair value, as determined by current appraisals, less
estimated selling costs. Certain costs incurred in preparing properties
for sale are capitalized to the extent that the appraisal amount exceeds
the carry value, and expenses of holding foreclosed properties are charged
to operations as incurred.
Amortization of Intangible Assets
The $3.9 million intangible asset, associated with the acquisition
of Certified Mortgage Associates, Inc., is comprised of the $2.8 million
purchase amount, amortized over eight years, being the principals'
contractual term, and the remaining $1.1 million relating to the acquired
negative capital and other acquisition costs is being amortized over ten
years.
Income Taxes
The Company accounts for income taxes according to the asset and
liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates applicable to taxable
income for the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
42 of 62
<PAGE>
Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss)
for the period by the weighted average number of shares outstanding for
the period. Diluted earnings per share is computed by dividing net income
(loss) for the period by the weighted average number of shares outstanding
for the period presented adjusted for the effect of the stock options and
warrants outstanding, under the treasury stock method. In periods where
there is a net loss, diluted earnings per share equals basic earnings per
share as inclusion of options and warrants outstanding would cause an
anti-dilutive effect. All amounts have been restated for the effect of the
5% stock dividend paid on January 8, 1999.
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net income or loss for the
current period and the change in unrealized (loss) gain that was reported
as a component of shareholders' equity.
Reclassifications
Certain reclassifications have been made to prior years' amounts to
conform with the current year presentation.
43 of 62
<PAGE>
(3) SECURITIES
Information on the Company's securities portfolio at December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
US Treasury securities $ 6,988 $0 $ (91) $ 6,897 $ 243 $ 1 $ 0 $ 244
Obligations of US Government Agencies 9,742 0 (260) 9,482 4,371 35 (5) 4,401
Mortgage backed securities 19,808 0 (718) 19,090 14,910 9 (148) 14,771
Obligations of states & political
subdivisions 655 2 0 657 931 14 0 945
Federal Home Loan Bank stock 2,675 0 0 2,675 630 0 0 630
Corporate debt securities 964 0 (42) 922 0 0 0 0
Other corporate stocks 580 0 (204) 376 612 3 (116) 499
------------------------------------------ ----------------------------------------
Total available for sale $41,412 $2 $(1,315) $40,099 $21,697 $62 $(269) $21,490
========================================== ========================================
HELD TO MATURITY
Obligations of US Government Agencies $20,245 $0 $(1,128) $19,117 $ 3,757 $ 0 $(355) $ 3,402
Mortgage backed securities 14,005 0 (852) 13,153 15,182 7 (1) 15,188
Corporate debt securities 0 0 0 0 500 0 (1) 499
------------------------------------------ ----------------------------------------
Total held to maturity $34,250 $0 $(1,980) $32,270 $19,439 $ 7 $(357) $19,089
========================================== ========================================
</TABLE>
The securities' amortized cost and estimated fair market value at December
31, 1999 and 1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
1999 1998
(In thousands) Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------- ----------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Due in one year or less $ 246 $ 246 $ 516 $ 518
Due after one year through five years 9,443 9,322 658 671
Due after five years through ten years 6,000 5,788 0 0
Due after ten years 2,661 2,602 4,371 4,401
Mortgage-backed securities 19,808 19,090 14,910 14,771
Corporate stocks 3,255 3,051 1,242 1,129
----------------------- ----------------------
Total available for sale $41,412 $40,099 $21,697 $21,490
======================= ======================
HELD TO MATURITY
Due in one year or less $ 0 $ 0 $ 1,507 $ 1,506
Due after one year through five years 13,500 13,027 1,500 1,425
Due after five years through ten years 5,245 4,674 1,250 970
Due after ten years 1,500 1,416 0 0
Mortgage-backed securities 14,005 13,153 15,182 15,188
----------------------- ----------------------
Total held to maturity $34,250 $32,270 $19,439 $19,089
======================= ======================
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations without call or
prepayment penalties.
Proceeds from sales of securities were $14,899,000 in 1999 and $26,243,000
in 1998. For 1999, security gains and (losses) were $287,000 and ($94,000)
respectively and for 1998, $320,000 and ($65,000), respectively, totaling a net
gain on security sales of $193,000 in 1999 and $255,000 in 1998.
Securities with carrying values aggregating $18,668,000 were pledged to
secure public deposits and $49,794,000 were pledged to secure borrowings at
December 31, 1999.
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<PAGE>
(4) LOANS
Loans outstanding by classification as of December 31, 1999 and 1998 are
as follows:
(In thousands) 1999 1998
-------- --------
Commercial & industrial $ 43,441 $ 41,502
Loans secured by real estate:
Non-residential properties 52,312 59,845
Residential properties 178,132 26,565
Construction 17,818 16,218
Loans to individuals 29,780 22,440
-------- --------
Total loans $321,483 $166,570
======== ========
SBA loans held for sale, totaling $3.7 million and $3.6 million at
December 31, 1999 and 1998, respectively, are included in the commercial and
industrial totals. ARM loans held for sale, totaling $36.4 million at December
31, 1999 are included in residential properties. There were no ARM loans held
for sale at December 31, 1998.
As of December 31, 1999 and 1998, the Bank's recorded investment in
impaired loans, defined as nonaccrual loans, was $1,412,000 and $2,297,000,
respectively, and the related valuation allowance was $219,000 and $496,000,
respectively. This valuation allowance is included in the allowance for loan
losses in the accompanying balance sheets. Interest income that would have been
recorded during 1999 had these impaired loans performed under the original
contract terms was $206,000 in 1999, as compared to $227,000 in 1998 and $92,000
in 1997. Average impaired loans for 1999, 1998, and 1997 were $1,472,000,
$2,292,000, and $912,000 respectively. At December 31, 1999, $166,000 in loans
was past due greater than 90 days but still accruing interest as compared to
$1,600,000 at December 31, 1998. Management has evaluated these loans and
determined that they are both well collateralized and in the process of
collection.
As of December 31, 1999, approximately 77% of the Company's loans were
secured by real estate. As such, repayment is dependent upon both the economic
environment and the real estate market in the Company's market area.
In the ordinary course of business, the Company may extend credit to
officers, directors or their associates. These loans are subject to the
Company's normal lending policy. An analysis of such loans, all of which are
current as to principal and interest payments, is as follows:
(In thousands)
Loans to officers, directors or their associates at December 31, 1998 $ 7,082
New loans 2,462
Repayments (5,651)
-------
Loans to officers, directors or their associates at December 31, 1999 $ 3,893
=======
(5) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on estimates. Ultimate losses may
vary from current estimates. These estimates are reviewed periodically and, as
adjustments become known, they are reflected in operations in the periods in
which they become known. An analysis of the change in the allowance for loan
losses during 1999, 1998 and 1997 is as follows:
(In thousands) 1999 1998 1997
------- ------- -------
Balance at beginning of year $ 1,825 $ 1,322 $ 886
Provision charged to expense 1,743 804 497
Loans charged-off (1,433) (329) (68)
Recoveries on loans previously charged-off 38 28 7
------- ------- -------
Balance at end of year $ 2,173 $ 1,825 $ 1,322
======= ======= =======
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<PAGE>
(6) PREMISES AND EQUIPMENT
The detail of premises and equipment as of December 31, 1999 and 1998 is
as follows:
(In thousands) 1999 1998
-------- --------
Land and buildings $ 6,751 $ 1,825
Furniture, fixtures and equipment 6,036 2,815
Leasehold improvements 2,321 1,486
Less: Accumulated depreciation and amortization (2,738) (1,567)
-------- --------
Net premises and equipment $ 12,370 $ 4,559
======== ========
The Bank entered into a lease for a branch facility in April 1996 that met
the requirements of capital lease accounting. In 1999, the Bank entered into 8
leases for locations used as branch facilities and 1 lease for a location to be
used as a lending office that met the requirements of capital lease accounting.
The net present value of the future minimum lease payments, included in land and
buildings, is $3,971,000 and $304,000 for December 31, 1999 and 1998
respectively. The capitalized asset is contained in land and buildings and the
amortization is included in accumulated depreciation and amortization.
Amortization of capital leases totaled $427,000, $57,000, and $38,000 in 1999,
1998 and 1997, respectively.
(7) DEPOSITS AND BORROWINGS
Time deposits in denominations of $100,000 or more totaled $71,102,000 and
$28,164,000 at December 31, 1999 and 1998, respectively. The following schedule
is of time deposit maturities:
Time Deposit Maturities 3 Over 3 months Over 1 year
(In thousands) months Through through Over
Or less 1 year 3 years 3 years Total
------------------------------------------------------
At December 31, 1999
$100,000 or more $50,498 $17,151 $ 2,949 $ 504 $71,102
Less than $100,000 $19,710 $34,846 $22,586 $1,962 $79,104
At December 31, 1998
$100,000 or more $18,748 $ 7,685 $ 1,731 $ 0 $28,164
Less than $100,000 $24,784 $36,665 $11,020 $1,202 $73,671
Federal Home Loan Bank - New York short-term borrowings, maturing within
the first six months of 2000 with an average rate of 5.86%, totaled $39,000,000
and overnight borrowings, at a 5.10% rate, totaled $14,000,000 at December 31,
1999. The average amount of borrowings was $16,971,000 in 1999. Assets
underlying the borrowings included $12,528,000 in adjustable rate mortgages with
a FHLB borrowing value of $11,275,000 and $49,794,000 in securities with a FHLB
borrowing value of $47,395,000. There were no borrowings at December 31, 1998.
(8) SHAREHOLDERS' EQUITY
In April 1998, the Company declared a 3 for 2 stock split and a 5% stock
dividend was declared on November 23, 1998, for shareholders of record on
December 21, 1998 payable January 8, 1999. All share and per share information
for all periods presented in these financial statements has been adjusted to
give effect to the stock dividends and the stock splits.
In December 1996, the Company completed a stock offering resulting in the
issuance of 401,500 shares of common and, attached to each share, a
nontransferable warrant to purchase one share of common stock at an original
exercise price of $15.75 at any time within two years after the offering
expiring at the close of business on December 15, 1998. After the Company's 3
for 2 stock split in April 1998, the total number of warrants available to be
exercised became 602,250 and had an exercise price of $10.50. During 1997, 3,090
warrants were exercised and 557,971 warrants were exercised in 1998. The
46 of 62
<PAGE>
exercising of warrants in 1998 led to an increase to capital of $5,649,000. The
remaining 41,189 warrants expired at the close of business December 15, 1998.
On April 29, 1994, the Company's shareholders approved the 1994 Employee
Non-qualified Stock Option Plan (the Employee Plan) and the 1994 Non-employee
Director Stock Option Plan (the Director Plan). Under the Plans, the Board of
Directors may grant options to officers or non-employee directors to purchase
the Company's stock. Option prices of the Plans are determined by the Board,
provided however, that the option price of shares may not be less than 85% of
the fair market value of shares at the date of grant. The period during which an
option under either Plan may be exercised varies, but no option may be exercised
after 10 years from the date of grant. As of December 31, 1999, 196,876 shares
have been reserved for issuance under the Plans, 181,046 shares have been
utilized leaving 15,831 shares available.
On April 25, 1997, the Company's shareholders approved the 1997 Stock
Option Plan. Under the plan, the Board of Directors may grant incentive stock
options ("ISOs") and non-statutory options. Officers, employees and members of
the Board of Directors of the Corporation are eligible to participate in the
Plan. Options intended to qualify as Incentive Stock Options will be granted
only to persons who are eligible to receive such options. The exercise price for
options granted under the 1997 Option Plan will be determined by the Board of
Directors at the time of the grant, but may not be less than 85% of the fair
market value of the Common Stock on the date of grant or 100% for any ISO. The
term during which each option may be exercised shall be determined by the Board
of Directors, but in no event shall an option be exercisable in whole or in part
more than ten years form the date of grant. As of December 31, 1999, 78,750
shares have been reserved for issuance under the Plan and 74,550 have been
utilized leaving 4,200 shares available.
On April 24, 1998, the Company's shareholders approved the 1998 Stock
Option Plan. The specifics to this plan are similar to the 1997 Stock Option
Plan. Options were granted to all employees under this plan. These employee
options vest over five years, but could vest 20% each year if the Company
reaches its goals. As of December 31, 1999, 236,250 shares have been reserved
for issuance under the Plan and 216,977 have been utilized leaving 19,273 shares
available.
On April 30, 1999, the Company's shareholders approved the 1999 Stock
Option Plan. The specifics to this plan are similar to the 1998 Stock Option
Plan. As of December 31, 1999, 300,000 shares have been reserved for issuance
under the Plan and 130,500 have been utilized leaving 169,500 shares available.
Transactions under the stock option plans are summarized as follows:
<TABLE>
<CAPTION>
Number of Exercise Price Per Weighted Average
Shares Share Exercise Price
---------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 78,749 $ 6.17 - $ 6.86 $ 6.69
Options granted 63,316 7.28 - 8.84 8.13
Options exercised (16,241) 6.17 - 7.28 6.71
Options expired -- -- --
---------
Outstanding, December 31, 1997 125,824 $ 6.17 - $ 8.84 $ 7.41
=========
Options granted 363,322 10.59 - 15.24 11.14
Options exercised (46,560) 6.17 - 11.21 7.90
Options expired (20,476) 11.19 - 11.21 11.20
---------
Outstanding, December 31, 1998 422,110 $ 6.17 - $ 15.24 $ 10.38
=========
Options granted 143,100 9.88 - 13.50 $ 11.21
Options exercised -- -- --
Options expired (36,990) 9.88 - 15.24 $ 10.95
---------
Outstanding, December 31, 1999 528,220 $ 6.17 - $13.69 $ 10.57
=========
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plans and, accordingly, recorded
compensation expense totaling $0 in 1999,
47 of 62
<PAGE>
$196,000 in 1998, and $17,000 in 1997 for those options that had an exercise
price which was less than the fair market value of the Company's stock on the
grant date. Had compensation costs for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net (loss)
income and (loss) income per share would have been reduced to the pro forma
amounts indicated in the following schedule:
48 of 62
<PAGE>
SFAS 123 Proforma Restatement 1999 1998 1997
---- ---- ----
(In thousands, except per share amounts)
Net (loss) income-
As reported $ (3,378) $ 2,137 $ 2,015
Pro forma $ (3,909) $ 1,638 $ 1,902
(Loss) earnings per share-
Basic as reported $ (0.91) $ 0.67 $ 0.65
Pro forma $ (1.05) $ 0.51 $ 0.61
Diluted as reported $ (0.91) $ 0.64 $ 0.64
Pro forma $ (1.05) $ 0.49 $ 0.61
The fair value of each option grant under the Plans is estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1999, 1998, and 1997; dividend
yields of 0.0%, 2.0% and 1.5% respectively, expected volatility of 90.0%, 33.8%,
and 47.06% respectively, a risk-free interest rates of 5.75%, 5.48%, and 6.08%
respectively, and expected lives of 3.8, 2.6, and 2.6 years, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1999:
Shares Shares
Exercise Outstanding at Remaining Exercisable at
Price December 31, 1999 Contractual Life December 31, 1999
$ 6.17 1,969 1.0 years 1,969
6.86 44,297 1.0 years 44,297
7.28 5,906 2.0 years 5,906
8.49 31,500 2.0 years 31,500
8.77 1,103 2.9 years 1,103
8.84 3,938 2.9 years 3,938
10.00 34,000 4.1 years 0
10.25 49,000 2.2 years 0
10.38 2,500 4.5 years 0
10.59 49,613 3.1 years 49,613
11.07 5,250 3.9 years 5,250
11.19 231,702 3.6 years 133,160
11.21 14,569 3.1 years 14,569
11.31 5,250 3.9 years 0
13.50 45,000 2.1 years 0
13.69 2,625 3.6 years 2,625
$ 10.57* 528,220 293,928
* Weighted average exercise price
Select key employees and Board members are eligible to participate in the
Company's two Stock Bonus Plans (1994 and 1997). Under the Plans, the Company
may award stock grants to those employees and Board members at its discretion.
The Company records an expense equal to the number of shares granted multiplied
by the fair market value of the stock at the date of grant. 14,175 shares were
granted to employees and Board members in 1997, amounting to approximately
$120,000 in expense. On April 25, 1997, the Company's shareholders approved
50,000 additional shares to be reserved for Stock Bonuses, which became 78,750
shares after the 3 for 2 split and the 5% stock dividend (39,375 were approved
under the 1994 Plan). The Company granted 26,894 shares to employees and Board
members in 1999, resulting in approximately $289,000 in expense compared to
1998's 24,573 shares granted to employees and Board members with approximately
$320,000 in expense. As of December 31, 1999, the Company has 47,646 shares
reserved for issuance under the Stock Bonus Plans.
49 of 62
<PAGE>
(9) EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and
dilutive (loss) earnings per share. All share amounts have been restated
to include the effect of a 5% stock dividend paid on January 8, 1999.
<TABLE>
<CAPTION>
Weighted Earnings
Net Average Per
(In thousands, except share data amounts) Income Shares Share
------ ------ -----
<S> <C> <C> <C>
For the year ended December 31, 1999
Basic earnings per share -
Income available to common shareholders $(3,378) 3,723,448 $(0.91)
Effect of dilutive securities- stock options and warrants *
Diluted earnings per share - Income available to
------- ---------
Common shareholders plus assumed conversions $(3,378) 3,723,448 $(0.91)
======= ========= ======
* Dilutive EPS does not include stock options, due to the net loss position.
Inclusion would be anti-dilutive.
For the year ended December 31, 1998
Basic earnings per share -
Income available to common shareholders $ 2,137 3,198,813 $0.67
Effect of dilutive securities- stock options and warrants 160,031
Diluted earnings per share - Income available to
------- --------- ------
Common shareholders plus assumed conversions $ 2,137 3,358,844 $0.64
======= ========= ======
For the year ended December 31, 1997
Basic earnings per share -
Income available to common shareholders $ 2,015 3,114,726 $0.65
Effect of dilutive securities- stock options and warrants 33,982
Diluted earnings per share - Income available to
------- --------- ------
Common shareholders plus assumed conversions $ 2,015 3,148,708 $0.64
======= ========= ======
</TABLE>
(10) CASH SURRENDER VALUE OF LIFE INSURANCE POLICY AND SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
On December 30, 1998, the Company purchased company owned life insurance
policies on its key directors and executive officers totaling $6,000,000. In
1999, all policies, except one, were canceled. The cash surrender value of this
one policy is $2,203,000 and relates to the Supplemental Executive Retirement
Plan described within Employee Benefit Plans (see note 14).
(11) INCOME TAXES
The components of the (benefit) provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
------- --------- ------
INCOME TAXES
<S> <C> <C> <C>
Federal - Current (benefit) provision $(2,239) $ 1,274 $1,221
- Deferred (benefit) provision 496 (262) (202)
------- --------- ------
Total Federal (benefit) provision (1,743) 1,012 1,019
------- --------- ------
State (benefit) provision (644) 270 240
------- --------- ------
Total (benefit) provision for income taxes $(2,387) $ 1,282 $1,259
======= ========= ======
</TABLE>
A reconciliation between the reported income taxes and the amount computed by
multiplying income before taxes by the statutory Federal income tax rate is as
follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
-------------- ---- ---- ----
<S> <C> <C> <C>
Federal income taxes at statutory rate $(1,960) $ 1,162 $1,113
State income taxes, net of Federal income tax effect (425) 178 159
Other (2) (58) (13)
------- --------- ------
(Benefit) provision for income taxes $(2,387) $ 1,282 $1,259
======= ========= ======
</TABLE>
50 of 62
<PAGE>
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. The components of the net deferred tax asset at December 31, 1999
and 1998 are as follows-
(In thousands) 1999 1998
-------- --------
Provision for loan losses $ 550 $ 639
Unrealized loss on securities available for sale 497 73
Deferred loan costs (591) 0
State net operating loss carry-forward 576 0
Mark to market valuation - loans held for sale 461 0
Other, net (62) 10
-------- --------
Net deferred tax asset $ 1,431 $ 722
======== ========
Management believes that, based upon taxes paid in the carry-back period
and projected future taxable income, it is more likely than not that the
deferred tax asset will be realized.
(12) COMMITMENTS AND CONTINGENCIES
Facility Lease Obligations
The Company leases its headquarters and three of its branch facilities
under operating leases. Future minimum rental payments under these leases,
excluding renewal options, are as follows:
(In thousands)
2000 $ 602
2001 $ 597
2002 $ 600
2003 $ 516
2004 $ 81
Thereafter $ 74
The Company leases its headquarters and one of its branch locations under
operating leases from an entity of which certain Company directors have an
ownership interest. Rent expense under operating leases totaled $863,000,
$562,000, and $462,000 in 1999, 1998, and 1997, respectively. The Bank entered
into a lease for a branch facility in April 1996 that meets the requirements of
capital lease accounting. In 1999, the Bank entered into 8 leases for locations
used as branch facilities and 1 lease for a location to be used as a lending
office that meet the requirements of capital lease accounting. The future
capital lease obligations and lease expiration dates are as follows:
(In thousands) Initial Lease Capital Lease
# of Leases Expiration * Obligations
- --------------------------------------------------------------------------------
1996 Lease 1 April 2006 $ 271
1999 Leases 3 January 2009 $ 1,569
1999 Leases 3 February 2009 $ 1,096
1999 Lease 1 March 2009 $ 231
1999 Lease 1 March 2014 $ 379
1999 Lease 1 November 2014 $ 550
- --------------------------------------------------------------------------------
Total Leases 10 $ 4,096
================================================================================
* Represents the current obligation expiration. These leases contain renewal
clauses for additional years if the Company so chooses to exercise.
51 of 62
<PAGE>
Equipment and Computer Services Contract Obligations
The Company is under contract for computer portfolio servicing and
processing in addition to certain equipment. Future minimum contractual
payments under these contracts, excluding renewal options, are as follows:
(In thousands)
2000 $ 1,709
2001 $ 1,452
2002 $ 1,336
2003 $ 1,014
2004 $ 854
Thereafter $ 134
Litigation
The Company may, in the ordinary course of business, become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business.
An officer of Certified Mortgage Associates, Inc., the Bank's mortgage
banking subsidiary, has commenced an action alleging, among other things, that
he has been constructively terminated following his suspension and subsequent
reinstatement to his current position. The individual has returned to work and
is performing his duties in accordance with his Employment Agreement. The
complaint seeks damages for breach of his Employment Agreement that would arise
only if he had been terminated "without cause", in the amount of $5.4 million
and for unspecified damages for mental distress he has suffered as a result of
the alleged change of his employment status. The complaint also seeks
unspecified damages for defamation unrelated to the employment claims and
damages in the amount of $272,000 representing the diminution in value of his
stock in the Company, plus interest, arising from an alleged late registration
of shares delivered to the individual in connection with the sale of his
interest in CMA to the Bank in 1999.
Based upon information and documents provided to it by the Bank, CMA, and
their respective officers and employees in the course of its investigation to
date, the Bank's counsel believes (i) that the claims against the Bank for
constructive termination and for termination without cause are without merit and
that the Bank has various affirmative defenses against these claims; and (ii)
that the Bank has affirmative claims against the individual arising from the
performance of his duties.
The Bank is presently engaged in settlement discussions with the
individual officer and hopes to conclude a settlement of all of the asserted
claims prior to the time that any Answer is filed. Counsel is unable to predict
whether any settlement will be reached or the outcome of any litigation in the
event that the matter goes to trial.
However, the Bank, based upon the opinion of its counsel, believes it is
not probable that the outcome of the employment-related claims will result in a
material loss to the Bank based upon the facts and information that have been
provided to it, to date. The Bank, based upon the opinion of its counsel, has
not been able to determine whether the claims for defamation and the loss in the
value of the stock are probable of having any materially adverse impact upon the
Bank until further investigation has been completed.
Commitments to Borrowers
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are intended to be disbursed, subject to certain
conditions, upon request of the borrower. The Company was committed to advance
approximately $65,013,000 to its borrowers as of December 31, 1999, as compared
to $36,250,000 at December 31, 1998. These commitments generally expire within
one year. At December 31, 1999, $8,213,000 of these commitments expire after one
year, as compared to $7,761,000 a year earlier.
Standby letters of credit are provided to customers to guarantee their
performance, generally in the production of goods and services or under
contractual commitments in the financial markets. The Company has entered into
standby letters of credit contracts with its customers totaling approximately
$299,000 as of December 31, 1999, compared to $581,000 at December 31, 1998.
These standby letters of credit generally expire within one year.
(13) REGULATORY CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines
which require a bank to maintain certain capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, regulators require that a bank
which meets the regulator's highest performance and operation standards maintain
a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of
4%. For those banks with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be
proportionately increased. Minimum leverage ratios for each bank are evaluated
through the ongoing regulatory examination process.
In connection with the Company's branch expansion the New Jersey
Department of Banking and Insurance imposed a tier 1 capital to total assets
ratio of 6%. Due to losses incurred during 1999, the Company and the Bank failed
to meet their minimum regulatory capital ratios at both September 30, 1999 and
December 31, 1999. Because the Bank failed to satisfy the minimum total
risk-based capital
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<PAGE>
requirement of 8% at September 30, it was deemed to be "undercapitalized" under
the Prompt Corrective Action provisions of the Federal Deposit Insurance Act and
the regulations of the FDIC. At December 31, 1999, the Company's average asset
leverage ration was 4.35% , the Company's total risk based capital ratio was
6.88% and the Company's Tier 1 risk based capital ratio was 6.17%. The Bank's
ratios were 4.01%, 6.33%, and 5.62%, respectively. Minimum required ratios under
both FRB and FDIC regulations are 4%, 8%, and 4%, respectively. Because of the
capital ratios, the Company and the Bank have entered into memoranda of
understanding with the state and federal regulators. The memoranda require the
Company and the Bank to raise capital, establish procedures to update the
regulators every 30 days on the Company's progress, adopt certain policies and
review the Company's management. The Company is prohibited from paying a
dividend to its shareholders, and the Bank is prohibited from paying a dividend
to the Company, if , after giving effect to the dividend, either the Company or
the Bank would not meet all minimum capital ratios. In addition, even if a
proposed dividend would not leave the Company undercapitalized, the Company must
notify its regulators in writing 30 days prior to any proposed dividend.
In March 2000, the Company and the Bank were required to provide their
respective regulators with an amended and updated capital plan. Management is
currently preparing the amended and updated plan.
During the first quarter of 2000, the Company undertook an offering of
shares of a newly-created class of preferred stock. The offering was undertaken
without registration with the Securities and Exchange Commission to a limited
number of sophisticated investors. The preferred stock bears a cumulative
dividend rate of 10%, and is convertible into shares of the Company's common
stock at an assumed value of $7.25 per common share. The Company also has rights
to force conversion of its preferred stock into common stock starting in March
2002 at an assumed common stock price of $7.25 per share. The Company obtained
$5.2 million in proceeds from this offering. The Company issued 103,500 shares
of the preferred stock, which are convertible into 713,793 shares of the
Company's common stock at a conversion rate of 6.8966. The Bank is expected to
receive $4.0 million of the proceeds from the Company in March 2000.
In connection with the memorandum of understanding, and because the Bank
was deemed "undercapitalized" pursuant to the FDIC's prompt corrective action
regulations at September 30, 1999, the Company and the Bank submitted a capital
plan to the FDIC and the New Jersey Department of Banking and Insurance. Under
this plan, in addition to the sale of preferred stock previously discussed, the
Company contemplates selling assets as a way to enhance its capital ratios both
through the reduction of assets and through income earned on the sale. Pursuant
to this portion of the Bank's capital plan, the Bank sold $36.4 million in
adjustable rate one-to-four family mortgages (ARM's) on March 7, 2000. The
purchase price for these mortgages, which were sold servicing released and
without recourse was $35.6 million. $37.8 million of ARM loans were reclassified
at December 31, 1999 from held to maturity to held for sale in the amount of
$36.4 million. This resulted in an after tax realized valuation loss of $891
thousand, based on the market value at December 31, 1999.
53 of 62
<PAGE>
The Company's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
For Capital To Be Well Capitalized
Actual Adequacy Purposes Provisions
---------------- -------------------- ------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 1999
Total capital
<S> <C> <C> <C> <C> <C> <C>
(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%
AS OF DECEMBER 31, 1999
Total capital
(to Risk Weighted Assets) $28,271 14.85% => $15,231 8.00% => $19,039 10.00%
Tier I Capital
(to Risk Weighted Assets) $26,446 13.89% => $ 7,615 4.00% => $11,423 6.00%
Tier I Capital
(to Average Assets) $26,446 10.87% => $ 9,732 4.00% => $12,165 5.00%
</TABLE>
54 of 62
<PAGE>
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 Adquacy Purpose Action Provisions
--------------- ------------------ -----------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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
(to Average Assets) $17,215 4.01%(a) => $17,181 4.00% < $21,476 5.00%
As of December 31, 1998-
Total capital
(to Risk Weighted Assets) $18,613 9.80% => $15,190 8.00% < $18,987 10.00%
Tier I Capital
(to Risk Weighted Assets) $16,788 8.84% => $ 7,595 4.00% => $11,392 6.00%
Tier I Capital
(to Average Assets) $16,788 7.09% => $ 9,472 4.00% => $11,840 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%.
(14) EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) savings plan covering substantially all employees.
Under the Plan, an employee can contribute up to 15% of their salary on a tax
deferred basis. The Bank may also make discretionary contributions to the Plan.
The Bank contributed $39,000, $44,000, and $31,000 to the Plan in 1999, 1998,
and 1997, respectively.
The Bank does not currently provide any post retirement or post employment
benefits to its employees other than the 401(k) plan. The Company currently
provides a Supplemental Executive Retirement Plan to the Company's chief
executive officer. Under this plan, the individual will receive a retirement
benefit equal to 60% of the person's average final compensation determined by
the last three years of employment. In certain circumstances, such as in a
change in control, the individual will be paid 60% of his "final scheduled
compensation", which is calculated by taking the then current compensation and
increasing it five percent (5%) per year for each year remaining until he
reaches age 65. In this case, he will also receive a tax allowance. Annual
retirement payments are to be made for 20 years under the supplemental executive
retirement plan. The salary continuation expense totaled $100,000 in 1999. There
was no expense in 1998.
55 of 62
<PAGE>
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates for financial instruments are made at a discrete
point in time based upon relevant market information and information about the
underlying instruments.
Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgment regarding a number of
factors. These estimates are subjective in nature and involve some
uncertainties. Changes in assumptions and methodologies may have a material
effect on these estimated fair values. In addition, reasonable comparability
between financial institutions may not be likely due to a wide range of
permitted valuation techniques and numerous estimates which must be made. This
lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Federal Funds Sold-
For those short-term instruments, the carrying value is a reasonable
estimate of fair value.
Securities-
For the held to maturity and available for sale portfolios, fair
values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans-
The fair value of loans is estimated by discounting the future cash
flows using current market rates that reflect the credit, collateral, and
interest rate risk inherent in the loan.
Deposit Liabilities-
The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash flows
using current market rates.
Borrowings -
The borrowings are short term and the fair value of the borrowings
is approximately the carrying value.
Unrecognized Financial Instruments
At December 31, 1999, the Bank had standby letters of credit
outstanding of $299,000, as compared to $581,000 at December 31, 1998. The
fair value of these commitments is nominal.
At December 31, 1999, the bank had commitments to extend credit
totaling $6,013,000, as compared to $36,250,000 at December 31, 1998. The
Bank does not charge a fee on these loan commitments and, consequently,
there is no basis to calculate a fair value.
At December 31, 1999, the Bank services loans owned by outside
investors in the amount of $65,712,000 at various service fee rates, as
compared to $46,093,000 at December 31, 1998. The fair value approximates
the present value of service fees charged to the investors, net of costs
to service the loans, under the loan servicing arrangements.
The estimated fair value of the Company's financial instruments as
of December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets-
Cash and Federal funds sold $ 15,121 $ 15,121 $ 32,488 $ 32,488
Securities held to maturity $ 34,250 $ 32,270 $ 19,439 $ 19,089
Securities available for sale $ 40,099 $ 40,099 $ 21,490 $ 21,490
Loans, net of allowance for possible loan losses $320,359 $316,374 $164,967 $165,931
Financial liabilities- Total deposits $357,538 $356,843 $226,860 $227,022
Financial liabilities- Borrowings $ 53,000 $ 53,000 $ -- $ --
</TABLE>
56 of 62
<PAGE>
(16) OTHER OPERATING EXPENSES
The other operating expense components for the years ended December 31,
1999, 1998 and 1997 are as follows:
(In thousands) 1999 1998 1997
Professional Services $ 1,386 $ 887 $ 514
Office Expense 1,986 1,042 809
Advertising Expense 881 370 272
Communication Expense 767 240 212
Bank Services 802 491 427
FDIC Insurance 192 116 100
Director Fees 236 298 271
Non-Loan Losses * 848 370 16
Loan Processing and Collection Expense 1,265 430 192
Amortization of Intangibles 393 13 13
Other Expense 729 462 223
------- ------ ------
Total Other Operating Expenses $ 9,485 $4,719 $3,049
======= ====== ======
*Includes $786,000 and a $300,000 write-down of uncollected assets associated
with a check-kiting scheme in 1999 and 1998 respectively.
(17) OTHER INCOME
The other income components for the years ended December 31, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
OTHER INCOMES 1999 1998 1997
<S> <C> <C> <C>
(In thousands)
SBA Fees $ 671 $ 635 $ 449
Loan fees 394 70 26
Income from cash surrender value of life insurance 248 0 0
Non-deposit account transaction charges 144 32 61
Miscellaneous 115 120 55
------- ------ ------
Total other income $ 1,572 $ 857 $ 591
======= ====== ======
</TABLE>
(18) CONDENSED FINANCIAL STATEMENTS OF UNITY BANCORP, INC. (PARENT COMPANY ONLY)
(In thousands)
<TABLE>
<CAPTION>
Unity Bancorp, Inc (Parent Company Only) December 31
----------------------------------------
Balance Sheets 1999 1998
-------------- -------- --------
<S> <C> <C>
Assets:
Cash and due from banks $ 606 $ 8,837
Securities available for sale 376 498
Investment in Bank subsidiary 20,122 16,763
Other assets 756 311
-------- --------
Total assets $ 21,860 $ 26,409
======== ========
Liabilities and Shareholders' Equity:
Other liabilities $ 68 $ 63
Shareholders' equity 21,792 26,346
-------- --------
Total liabilities and shareholders' equity $ 21,860 $ 26,409
======== ========
</TABLE>
57 of 62
<PAGE>
<TABLE>
<CAPTION>
Unity Bancorp, Inc (Parent Company Only) December 31
----------------------------------------
Balance Sheets 1999 1998 1997
-------------- -------- -------- -------
<S> <C> <C> <C>
(In thousands)
Interest income $ 187 $ 229 $ 291
Dividends from Bank subsidiary -- 505 296
Gain on sale of available for sale securities 205 212 --
-------- -------- -------
Total income 392 946 587
Compensation 431 227 120
Other expenses 618 438 241
-------- -------- -------
(Loss) income before income taxes and
equity in undistributed income of subsidiary (657) 281 226
Income tax benefit (a) (223) (76) (24)
-------- -------- -------
(Loss) income before equity in undistributed (loss) income of subsidiary (434) 357 250
Equity in undistributed (loss) income of subsidiary (2,944) 1,780 1,765
-------- -------- -------
Net (loss) income $ (3,378) $ 2,137 $ 2,015
======== ======== =======
</TABLE>
(a) No Federal income tax is applicable to the dividends and other income
received from the Bank since the Parent Company and the Bank file a
consolidated income tax return.
<TABLE>
<CAPTION>
Unity Bancorp, Inc (Parent Company Only) December 31
----------------------------------------
Balance Sheets 1999 1998 1997
-------------- -------- -------- -------
<S> <C> <C> <C>
(In thousands)
Operating Activities:
Net (loss) income $ (3,378) $ 2,137 $ 2,015
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in undistributed (loss) income of subsidiary 2,944 (1,780) (1,765)
Amortization of securities premium, net -- -- (39)
Depreciation and amortization 13 13 13
Gain on sale of securities available for sale (205) (212)
Increase in other assets (454) 41 (38)
Increase in other liabilities (5) (64) (12)
-------- -------- -------
Net cash (used in) provided by operating activities (1,085) 135 174
-------- -------- -------
Investing Activities:
Sales and maturities on securities available for sale 2,834 5,741 1,000
Purchases of securities available for sale (2,803) (3,449) (3,711)
Additional equity investment in bank subsidiary (3,640) 0 (1,750)
Cash payment - CMA acquisition (1,700) 0 0
-------- -------- -------
Net cash (used in) provided by investing activities (5,309) 2,292 (4,461)
-------- -------- -------
Financing Activities:
Proceeds from issuance of common stock 0 6,019 260
Payment to repurchase common stock, net (983) (1,202)
Cash dividends and fractional shares paid (854) (504) (297)
-------- -------- -------
Net cash provided by financing activities (1,837) 4,313 (37)
-------- -------- -------
Net (decrease) increase in cash and cash equivalents (8,231) 6,740 (4,324)
-------- -------- -------
Cash and cash equivalents, beginning of year 8,837 2,097 6,421
-------- -------- -------
Cash and cash equivalents, end of year $ 606 $ 8,837 $ 2,097
======== ======== =======
Supplemental disclosures:
Interest paid $ -- $ -- $ --
======== ======== =======
</TABLE>
58 of 62
<PAGE>
(19) QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following quarterly financial information for the years ended December 31,
1999 and 1998 is unaudited. However, in the opinion of management, all
adjustments, which include normal recurring adjustments necessary to present
fairly the results of operations for the periods, are reflected. Results of
operations for the periods are not necessarily indicative of the results of the
entire year or any other interim period.
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income $ 4,589 $ 5,361 $ 6,759 $ 6,979
Total interest expense 1,992 2,951 3,714 4,081
------------------------------------------------
Net interest income 2,597 2,410 3,045 2,898
Provision for loan losses 61 600 867 215
------------------------------------------------
Net interest income after provision for loan losses 2,536 1,810 2,178 2,683
Total other income 1,690 2,840 1,098 (22)
Total other expense 3,432 5,334 6,075 5,737
Taxes 293 (309) (1,118) (1,253)
------------------------------------------------
Net (loss) income $ 501 $ (375) $(1,681) $(1,823)
================================================
Basic (loss) earnings per common share $ 0.13 $ (0.10) $ (0.45) $ (0.49)
Diluted (loss) earnings per common share $ 0.13 $ (0.10) $ (0.45) $ (0.49)
<CAPTION>
1998 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income $ 4,092 $ 4,299 $ 4,532 $ 4,557
Total interest expense 1,747 1,789 1,863 1,766
------------------------------------------------
Net interest income 2,345 2,510 2,669 2,791
Provision for loan losses 204 73 197 330
------------------------------------------------
Net interest income after provision for loan losses 2,141 2,437 2,472 2,461
Total other income 821 1,206 1,154 1,226
Total other expense 2,412 2,619 2,574 2,894
Taxes 210 405 388 279
------------------------------------------------
Net income $ 340 $ 619 $ 664 $ 514
================================================
Basic earnings per common share $ 0.10 $ 0.20 $ 0.21 $ 0.15
Diluted earnings per common share $ 0.10 $ 0.18 $ 0.20 $ 0.15
</TABLE>
59 of 62
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant dismissed Arthur Andersen LLP as its independent auditors
effective April 30, 1999. The decision to dismiss Arthur Andersen LLP as
auditors was recommended by the Registrant's Board of Directors and Audit
Committee. For the fiscal years ended December 31, 1998 and 1997 and up to May
7, 1999, there have been no disagreements with Arthur Andersen LLP, on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with their reports. The independent auditor's
report on the consolidated financial statements for the fiscal years ended
December 31, 1998 and 1997 expressed an unqualified opinion. The Registrant
announced that, as of June 7, 1999, it had retained KPMG LLP as its independent
auditors for the fiscal year ended December 31, 1999. The decision to hire KPMG
LLP as auditors was recommended by the Registrant's Board of Directors and Audit
Committee.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
Information concerning directors and executive officers is included in the
definitive Proxy Statement for the Company's 1999 Annual Shareholders Meeting
under the captions "PROPOSAL 1.-- ELECTION OF DIRECTORS" and information
concerning compliance with Section 16(a) of the Exchange Act is included under
the caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF
1934," each of which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the Securities and Exchange Commission
no later than April 30, 2000.
The following table sets forth certain information about each executive
officer of the Company who is not also a director.
Principal Occupation During
Name, Age and Position Officer Since Past Five Years
- ------------------------------------------------------- ------------------------
Kevin J. Killian, 43, 1998 Chief Financial Officer
Chief Financial Officer of the Company of the Company and
Executive Vice President
of the Bank. Previously,
Mr. Killian was
President of United
Heritage Bank and Chief
Financial Officer of
Independence Bancorp.
Anthony J. Feraro, 52, Senior 1999 Executive Vice President
Vice President and of Zion Bancorp.
Chief Operating Officer of the Company
ITEM 10. EXCEUTIVE COMPENSATION
Information concerning executive compensation is included in the
definitive Proxy Statement for the Company's 1999 Annual Meeting under the
caption "EXECUTIVE COMPENSATION," which is incorporated herein by reference. It
is expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 30, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is included in the definitive Proxy Statement for the Company's 1999
Annual Shareholders Meeting under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT," which is incorporated herein by reference. It
is expected that such Proxy Statement will be filed with the Securities and
Exchange Commission no later than April 30, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Company's 1999 Annual
Shareholders Meeting under the caption "Certain Transactions with Management,"
which is incorporated herein by reference. It is expected that such Proxy
Statement will be filed with the Securities and Exchange Commission no later
than April 30, 1999.
60 of 62
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3(i) Certificate of Incorporation of the
Company, as amended(2)
3(ii) Bylaws of the Company(1)
4(i) Form of Stock Certificate(2)
10(i) 1994 Stock Option Plan for
Non-Employee Directors (1)
10(ii) Stock Bonus Plan (2)
10(iii) 1997 Stock Option Plan (3)
10(iv) 1997 Stock Bonus Plan (3)
10(v) 1998 Stock Option Plan (4)
10(vi) Employment Agreement, dated October 18, 1999
by and among Anthony J. Feraro, Unity Bank
21 Subsidiaries of the Registrant
23a Consent of KPMG LLP
23b Consent of Arthur Andersen LLP
27 Financial Data Schedule
- ----------
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the
Registrant's Registration Statement on Form S-4, Registration No.
33-76392.
(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's
Registration Statement on Form SB-2, Registration No. 333-12565.
(3) Incorporated by reference from Exhibits B and C from the Company's
Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
(4) Incorporated by reference from Exhibit A from the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Shareholders.
61 of 62
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
DATE ITEM REPORTED
---- -------------
November 19 5 - announcing cash dividend.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
UNITY BANCORP, INC.
Dated: March 29, 2000 By: /s/ Robert J. Van Volkenburgh
---------------------------------
ROBERT J. VAN VOLKENBURGH
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
================================================================================
/s/ Robert J. Van Volkenburgh Chairman of the Board and March 29, 2000
- -------------------------------- Chief Executive Officer
Robert J. Van Volkenburgh
/s/ Kevin J. Killian Chief Financial Officer March 29, 2000
- -------------------------------- (Principal Financial and
Kevin J. Killian Accounting Officer)
/s/ David D. Dallas Vice Chairman and Corporate March 29, 2000
- -------------------------------- Secretary
David D. Dallas
/s/ Charles S. Loring Director March 29, 2000
- --------------------------------
Charles S. Loring
/s/ Peter P. DeTommaso Director March 29, 2000
- --------------------------------
Peter P. DeTommaso
================================================================================
62 of 62
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The Registrant has one subsidiary, First Community Bank, which changed its name
to Unity Bank, effective March 1, 1999.
Unity Bank has two subsidiaries, FCB Investment Company, Inc., and Unity
Financial Services, Inc.
EXHIBIT 23a
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Unity Bancorp, Inc.:
We consent to incorporation by reference in registration statements No. 33-20687
on Form S-8, No. 333-78603 on Form S-3 and No. 333-46509 on Form S-3A of Unity
Bancorp, Inc. of our report dated March 22, 2000, relating to the consolidated
balance sheet of Unity Bancorp, Inc. and subsidiary as of December 31, 1999, and
the related consolidated statements of operations, comprehensive (loss) income,
changes in shareholders' equity, and cash flows for the year then ended, which
report appears in the December 31, 1999 Annual Report on Form 10-KSB of Unity
Bancorp, Inc.
KPMG LLP
Short Hills, New Jersey
March 28, 2000
EXHIBIT 23b
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unity Bancorp, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated January 22, 1999 included in this Form 10-KSB and
to all references to our Firm into Unity Bancorp, Inc.'s previously filed
Registration Statement No. 333-20687 on Form S-8, Registration Statement
No.333-46509 on Form S-3A, and Registration Statement No 333-78603 on Form S-3A.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
registrants audited December 31, 1999 annual financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,121
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40,099
<INVESTMENTS-CARRYING> 34,250
<INVESTMENTS-MARKET> 32,270
<LOANS> 322,532
<ALLOWANCE> 2,173
<TOTAL-ASSETS> 438,969
<DEPOSITS> 357,538
<SHORT-TERM> 53,000
<LIABILITIES-OTHER> 2,543
<LONG-TERM> 4,096
0
0
<COMMON> 26,224
<OTHER-SE> (4,432)
<TOTAL-LIABILITIES-AND-EQUITY> 438,969
<INTEREST-LOAN> 19,067
<INTEREST-INVEST> 4,107
<INTEREST-OTHER> 514
<INTEREST-TOTAL> 23,688
<INTEREST-DEPOSIT> 12,738
<INTEREST-EXPENSE> 12,738
<INTEREST-INCOME-NET> 10,950
<LOAN-LOSSES> 1,743
<SECURITIES-GAINS> 193
<EXPENSE-OTHER> 9,485
<INCOME-PRETAX> (5,765)
<INCOME-PRE-EXTRAORDINARY> (5,765)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,387)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
<YIELD-ACTUAL> 0.035
<LOANS-NON> 1,412
<LOANS-PAST> 166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,825
<CHARGE-OFFS> 1,433
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 2,173
<ALLOWANCE-DOMESTIC> 2,173
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
