-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GhsjZwqVLlRa3gPEhC9K/+VoFD3W+TcjJcXD6pPu0UD4deB/qpuTaA9d0CdJklhs xk0I5gJwwIenC3XBxPcCAQ== 0000950110-01-000309.txt : 20010402 0000950110-01-000309.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950110-01-000309 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITY BANCORP INC /DE/ CENTRAL INDEX KEY: 0000920427 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223282551 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12431 FILM NUMBER: 1587503 BUSINESS ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 BUSINESS PHONE: 9087307630 MAIL ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 10KSB 1 0001.txt FORM 10KSB ================================================================================ 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, 2000 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______. Commission file number 1-12431 ------- UNITY BANCORP, INC. --------------------------------------------------------- (Name of small business issuer as specified in its charter) DELAWARE 22-3282551 ------------------------------------- ------------------- (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 64 OLD HIGHWAY 22, CLINTON, NJ 08809 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (908) 730-7630 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 1, 2001, was $9,502,699 The number of shares of the Issuer's Common Stock, no par value, outstanding as of March 27, 2001, was 3,706,708. For the fiscal year ended December 31, 2000, the Issuer had total revenues of $35.7 million. ================================================================================ 1 of 14
UNITY BANCORP, INC. DOCUMENTS INCORPORATED BY REFERENCE - --------------------------------------------------------------- ---------------------------------------------------------- 10-KSB ITEM DOCUMENT INCORPORATED - --------------------------------------------------------------- ---------------------------------------------------------- Item 6. Management's Discussion and Analysis of Financial Financial Report to Shareholders for the fiscal year ended Condition and Results of Operations December 31, 2000 Item 7. Financial Statements Financial Report to Shareholders for the fiscal year ended December 31, 2000 Item 9. Directors and Executive Officers of the Company; Proxy Statement for 2001 Annual Meeting of Shareholders Compliance with Section 16(a) of the Exchange Act to be filed no later than April 30, 2001 - --------------------------------------------------------------- ---------------------------------------------------------- Item 10. Executive Compensation Proxy Statement for 2001 Annual Meeting of Shareholders to be filed no later than April 30, 2001 - --------------------------------------------------------------- ---------------------------------------------------------- Item 11. Security Ownership of Certain Beneficial Owners and Proxy Statement for 2001 Annual Meeting of Shareholders Management to be filed no later than April 30, 2001 - --------------------------------------------------------------- ---------------------------------------------------------- Item 12. Certain Relationships and Related Transactions Proxy Statement for 2001 Annual Meeting of Shareholders to be filed no later than April 30, 2001 - --------------------------------------------------------------- ----------------------------------------------------------
INDEX TO FORM 10-KSB PART I Page ---- Item 1. Description of the Business a) General 3 b) Statistical information 4 Item 2. Description of Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Common Equity and Related Stockholder Matters 8 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7. Financial Statements 9 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III Item 9. Directors and Executive Officers 10 Item 10. Executive Compensation 10 Item 11. Security Ownership of Certain Beneficial 10 Owners and Management Item 12. Certain Relationships and Related Transactions 10 PART IV Item 13. Exhibits and Reports on Form 8-K 11 Signatures 12 Page 2 of 14 PART I ITEM 1. DESCRIPTION OF THE BUSINESS a) 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 twelve (12) branches located in Clinton, Colonia, Edison, Flemington, Highland Park, Linden, North Plainfield, Scotch Plains, South Plainfield, Springfield, 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. In the second half of 1999, the Company incurred certain losses, which combined with the Company's asset growth, caused both the Bank's and the Company's capital ratios to fall below levels required under federal regulation. As a result of the capital deficiency, in the first quarter of 2000, the Company and the Bank entered into Memoranda of Understanding with their primary regulatory agencies. However, due to continued losses through the first two quarters of 2000, among other reasons, the Bank and the Company entered into stipulations and agreements with each of their respective regulators on July 18, 2000. Under these agreements, the Bank and the Company are each required to take a number of affirmative steps including hiring an outside consulting firm to review the management structures, adopt strategic and capital plans which will increase the Bank's leverage ratio to 6% or above, review and adopt various policies and procedures, adopt programs with regard to the resolution of certain criticized assets, and provide ongoing reporting to the various regulatory agencies with regard to the Bank's and Company's progress in meeting the requirements of the agreements. The agreements require the Bank and Company to establish a compliance committee to oversee the efforts in meeting all requirements of the agreements, and prohibited the Bank from paying a dividend to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval. As of December 31, 2000, the Bank and the Company believe they are in compliance with the requirements of the agreements. As a result of the regulatory orders and the Company's losses in 1999 and 2000, the Company undertook a number of steps during 2000 to restructure its balance sheet, enhance its capital ratios and restructure the Company's management. In the first quarter of 2000, the Company completed an offering of shares of a newly created class of preferred stock. The offering was undertaken without registration with the Securities and Exchange Commission to a limited number of sophisticated investors, and yielded $4.9 million in proceeds to the Company, net of offering expenses. This additional capital was contributed to the Bank. The preferred stock provides for a 10% annual cumulative dividend. However, due to the regulatory agreements discussed above, the Company had been unable to pay dividends on any of its outstanding securities, and therefore has failed to pay the dividend on the preferred stock since the first dividend payment in April 2000. At December 31, 2000, there were $388 thousand in preferred stock dividends in arrears. Also during 2000, the Company engaged in several sales of loan packages. In the first quarter of 2000, the Company sold $36.4 million in adjustable rate 1-4 family mortgages, recognizing a loss of $.7 million. In the third quarter of 2000, the Company also sold $44.9 million in home equity loans, recognizing a loss of $1.2 million. The loan sales helped improved the Company's liquidity as well as its capital ratios by reducing the Company's outstanding assets. In addition, the cash from the third quarter loan sale was used to fund the sale of five (5) of the Company's branches in the fourth quarter of 2000. The branch sales involved the assumption of $48.0 million in deposits by the acquirers, which also assumed the Company's lease obligations under the leases for the branch premises. The Company recognized a pretax gain of $3.5 million on these sales. Also in the fourth quarter of 2000, Certified Mortgage Associates, Inc. ("CMA"), a subsidiary of the Bank, ceased operations. CMA had been acquired in February 1999. However, CMA had not operated profitably since the second quarter of 1999. Certain members of management left the employment of CMA in the third and fourth quarters of 2000 and the Company Page 3 of 14 elected to have CMA cease operations during the fourth quarter. In connection with the cessation of business, in the third and fourth quarters of 2000, the Company wrote off $3.2 million in intangibles booked on the acquisition of CMA. On August 14, 2000, Mr. Robert J. VanVolkenburgh resigned from his positions of Chairman of the Board and Chief Executive Officer of the Company. In February 2001, Mr. VanVolkenburgh filed a complaint in the Superior Court of New Jersey alleging breach of two agreements. The Company intends to vigorously defend itself from any claims for payment under the agreements. Counsel has advised the Company it has strong defenses to any such claims by Mr. VanVolkenburgh and he is not likely to succeed in this regard. 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 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"). 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, SBA, consumer, mortgage, home equity and personal loans. SERVICE AREAS 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, and Springfield offices serve the majority of the communities in Union County, and the southwestern communities of Essex County. The offices in South Plainfield, Highland Park, Edison, and Colonia Township extend the Company's service area into Middlesex County. 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. In addition, since passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "Modernization Act"), securities firms and insurance companies have been allowed to acquire or form financial institutions, thereby increasing competition in the financial services market. 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 At December 31, 2000, the Company employs 115 full-time and 24 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. Page 4 of 14 SUPERVISION AND REGULATION GENERAL - SUPERVISION AND REGULATION 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. The BHCA also generally prohibits 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. The BHCA was substantially amended through the Modernization Act. The Modernization Act permits bank holding companies and banks, which meet certain capital, management and Community Reinvestment Act standards to engage in a broader range of nonbanking activities. In addition, bank holding companies, which elect to become financial holding companies, may engage in certain banking and nonbanking activities without prior FRB approval. Finally, the Modernization Act imposes certain new privacy requirements on all financial institutions and their treatment of consumer information. At this time, the Company has elected not to become a financial holding company, as it does not engage in any nonbanking activities. 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. Page 5 of 14 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. 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 standby letters of credit backing non-financial 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. The Company is currently in compliance with these minimum Federal capital requirements. GENERAL BANK REGULATION 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. Page 6 of 14 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. However, as described above, pursuant to its agreements with its federal and state regulators, the Bank is currently prohibited from paying dividends without the prior written approval of those regulatory agencies. b) STATISTICAL INFORMATION The table below provides a cross-reference to portions of Unity Bancorp. Inc.'s 2000 Annual Report to Shareholders incorporated by reference herein. Information that is not applicable is indicated by (N/A): Annual Report Description of Financial Data Pages ------------------------------------- -------------- I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential A. Analysis of Net Interest Earnings 7 B. Average Balance Sheets 8 C. Rate/Volume Analysis 8 II. Investment Portfolio A. Book value of investment securities 25 B. Investment securities by range of maturity with corresponding average yields 25 C. Securities of issuers exceeding ten percent of stockholders' equity NA III. Loan Portfolio A. Types of loans 11 B. Maturities and sensitivities of loans to changes in interest rates 11 C. Risk elements 1) Nonaccrual, past due and restructured loans 11-12 2) Potential problem loans 12 3) Foreign outstandings NA 4) Loan concentrations NA D. Other interest bearing assets NA IV. Summary of Loan Loss Experience A. Analysis of the allowance for loan losses 12 B. Allocation of the allowance for loan losses 13 V. Deposits A. Average amount and average rate paid on major categories of deposits 13 B. Other categories of deposits NA C. Deposits by foreign depositors in domestic offices NA D. Time deposits of $100,000 or more by remaining maturity 26 E. Time deposits of $100,000 or more by foreign offices NA VI. Return on Equity and Assets 5 VII. Short-term Borrowings 27 Page 7 of 14 ITEM 2. DESCRIPTION OF PROPERTIES The Company presently conducts its business through its main office located at 64 Old Highway 22, Clinton, New Jersey, and its twelve branch offices. The following table sets forth certain information regarding the Company's properties for which it conducts business as of December 31, 2000.
Leased Date Leased Lease 2000 Annual Location Or Owned or Acquired Expiration Rental Fee -------- -------- ----------- ---------- ----------- Clinton, NJ Leased 1996 2006 $ 448,056 Colonia, NJ Leased 1995 2005 36,000 Flemington, NJ Leased 1995 2003 55,725 Linden, NJ Owned 1991 -- -- Highland Park, NJ Leased 1999 2024 66,950 North Plainfield, NJ Owned 1991 -- -- Scotch Plains, NJ Leased 1996 2006 70,812 Springfield, NJ-1 Leased 1995 2003 30,336 South Plainfield, NJ Leased 1999 2024 80,340 Union, NJ Leased 1996 2006 61,350 Edison, NJ Leased 1999 2024 92,700 Whitehouse, NJ Owned 1998 -- --
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. With the exception of the litigation described below, none of these proceedings individually or in the aggregate is expected to have a material adverse effect upon the Company. On August 14, 2000, Mr. Robert J. VanVolkenburgh resigned from his positions of Chairman of the Board and Chief Executive Officer of the Company. In February 2001, Mr. VanVolkenburgh filed a complaint in the Superior Court of New Jersey alleging breach of two agreements. The Company intends to vigorously defend itself from any claims for payment under the agreements. Counsel has advised the Company it has strong defenses to any such claims by Mr. VanVolkenburgh and he is not likely to succeed in this regard. 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 2000. Page 8 of 14 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, 2000, there were 574 stockholders of record of the Common Stock. The following table sets forth the high and low bid prices of the Common Stock along with the closing prices, as reported on the NASDAQ National Market for 2000 and 1999. 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. The table also sets forth cash dividends paid on the Common Stock. ================================================================================ UNITY BANCORP, INC., COMMON STOCK PRICES AND CASH DIVIDENDS - -------------------------------------------------------------------------------- CASH HIGH LOW CLOSE DIVIDEND - -------------------------------------------------------------------------------- 2000: 4th Quarter................ $ 4.38 $ 2.00 $ 2.00 $ 0.00 - -------------------------------------------------------------------------------- 3rd Quarter................ 4.94 3.44 3.44 0.00 - -------------------------------------------------------------------------------- 2nd Quarter................ 6.25 3.50 3.88 0.00 - -------------------------------------------------------------------------------- 1st Quarter................ 6.68 5.25 6.00 0.00 - -------------------------------------------------------------------------------- 1999: 4th Quarter................ $ 8.50 $ 4.75 $ 6.00 $ 0.06 - -------------------------------------------------------------------------------- 3rd Quarter................ 11.75 6.38 6.88 0.06 - -------------------------------------------------------------------------------- 2nd Quarter................ 12.00 9.63 11.75 0.06 - -------------------------------------------------------------------------------- 1st Quarter................ 11.00 9.31 10.00 0.06 ================================================================================ 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 on its securities pursuant to its consent with its state and federal regulators. On March 13, 2000, the Company completed an offering of shares of a newly created class of preferred stock. The offering was undertaken without registration with the Securities and Exchange Commission to a limited number of sophisticated investors. The preferred stock bears a cumulative dividend rate of 10%, and is convertible into shares of the Company's common stock at an assumed value of $7.25 per common share. The Company also has rights to force conversion of its preferred stock into common stock starting in March 2002 at an assumed common stock price of $7.25 per share. The Company obtained $5.2 million in proceeds from this offering. The Company issued 103,500 shares of the preferred stock, which are convertible into 713,793 shares of the Company's common stock at a conversion rate of 6.8966 common. Due to the Company's regulatory agreements, the Company has not paid dividends on the preferred stock since the first dividend in April 2000. At December 31, 2000, there were $388 thousand of preferred stock dividends in arrears. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 5 to 17 of the 2000 Annual Report to Shareholders which information is incorporated by reference herein. ITEM 7. FINANCIAL STATEMENTS See Financial Statements and Notes to Financial Statements on pages 18 to 31 of the 2000 Annual Report to Shareholders which information is incorporated by reference herein. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 9 of 14 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 200 Annual Shareholders Meeting under the captions "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, 2001. 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 - -------------------------------------------------------------------------------------------------------------- Anthony J. Feraro, 53, President and Chief 1999 Previously, Mr. Feraro was an Executive Vice Executive Officer of the Company and the President of Zion Bancorp. Bank ============================================================================================================== James A. Hughes *, 42, 2001 Previously, Mr. Hughes was SVP of Finance for Chief Financial Officer and Executive Vice Summit Bancorp, Inc. President of the Company and Bank ============================================================================================================== James W. Loney **, 59, 2000 Managing Examiner for the State of New Jersey, Chief Operating Officer and Executive Vice Department of Banking and Insurance President of the Bank ==============================================================================================================
* James A. Hughes began employment with the Company in December 2000 and was ratified by regulatory agencies as the Chief Financial Officer of the Company in February 2001. ** James W. Loney began employment with the Bank in September 2000. ITEM 10. EXECUTIVE COMPENSATION Information concerning executive compensation is included in the definitive Proxy Statement for the Company's 2001 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, 2001. 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 2001 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, 2001. 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 2001 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, 2001. Page 10 of 14 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) (1) Financial statements See Financial Statements and Notes to Financial Statements on pages 18 to 31 of the 2000 Annual Report to Shareholders which information is incorporated by reference herein. (a) (2) Other 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) 13 Unity Bancorp. Inc. 2000 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23a Consent of KPMG 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. (a) (3) Reports on Form 8-K DATE ITEM REPORTED ---- ------------- October 10, 2000 5 - announcing loan and branch sale December 11, 2000 5- announcing the sale of certain branches of its subsidiary, Unity Bank and announcing the appointment of Anthony Feraro president of the Registrant and other certain management changes. Page 11 of 14 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, 2001 By:/s/ ANTHONY J. FERARO --------------------- Anthony J. Feraro President and Chief Executive Officer 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/ David D. Dallas Chairman of the Board March 29, 2001 - ------------------------- David D. Dallas - -------------------------------------------------------------------------------- /s/ Anthony J. Ferraro President and Chief Executive March 29, 2001 - ------------------------- Officer Anthony J. Ferraro - -------------------------------------------------------------------------------- /s/ James A. Hughes Chief Financial Officer (Principal March 29, 2001 - ------------------------- Financial and Accounting Officer) James A. Hughes - -------------------------------------------------------------------------------- /s/ Charles S. Loring Director March 29, 2001 - ------------------------- Charles S. Loring - -------------------------------------------------------------------------------- /s/ Peter P. DeTommaso Director March 29, 2001 - ------------------------- Peter P. DeTommaso - -------------------------------------------------------------------------------- /s/ Allen Tucker Director March 29, 2001 - ----------------------- Allen Tucker ================================================================================ Page 12 of 14 EX-13 2 0002.txt ANNUAL REPORT - -------------------------------------------------------------------------------- [LOGO FOR UNITY BANCORP] - -------------------------------------------------------------------------------- Table of Contents Shareholders' Message 2 Directors and Management 4 Management's Discussion and Analysis 5 Independent Auditors' Report 18 Consolidated Financial Statements 19 Notes to Financial Statements 23 Products and Services 32 Company Information 33 - -------------------------------------------------------------------------------- Unity Bancorp - -------------------------------------------------------------------------------- [LOGO FOR UNITY BANCORP] Mission Statement Our mission is to fulfill the needs of our shareholders, customers and employees by being a profitable, sound, and responsive community bank. We commit to: o Provide quality products and services; o Be creative and responsive to our customers; o Select, train and maintain a professional team and provide an environment where they feel motivated to achieve outstanding performance and in which they can obtain a sense of personal worth, growth, achievement and recognition; o Strongly support the continued growth and development of our community. The foundation of our business practice includes: o Confidentiality and Professionalism o Honesty and Integrity o Safety and Soundness o Accuracy and Dependability Shareholders' Message ================================================================================ This past year was a most difficult and disappointing year for Unity, the employees and for you, our shareholders. It was a year of dramatic change and challenge, which included the restructuring of the Company's financial position, the divestiture of an unprofitable business operation, the sale of five branches, and significant management and staff changes. As you will read, the losses incurred in 2000 were significantly attributed to changes necessary to improve the Company's financial condition to position us to return to profitability and increase shareholder value. We are convinced that through these initiatives, we will emerge and be recognized as a well managed financial services company capable of meeting the competition while operating as a community-oriented bank. Allow us to reiterate the changes that have taken place and the difficult decisions made to properly position us for the future. As you are aware, in early 1999, the Company embarked on a mission of expansion, which included doubling the branch network and the purchase of CMA, a wholly owned mortgage company. Unfortunately, this aggressive expansion proved to be a formidable challenge and ultimately was the cause of the losses incurred in both 1999 and 2000. As a result of the Company's expansion in 1999 and the reduction in capital resulting from operating losses, the Company started the year needing to improve its liquidity and capital position. The Company adopted a strategic plan to restructure the balance sheet, which included the reduction of the Company's assets and the issuance of new securities to raise capital. In order to provide additional equity capital, in the first quarter, the Company consummated a private placement of preferred stock, which raised $4.9 million, net, of new capital. In accordance with the strategic plan, the Company sold $81.2 million of loans and $48.0 million of deposits. These transactions substantially improved the Company's liquidity and capital positions. The sale of deposits, which occurred in December 2000, reduced the branch network from 17 branches to 12 branches. The reduction in branches will reduce our operating expenses in 2001, and beyond. As a result of these events, total assets at December 31, 2000, were $356.0 million, a decline of $83.0 million from the prior year of $439.0 million. Total loans as of December 31, 2000, were $225.1 million compared to $321.5 million a year ago. Total deposits declined $37.2 million and ended the year at $320.3 million. At December 31, 2000, both the Company and the Bank are considered well capitalized under federal capital requirements. 2 corporate profile ================================================================================ For the year-ended December 31, 2000, the Company reported a net operating loss of $5.9 million, or $1.71 per diluted share, as compared to a $3.4 million loss, or $0.91 per diluted share a year earlier. The losses in 2000 were significantly attributable to the Company's mortgage subsidiary, CMA. For the year 2000, $4.4 million of Unity's $5.9 million loss was attributed to CMA. As a result of CMA's operational losses, CMA was dissolved, in the fourth quarter of 2000. In addition, the current year operating results were also impacted by $1.7 million of additional tax valuation reserves established against the Company's tax assets. These additional reserves were necessary under current accounting rules. Excluding all the above transactions, the Company's net operating losses for 2000 were approximately $700,000. These losses are in part attributed to the expenses related to the 1999 branch expansion and increased professional and legal fees. The majority of these expenses will not be recurring in 2001 as a result of the reduction in the branch network. In Closing As we look back to the past year, the year 2000, we can honestly say it was a year that neither the Board nor the employees of Unity will ever forget. It was a year full of challenges, surprises and reorganization from top to bottom, all done out of necessity and prudence, and in the shareholder's best long-term interest. As we venture into this New Year, we do so with the finest management team in Unity's history. We are both extremely confident that the improvements and decisions made were the proper decisions and that the plans initiated throughout the past several months will renew the confidence of the shareholders and the investment community at large. We and the employees at Unity believe that this institution has the potential to be one of the best Community Banks in the State. This organization's strength is the sales-cultured staff that has consistently outperformed our peers in loan closings and core deposit growth. All of the employees of this institution are committed to making 2001 the year we return to profitability. We anticipate this will be one of the greatest turnaround and success stories in financial history. The Board of Directors of Unity Bancorp, Inc., Unity Bank, Management and Staff thank you and appreciate your continued loyalty and confidence. /s/ David Dallas /s/ Anthony J. Feraro David Dallas Anthony J. Feraro Chairman of the Board President / CEO 3 Directors and Management ================================================================================ Board of Directors David Dallas (1) Mr. David Dallas is the Chairman of the Board and was a founding member of the company in 1991. He serves as Chief Executive Officer of the Dallas Group of America, a chemical manufacturing company in Whitehouse, NJ. Robert H. Dallas, II (2) Mr. Robert H. Dallas, II was a founding member of the company in 1991 and serves as President of the Dallas Group of America, a chemical manufacturing company in Whitehouse, NJ. Peter P. DeTommaso (1) Mr. DeTommaso was a founding member of the company in 1991 and is the retired President of Homeowners Heaven, Inc., a building and lumber supply company in North Plainfield, NJ. Anthony J. Feraro (2) Mr. Feraro joined the company in November 1999 and serves as President and Chief Executive Officer of Unity Bank and the Company. Charles S. Loring (1) Mr. Loring was a founding member of the company in 1991 and is the owner of the accounting firm, Charles S. Loring CPA, based in Branchburg, NJ. Samuel Stothoff (2) Mr. Stothoff was a founding member of the company in 1991 and is President of the Samuel Stothoff Company, a well drilling company in Flemington, NJ. Allen Tucker (1) Mr. Tucker joined the company in 1995 and is President of Tucker Enterprises, a real estate development company in Clark, NJ. Executive Officers Anthony J. Feraro (2) Mr. Feraro joined the company in November 1999 and serves as President and Chief Executive Officer of Unity Bank and the Company. James A. Hughes Mr. Hughes joined the company in December 2000 and serves as Executive Vice President and Chief Financial Officer. (1) Director of Unity Bancorp, Inc. and Unity Bank (2) Director of Unity Bank. Senior Management James Loney Executive Vice President Chief Operating Officer Michael Bono Executive Vice President Commercial Banking Albert Fendrich Executive Vice President Auditor John Kauchak Executive Vice President Deposit Services Robert Buhler Senior Vice President Credit Officer Michael Downes Senior Vice President Small Business Capital Kelly A. Stashko Vice President Information Technology 4 corporate profile Management's Discussion and Analysis of Financial Condition and Results of Operations ================================================================================ SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------------------------------------------------ At or for the Years Ended December 31 ------------------------------------------------------------------------------ (Dollar in thousands, except per share data) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Selected Results of Operations Interest income $ 28,017 $ 23,688 $ 17,480 $ 15,025 $ 10,860 Interest expense 16,322 12,738 7,165 6,312 4,756 Net interest income 11,695 10,950 10,315 8,713 6,104 Provision for loan losses 716 1,743 804 497 417 Other income 7,666 5,606 4,407 3,043 2,404 Other expenses 23,718 20,578 10,499 7,985 6,403 Tax expense (benefit) 839 (2,387) 1,282 1,259 644 Net income (loss) (5,912) (3,378) 2,137 2,015 1,044 Per Share Data Net income (loss) per common share (basic) (1.71) (0.91) 0.67 0.65 0.47 Net income (loss) per common share (diluted) (1.71) (0.91) 0.64 0.64 0.46 Book value per common share 4.32 5.88 7.01 6.39 5.82 Cash dividend on common shares -- 0.24 0.20 0.20 0.18 Selected Balance Sheet Data Total assets 356,003 438,969 254,612 213,782 172,688 Loans 226,140 322,532 166,792 134,176 97,827 Allowance for loan losses 2,558 2,173 1,825 1,322 886 Investment securities 70,837 74,349 40,929 41,308 37,153 Deposits 320,318 357,538 226,860 192,414 153,555 Borrowings 10,000 53,000 -- -- -- Shareholders' equity 21,314 21,792 26,346 19,990 17,990 Performance Ratios Return on average assets (1.44)% (0.94)% 0.93% 1.05% 0.73% Return on average common equity (33.43)% (14.33)% 10.17% 10.78% 9.37% Net interest margin (1) 3.19% 3.49 % 4.91% 4.72% 4.47% Net interest spread (2) 2.61% 3.01 % 3.99% 3.60% 3.55% Dividend payout (3) N/A N/A 23.61% 14.73% 34.37% Asset Quality Ratios Allowance for loan losses to loans (4) 1.17% 0.77% 1.12% 1.01% 0.93% Allowance for loan losses to non-performing loans 61.27% 137.71% 46.83% 88.38% 103.02% Non--performing loans to total loans 1.85% 0.49% 2.34% 1.11% 0.95% Non--performing assets to total assets 1.21% 0.70% 1.97% 0.70% 0.54% Net charge--offs to average loans 0.12% 0.59% 0.21% 0.05% 0.12% Capital Ratios-- Company Leverage ratio 5.50% 4.35% 10.87% 9.51% 11.09% Tier 1 risk--based capital ratio 9.61% 6.17% 13.89% 13.29% 16.43% Total risk--based capital ratio 10.76% 6.88% 14.85% 14.28% 17.24% Capital Ratios-- Bank Leverage ratio 5.24% 4.01% 7.09% 7.35% 7.09% Tier 1 risk--based capital ratio 9.12% 5.62% 8.84% 10.13% 10.51% Total risk--based capital ratio 10.26% 6.33% 9.80% 11.03% 11.32% - -----------------------------------------------------------------------------------------------------------------------------------
(1) The net interest margin is calculated by dividing net interest income by average interest earning assets. (2) 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. (3) Dividends paid divided by net income. (4) Excludes loans held for sale. financial profile - md & a 5 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 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 12 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. In the second half of 1999, the Company incurred certain losses which, combined with the Company's asset growth, caused both the Bank's and the Company's capital ratios to fall below levels required under federal regulation. As a result of the capital deficiency, in the first quarter of 2000, the Company and the Bank entered into Memoranda of Understanding with their primary regulatory agencies. However, due to continued losses through the first two quarters of 2000, among other reasons, the Bank and the Company entered into stipulations and agreements with each of their respective regulators on July 18, 2000. Under these agreements, the Bank and the Company were each required to take a number of affirmative steps including; hiring an outside consulting firm to review the management structures, adopt strategic and capital plans which will increase the Bank's leverage ratio to 6% or above, by December 31, 2001, review and adopt various policies and procedures, adopt programs with regard to the resolution of certain criticized assets, and providing ongoing reporting to the various regulatory agencies with regard to the Bank's and Company's progress in meeting the requirements of the agreements. The agreements require the Bank and Company to establish a compliance committee to oversee the efforts in meeting all requirements of the agreements, and prohibit the Bank from paying a dividend to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval. As of December 31, 2000, the Bank and the Company believe they are in compliance with the requirements of the agreements. To bolster the Company's capital ratios and to reposition the Company for future profitable operation, and to improve liquidity, the Company undertook a number of corrective measures in 2000. In the first quarter, the Company consummated a private placement of approximately $4.9 million (net of offering expenses) of preferred stock to sophisticated investors. This capital was contributed to the Bank. To improve the Bank's liquidity, also in the first quarter of 2000, the Company sold $36.4 million in adjustable rate, one-to-four family mortgage loans. A loss of $0.7 million was recognized as a result of the sale. In the third quarter, the Company entered into sales agreements for the deposits of five branches to be sold in the fourth quarter of 2000. The Company entered into the agreements to reduce the Bank's operating expenses, and improve the regulatory capital ratios. In December 2000, the Company completed the deposit sales and realized a $3.5 million gain ($2.0 million after-tax) on the transaction. The sale included $48.0 million of deposits, equipment and the sublease or assumption of the Company's lease obligations. To fund the sale of the branches, in the third quarter of 2000, the Bank sold $44.8 million of purchased home equity loans for a pre-tax $1.2 million loss. Also during the third quarter of 2000, key employees of Certified Mortgage Associates, Inc. ("CMA") left employment with the Company. Based upon these departures and CMA's continued operational losses, in the third quarter, the Company wrote off approximately $2.25 million of the goodwill recorded in the 1999 acquisition of CMA. In the fourth quarter of 2000, the Company decided to discontinue CMA's operations, resulting in the write-off of an additional $962 thousand in goodwill. Although the goodwill write-offs contributed to the Company's 2000 losses, they have not negatively affected the Company's regulatory capital, which excludes intangible assets. As a result of Unity's losses in 1999 and 2000, the Company generated deferred tax benefits, which may be used to offset future tax liabilities for future earnings. Because it is difficult to accurately forecast future operating results, in the fourth quarter of 2000, the Company recorded $1.7 million of additional tax valuation reserves against these tax benefits. As of December 31, 2000, the Company had $2.1 million of tax valuation reserves. This valuation allowance will be assessed quarterly and will be adjusted as appropriate. Results of Operations For the year ended December 31, 2000, the Company realized an after-tax loss of $5.9 million, or $1.71 per diluted share, compared to a $3.4 million loss, or $0.91 per diluted share a year ago. The losses incurred in 2000 were significantly impacted by CMA's operating results and the write-off of CMA's goodwill resulting from the termination of the business. In total, CMA accounted for approximately $4.4 million of the Company's $5.9 million loss. The two loan sales in the first and third quarter contributed $1.2 million to the Company's losses, offset by the $2.0 million (net after-tax) gains on the deposit sales. Excluding the aforementioned transactions and the additional $1.7 million tax valuation reserve, the Company's core after-tax operating losses in 2000 were approximately $.7 million. 6 financial profile - md & a The core operating losses in 2000 were primarily the result of the expenses associated with the new branches acquired in 1999, compliance expenses under the regulatory agreements, and additional expenses related to loan collections and personnel changes. The losses in 1999 largely reflect growth in non-interest expenses due to the new branches, a valuation loss reclassifying certain loans from held-to-maturity to held-for-sale, the write-down of an impaired asset, the costs associated with the collection of non-performing loans, and the costs of expanding the loan portfolios. As a result of the dissolution of CMA, the reduction in the number of branches and certain other cost saving measures undertaken by management, the Company's core operating results are expected to improve in 2001. In 2000, the net losses increased $2.5 million from the prior year. The change in the components of the net loss from 1999 to 2000 included a $0.7 million increase in net interest income, a $1.0 million decrease in the provision for loan losses, a $2.1 million increase in non-interest income, a $3.1 million increase in non-interest expense, and a $3.2 million increase in the provision for income taxes, related to reserves against the Company's deferred tax assets. Net interest income, on a tax-equivalent basis for 2000, was $11.8 million compared to $11.0 million in 1999, an increase of 7.12%. The increase in net interest income was attributed to a $54.3 million, or 17.2%, increase in average interest-earning assets. The benefit of the increase in interest-earning assets was significantly impacted by the increased cost of funds from deposit promotions, reducing net interest spread from 3.01% in 1999, to 2.61% in 2000. Non-interest income for 2000 was $7.7 million, an increase of $2.1 million, or 36.7%, over 1999. The increase over the prior year is the result of the $3.5 million gain on the sales of deposits, primarily offset by losses from the first and third quarter loan sales. Non-interest expenses were $23.7 million in 2000, an increase of $3.1 million, or 15.3%, over $20.6 million recorded in 1999. The increase is primarily attributed to the $3.2 million write-off of CMA goodwill. Included in non-interest expense for 1999 was a write-down of $786 thousand and legal costs of $150 thousand relating to a check-kite. In 1999, the Company recorded $2.4 million of income tax benefits as a result of $5.8 million of pre-tax losses. Although pre-tax operating losses were $5.1 million in 2000, the Company recorded income tax expense of $0.8 million during the current year, for a net $3.2 million increase in income tax expense. The increase in income tax expense was the result of the establishment of tax valuation allowances against the Company's deferred tax assets, which are dependent on future taxable income. Net Interest Income The Company's results of operations depend substantially on its net interest income, which is the difference between the interest earned on its 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 rates received on interest-earning assets as compared with that of interest-bearing liabilities. Net interest income, on a tax-equivalent basis increased $0.8 million, or 7.12%, to $11.8 million for 2000 from $11.0 million for 1999. This increase was due to the growth in interest-earning assets, partially offset by the increase in the cost of interest-bearing liabilities. On average, interest-earning assets increased $54.3 million, or 17.2%, to $370.2 million. The increase in earning-assets was primarily attributed to a $40.5 million increase in average loans. Total tax-equivalent interest income on earning assets was $28.1 million for 2000, an increase of $4.4 million over the prior year. Of the $4.4 million increase, $4.0 million was attributed to increased volume of average interest earning assets, with the remainder attributed to higher rates earned. The yield on interest-earning assets was 7.60% in 2000, compared to 7.52% the prior year. The increase in the yield was primarily related to the investment and Federal Funds sold portfolios as a result of the higher rate environment in 2000. The prime-lending rate increased 100 basis points in 2000 to end the year at 9.50%. The average yield on the loan portfolio was 7.95% in 2000, as compared to 8.02% in 1999. The decline in the average loan yield can be attributed to lower yielding mortgage loans closed in late 1999 and the increase in non-performing loans. Average interest-bearing liabilities increased 15.7%, or $44.3 million, to average $326.9 million for 2000. The cost of interest-bearing liabilities increased from 4.51% in 1999 to 4.99% in 2000. The increase in interest-bearing liabilities reflects the Company's decision to offer higher promotional rates of interest to attract new customers to the new branch locations, more competitive rates paid on money market accounts and the increase in the interest rate environment. Interest expense on deposits and borrowed funds was $16.3 million in 2000, a $3.6 million increase over 1999. Of the $3.6 million increase, $1.4 million was attributed to higher levels of interest-bearing liabilities and the remainder attributed to increased cost of funds. Net interest spread, the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, declined from 3.01% in 1999, to 2.61% in 2000. The decline in net interest spread is the result of the increased cost of interest-bearing deposits. As a result of the decline in net interest spread, net interest margin decreased to 3.19% in 2000, from 3.49% in 1999. The following table reflects the components of net interest income, setting forth for the periods presented herein, (1) average assets, liabilities and shareholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread which is the average yield on interest-earning assets less the average rate on interest-bearing liabilities and (5) net interest income/margin on average earning assets. Rates/Yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 34%. 7 Comparative Average Balance Sheets (Dollar amounts in thousands - Interest amounts and interest rates/yields on a fully tax-equivalent basis.)
------------------------------------------------------------------------------------------ 2000 1999 1999 ------------------------------------------------------------------------------------------ Average Rate/ Average Rate/ Average Rate/ Year Ended December 31, Balance Interest Yield Balance Interest Yield Balance Interest Yield - --------------------------------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Taxable loans (net of unearned income) $ 278,257 $22,132 7.95% $ 237,799 $19,067 8.02% $ 143,940 $13,355 9.28% Tax-exempt securities 3,259 318 9.73% 2,214 200 9.03% 1,615 112 6.94% Taxable investment securities 69,140 4,411 6.38% 63,279 3,804 6.01% 49,044 3,182 6.49% Interest-bearing deposits 131 9 6.87% 1,934 171 8.84% 4,140 231 5.58% Federal funds sold 19,400 1,255 6.47% 10,630 514 4.84% 11,925 638 5.35% ------------------ -------------------- -------------------- Total interest-earning assets $ 370,187 $28,125 7.60% $ 315,856 $23,756 7.52% $ 210,664 $17,518 8.32% Noninterest-earning assets 43,823 47,196 20,525 Allowance for loan losses (2,434) (1,995) (1,409) --------- --------- --------- Total assets $ 411,576 $ 361,057 $ 229,780 --------- --------- --------- Liabilities and Shareholders' Equity Interest-bearing liabilities: High yield and NOW deposits $ 95,817 $ 3,974 4.15% $ 87,884 $ 3,441 3.92% $ 36,162 $ 591 1.63% Savings deposits 35,491 1,106 3.12% 17,260 315 1.83% 13,811 312 2.26% Money market deposits 20,724 831 4.01% 18,053 529 2.93% 18,557 928 5.00% Time deposits 162,736 9,675 5.95% 139,187 7,212 5.18% 96,969 5,311 5.48% ------------------ -------------------- -------------------- Total interest-bearing deposits $ 314,768 $15,586 4.95% $ 262,384 $11,497 4.38% $ 165,499 $ 7,142 4.32% Other debt 12,095 736 6.09% 20,159 1,241 6.16% 319 23 7.21% ------------------ -------------------- -------------------- Total interest-bearing liabilities $ 326,863 $16,322 4.99% $ 282,543 $12,738 4.51% $ 165,818 $ 7,165 4.32% Noninterest-bearing liabilities 2,212 4,280 1,692 Demand deposits 59,885 50,663 41,250 Shareholders' equity 22,616 23,571 21,020 --------- --------- --------- Total liabilities and shareholders' equity $ 411,576 $ 361,057 $ 229,780 ------------------ -------------------- -------------------- Net interest income $11,803 $11,018 $10,353 Net interest rate spread 2.61% 3.01% 3.99% Net interest income/margin 3.19% 3.49% 4.91% - ---------------------------------------------------------------------------------------------------------------------------------
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, 2000, and 1999 as compared to each respective period. Amounts have been computed on a fully tax-equivalent basis, assuming a Federal income tax rate of 34%.
----------------------------------------------------------------------------- 2000 versus 1999 1999 versus 1998 Year ended December 31 Increase (Decrease) Increase (Decrease) (Dollar amounts in thousands Due to Change in Due to Change in on a fully tax equivalent basis) Volume Rate Net Volume Rate Net - ---------------------------------------------------------------------------------------------------------------- Interest Income: Net loans $ 3,252 $ (186) $ 3,066 $ 8,707 $(2,995) $ 5,712 Tax-exempt securities 95 22 117 42 46 88 Taxable investment securities 352 255 607 924 (302) 622 Interest-bearing deposits (159) (3) (162) (123) 63 (60) Federal funds sold 424 317 741 (69) (55) (124) ----------------------------------------------------------------------------- Total interest income $ 3,964 $ 405 $ 4,369 $ 9,481 $(3,243) $ 6,238 Interest expense: High yield and NOW deposits $ 311 $ 223 $ 534 $ 845 $ 2,005 $ 2,850 Savings deposits 333 458 791 78 (75) 3 Money market deposits 78 224 302 (25) (374) (399) Time deposits 1,220 1,243 2,463 2,312 (411) 1,901 ----------------------------------------------------------------------------- Total deposits $ 1,942 $ 2,148 $ 4,090 $ 3,210 $ 1,145 $ 4,355 ----------------------------------------------------------------------------- Other borrowings (496) (10) (506) 1,431 (213) 1,218 ----------------------------------------------------------------------------- Total interest expense $ 1,446 $ 2,138 $ 3,584 $ 4,641 $ 932 $ 5,573 ----------------------------------------------------------------------------- Net interest income $ 2,518 $(1,733) $ 785 $ 4,840 $(4,175) $ 665 - ----------------------------------------------------------------------------------------------------------------
Provision for Loan Losses The provision for loan losses is based on management's evaluation of the adequacy of the allowance for loan losses which is maintained at a level sufficient to absorb estimated losses in the loan portfolio as of the balance sheet date. The provision for loan losses totaled $716 thousand for 2000, compared to $1.7 million a year ago. In 1999, the Company recorded $1.4 million of net charge-offs, compared to $331 thousand of net charge-offs in 2000. The net charge-offs in 1999 primarily related to one borrower. The lower 2000 provision for loan losses was a result of the reduced level of charge-offs and the decline in the size of the loan portfolio, somewhat mitigated by the increased level of non-performing loans. Total loans at December 31, 1999 were $322.5 million, compared to $226.1 million at year-end 2000. Non-Interest Income Non-interest income consists of service charges on deposits, gains on sales of securities and loans and other income. Non-interest income was $7.7 million for 2000, an increase of $2.1 million, or 36.7%, compared to $5.6 million for 1999. The increase in non-interest income was primarily attributed to $3.5 million of gains realized on deposit sales in 2000. 8 financial profile - md & a Service charges on deposits increased 50.9% for 2000, and totaled $1.2 million, compared to $778 thousand for the prior year. The increase in deposit service charges is attributed to the increased level of transaction accounts and improved collection of deposit fees and account charges for non-sufficient funds. The following table shows the total gains on sales of loans for each of the last two years. Gain on loan sales - ------------------------------------------------------------------------- 2000 1999 (In thousands) Gain Gain - ------------------------------------------------------------------------- Mortgage loan sales $ 960 $ 3,059 SBA loan sales 2,142 1,324 ARM loan sales/valuation (731) (1,484) Home equity loan sales (1,202) 94 Other loan sales 13 70 ------- ------- Total gain on loan sales $ 1,182 $ 3,063 ======= ======= - ------------------------------------------------------------------------- The total gain on loan sales was $1.2 million in 2000, a decrease of $1.9 million, or 61.4%, from $3.1 million realized in 1999. Gains on mortgage loans declined $2.1 million to $1.0, million, a 68.6% decline from the $3.1 million gain in 1999. The decline in mortgage loan sales was impacted by lower origination volumes attributed to the rising rate environment and the closing of CMA in 2000. As a result of the dissolution of CMA, the Company will no longer have significant gains on the sale of mortgages. In the fourth quarter of 2000, the Company entered into an agreement with First Hallmark Mortgage, where in 2001, the Company will refer applications, rather than close loans. There are no incremental costs incurred by the Company as a result of this agreement. Gains on SBA loan sales reflect the participation in the SBA's guaranteed loan program. Under the SBA program, the SBA guarantees between 75% to 85% of the principal of a qualifying loan. Generally, the guaranteed portion of the loan is then sold into the secondary market. Sales of guaranteed SBA loans totaled $30.4 million in 2000, as compared to $24.3 million of sales the prior year. These loans are sold servicing retained, and generally yield a servicing fee of approximately 100 basis points. As a result of the increased volume of loans sold and higher premiums realized, gains on sales of SBA loans totaled $2.1 million, an increase of 61.8%, or $0.8 million, over 1999. In December 1999, $37.8 million of adjustable rate mortgage (ARM) loans were reclassified from held-to-maturity to held-for-sale at a valuation of $36.4 million. Based on this reclassification, the company reported a valuation loss of $1.5 million in 1999. This portfolio was sold on March 7, 2000, servicing released and without recourse, for $35.6 million, resulting in an additional loss of $0.7 million recorded in 2000. In order to fund the fourth quarter sale of deposits, on September 29, 2000, the Company sold, servicing released and without recourse, $44.8 million of home equity loans originally purchased in 1999, realizing $43.6 million in proceeds and incurring a $1.2 million loss. The following table shows the components of Other Income for each of the last two years. - ------------------------------------------------------------------------- Other income (In thousands) 2000 1999 - ------------------------------------------------------------------------- SBA fees $ 785 $ 671 Loan fees 355 394 Income from cash surrender value of life insurance 108 248 Non-deposit account charges 225 144 Gain on sale of deposits 3,477 -- Miscellaneous 357 115 ------- ------- Total other income $ 5,307 $ 1,572 ======= ======= - ------------------------------------------------------------------------- Other income increased $3.7 million in 2000, and totaled $5.3 million, as compared to $1.6 million for 1999. Included in other income for 2000, are $3.5 million of gains from the five-branch deposit sales. The branches were sold to reduce the Company's operating expenses and to improve the capital ratios. Excluding the gains on the branch sales, other income increased $0.3 million, to $1.8 million, a 16.4% increase over the $1.6 million in 1999. The major component of other income is SBA servicing fees on sold SBA loans. The portfolio of serviced SBA loans as of December 31, 2000 and 1999 was $86.5 million and $65.7 million, respectively. As a result of the increase in the serviced portfolio, SBA servicing fees increased to $0.8 million in 2000 as compared to $0.7 million in 1999. In September, the Company liquidated the corporate owned life insurance policy on a senior executive, resulting in a decrease in income on the policy in 2000 from the prior year. Non-Interest Expenses Total non-interest expenses totaled $23.7 million in 2000, a $3.1 million, or 15.3%, increase from the $20.6 million in 1999. Salaries and benefits increased $0.5 million to $9.2 million from $8.7 million in the prior year. The increase is primarily related to lower levels of deferred salary expense resulting from lower mortgage originations in 2000. As a result of the dissolution of CMA and the branch sales, salaries and benefits expense are expected to be reduced in 2001. As of December 31, 2000 and 1999, there were 133 and 165 full time equivalent employees, respectively. Occupancy expenses increased $0.2 million to $2.2 million, from $2.4 million in 1999. Occupancy expenses increased as a result of the full year impact of the branch expansion in 2000 over the prior year. In 2001, occupancy expense will decline as a result of the reduction in the branch network from 17 to 12 branches and the dissolution of CMA. The following table presents a breakdown of other operating expenses for the year ended December 31, 2000 and 1999: - ------------------------------------------------------------------------- Other expense (In thousands) 2000 1999 - ------------------------------------------------------------------------- Professional services $ 1,471 $ 1,386 Office expenses 1,885 1,986 Advertising expenses 815 881 Communication expenses 877 767 Bank services 1,052 802 FDIC insurance 311 192 Director fees 98 236 Operational losses 43 (1)848 Loan expense 1,280 1,265 Amortization of intangibles 387 393 Write-off of CMA intangibles 3,208 -- Other expenses 863 729 ------- ------- Total other expense $12,290 $ 9,485 ======= ======= - ------------------------------------------------------------------------- (1) Includes a $786 thousand write-down of uncollected assets associated with the check-kiting scheme. 9 Other operational expenses increased $2.8 million to $12.3 million for 2000, compared to $9.5 million in 1999. Included in other expenses in 2000 was the $3.2 million write-off of intangibles associated with the dissolution of CMA. On a year to year comparison, 2000 to 1999, most of the operating expenses are comparable. Professional services for both 1999 and 2000 were impacted by increased legal expenses associated with suits against the company and increased accounting and auditing fees as a result of increased regulatory supervision. Bank services for 2000, which includes item processing costs and third party ATM charges, increased 31.2% in 2000 to $1.1 million, as a result of the increase in transactions for the new branches and new account charges. FDIC insurance premiums increased in 2000 to $0.3 million from $0.2 million as a result of the increased risk classification assessed by the FDIC in the first half of 2000. The Bank's risk classification was adjusted downward again in the second half of 2000, which will increase FDIC insurance premium charges for 2001. Director's fees declined 58.5% in 2000, as a result of the elimination of fees paid to the directors for Holding Company meetings and a reduction in the number of directors. Operational losses declined to $43 thousand in 2000, as compared to $0.8 million in 1999. Included in 1999 was a one-time $786 thousand check kiting loss. Amortization of intangibles for 1999 and 2000 primarily represents the normal amortization of goodwill associated with the acquisition of CMA. Because CMA was dissolved in 2000, and all the related goodwill was expensed, the Company will not have amortization of intangibles expense in future periods. Income Tax Expense For 2000, the Company reported $0.8 million of income tax expense as compared to a tax benefit of $2.4 million in 1999. Although the Company realized a $5.1 million pre-tax loss in 2000, under current accounting rules tax benefits cannot be recorded until the Company generates taxable earnings. The Company has $5.0 million of gross tax assets including $2.4 million of deferred tax assets, for which it has established tax valuation reserves of $2.1 million. The tax benefits recorded in 1999 were primarily supported by net operating losses in carry-back periods. Financial Condition Total assets declined $83.0 million, or 18.9%, to $356.0 million at December 31, 2000, compared to $439.0 million at December 31, 1999. Net loans decreased $96.8 million, or 30.2%, to $223.6 million at December 31, 2000, compared to $320.4 million at December 31, 1999. The securities portfolio, including held to maturity and available for sale, decreased $3.5 million, or 4.7%, to $70.8 million at December 31, 2000, compared to $74.3 million at December 31, 1999. The decline in period-end financial assets was a result of the loan and deposit sales to enhance the company's liquidity and capital levels. On average for the year ended December 31, 2000, total assets were $411.6 million, a $50.5 million increase over the prior year $361.1 million average balance. The increase in average assets was due to the growth in average loans primarily attributed to loan originations and loan purchases from the prior year. At December 31, 2000, the Company had $31.5 million of Federal Funds sold. There were no Federal Funds sold for the prior year-end period. Period-end deposits declined $37.2 million, or 10.4%, to $320.3 million at December 31, 2000. On average, deposits grew $52.4 million to $314.8 million in 2000, as a result of the 1999 branch expansion and core deposit generation. In December 2000, $48.0 million of deposits were sold in conjunction with the branch sales. In addition, in 2000, the Company reduced higher costing government deposits by $36.8 million. The Company does not have any brokered deposits. Total borrowings declined $43.0 million, from $53.0 million at year-end 1999, to $10.0 million at December 31, 2000. The decline in borrowings reflects the Company's improved liquidity position, resulting from deposit generation and the reduction in the loan and investment portfolios. At December 31, 2000, total shareholders' equity declined $0.5 million to $21.3 million. Total equity to total assets as of December 31, 2000 and 1999 was 5.99% and 4.96%, respectively. To bolster the Company's capital ratios, in the first quarter of 2000, the Company consummated a private placement of approximately $4.9 million (net of $0.3 million of offering expenses) of cumulative preferred stock. The preferred stock bears a 10% dividend rate. Under regulatory agreement, the Company is prohibited from declaring or paying dividends on its preferred or common stock. As of December 31, 2000, the Company has accumulated unpaid preferred dividends of $388 thousand. The increase in the Company's capital from the preferred stock offering was offset by operational losses incurred in 2000. Loan Portfolio 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 provide for SBA guarantees of between 75% and 85% of the principal. The guaranteed portion of the SBA loan is generally sold in the secondary market with the non-guaranteed portion held in the portfolio. The loans are primarily to businesses located in New Jersey and its neighboring states. 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 in Unity's marketplace. Average loans increased $40.5 million, or 17.0%, from $237.8 million in 1999 to $278.3 million in 2000. The increase in average loans is due primarily to the growth in the loan portfolio which occurred late in 1999. Period-end loans actually declined $96.4 million, or 30.0%, to $225.1 million at December 31, 2000 compared to $321.5 at December 31, 1999. The decline in the loan portfolio reflects the first quarter loan sale of $36.4 million of adjustable rate mortgages and the third quarter loan sale of $44.8 million home equity loans. As a result of the loan sales and mortgage originations being sold in the secondary market, residential mortgage loans declined $87.6 million, or 49.2%, to $90.6 million as of December 31, 2000, from $178.1 million the prior year end. Residential mortgages are no longer being originated for the portfolio. The Company has established a relationship with First Hallmark Mortgage, and in 2001 will be paid commissions for referred mortgage loans applications. The Company expects to continue to grow the higher yielding commercial and SBA loan portfolios. 10 financial profile - md & a The following table sets forth the classification of loans by major category for the past five years at December 31:
-------------------------------------------------------------------------------------------------- Loans By Type 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------- % of % of % of % of % of (In thousands) Amount Total Amount Total Amount Total Amount Total Amount Total - -------------------------------------------------------------------------------------------------------------------------------- Commercial & industrial $ 61,427 27.2% $ 43,523 13.5% $ 41,546 24.9% $ 20,368 15.2% $18,002 18.4% Real estate Commercial mortgages 48,770 21.6% 52,359 16.2% 59,884 35.9% 66,526 49.6% 41,674 42.6% Residential mortgages 91,371 40.4% 178,963 55.5% 26,642 16.0% 28,891 21.5% 23,044 23.6% Construction 5,784 2.5% 17,837 5.5% 16,237 9.7% 13,014 9.7% 10,223 10.4% Consumer 18,788 8.3% 29,850 9.3% 22,483 13.5% 5,419 4.0% 4,924 5.0% ------------------ ----------------- ---------------- ---------------- --------------- Total Loans $226,140 100.0% $322,532 100.0% $166,792 100.0% $134,218 100.0% $97,867 100.0% ------------------ ----------------- ---------------- ---------------- --------------- - --------------------------------------------------------------------------------------------------------------------------------
As the above table depicts, the composition of the loan portfolio has changed significantly in 2000. As of December 31, 2000, 51.3% of the loan portfolio is now housed in commercial loans compared to 35.3% at the prior year end. Total commercial loans, including C&I loan, commercial mortgages, and construction loans were $116.0 million, an increase from the prior year total of $113.7 million. The increase in commercial loans was primarily in the SBA portfolio, which increased $13.3 million, or 79.1%, to $30.2 million from the prior year $16.9 million. Construction loans declined to $5.8 million from $17.8 million the prior year end. The decline in construction loans was attributed to the completion of several projects outstanding at year-end 1999. Residential real estate loans declined $87.6 million as a result of the $81.2 million of loan sales. Approximately $36.5 million of the residential mortgage portfolio, with a borrowing value of $27.6 million, is available to collateralize borrowing from the FHLB of New York. Consumer loans declined $11.1 million to $18.7 million from the prior year primarily as a result of payoffs on indirect auto loans, which declined $8.2 million, to $14.2 million at December 31, 2000. There are no concentrations of loans to any borrowers or group of borrowers exceeding 10% of the total loan portfolio. There are no foreign loans in the portfolio. As a preferred SBA lender, the Company does make SBA loans outside of its marketplace. A portion of the SBA loan portfolio is not located in New Jersey. The following table shows the maturity distribution of the loan portfolio and the allocation of floating and fixed interest rates at December 31, 2000. Loan Maturities and Floating/Fixed Interest Rates
-------------------------------------------------------------------- (In thousands) Within 1 Year 1 - 5 Years After 5 Years Total - ---------------------------------------------------------------------------------------------------------------- Commercial $ 40,274 $13,625 $ 7,528 $ 61,427 Commercial mortgages 20,563 17,507 10,700 48,770 Construction loans 5,740 44 -- 5,784 Residential mortgages 10,501 7,218 73,652 91,371 Consumer loans 2,175 16,472 141 18,788 -------- ------- ------- -------- Total $ 79,253 $54,866 $92,021 $226,140 ======== ======= ======= ======== -------------------------------------------------------------------- Amount of loans based upon: Fixed interest rates $ 78,118 Floating or adjustable interest rates $148,022 Total $226,140 ======== - ----------------------------------------------------------------------------------------------------------------
Asset Quality 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 its obligation can create the risk of nonaccrual loans, past due loans, and potential problem loans, which can have a material impact on the Company's results of operations. 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 or when the collectibility of principal and interest according to the contractual terms is in doubt, and loans past due 90 days or greater, still accruing interest. Management has evaluated the loans past due 90 days or greater and still accruing interest and determined that they are both well collateralized and in the process of collection. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Credit risk is minimized by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins upon 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 11 approval. The loan portfolio is then subject to ongoing internal reviews for credit quality. In addition, an outside firm has been used to conduct independent credit reviews. The following table sets forth information concerning non-performing loans and non-performing assets at December 31 for the past five years:
------------------------------------------------------------------------ (In thousands) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Non-accrual by category Commercial $2,064 $ 692 $ -- $ -- $ 27 Real estate 807 720 2,297 861 $639 Consumer 32 -- -- 82 3 ------ ------ ------ ------ ---- Total $2,903 $1,412 $2,297 $ 943 $669 ------ ------ ------ ------ ---- Past due 90 or more and still accruing interest Commercial $ 578 $ -- $ 803 $ 346 $ 77 Real estate 694 159 790 206 156 Consumer -- 7 7 -- 28 ------ ------ ------ ------ ---- Total $1,272 $ 166 $1,600 $ 552 $261 ------ ------ ------ ------ ---- Total nonperforming loans $4,175 $1,578 $3,897 $1,495 $930 ------ ------ ------ ------ ---- OREO property $ 142 $1,505 -- -- -- Other asset(1) -- -- $1,131 -- -- Total nonperforming assets $4,317 $3,083 $5,028 $1,495 $930 ------ ------ ------ ------ ---- Nonperforming loans to total loans 1.85% 0.49% 2.34% 1.11% 0.95% ------ ------ ------ ------ ---- Nonperforming assets to total assets 1.21% 0.70% 1.97% 0.70% 0.54% Allowance for loans losses as a percentage of non-performing loans 61.27% 137.71% 46.83% 88.43% 95.27% - -------------------------------------------------------------------------------------------------------------------
(1) reflects the value of an impaired asset associated with an unauthorized overdraft Nonaccrual loans increased $1.5 million from $1.4 million at year-end 1999, to $2.9 million at December 31, 2000. The increase in nonaccrual loans is due primarily to increased levels of non-performing commercial accounts. Loans past due 90 days or more and still accruing increased $1.1 million from December 31, 1999 to $1.3 million primarily as a result of loans which have matured pending renewal. These loans do not represent a material risk of default to the Company. Other real estate owned (OREO) properties declined by $1.4 million in 2000, from $1.5 million at year-end 1999, as a result of sales. OREO are carried at the lower of cost or market, less estimated selling costs. Total non-performing assets increased $1.2 million, to $4.3 million at year-end 2000, from $3.1 million the prior year. Potential problem loans are those where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are not included in non-performing loans as they continue to perform. Potential problem loans, which consist primarily of commercial loans were $0.3 million and $0.4 million at December 31, 2000 and 1999, respectively. Allowance for Loan Losses The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the financial statements as of the balance sheet date. Management utilizes a standardized methodology to assess the adequacy of the allowance for loan losses. This process consists of the identification of specific reserves for identified problem loans based on loan grades and the calculation of general reserves based on minimum reserve levels by loan type. Risks within the loan portfolio are analyzed on a continuous basis by management, and periodically by an independent credit 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 to quantify the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current 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 which includes the determination of the adequacy of the allowance for loan losses, 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 and 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 obtaining updated financial information about the borrower's financial condition and changes in market conditions. In addition, various regulatory agencies periodically review the adequacy of the allowance for loan losses. These agencies have in the past and may in the future require the Bank to make additional adjustments based on their judgments about information available to them at the time of their examination. The allowance for loan losses totaled $2.6 million as of December 31, 2000, compared to $2.2 million the prior year end. The increase in the allowance for the current year is due the current provision for loan losses or $0.7 million exceeding $0.3 million of net charge-offs. Although the loan portfolio declined in 2000, the allowance for loan losses was increased due to a shift in the portfolio from loans secured by residential properties to commercial loans and an increase in non-performing loans. Commercial loans generally have a higher risk of loss than a loan secured by residential real estate. The following is a reconciliation summary of the allowance for loan losses for the past five years:
------------------------------------------------------------------------ (In thousands) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $2,173 $1,825 $1,322 $ 886 $562 Charge-offs: Commercial and industrial 278 432 60 10 44 Real estate 19 871 254 55 -- Consumer 75 130 15 3 49 ------ ------ ------ ------ ---- Total Charge-offs 372 1,433 329 68 93 Recoveries: Commercial and industrial 12 16 -- -- -- Real estate 17 2 23 6 -- Consumer 12 20 5 -- -- ------ ------ ------ ------ ---- Total recoveries 41 38 28 6 -- ------ ------ ------ ------ ---- Total net charge-offs 31 1,395 301 62 93 ------ ------ ------ ------ ---- Provision charged to expense 716 1,743 804 498 417 ------ ------ ------ ------ ---- Balance of allowance at end of year $2,558 $2,173 $1,825 $1,322 $886 ------ ------ ------ ------ ---- Net charge-offs to average loans 0.12% 0.59% 0.21% 0.05% 0.12% Allowance to total loans (1) 1.17% 0.77% 1.12% 1.01% 0.93% - ---------------------------------------------------------------------------------------------------------------------
(1) Total loans exclude loans held for sale. The ratio of allowance to total loans, excluding loans held for sale, increased to 1.17% in 2000 from .77% in 1999, due to the decline in the loan portfolio and the shift in the portfolio mix. At December 31, 1999, the residential mortgage portfolio was $178.1 million as compared to $90.6 million at December 31, 2000. Residential mortgage loans have a general reserve rate of .25%. As of December 31, 2000, the commercial and industrial portfolio increased $17.9 million, to $61.3 million. Commercial and 12 financial profile - md & a industrial loans have general reserve rates of 1.00% to1.25% depending on the product. As a result of the shift in the portfolio from being predominately retail in 1999 to commercial in 2000, the decrease in loans, and the increase in non-performing loans, the level of the allowance to total loans increased. In addition, in 1999 the Company carried a portfolio of purchased loans valued at the amount of undiscounted estimated future cash collections and therefore had no allocated allowance. This portfolio was sold in 2000. The following table sets forth, for each of the major lending areas, the amount of the allowance for loan losses allocated to each category and the percentage of total loans represented by such category, as of December 31, of each year. The allocated allowance is the total of identified specific and general reserves by loan. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio.
----------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------- % of % of % of % of % of (In thousands) Amount All Loans Amount All Loans Amount All Loans Amount All Loans Amount All Loans - ---------------------------------------------------------------------------------------------------------------------------------- Balance applicable to: Commercial & industrial $1,332 27.2% $ 738 13.5% $ 741 24.9% $ 267 15.2% $ 152 18.4% Real estate: Commercial mortgages 641 21.6% 404 16.2% 663 35.9% 555 49.6% 336 42.6% Residential mortgages 298 40.4% 461 55.5% 96 16.0% 340 21.5% 247 23.6% Construction 98 2.5% 316 5.5% 160 9.7% 107 9.7% 82 10.4% Consumer 189 8.3% 254 9.3% 165 13.5% 53 4.0% 69 5.0% --------------- --------------- --------------- --------------- -------------- Total $2,558 100.0% $2,173 100.0% $1,825 100.0% $1,322 100.0% $ 886 100.0% --------------- --------------- --------------- --------------- -------------- - ----------------------------------------------------------------------------------------------------------------------------------
Investment Security Portfolio Securities available for sale are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Securities held to maturity, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The investment security portfolio is maintained for asset-liability management purposes, an additional source of liquidity, and as an additional source of earnings. The portfolio is comprised of U.S. Treasury securities, obligations of U.S. Government and government sponsored agencies mortgage-backed securities, corporate debt securities and equity securities. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. Average investments increased $6.9 million in 2000, to average $72.4 million. At December 31, 2000, the investment security portfolio totaled $70.8 million, comprised of $37.8 million in securities available for sale and $33.0 million in securities held to maturity. The total investment portfolio declined $3.5 million, or 4.7%, from the prior year balance of $74.3 million. The decline in investment securities primarily represents payments and maturities of investments, reinvested in other financial assets. The tax-equivalent yield on the investment portfolios for 2000 was 6.53%, as compared to 6.11% for the prior year. The increase in the yield was a result of paydown and maturities of lower yielding securities and the repricing of floating rate investments in a rising rate environment. Approximately 85% of the investment portfolio has a fixed rate of interest. Net gains on sales of securities for 2000 were $3.0 thousand, as compared to $193.0 thousand for the year ended December 31, 1999. As of year-end 2000 and 1999, the total net unrealized loss on the investment portfolios was $1.3 million and $3.3 million, respectively. The improvement in the market value of the portfolio was primarily due to the declining interest rate environment at the end of 2000. In the normal course of business, the company accepts government deposits, for which investment securities are required to be held as collateral. As of December 31, 2000, $20.1 million of securities were required to be pledged for these deposits. Deposits Deposits, which include non-interest bearing demand deposits and interest-bearing savings and time deposits, are the primary source of the Company's funds. For the year, the Company realized continued growth in average deposits. This growth was achieved through the 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. The following are average deposits for each of the last three years.
----------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------- (In thousands) Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------ Average Balance: High-yield & NOW deposits $ 95,817 25.6% $ 87,884 28.1% $ 36,162 17.5% Savings deposits 35,491 9.5% 17,260 5.5% 13,811 6.6% Money market deposits 20,724 5.5% 18,053 5.8% 18,557 9.0% Time deposits 162,736 43.4% 139,187 44.4% 96,969 46.9% Demand deposits 59,885 16.0% 50,663 16.2% 41,250 20.0% ---------------------- --------------------- --------------------- Total deposits $374,653 100.0% $313,047 100.0% $206,749 100.0% ---------------------- --------------------- --------------------- - ------------------------------------------------------------------------------------------------------------
On average, total deposits grew 19.7%, or $61.6 million, for 2000, to average $374.7 million. The increase in average deposits was primarily the result of deposit generation related to the new branch openings in 1999, partially offset by a reduction in higher-costing municipal deposits. As a result of the $48.0 million of deposit sales and the $36.8 million planned reduction of municipal deposits, period end deposits declined 10.4%, or $37.2 million, from the prior year end to $320.3 million at December 31, 2000. The following are period-end deposit balances for each of the last three years.
----------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------- (In thousands) Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------ Ending Balance: High-yield & NOW deposits $100,121 31.3% $104,343 29.2% $ 40,585 17.9% Savings deposits 23,223 7.2% 18,448 5.2% 15,098 6.7% Money market deposits 13,552 4.2% 19,462 5.4% 19,222 8.4% Time deposits 130,314 40.7% 150,206 42.0% 101,835 44.9% Demand deposits 53,108 16.6% 65,079 18.2% 50,120 22.1% ---------------------- --------------------- --------------------- Total deposits $320,318 100.0% $357,538 100.0% $226,860 100.0% ---------------------- --------------------- --------------------- - ------------------------------------------------------------------------------------------------------------
13 Non-interest bearing demand deposits represented 16.6% of total deposits at December 31, 2000, down from 18.2% in 1999. The decline in non-interest bearing deposits can be attributed to the migration of customer balances to interest-bearing accounts. The average cost of interest bearing deposits in 2000 was 4.95% compared to 4.38% for 1999. The increase in the cost of deposits can be attributed to the increase in interest rates and higher costing promotional deposit rates that were offered in late 1999 and early 2000. The increase in the cost of deposits was the primary cause of the decline in the Company's net interest margin in 2000. Borrowed Funds Borrowed funds consist of advances from the Federal Home Loan Bank of New York. These borrowings are used as a source of liquidity or to fund asset growth not supported by deposit generation. Residential mortgages collateralize the borrowings from the FHLB. As of December 31, 2000, total borrowings were $10.0 million, a decline of $43.0 million from the prior year end. The decline in borrowings was a result of increased liquidity generated from loan sales and deposit generation. At December 31, 2000, the Company had $17.6 million of additional availability at the FHLB. The $10.0 million FHLB borrowing at December 31, 2000 is a ten-year borrowing at a cost of 4.92% and is callable after November 2001. Asset/Liability Management Based on the Company's business, the two largest risks facing the Company are credit risk and market risk. Market risk, for the Company, is primarily limited to interest rate risk, which is the impact that changes in interest rates would have on future earnings. This risk is managed by the Asset/Liability Committee (ALCO). The principal objectives of the ALCO 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 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, 2000. 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.
---------------------------------------------------------------------------------- More than More than More than More than Six months one year two years five years ten years Under six through through through through and not (In thousands) months one year two years five years ten years repricing Total - ----------------------------------------------------------------------------------------------------------------------------------- Assets Cash & due from banks $ -- $ -- $ -- $ -- $ -- $ 13,740 $ 13,740 Fed Funds sold 31,500 -- -- -- -- -- 31,500 Investment Securities 16,197 3,710 14,103 20,802 9,026 6,999 70,837 Loans 81,972 10,841 16,515 107,829 4,908 4,075 226,140 Other assets -- -- -- -- -- 13,786 13,786 --------- -------- -------- -------- ------- -------- -------- Total Assets $ 129,669 $ 14,551 $ 30,618 $128,631 $13,934 $ 38,600 $356,003 --------- -------- -------- -------- ------- -------- -------- Liabilities and shareholders' equity Non interest demand $ -- $ -- $ -- $ -- $ -- $ 53,108 $ 53,108 Savings and checking 94,550 -- 5,201 30,006 7,139 -- 136,896 Time deposits 68,285 41,327 6,616 13,824 262 -- 130,314 Other debt -- -- -- 10,000 -- -- 10,000 Other liabilities -- -- -- -- -- 4,371 4,371 Shareholders' equity -- -- -- -- -- 21,314 21,314 --------- -------- -------- -------- ------- -------- -------- Liabilities and shareholders' equity $ 162,835 $ 41,327 $ 11,817 $ 53,830 $ 7,401 $ 78,793 $356,003 --------- -------- -------- -------- ------- -------- -------- Gap $ (33,166) $(26,776) $ 18,801 $ 74,801 $ 6,533 $(40,193) -- Cumulative Gap $ (33,166) $(59,942) $(41,141) $ 33,660 $40,193 -- -- Cumulative Gap to total assets -9.3% -16.8% -11.6% 9.5% 11.3% 0.0% 0.0% - -----------------------------------------------------------------------------------------------------------------------------------
14 financial profile - md & a 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. At December 31, 2000, there was a six-month liability-sensitive gap of $33.2 million and a one-year liability gap of $59.9 million, as compared to $157.9 million and $168.3 million for the prior year, respectively. The improvement in the liability gap is primarily a result of the reduction in borrowed funds and the increase in Federal funds sold. Other models are also used in conjunction with the static gap table, which is not able to capture the risk to changing spread relationships over time, the effects of projected growth in the balance sheet, or dynamic decisions such as the modification of investment maturities as a rate environment unfolds. For these reasons, a simulation model is used, where numerous interest rate scenarios and balance sheets are combined to produce a range of potential income results. Net interest income is managed within guideline ranges for interest rates rising or falling by 300 basis points. Results outside of guidelines require action by the ALCO to correct the imbalance. Simulations are typically created over a 12-24 month time horizon. At December 31, 2000 these simulations show that with a 300 basis point immediate increase in interest rates, net interest income would increase by approximately $.4 million, or 3.3%. An immediate decline of 300 basis points in interest rates would decrease net interest income by approximately $.3 million or 2.9%. These variances in net interest income are 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 1.5% in a rising rate environment and a decline of 0.08% in a falling rate environment. The decline in the EVPE is within board-approved guidelines of +/- 3.00%. Operating, Investing, and Financing Cash and cash equivalents increased $30.1 million to $45.2 million at December 31, 2000 from $15.1 million at December 31, 1999. Net cash used in operating activities decreased $3.8 million, totaling $2.7 million at December 31, 2000 compared to a $6.5 million in 1999. This was primarily due to the $5.9 million loss reduced by the intangible write-off of $3.2 million and a $3.5 million gain on sale of deposits. Net cash provided by investing activities increased $297.4 million to $104.7 million in 2000, compared to cash used by investing activities in 1999 of $192.7 million. This was primarily from loan sales and fewer loan originations in 2000. Net cash used in financing activities increased $253.7 million to $71.8 million for 2000, compared to $181.8 million provided in 1999. This change was attributable to the deposit sale in 2000, the reduction of borrowed funds and the increase in deposits in 1999. 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 sources of funds for the Bank Holding Company ("Holding Company") are dividends paid by the Bank. Under regulatory agreement, 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. The Holding Company is also under agreement with its regulators not to pay dividends on its preferred or common stock. Excluding the payment of dividends to shareholders, the Holding Company only pays expenses that are specifically for the benefit of the Holding Company. Other than its investment in the Bank, the Holding Company does not actively engage in other transactions or business. As a result the annual expenses of the Holding Company are not material. At December 31, 2000 the Holding Company had $0.7 million in cash and $.4 million 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 $330.3 million, as of December 31, 2000. The Company has augmented its liquidity with $10.0 million in borrowings from the FHLB of New York. At December 31, 2000, $17.6 million was available for additional borrowings from the FHLB of New York. Pledging additional collateral in the form of 1-4 family residential mortgages or investment securities can increase the line with the FHLB. An additional source of liquidity is Federal Funds sold, which were $31.5 million at December 31, 2000 and loans held for sale. 15 As of December 31, 2000 deposits included $31.7 million of Government deposits, as compared to $68.5 million the prior year end. These deposits, are generally short in duration, and are very sensitive to price competition. The Company has significantly reduced its reliance on these deposits as a source of funds, and believes the current portfolio of these deposits to be appropriate. Included in the portfolio are $25.9 million of deposits from two municipalities. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company. At December 31, 2000, the Bank had approximately $42.0 million of loan commitments, which will either expire or be funded, generally within one year. Management believes the Company's liquidity profile was significantly enhanced in 2000. This area will be actively monitored in 2001. 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 leverage ratio of 6% for the Bank. Due to losses incurred during 1999, the Company and the Bank failed to meet the total risk-based capital requirement of 8% at both September 30, 1999 and December 31, 1999. Because the Bank failed to satisfy the minimum capital requirements, it was deemed to be "undercapitalized" under the Prompt Corrective Action provisions of the Federal Deposit Insurance Act and the regulations of the FDIC. Because the Company and the Bank failed to maintain minimum levels of required capital the Bank and the Company were required to raise additional capital. As a result of the capital deficiency, in the first quarter of 2000, the Bank and the Company entered into Memoranda of Understanding with their primary regulatory agencies. However, due to continued losses through the first two quarters of 2000, and among other reasons, the Bank and Company entered into stipulations and agreements with each of their respective regulators on July 18, 2000. Under these agreements, the Bank and the Company were each required to take a number of affirmative steps including; hiring an outside consulting firm to review the management structures, adopt strategic and capital plans which will increase the Bank's leverage ratio to 6% or above, review and adopt various policies and procedures, adopting programs with regard to the resolution of certain criticized assets, and providing ongoing reporting to the various regulatory agencies with regard to the Bank's and Company's progress in meeting the requirements of the agreements. The agreements require the Bank and Company to establish a compliance committee to oversee the efforts in meeting all requirements of the agreements, and prohibited the Bank from paying a dividend to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval. In accordance with the capital plan submitted to the regulators, 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 the right 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 6.8966 per share. The accounting, legal and consulting costs to issue the preferred stock totaled $0.3 million and were applied against the proceeds. The Holding Company contributed $5.1 million of capital to the Bank in 2000. In addition to the issuance of preferred stock, the Company under the capital restoration plan agreed to improve capital by reducing its financial assets. Pursuant to the plan, the Bank sold $36.4 million in adjustable rate one-to-four family mortgages (ARM's) on March 7, 2000. In the third quarter, the Bank entered into agreements to sell the deposits of five of its branches. The transaction closed in December 2000, and the Bank realized a $3.3 million gain on the sale of deposits, including the write-off of certain equipment in the branches. In order to fund the sale of the branches, $44.8 million of home equity loans were sold for a $1.2 million loss in the third quarter. As a result of the March 2000 preferred stock offering, the sale of loans and the gains realized on the deposit sales, the Company and the Bank now meet all of the minimum federal capital requirements. The Bank has until December 2001 to achieve the 6% Tier 1 leverage ratio required by the New Jersey Department of Banking and Insurance. 16 financial profile - md & a The following table summarizes the Holding Company's risk-based and leverage capital ratios at December 31, 2000 and 1999, as well as the required minimum regulatory capital ratios:
--------------------------------------------------- Adequately Well Capitalized Capitalized Company 2000 1999 Requirements Provisions - ------------------------------------------------------------------------------------------ Leverage ratio 5.50% 4.35% 4.00% 5.00% Tier 1 risk-based capital ratio 9.61% 6.17% 4.00% 6.00% Total risk-based capital ratio 10.76% 6.88% 8.00% 10.00% - ------------------------------------------------------------------------------------------
The following table summarizes the Bank's risk based and leveraged capital ratios at December 31, 2000 and 1999, as well as the required minimum regulatory capital ratios.
--------------------------------------------------- Adequately Well Capitalized Capitalized Bank 2000 1999 Requirements Provisions - ------------------------------------------------------------------------------------------ Leverage ratio(1) 5.24% 4.01% 4.00% 5.00% Tier 1 risk-based capital ratio 9.12% 5.62% 4.00% 6.00% Total risk-based capital ratio 10.26% 6.33% 8.00% 10.00% - ------------------------------------------------------------------------------------------
(1) The New Jersey Department of Banking and Insurance has imposed a ratio of 6%. At December 31, 2000, shareholders' equity was $21.3 million, a $0.5 million decline from the prior year end. The reduction in shareholder's equity was a result of the $5.9 million operating loss, somewhat offset by the $4.9 million of proceeds from the preferred stock offering and $0.5 million of unrealized gains on securities available for sale. At December 31, 2000, there were $388 thousand of preferred stock dividends in arrears that have not been declared. Special Note Regarding Forward-Looking Statements This report contains certain "forward-looking statements" as defined under Section 21E of the Securities Exchange Act of 1934. The Company desires to take advantage of the "safe harbor" provisions of Section 21E and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all such forward-looking statements. These forward-looking statements, which are included in Management's Discussion and Analysis and the Shareholders' Message, describe future plans or strategies and may include the Company's expectations of future financial results. The words "believe", "expect", "anticipate", "estimate", "project", and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies or qualitative or quantitative changes based on market exposure is inherently uncertain. Factors which could effect actual results include but are not limited to i) change in general market interest rates, ii) general economic conditions, both in the United States generally and in the Company's market area, iii) legislative/regulatory changes, iv) monetary and fiscal policies of the U.S. Treasury and the Federal Reserve, v) changes in the quality or composition of the Company's loan and investment portfolios, vi) demand for loan products, vii) deposit flows, viii) competition, and ix) demand for financial services in the Company's markets. These factors should be considered in evaluation the forward-looking statements, and undue reliance should not be placed on such statements. 17 Independent Auditors' Report ================================================================================ To the Shareholders and Board of Directors of Unity Bancorp, Inc: We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Short Hills , New Jersey February 28, 2001 18 financial profile - statements Consolidated Balance Sheets (in thousands, except share amounts) ================================================================================
----------------------- December 31, 2000 1999 - ------------------------------------------------------------------------------------- Assets Cash and due from banks $ 13,740 $ 15,121 Federal funds sold 31,500 -- Securities Available for sale 37,809 40,099 Held to maturity (fair value of $32,153 and $32,270 in 2000 and 1999, respectively) 33,028 34,250 --------- --------- Total securities 70,837 74,349 Loans held for sale - SBA loans 6,741 3,745 Loans held for sale - ARM loans -- 36,362 Loans held to maturity 219,399 282,425 --------- --------- Total loans 226,140 322,532 Less: Allowance for loan losses 2,558 2,173 --------- --------- Net loans 223,582 320,359 Premises and equipment, net 9,380 12,370 Accrued interest receivable 2,836 2,862 Other assets 4,128 13,908 --------- --------- Total Assets $ 356,003 $ 438,969 ========= ========= Liabilities and Shareholders' Equity Liabilities: Deposits Non-interest-bearing demand deposits $ 53,108 $ 65,079 Interest bearing demand and savings deposits 136,896 142,253 Certificates of deposit, under $100,000 95,112 79,104 Certificates of deposit, $100,000 and over 35,202 71,102 --------- --------- Total Deposits 320,318 357,538 Borrowed funds 10,000 53,000 Obligation under capital leases 2,899 4,096 Accrued interest payable 667 1,199 Accrued expenses and other liabilities 805 1,344 --------- --------- Total Liabilities 334,689 417,177 Commitments and contingencies Shareholders' equity Preferred stock class A, 10% cumulative and convertible, 103,500 shares issued and outstanding 4,929 -- Common stock, no par value, 7,500,000 shares authorized; 3,863,568 issued and 3,706,708 outstanding in 2000; 3,861,568 shares issued and 3,704,708 outstanding in 1999 26,234 26,224 Treasury stock, at cost, 156,860 shares (1,762) (1,762) Retained deficit (7,793) (1,856) Accumulated other comprehensive loss, net of tax benefit (294) (814) --------- --------- Total Shareholders' Equity 21,314 21,792 --------- --------- Total Liabilities and Shareholders' Equity $ 356,003 $ 438,969 ========= ========= - -------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements 19 Consolidated Statements of Operations (in thousands, except share and share amounts) ================================================================================
--------------------------- For the years ended December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------- Interest income Loans $ 22,132 $ 19,067 Securities 4,630 4,107 Federal funds sold 1,255 514 ----------- ----------- Total interest income 28,017 23,688 Interest expense Deposits 15,586 11,497 Borrowings 736 1,241 ----------- ----------- Total interest expense 16,322 12,738 ----------- ----------- Net interest income 11,695 10,950 Provision for loan losses 716 1,743 ----------- ----------- Net interest income after provision for loan losses 10,979 9,207 ----------- ----------- Non-interest Income Service charges on deposit accounts 1,174 778 Gain on sale of loans, net 1,182 3,063 Net gain on sale of securities 3 193 Other income 5,307 1,572 ----------- ----------- Total non-interest income 7,666 5,606 ----------- ----------- Non-interest Expense Salaries and employee benefits 9,198 8,710 Occupancy expense 2,230 2,383 Other operating expenses 12,290 9,485 ----------- ----------- Total non-interest expenses 23,718 20,578 ----------- ----------- Loss before provision (benefit) for income taxes (5,073) (5,765) ----------- ----------- Provision (benefit) for income taxes 839 (2,387) ----------- ----------- Net loss $ (5,912) $ (3,378) Preferred stock dividends - paid and unpaid 413 -- ----------- ----------- Net loss to common shareholders $ (6,325) $ (3,378) =========== =========== Loss per common share - basic and diluted $ (1.71) $ (0.91) =========== =========== Weighted average common shares outstanding - basic and diluted 3,706,047 3,723,448
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 financial profile - statements Consolidated Statements of Changes in Shareholders' Equity (in thousands, except per share amounts) ================================================================================
------------------------------------------------------------------------------ Accumulated Retained Other Total For the years ended Common Preferred Earnings Treasury Comprehensive Shareholders' December 31, 2000 and 1999 Stock Stock (Deficit) Stock Loss Equity - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 23,146 $ -- $ 4,534 $(1,202) $(132) $ 26,346 ======== ====== ======= ======= ===== ======== Comprehensive loss: Net loss -- -- (3,378) -- -- (3,378) Unrealized holding loss on securities arising during the period, net of tax of $418 -- -- -- -- (682) (682) -------- ------ ------- ------- ----- -------- Total comprehensive loss -- -- -- -- -- (4,060) ======== ====== ======= ======= ===== ======== Common Stock - Cash dividend $.24 per share -- -- (854) -- -- (854) Common stock - stock dividend 2,158 -- (2,158) -- -- -- Issuance of common stock: CMA acquisition 102,459 shares 1,100 -- -- -- -- 1,100 Warrant and Grants 26,752 shares (180) -- -- 423 -- 243 Purchase of treasury stock 92,700 shares -- -- -- (983) -- (983) -------- ------ ------- ------- ----- -------- Balance, December 31, 1999 $ 26,224 $ -- $(1,856) $(1,762) $(814) $ 21,792 ======== ====== ======= ======= ===== ======== Comprehensive loss: Net loss -- -- (5,912) -- -- (5,912) Unrealized holding gain on securities arising during the period, net of tax of $319 -- -- -- -- 520 520 -------- ------ ------- ------- ----- -------- Total comprehensive loss -- -- -- -- -- (5,392) ======== ====== ======= ======= ===== ======== Preferred stock dividends paid -- -- (25) -- -- (25) Issuance of common stock 2,000 shares 10 -- -- -- -- 10 Issuance of preferred stock -- 4,929 -- -- -- 4,929 -------- ------ ------- ------- ----- -------- Balance, December 31, 2000 $ 26,234 $4,929 $(7,793) $(1,762) $(294) $ 21,314 ======== ====== ======= ======= ===== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 21 Consolidated Statements of Cash Flows (in thousands) ================================================================================
-------------------------- For the years ended December 31, 2000 1999 - ---------------------------------------------------------------------------------------------------- Operating Activities: Net loss $ (5,912) $ (3,378) Adjustments to reconcile net loss to net cash used in operating activities Write-off of intangibles 3,208 -- Provision for loan losses 716 1,743 Depreciation, amortization and accretion, net 1,639 1,590 Deferred tax provision 839 496 Net gain on sale of securities (3) (193) Gain on sale of loans (1,182) (3,063) Gain on sale of deposits (3,477) -- Stock grants 10 286 Loss on sale of premises and equipment 205 -- Net loss on sale of other real estate owned 112 -- Decrease (increase) in accrued interest receivable and other assets 2,192 (5,451) (Decrease) increase in accrued interest payable, accrued expenses and other liabilities (1,071) 1,441 --------- --------- Net cash used in operating activities (2,724) (6,529) --------- --------- Investing Activities: Purchases of securities held to maturity -- (17,494) Purchases of securities available for sale (145) (39,596) Maturities and principal payments on securities held to maturity 1,222 2,683 Maturities and principal payments on securities available for sale 2,449 5,175 Proceeds from sale of securities available for sale 509 14,899 Purchases of loans -- (56,070) Sale of loans 112,944 27,343 Net increase in loans (15,701) (126,523) Redemption of bank owned life insurance 2,203 3,895 Capital expenditures (825) (5,291) CMA acquisition -- (1,700) Proceeds from sale of OREO property 1,251 -- Proceeds from sale of premises and equipment 775 -- --------- --------- Net cash provided by (used in) investing activities 104,682 (192,679) --------- --------- Financing Activities: Increase in deposits 10,821 130,678 Sale of deposits (44,564) -- (Decrease) increase in borrowings (43,000) 53,000 Proceeds from issuance of preferred stock, net 4,929 -- Treasury stock purchases -- (983) Cash dividends on preferred stock (25) -- Cash dividends on common stock -- (854) --------- --------- Net cash (used in) provided by financing activities (71,839) 181,841 --------- --------- Increase (decrease) in cash and cash equivalents 30,119 (17,367) Cash and cash equivalents at beginning of year 15,121 32,488 --------- --------- Cash and cash equivalents at end of year $ 45,240 $ 15,121 ========= ========= Supplemental Disclosures: Cash paid: Interest paid $ 16,854 $ 11,947 Net income taxes (received) paid (143) 775 Non-cash investing activities: Transfer to other real estate owned from loans 299 759 - ---------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 financial profile - statements Notes to Consolidated Financial Statements ================================================================================ 1. Summary of Significant Accounting Policies Overview The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, Unity Bank (the "Bank", or when consolidated with the Parent Company, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The Parent Company is a bank holding company incorporated in Delaware under the Bank Holding Company Act of 1956, as amended. The Bank 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 12 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 fourth quarter of 2000, the Bank discontinued the operations of Certified Mortgage Associates, Inc ("CMA"), which it had acquired in the first quarter of 1999 and accounted for under the purchase method of accounting. 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, valuation of deferred tax assets, 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. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. 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 two categories, held to maturity and available for sale. 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 using a method that approximates a level yield. Securities not classified as securities held to maturity 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, or for asset/liability management purposes. The cost of securities sold is determined on a specific identification basis. Gains and losses on sales of securities are recognized in the statements of operations on the date of sale. Loans Held To Maturity and Loans Held For Sale Loans held to maturity are stated at the unpaid principal balance, net of unearned discounts and net deferred loan origination fees and costs. 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. 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 collectibility is reasonably assured and when the loan is brought current as to principal and interest. 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 a SBA program that generally provides for SBA guarantees of 75% to 85% of each loan. The Company generally sells the guaranteed portion of each loan to a third party and retains the servicing. The non-guaranteed portion is generally held in the portfolio. Serviced loans sold to others are not included in the accompanying consolidated balance sheets. Income and fees collected for loan servicing are credited to non-interest income when earned. Allowance for Loan Losses The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The level of the allowance is based on management's evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company's market area. financial profile - notes 23 Credit reviews of the loan portfolio, designed to identify potential charges to the allowance are made during the year by management. 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 economic conditions and considers such factors as the financial condition of the borrowers, past 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 probable 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. Capitalized leases on certain branches are included in premises and equipment and are amortized over the lease life. Other Real Estate Owned Other real estate owned is recorded at the fair value less estimated selling costs (net realizable value "NRV") at the date of acquisition, with a charge to the allowance for loan losses for any excess over NRV. Subsequently, other real estate owned is carried at the lower of cost or NRV, as determined by current appraisals. 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 Company recorded $3.9 million of intangible assets, associated with the 1999 acquisition of Certified Mortgage Associates, Inc., (CMA). In 2000, CMA's operations were discontinued and as a result, the intangible asset, net of accumulated amortization, was written-off. As of December 31,2000, the Company has no intangible assets. 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. Valuation reserves are established against certain deferred tax assets when the collectibility of the deferred tax assets cannot be reasonably assured. Increases or decreases in the valuation reserve are charged or credited to income tax provision (benefit). Loss Per Common Share Basic loss per common share is computed by dividing the net loss to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted loss per common share is computed by dividing net loss to common shareholders for the period by the weighted average number of common 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 loss per common share equals basic loss per common share as inclusion of options and warrants outstanding would cause an anti-dilutive effect. The conversion of the 10% cumulative preferred stock into common stock will be considered dilutive and included in the calculation of diluted earnings per share under the treasury stock when the Company's quarterly basic earnings per share are in excess of $0.18. Comprehensive Loss Comprehensive loss consists of net loss for the current period and the change in unrealized (loss) gain on securities available for sale, net of tax, that was reported as a component of shareholders' equity. Recent Accounting Pronouncements In March 2000, the Financial Accounting Standards Board (FASB) issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25". The interpretation clarifies certain issues with respect to the application of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB Opinion No. 25). The interpretation results in a number of changes in the application of APB Opinion No. 25 including the accounting for modifications to equity awards as well as extending APB Opinion No. 25 accounting treatment to options granted to outside directors for their services as directors. The provisions of the interpretation were effective July 1, 2000 and apply prospectively, except for certain modifications to equity awards made after December 15, 1998. The initial adoption of the interpretation did not have a significant impact on the Company's financial statements. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment to FASB Statement No. 133". Statement No. 138 amends certain aspects of Statement No. 133 to simplify the accounting for derivatives and hedges under Statement No. 133. Statement No 138 is effective upon the company's adoption of Statement No. 133 (January 1, 2001). The initial adoption of Statements No. 133 and 138 did not have a material impact on the Company's financial statements. In September 2000, the FASB issued SFAS No.140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement of FASB Statement 125)." SFAS No. 140 supersedes and replaces the guidance in SFAS No. 125 and, accordingly, provides guidance on the following topics: securitization transactions involving financial assets; sales of financial assets such as receivables, loans and securities; factoring transactions; wash sales; servicing assets and liabilities; collateralized borrowing arrangements; securities lending transactions; repurchase agreements; loan participations; and extinguishment of liabilities. While most of the provisions of SFAS No.140 are effective for transactions entered into after March 31, 2001, companies with fiscal year ends that hold beneficial interest from previous securizations will be required to make additional disclosures in their December 31, 2000 financial statements. The initial adoption of SFAS No. 140 is not expected to have a material impact on the Company's financial statements. 24 financial profile - notes 2. Securities Information on the Company's securities portfolio at December 31, 2000 and 1999 is as follows:
------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair (In thousands) Cost Gains Losses Value Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Available for sale US Treasury $ 7,097 $-- $ (22) $ 7,075 $ 6,988 $-- $ (91) $ 6,897 US Government Agencies 9,067 24 (39) 9,052 9,742 -- (260) 9,482 Mortgage-backed 17,912 5 (275) 17,642 19,808 -- (718) 19,090 States & political -- -- -- -- 655 2 -- 657 Federal Home Loan Bank stock 2,720 -- -- 2,720 2,675 -- -- 2,675 Corporate debt 964 -- (56) 908 964 -- (42) 922 Equity 523 -- (111) 412 580 -- (204) 376 -------------------------------------------- -------------------------------------------- Total securities available for sale $38,283 $29 $(503) $37,809 $41,412 $ 2 $(1,315) $40,099 ============================================ ============================================ Held to maturity US Government Agencies $20,246 $-- $(620) $19,626 $20,245 $-- $(1,128) $19,117 Mortgage-backed 12,782 -- (255) 12,527 14,005 -- (852) 13,153 -------------------------------------------- -------------------------------------------- Total securities held to maturity $33,028 $-- $(875) $32,153 $34,250 $-- $(1,980) $32,270 ============================================ ============================================ - ------------------------------------------------------------------------------------------------------------------------------------
The table below provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at December 31, 2000, is primarily distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls. The total weighted average yield excludes equity securities.
-------------------------------------------------------------------------------------------- Within After One Year After Five Years After Total One Year Through Five Years Through Ten Years Ten Years Carrying -------------------------------------------------------------------------------------------- (In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - -------------------------------------------------------------------------------------------------------------------------------- Available for Sale at Fair Value: US Government and Federal agencies $ 9,151 5.35% $ 998 6.75% $ 4,845 6.48% $ 1,133 7.37% $16,127 5.92% Other Securities Mortgage-backed -- -- -- -- 937 5.80% 16,705 6.54% 17,642 6.50% Other Debt -- -- -- -- -- -- 908 7.59% 908 7.59% Equities, net 412 -- 2,720 -- -- -- -- -- 3,132 -- -------------- -------------- -------------- --------------- --------------- Total Other 412 -- 2,720 -- 937 5.80% 17,613 6.60% 21,682 6.56% -------------- -------------- -------------- --------------- --------------- $ 9,563 5.35% $ 3,718 6.75% $ 5,782 6.37% $18,746 6.64% $37,809 6.26% ============== ============== ============== =============== =============== Held to Maturity at Cost: US Government and Federal agencies $ 2,000 5.51% $12,500 5.70% $ 4,246 5.07% $ 1,500 7.39% $20,246 5.68% Mortgage-backed -- -- -- -- 352 5.99% 12,430 6.41% 12,782 6.40% -------------- -------------- -------------- --------------- --------------- $ 2,000 5.51% $12,500 5.70% $ 4,598 5.14% $13,930 6.51% $33,028 5.96% ============== ============== ============== =============== =============== - --------------------------------------------------------------------------------------------------------------------------------
For 2000, gross security gains and losses were $4,600 and ($2,100) respectively and for 1999, gross security gains and losses were $287,000 and ($94,000), respectively. Securities with carrying values aggregating $30,737,000 were pledged to secure public deposits. 25 3. Loans Loans outstanding by classification as of December 31, 2000 and 1999 are as follows: ---------------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Commercial & industrial $ 61,427 $ 43,523 Loans secured by real estate: Commercial mortgages 48,770 52,359 Residential mortgages 91,371 178,963 Construction 5,784 17,837 Consumer 18,788 29,850 -------- -------- Total loans $226,140 $322,532 ======== ======== - -------------------------------------------------------------------------------- SBA loans held for sale, totaling $6.7 million and $3.7 million at December 31, 2000 and 1999, 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, 2000. SBA loans sold to others and serviced by Unity are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by outside investors, amounted to approximately $86,544,000 and $65,712,000 at December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999, the Bank's recorded investment in impaired loans, defined as nonaccrual loans, was $2,903,000 and $1,412,000, respectively, and the related valuation allowance was $417,000 and $219,000, respectively. This valuation allowance is included in the allowance for loan losses in the accompanying balance sheets. Interest income that would have been recorded had these impaired loans performed under the original contract terms was $313,000 in 2000 as compared to $206,000 in 1999. Average impaired loans for 2000 and 1999 were $2,326,000 and $1,472,000 respectively. At December 31, 2000, $1,272,000 of loans were past due greater than 90 days but still accruing interest as compared to $166,000 at December 31, 1999. Management has evaluated these loans and determined that they are both well collateralized and in the process of collection. The majority of the Company's loans are secured by real estate, a portion of which are located outside of New Jersey. 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, 1999 $ 3,893 New loans 1,441 Reductions through resignations (743) Repayments (2,590) ------- Loans to officers, directors or their associates at December 31, 2000 $ 2,001 ======= - -------------------------------------------------------------------------------- 4. Allowance for Loan Losses The allowance for loan losses is based on estimates. Ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become known, they are reflected in operations in the periods in which they become known. An analysis of the change in the allowance for loan losses during 2000 and 1999 is as follows: ------------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Balance at beginning of year $ 2,173 $ 1,825 Provision charged to expense 716 1,743 Loans charged-off (372) (1,433) Recoveries on loans previously charged-off 41 38 ------- ------- Balance at end of year $ 2,558 $ 2,173 ======= ======= - -------------------------------------------------------------------------------- 5. Premises and Equipment The detail of premises and equipment as of December 31, 2000 and 1999 is as follows: ---------------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Land and buildings $ 2,793 $ 2,780 Capital leases 2,714 3,971 Furniture, fixtures and equipment 5,079 6,036 Leasehold improvements 2,119 2,321 -------- -------- Gross premises and equipment 12,705 15,108 -------- -------- Less: Accumulated depreciation (3,325) (2,738) -------- -------- Net premises and equipment $ 9,380 $ 12,370 ======== ======== - -------------------------------------------------------------------------------- The Company has four capital lease locations that are sublet or assigned to a third party, with the third party paying rent in equal amounts as per the lease agreement between the Company and the lessor. Depreciation of premises and equipment totaled $1,251,000 and $956,000 in 2000 and 1999, respectively. 6. Other Assets The detail of other assets as of December 31, 2000 and 1999 are as follows: ----------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Intangibles $ -- $ 3,595 Income taxes receivable 2,591 2,489 Net deferred tax asset 276 1,431 Prepaid expenses 589 704 Cash surrender value of life insurance -- 2,203 Other real estate owned 142 1,505 Other assets 530 1,981 ------ ------- Total other assets $4,128 $13,908 ====== ======= - -------------------------------------------------------------------------------- On December 30, 1998, the Company purchased life insurance policies on its key directors and executive officers. In 1999, all policies, except one, were canceled. This policy was canceled in 2000. In 2000, the Company wrote off approximately $3.2 million of goodwill intangible recognized in the 1999 acquisition of CMA. 7. Deposits The maturity distribution of time deposits for December 31, 2000 is as follows:
--------------------------------------------------------------- Within 1 to 2 2 to 3 3 to 4 Over (In thousands) 1 year years years years 4 years - ------------------------------------------------------------------------------------------- At December 31, 2000 $100,000 or more $32,387 $1,127 $1,482 $ 206 $ -- Less than $100,000 $77,227 $5,490 $5,485 $6,506 $404 - -------------------------------------------------------------------------------------------
26 financial profile - notes 8. Borrowings The following table is the period-end and average balance of FHLB borrowings for the last two years with resultant rates: ---------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------- (In thousands) Amount Rate Amount Rate At December 31, $10,000 4.92% $53,000 5.66% Year-to-date average $ 8,289 6.16% $16,971 5.59% - -------------------------------------------------------------------------------- The ten year borrowings at December 31, 2000 are callable after November 2001. 9. Commitments and Contingencies Facility Lease Obligations The Company operates twelve branches, five branches under operating leases, including its headquarters, four branches under capital leases and three branches are owned. In addition, the Company has long term leases on four other locations, which are sublet to a third party, with the third party paying rent in equal amounts as per the lease agreement between the Company and the lessor. The leases contractual expiration range between the years 2006 and 2014. The following schedule summarizes the contractual rent payments for the future years. --------------------------------------------------------- Operating Capital Rent Lease Lease From Net Rental Rental Sublet Rent (In thousands) Payments Payments Locations Obligation - -------------------------------------------------------------------------------- 2001 $632 $ 739 $ 347 $1,024 2002 645 758 358 1,045 2003 626 775 368 1,033 2004 584 802 379 1,007 2005 560 821 390 991 Thereafter 87 2,371 1,244 1,214 - -------------------------------------------------------------------------------- Total rent expense, including the payments made under capital leases, totalled $915,000 and $1,290,000 for 2000 and 1999, respectively. 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. The Company does not believe that any existing legal claims or proceedings will have a material impact on the Company's financial position, although they could have a material impact on the Company's reults of operations. On August 14, 2000, Robert J. Van Volkenburgh resigned from his positions of Chairman of the Board and Cheif Executive Officer of the Company. In February 2001, Mr. Van Volkenburgh filed a complaint in the Superior Court of New Jersey alleging breach of two agreements. The Company intends to vigorously defend itself from any claims for payment under the agreements. Counsel has advised the Company it has strong defenses to any such claims by Mr. Van Volkenburgh and he is not likely to succeed in this regard. Commitments to Borrowers Commitments to extend credit are legally binding loan commitments with set expiration dates. They are to be disbursed, subject to certain conditions, upon request of the borrower. The Company was committed to advance approximately $42,193,000 to its borrowers as of December 31, 2000, as compared to $65,013,000 at December 31, 1999. At December 31, 2000, $13,580,000 of these commitments expire after one year, as compared to $8,213,000 a year earlier. 10. 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. On March 13, 2000, the Company completed an offering of shares of a newly created class of preferred stock. The offering was undertaken without registration with the Securities and Exchange Commission to a limited number of sophisticated investors. The preferred stock bears a cumulative dividend rate of 10%, and is convertible into shares of the Company's common stock at an assumed value of $7.25 per common share. The Company also has rights to force conversion of its preferred stock into common stock starting in March 2002 at an assumed common stock price of $7.25 per share. The Company obtained $5.2 million in proceeds from this offering. The Company issued 103,500 shares of the preferred stock, which are convertible into 713,793 shares of the Company's common stock at a conversion rate of 6.8966 common. The accounting, legal and consulting costs to issue the preferred stock totaled $0.3 million and were applied against the proceeds. The Company is prohibited under regulatory order, from paying dividends to its shareholders, and the Bank is prohibited from paying a dividend to the Company. At December 31, 2000, there were $388 thousand of preferred stock dividends in arrears that have not been declared. 11. Other Income The other income components for the years ended December 31, 2000 and 1999 are as follows: -------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- SBA Fees $ 785 $ 671 Loan Fees 355 394 Income from cash surrender value of life insurance 108 248 Non-deposit account transaction charges 225 144 Gain on sale of deposits 3,477 -- Other income 357 115 ------ ------ Total other income $5,307 $1,572 ====== ====== - -------------------------------------------------------------------------------- 12. Other Operating Expenses The other operating expense components for the years ended December 31, 2000 and 1999 are as follows: ----------------------- (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Professional services $ 1,471 $1,386 Office expense 1,885 1,986 Advertising expense 815 881 Communication expense 877 767 Bank services 1,052 802 FDIC Insurance 311 192 Director Fees 98 236 Non-loan losses* 43 848 Loan processing and collection expense 1,280 1,265 Amortization of intangibles 387 393 Write-off of intangibles 3,208 -- Other expense 863 729 ------- ------ Total other operating expenses $12,290 $9,485 ======= ====== - -------------------------------------------------------------------------------- * 1999 includes a $786 thousand write-down of uncollected assets associated with a check-kiting scheme. 27 13. Income Taxes The components of the provision (benefit) for income taxes are as follows: ------------------------ (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Federal - Current (benefit) provision $ (24) $(2,239) - Deferred (benefit) provision (936) 496 ------- ------- Total Federal (benefit) provision $ (960) $(1,743) ------- ------- State - Current (benefit) provision 25 (644) - Deferred (benefit) provision (316) -- ------- ------- Total State (benefit) provision $ (291) $ (644) Valuation allowance 2,090 -- ------- ------- Total (benefit) provision for income taxes $ 839 $(2,387) ======= ======= - -------------------------------------------------------------------------------- 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: ------------------------ (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Federal income taxes at statutory rate $(1,725) $(1,960) State income taxes, net of Federal income tax effect 95 (425) Other 379 (2) Valuation allowance 2,090 -- ------- ------- Provision (benefit) for income taxes $ 839 $(2,387) ======= ======= - -------------------------------------------------------------------------------- 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, 2000 and 1999 are as follows: ------------------------ (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Federal alternative minimum tax credit $ 70 $ -- Allowance for loan losses 818 550 Unrealized loss on securities available for sale 180 499 Deferred loan costs (370) (591) Operating loss carry-forwards 1,606 576 Mark to market valuation - loans held for sale -- 461 Other, net 62 (64) ------- ------- Net deferred tax asset $ 2,366 $ 1,431 Less: valuation allowance (2,090) -- ------- ------- Net deferred tax asset $ 276 $ 1,431 ======= ======= - -------------------------------------------------------------------------------- The Company computes deferred income taxes under the asset and liability method. Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions subject to reduction of the asset by a valuation allowance. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets may not be realized. The Company has provided a valuation allowance of $2.1 million which reduced the deferred tax asset to $276,000. At December 31, 2000, the Company has available for federal and state tax purposes, pre-tax net operating loss carryforwards of approximately $2.5 million and $13.0 million, respectfully. Utilization of such net operating losses may be significantly curtailed if a significant change of ownership occurs. 14. Loss Per Common Share The following is a reconciliation of the calculation of basic and dilutive loss per common share. All share amounts have been restated to include the effect of a 5% stock dividend paid on January 8, 1999. ----------------------------- (In thousands, except share data) 2000 1999 - -------------------------------------------------------------------------------- Net loss $ (5,912) $ (3,378) Less: Paid and unpaid preferred stock dividends 413 -- Net loss to common shareholders $ (6,325) $ (3,378) ----------- ----------- Weighted average common shares outstanding 3,706,047 3,723,448 Plus: Potential dilutive common stock -- -- ----------- ----------- Diluted average common shares outstanding 3,706,047 3,723,448 ----------- ----------- Net loss per common share - basic and diluted $ (1.71) $ (0.91) =========== =========== - -------------------------------------------------------------------------------- 15 Regulatory Matters 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 Bank's branch expansion the New Jersey Department of Banking and Insurance imposed a tier leverage ratio of 6% for the Bank. Due to losses incurred during 1999, the Company and the Bank failed to meet the total risk-based capital requirement of 8% at both September 30, 1999 and December 31, 1999. Because the Bank failed to satisfy the minimum capital requirements, it was deemed to be "undercapitalized" under the Prompt Corrective Action provisions of the Federal Deposit Insurance Act and the regulations of the FDIC. Because the Company and the Bank failed to maintain minimum levels of required capital the Bank and the Company were required to raise additional capital. As a result of the capital deficiency, in the first quarter of 2000, the Bank and the Company entered into Memoranda of Understanding with their primary regulatory agencies. However, due to continued losses through the first two quarters of 2000, and among other reasons, the Bank and Company entered into stipulations and agreements with each of their respective regulators on July 18, 2000. Under these agreements, the Bank and the Company were each required to take a number of affirmative steps including; hiring an outside consulting firm to review the management structures, adopt strategic and capital plans which will increase the Bank's leverage ratio to 6% or above, review and adopt various policies and procedures, adopting programs with regard to the resolution of certain criticized assets, and providing ongoing reporting to the various regulatory agencies with regard to the Bank's and Company's progress in meeting the requirements of the agreements. The agreements require the Bank and Company to establish a compliance committee to oversee the efforts in meeting all requirements of the agreements, and prohibited the Bank from paying a dividend to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval. financial profile - notes 28 In accordance with the capital plan submitted to the regulators, 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 obtained $5.2 million in gross proceeds from this offering. The accounting, legal and consulting costs to issue the preferred stock totaled $.3 million and were applied against the proceeds. The Holding Company contributed $5.1 million of capital to the Bank in 2000. In addition to the issuance of preferred stock, the Company under the capital restoration plan agreed to improve capital by reducing its financial assets. Pursuant to the plan, the Bank sold $36.4 million in adjustable rate one-to-four family mortgages (ARM's) on March 7, 2000. In the third quarter, the Bank entered into agreements to sell the deposits of five of its branches. The transaction closed in December 2000, and the Bank realized a $3.5 million gain on the sale of deposits, including the write-off of certain equipment in the branches. In order to fund the sale of the branches, $44.8 million of home equity loans were sold. As a result of the preferred stock offering and the reduction of assets through both loan sales and the sale of deposits and branches, both the Company and the Bank meet the minimum federal capital adequacy requirements at December 31, 2000. The Bank has until December 2001 to acheive the 6% Tier 1 leverage ratio required by the New Jersey Department of Banking and Insurance. The Company's actual capital amounts and ratios are presented in the following table.
--------------------------------------------------------------------- To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions (In thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- As of December 31, 2000 Leverage ratio $21,539 5.50% >= $15,670 4.00% >= $19,588 5.00% Tier I risk-based ratio $21,539 9.61% >= $ 8,961 4.00% >= $13,442 6.00% Total risk-based capital ratio $24,097 10.76% >= $17,922 8.00% >= $22,403 10.00% As of December 31, 1999 Leverage ratio $18,883 4.35% >= $17,348 4.00% < $21,685 5.00% Tier I risk-based ratio $18,883 6.17% >= $12,241 4.00% >= $18,361 6.00% Total risk-based capital ratio $21,056 6.88% < $24,481 8.00% < $30,602 10.00% - ----------------------------------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are presented in the following table.
--------------------------------------------------------------------- To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions (In thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- As of December 31, 2000 Leverage ratio $20,394 5.24% >= $15,579 4.00% >= $19,474 5.00% Tier I risk-based ratio $20,394 9.12% >= $ 8,946 4.00% >= $13,419 6.00% Total risk-based capital ratio $22,952 10.26% >= $17,892 8.00% >= $22,365 10.00% As of December 31, 1999 Leverage ratio $17,215 4.01% >= $17,181 4.00% < $21,476 5.00% Tier I risk-based ratio $17,215 5.62% >= $12,260 4.00% < $18,390 6.00% Total risk-based capital ratio $19,388 6.33% < $24,520 8.00% < $30,651 10.00% - ----------------------------------------------------------------------------------------------------------
16. 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 $42,000 and $39,000 to the Plan in 2000 and 1999, 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 has five stock option Plans. These Plans allow the Board of Directors to grant options to officers, employees and members of the Board. Option prices are determined by the Board, provided however, that the option price may not be less than 85% of the fair market value of the shares at the date of the grant. The period during which the option is vested varies, but no option may be exercised after 10 years from the date of the grant. As of December 31, 2000, 811,876 shares have been reserved for issuance under the Plans, 363,655 shares have been issued, leaving 448,221 shares available. 29 Transactions under these five stock option plans are summarized as follows: ---------------------------------------- Weighted Number Exercise Average of Price Per Exercise Shares Share Price - -------------------------------------------------------------------------------- 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 -------- Options granted 88,500 2.81 - 8.00 6.31 Options exercised -- -- -- Options expired (315,864) 5.88 - 13.50 10.44 -------- Outstanding, December 31, 2000 300,856 $2.81 - $13.69 $ 9.45 ======== - -------------------------------------------------------------------------------- The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. Under APB Opinion 25, compensation costs for the stock option is not recognized. The Company's net loss and loss per common share would have been reduced to the pro forma amounts indicated in the following schedule had there been compensation costs for the Company's stock option plans, based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123. The estimated fair value of each award option was $4.59 and $6.19 in 2000 and 1999, respectively. SFAS 123 Proforma Restatement -------------------------------- (In thousands, except per share amounts) 2000 1999 - -------------------------------------------------------------------------------- Net loss- As reported $ (6,325) $ (3,378) Pro forma $ (6,569) $ (3,909) Loss per share- Basic and diluted as reported $ (1.71) $ (0.91) Pro forma $ (1.77) $ (1.05) - -------------------------------------------------------------------------------- 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 2000 and 1999; dividend yields of 0.0% and 0.0% respectively, expected volatility of 90.0% and 90.0% respectively, risk-free interest rates of 5.55% and 5.75% respectively, and expected lives of 3.4 and 3.8 respectively. The following table summarizes information about stock options outstanding at December 31, 2000: - -------------------------------------------------------------------------------- Exercise Shares Remaining Shares Price Outstanding Contractual Life Exercisable - ---------------------------------- ------------------------------------- < $ 3.99 15,000 9.7 years -- $ 4.00 - $ 5.99 13,500 9.5 years 200 $ 6.00 - $ 7.99 38,192 5.3 years 31,892 $ 8.00 - $ 9.99 33,750 5.0 years 19,350 $10.00 - $11.99 197,789 2.2 years 157,469 > $12.00 2,625 2.5 years 2,625 ------ ------- ------- $ 9.45* 300,856 211,536 ====== ======= ======= - -------------------------------------------------------------------------------- * Weighted average exercise price Select key employees and Board members are eligible to participate in the Company's two Stock Bonus Plans. 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. The Company granted 26,894 shares to employees and Board members in 1999, resulting in approximately $289,000 in expense. No shares were granted in 2000. As of December 31, 2000, the Company has 47,646 shares reserved for issuance under the Stock Bonus Plans. 17. 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 fair value of the borrowings are estimated by discounting the projected future cash flows using current market rates. Unrecognized Financial Instruments At December 31, 2000, the Bank had standby letters of credit outstanding of $282,000, as compared to $299,000 at December 31, 1999. The fair value of these commitments is nominal. The Bank does not generally charge a fee on loan commitments and, consequently, there is no basis to calculate a fair value. Below is the Company's estimated financial instruments fair value as of December 31, 2000 and 1999:
-------------------------------------------- 2000 1999 -------------------------------------------- Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value - ------------------------------------------------------------------------------------- Financial assets- Cash and Federal funds sold $ 45,240 $ 45,240 $ 15,121 $ 15,121 Securities held to maturity $ 33,028 $ 32,153 $ 34,250 $ 32,270 Securities available for sale $ 37,809 $ 37,809 $ 40,099 $ 40,099 Loans, net of allowance for possible loan losses $223,582 $221,124 $320,359 $316,374 Financial liabilities- Total deposits $320,318 $320,579 $357,538 $356,843 Financial liabilities- Borrowings $ 10,000 $ 10,040 $ 53,000 $ 53,000 - -------------------------------------------------------------------------------------
30 financial profile - notes 18. CONDENSED FINANCIAL STATEMENTS OF UNITY BANCORP, INC. (PARENT COMPANY ONLY) ----------------------- Balance Sheets December 31 (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Assets: Cash and due from banks $ 721 $ 606 Securities available for sale 412 376 Investment in Bank subsidiary 20,169 20,122 Other assets 117 756 -------- -------- Total assets $ 21,419 $ 21,860 ======== ======== Liabilities and Shareholders' Equity: Other liabilities $ 105 $ 68 Shareholders' equity 21,314 21,792 -------- -------- Total liabilities and shareholders' equity $ 21,419 $ 21,860 ======== ======== - -------------------------------------------------------------------------------- ----------------------- Statements of Operations December 31 (In thousands) 2000 1999 - -------------------------------------------------------------------------------- Interest income $ 97 $ 187 Interest expense 15 -- -------- -------- Net interest expense 82 187 -------- -------- Gain on sale of available for sale securities 4 205 Total income 86 392 Compensation 79 431 Other expenses 594 618 -------- -------- Loss before income taxes and equity in undistributed income of subsidiary (587) (657) Income tax benefit (199) (223) -------- -------- Loss before equity in undistributed loss of subsidiary (388) (434) Equity in undistributed loss of subsidiary (5,524) (2,944) -------- -------- Net loss $ (5,912) $ (3,378) ======== ======== - -------------------------------------------------------------------------------- ----------------------- Statements of Cash Flows December 31 (In thousands) 2000 1998 - -------------------------------------------------------------------------------- Operating Activities: Net loss $ (5,912) $ (3,378) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Equity in undistributed loss subsidiary 5,524 2,944 Depreciation and amortization -- 13 Stock grants 10 -- Gain on sale of securities available for sale (4) (205) Decrease (increase) in other assets 605 (454) (Decrease) increase in other liabilities 35 (5) -------- -------- Net cash used in (provided by) operating activities 258 (1,085) -------- -------- Investing Activities: Sales and maturities on securities available for sale 62 2,834 Purchases of securities available for sale -- (2,803) Additional equity investment in bank subsidiary (5,109) (3,640) Cash payment - CMA acquisition -- (1,700) -------- -------- Net cash used in investing activities (5,047) (5,309) -------- -------- Financing Activities: Proceeds from issuance of common stock 4,929 -- Payment to repurchase common stock, net -- (983) Cash dividends and fractional shares paid (25) (854) -------- -------- Net cash provided by (used in ) financing activities 4,904 (1,837) -------- -------- Net increase (decrease) in cash and cash equivalents 115 (8,231) -------- -------- Cash and cash equivalents, beginning of year 606 8,837 -------- -------- Cash and cash equivalents, end of year $ 721 $ 606 -------- -------- Supplemental disclosures: Interest paid $ 15 $ -- ======== ======== - -------------------------------------------------------------------------------- 19. QUARTERLY FINANCIAL INFORMATION (Unaudited) The following quarterly financial information for the years ended December 31, 2000 and 1999 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 amounts) --------------------------------------------------------- 2000 March 31 June 30 September 30 December 31 - ---------------------------------------------------------------------------------------------------------------------- Total interest income $ 7,101 $ 6,968 $ 7,057 $ 6,891 Total interest expense 4,225 4,046 4,114 3,937 ------- ------- ------- ------- Net interest income 2,876 2,922 2,943 2,954 Provision for loan losses 246 90 90 290 ------- ------- ------- ------- Net interest income after provision for loan losses 2,630 2,832 2,853 2,664 Total non-interest income 544 2,437 554 4,131 Total non-interest expense 4,899 5,681 7,484 5,654 ------- ------- ------- ------- Net (loss) income before tax (1,725) (412) (4,077) 1,141 ------- ------- ------- ------- Income tax (benefit) provision (709) (173) (757) 2,478 ------- ------- ------- ------- Net loss from operations $(1,016) $ (239) $(3,320) $(1,337) ------- ------- ------- ------- Paid and unpaid preferred stock dividends $ 25 $ 131 $ 132 $ 125 ------- ------- ------- ------- Net loss to common shareholders $(1,041) $ (370) $(3,452) $(1,462) ------- ------- ------- ------- Basic and diluted loss per common share $ (0.27) $ (0.11) $ (0.93) $ (0.40) ------- ------- ------- ------- - ---------------------------------------------------------------------------------------------------------------------- 1999 March 31 June 30 September 30 December 31 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 non-interest income 1,690 2,840 1,098 (22) Total non-interest expense 3,432 5,334 6,075 5,737 ------- ------- ------- ------- Net income (loss) before tax 794 (684) (2,799) (3,076) ------- ------- ------- ------- Income tax (benefit) provision 293 (309) (1,118) (1,253) ------- ------- ------- ------- Net income (loss) from operations $ 501 $ (375) $(1,681) $(1,823) ------- ------- ------- ------- Basic and diluted earnings (loss) per common share $ 0.13 $ (0.10) $ (0.45) $ (0.49) - ----------------------------------------------------------------------------------------------------------------------
31 Products & Services ================================================================================ CHECKING NJCC Account Personal Plus Opportunity [graphic: check book] NOW Account Money Market Business Prosperity Plus (55+) SAVINGS/TIME Regular Money Market Deposit [graphic: piggy bank] Prosperity (55+) Individual Retirement Holiday Club Accounts Certificates of Deposit CONSUMER LOANS Home Equity Loans Auto Loans [graphic: graduation Personal Loans cap] Mortgage Loans Personal Access Line BUSINESS LOANS SBA Loans* Commercial Loans [graphic: trophy] Construction Loans Lines of Credit SBA *Preferred Lender in NJ, PA, NY & DE. Silver Award Winner in 2000. E-COMMERCE Unity24 - Bank by Phone [graphic] Unet-e.banking Unet-e.pay OTHER SERVICES Safe Deposit Boxes Certified Checks Direct Deposit U.S. Savings Bonds Traveler's Cheques Money Orders Wire Transfers Night Depository Notary Public Public Funds Depository Escrow Account Service Tenant Security Member FDIC. Equal Opportunity Lender. Equal Housing Lender. [graphic: house] Retail Financial Service Centers Clinton 64 Old Highway 22 908.730.7300 Colonia 1379 St. Georges Avenue 732.815.1177 Edison 1746 Oak Tree Road 732.205.0044 Flemington 110 Main Street 908.782.2000 Highland Park 104 Raritan Avenue 732.418.0330 Linden 628 North Wood Avenue 908.925.8353 North Plainfield 450 Somerset Street 908.769.0303 Scotch Plains 2222 South Avenue 908.233.8009 South Plainfield 2426 Plainfield Avenue 908.412.9393 Springfield 733 Mountain Avenue 973.258.0111 Union 952 Stuyvesant Avenue 908.851.9700 Whitehouse 370 Route 22 West 908-823-0555 Call Us At Unity Direct [graphic: State of 800.618.BANK New Jersey] unitybank.com 32 Company Information ================================================================================ Unity Bancorp, Inc. Company Headquarters Unity Bancorp, Inc. 64 Old Highway 22 Clinton, New Jersey 08809 Counsel Windels Marx Lane & Mittendorf, LLP New Brunswick, New Jersey Auditors KPMG LLP Short Hills, New Jersey Registrar & Transfer Agent Shareholder address changes or inquiries regarding shareholder accounts and stock transfers should be directed to: First City Transfer Company P.O. Box 170 Iselin, New Jersey 08837-0170 732.906.9227 Investor and Media Inquiries Analysts, institutional investors, individual shareholders and media representatives should contact: James Hughes Unity Bancorp, Inc. 64 Old Highway 22 Clinton, New Jersey 08809 908.730.7630 Web Info Information on financial results, products and services, and branch locations is available on the internet at: www.unitybank.com or email us at: info@unitybank.com. Financial Information Copies of the Company's annual report on Form 10-K SB filed with the Securities and Exchange Commission may be obtained: o by writing to James Hughes, CFO at Company headquarters. o electronically at the SEC's home page at www.sec.gov. Stock Listing Unity Bancorp, Inc. common stock is traded on the NASDAQ under the symbol "UNTY". Common Stock Prices/Dividend Paid The table below sets forth by quarter the range of high, low and quarter-end closing sale prices for Unity Bancorp, Inc's. common stock and the cash dividends paid per common share. - ------------------------------------------------------------------------- Cash 2000 Dividend Quarter High Low Close Paid - ------------------------------------------------------------------------- Fourth $4.38 $2.00 $2.00 $0.00 Third $4.94 $3.44 $3.44 $0.00 Second $6.25 $3.50 $3.88 $0.00 First $6.68 $5.25 $6.00 $0.00 Annual Meeting of Shareholders Shareholders are cordially invited to the Annual Meeting of Shareholders. The Meeting will convene at 10:00 am, Thursday, May 24, 2001, at the Holiday Inn Select of Clinton. 33 EX-21 3 0003.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT The Registrant has one subsidiary, Unity Bank. Unity Bank has two subsidiaries, Unity 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 February 28, 2001, relating to the consolidated balance sheets of Unity Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended, which report is incorporated by reference to the December 31, 2000 Annual Report on Form 10-KSB of Unity Bancorp, Inc. KPMG LLP Short Hills, New Jersey March 28, 2001 Page 13 of 14 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the registrants unaudited December 31, 2000 annual financial statements and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-2000 DEC-31-2000 13,740 0 31,500 0 37,809 33,028 32,153 70,837 2,558 356,003 320,318 0 10,000 4,371 0 4,929 26,234 (9,849) 356,003 122,132 4,630 1,255 28,017 15,586 16,322 11,695 716 3 12,290 (5,073) (5,073) 0 0 (5,912) (1.71) (1.71) 0.032 2,903 1,272 0 300 2,173 372 41 2,558 2,558 0 0
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