-----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, PeQvr/lyxHY6pDnoCCgjKP9j/78S0TF+Xf3+G5BmpQEs3NQO2qOAIxzKFUqVwF6h Bi7NqVg1hbhPWSqDk/K1aw== 0000950110-98-000366.txt : 19980401 0000950110-98-000366.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950110-98-000366 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX 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: 98582655 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 FORM 10-KSB ================================================================================ 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, 1997 ---------------------------- 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: Title of each class: Name of each exchange on which registered: Common Stock, No Par Value American Stock Exchange Common Stock Purchase Warrants American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: None. 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 February 28, 1998, was $22,446,200. The number of shares of the Issuer's Common Stock, no par value, outstanding as of February 28, 1998, was 2,011,853. For the fiscal year ended December 31, 1997, the Issuer had total revenues of $18,068,519. 2
DOCUMENTS INCORPORATED BY REFERENCE 10-KSB ITEM DOCUMENT INCORPORATED ----------- --------------------- Item 6. Management's Discussion and Registrant's Annual Report to Shareholders under Analysis or Plan of Operation the caption "Management's Discussion and Analysis" Item 7. Financial Statements Registrant's Annual Report to Shareholders under the caption "Consolidated Financial Statements" Item 9. Directors and Executive Officers of Proxy Statement for 1998 Annual Meeting of the Company; Compliance with Shareholders to be filed no later than April 29, 1998 Section 16(a) of the Exchange Act Item 10. Executive Compensation Proxy Statement for 1998 Annual Meeting of Shareholders to be filed no later than April 29, 1998 Item 11. Security Ownership of Certain Proxy Statement for 1998 Annual Meeting of Beneficial Owners and Management Shareholders to be filed no later than April 29, 1998 Item 12. Certain Relationships and Related Proxy Statement for 1998 Annual Meeting of Transactions Shareholders to be filed no later than April 29, 1998
3 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Unity Bancorp, Inc. (the "Company" or "Registrant") is a one-bank holding company incorporated under the laws of the State of Delaware to serve as a holding company for First Community 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 is a full-service commercial bank, providing a wide range of business and consumer financial services through its main office and six branches located in Clinton, North Plainfield, Flemington, Springfield, Scotch Plains, Linden and Union, New Jersey. The Bank's primary service area encompasses the Route 22/Route 78 corridor between the Bank's Clinton, New Jersey main office and its Linden, New Jersey branch. This service area includes communities in Essex, Hunterdon, Middlesex, Morris, Somerset, Union and Warren Counties, New Jersey. The Bank has applied to the New Jersey Department of Banking and Insurance and the Federal Deposit Insurance Corporation to establish a new branch in Whitehouse, New Jersey. Assuming receipt of regulatory approvals, this branch may be opened by the third quarter of 1998. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "FRB"). The Bank is a New Jersey chartered commercial bank whose deposits are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The operations of the Company and the Bank are subject to the supervision and regulation of FRB, FDIC and the New Jersey Department of Banking (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 4 specific services and charges in a manner designed to attract the business of the small and medium sized business and professional community as well as that of individuals residing, working and shopping in its service area. The Company engages in a wide range of lending activities and offers commercial, consumer, mortgage, home equity and personal loans. SERVICE AREA The Company's primary service area is defined as the neighborhoods served by the Bank's offices. The Bank's main office, located in Clinton, in combination with its Flemington office, 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 and Union offices serve the majority of the communities in Union County, and the southwestern communities of Essex County. The Company has a secondary service area along the Route 78/Route 22 corridor between its two Hunterdon County offices and its offices located in Union County. In addition to the previously mentioned Interstate highways, the Bank's primary and secondary service areas also have access to a major network of other roads which includes Route 287 and Route 202. COMPETITION The Company is located in an extremely competitive area. The Company's service area is already serviced by major regional banks, large thrift institutions and by a variety of credit unions. Most of the Company's competitors have substantially more capital and therefore greater lending limits than the Company. The Company's competitors generally have established positions in the service area and have greater resources than the Company with which to pay for advertising, physical facilities, personnel and interest on deposited funds. The Company relies upon the competitive pricing of its loans, deposits and other services as well as its ability to provide local decision making and personal service in order to compete with these larger institutions. EMPLOYEES The Company employs 87 full-time and 9 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. 5 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. 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. Additionally, the BHCA 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. 6 There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Capital Adequacy Guidelines for Bank Holding Companies. The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. 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-weighing. 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. 7 Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations, are given a 100% risk-weighing. Transaction related contingencies such as bid bonds, standby letters of credit backing nonfinancial obligations, and undrawn commitments (including commercial credit lines with an initial maturity or more than one year) have a 50% risk-weighing. Short term commercial letters of credit have a 20% risk-weighing and certain short-term unconditionally cancelable commitments have a 0% risk-weighing. In addition to the risk-based capital guidelines, the FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum. 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. Dividend Rights. Under the Banking Act, a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank's surplus. Recent Regulatory Enactments. On September 30, 1996, the Deposit Insurance Fund Act of 1996 (the "Deposit Act") became law. The primary purpose of the Deposit Act was to recapitalize the SAIF by charging all SAIF member institutions a one time special assessment of 65.7 basis points of the institution's SAIF assessable deposits as of March 31, 1995. As a result of the recapitalization of the SAIF, FDIC premium assessments to SAIF members, both in the 8 form of insurance premiums and for repayment of the Federal Finance Corporation obligations, have been reduced from 23 basis points to 6.4 basis points for the healthiest institutions. The Deposit Act also calls for the federal banking agencies to study the various financial institution charters and propose a single standard federal charter, thereby doing away with the separate bank and thrift charters. If a single charter is adopted, the Bank Insurance Fund ("BIF") and SAIF will be merged on January 1, 1999. At that time, all insured institutions will pay the same FDIC assessment. At this time, management of the Company is unable to predict when or if a unified federal charter will be adopted and when and if the BIF and the SAIF will be merged, or the effect, if any, of these events upon the Company. ITEM 2. DESCRIPTION OF PROPERTY The Company conducts its business through its main office located at 64 Old Highway 22, Clinton, New Jersey, and its six branch offices. The following table sets forth certain information regarding the Company's properties as of December 31, 1997. Leased Location or Owned Date of Lease Expiration - -------- ------- ------------------------ 64 Old Highway 22 Leased 7/3/04 Clinton, NJ 450 Somerset Street Owned N/A North Plainfield, NJ 110 Main Street Leased 3/31/03 Flemington, NJ 733 Mountain Avenue Leased 9/30/98 Springfield, NJ 2222 South Avenue Leased 4/30/06 Scotch Plains, NJ 752 Stuyvesent Avenue Leased 10/31/99 Union, NJ 628 North Wood Avenue Owned N/A Linden, NJ 9 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. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank which, if determined adversely, would have a material effect on the business or financial position of the Company or the Bank. 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 1997. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Commencing on January 13, 1997, the Company's Common Stock began trading on the American Stock Exchange under the symbol "UBI." Prior to that time, commencing in November, 1995, the Common Stock was listed for trading on the NASDAQ Bulletin Board. As of December 31, 1997, there were 724 stockholders of record of the Common Stock. Commencing on June 16, 1997, the Company's Common Stock Purchase Warrants also began trading on the American Stock Exchange under the symbol "UBI.WS". The following table sets forth the high and low bid prices of the Common Stock, as reported on the NASDAQ Bulletin Board during 1996. The high and low bid prices reflect interdealer quotations, without retail mark-up, mark-down or commissions and do not necessarily represent actual transactions. For 1997, the table sets forth the high and low sales prices for the Common Stock on the American Stock Exchange. The table also sets forth cash dividends paid on the Common Stock. The bid prices and dividends give retroactive effect to the Company's five for four stock split paid on October 28, 1996. 10 ================================================================================ Bid ---------------------------------------- - -------------------------------------------------------------------------------- Cash High Low Dividend - -------------------------------------------------------------------------------- 1997: 4th Quarter .................. 19.38 16.00 .05 - -------------------------------------------------------------------------------- 3rd Quarter .................. 16.50 13.38 .05 - -------------------------------------------------------------------------------- 2nd Quarter .................. 14.50 13.75 .05 - -------------------------------------------------------------------------------- 1st Quarter .................. 17.75 14.00 .05 - -------------------------------------------------------------------------------- 1996: 4th Quarter ................. 13.50 12.75 .10 - -------------------------------------------------------------------------------- 3rd Quarter ................. 14.00 13.00 .05 - -------------------------------------------------------------------------------- 2nd Quarter ................. 14.20 12.00 .05 - -------------------------------------------------------------------------------- 1st Quarter ................. 13.00 11.20 .05 ================================================================================ The Company began paying a cash dividend in the first quarter of 1995 and has paid a quarterly dividend each quarter since. The Company's current dividend is $.05 per share. Additionally, the Company issued 10% stock dividends during 1992 and 1993 and a 5% stock dividend in 1996. The Company also declared five for four stock split in 1996. The future payment of cash dividends, if any, by the Company will be determined from time to time by the Board of Directors which will consider, among other factors, the Company's financial condition and results of operations, investment opportunities, capital requirements and regulatory limitations. Funds for the payment of cash dividends by the Company are derived from dividends paid by the Bank to the Company. Accordingly, restrictions on the Bank's ability to pay cash dividends directly affect the payment of cash dividends by the Company. The Bank is subject to certain limitations on the amount of cash dividends that it may pay under the Banking Act, which provides that a bank may 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 11 of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank's surplus. As of December 31, 1997, the Bank had $6,095,817 available for the payment of dividends to the Company pursuant to these restrictions. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The information required by this item is incorporated by reference from the Registrant's Annual Report to Shareholders under the caption "Management's Discussion and Analysis." ITEM 7. FINANCIAL STATEMENTS The information required by this item is incorporated by reference from the Registrant's Annual Report to Shareholders under the caption "Consolidated Financial Statements." ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 1998 Annual Shareholders Meeting under the caption "PROPOSAL 1.-- ELECTION OF DIRECTORS" and information concerning compliance with Section 16(a) of the Exchange Act is included under the caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934," each of which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 1998. 12 The following table sets forth certain information about each executive officer of the Company who is not also a director. ================================================================================ Name, Age and Position Officer Since (1) Principal Occupation During Past Five Years - ---------------------- ----------------- --------------------------- - -------------------------------------------------------------------------------- Thomas B. Maresca, 40, 1991 Senior Vice President of the Senior Vice President Bank since 1994; employed by of the Bank the Bank since its inception. - -------------------------------------------------------------------------------- Joseph M. Reardon, 45, 1998 Chief Financial Officer of the Chief Financial Officer Company and Senior Vice President of the Company and of the Bank; previously Chief Senior Vice President Financial Officer of B.M.J. of the Bank Financial Corp. ================================================================================ - ----------- (1) Includes prior service as an officer of the Bank. ITEM 10. EXECUTIVE COMPENSATION Information concerning executive compensation is included in the definitive Proxy Statement for the Company's 1998 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 29, 1998. 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 1998 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 29, 1998. 13 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 1998 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 29, 1998. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3(i) Certificate of Incorporation of the Company, as amended (2) 3(ii) Bylaws of the Company (1) 4(i) Warrant Agreement/Form of Warrant (2) 4(ii) Form of Stock Certificate (2) 10(i) Lease Agreement (for Clinton, NJ main office) (2) 10(ii) Lease Agreement for Flemington Branch Office; Addenda to Lease and Lease for Parking (2) 10(iii) Lease Agreement for Springfield Branch Office (2) 10(iv) Lease Agreement for Scotch Plains Office (2) 10(v) 1994 Stock Option Plan for Employees (1) 10(vi) 1994 Stock Option Plan for Non-Employee Directors (1) 10(vii) Change in Control Agreement (2) 10(viii) Stock Bonus Plan (2) 10(ix) 1997 Stock Option Plan (3) 14 10(x) 1997 Stock Bonus Plan (3) 10(xi) Employment Agreement, dated November 14, 1997 by and among John F. Tremblay, Unity Bancorp, Inc. and First Community Bank. 13 Annual Report to Shareholders for the year ended December 31, 1997 21 Subsidiaries of the Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule - ----------- (1) Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's Registration Statement on Form S-4, Registration No. 33-76392. (2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's Registration Statement on Form SB-2, Registration No. 333-12565. (3) Incorporated by reference from Exhibits B and C from the Company's Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders. (b) Reports on Form 8-K DATE ITEM REPORTED ---- ------------- October 16, 1997 Item 5-- Reporting the Registrant's Third Quarter 1997 Earnings. October 28, 1997 Item 5-- Reporting the Appointment of John Tremblay as President. 15 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 30, 1998 By: /s/ JOHN F. TREMBLAY --------------------------- JOHN F. TREMBLAY, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
================================================================================================= NAME TITLE DATE - ------------------------------------------------------------------------------------------------- /s/ ROBERT J. VAN VOLKENBURGH Chairman of the Board and Chief March 30, 1998 - ----------------------------- Executive Officer Robert J. Van Volkenburgh - ------------------------------------------------------------------------------------------------- /s/ JOHN F. TREMBLAY President and Director March 30, 1998 - ----------------------------- John F. Tremblay - ------------------------------------------------------------------------------------------------- /s/ JOSEPH M. REARDON Chief Financial Officer (Principal March 30, 1998 - ----------------------------- Financial and Accounting Officer) Joseph M. Reardon - ------------------------------------------------------------------------------------------------- /s/ DAVID D. DALLAS Vice Chairman and Corporate March 30, 1998 - ----------------------------- Secretary David D. Dallas - ------------------------------------------------------------------------------------------------- /s/ CHARLES S. LORING Director March 30, 1998 - ----------------------------- Charles S. Loring - ------------------------------------------------------------------------------------------------- /s/ PETER P. DETOMMASO Director March 30, 1998 - ----------------------------- Peter P. DeTommaso =================================================================================================
16 EX-10.(XI) 2 EMPLOYMENT AGREEMENT EXHIBIT 10(XI) EMPLOYMENT AGREEMENT This AGREEMENT made as of this 14th day of November 1997 by and between UNITY BANCORP, INC., a Delaware corporation having its principal place of business at 64 Old Highway 22, Clinton, New Jersey 08809 ("UBI"), FIRST COMMUNITY BANK, a New Jersey state bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 ("FCB") (UBI and FCB jointly referred to herein as the "Employer"), and JOHN F. TREMBLAY, an individual residing at 5 Dorchester Court, Jackson, New Jersey 08527 (the "Executive"). W I T N E S S E T H: WHEREAS, Employer deems it to be in its best interests to secure and retain the services of the Executive and the Executive desires to work for Employer upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Employment and Term. (a) Employer hereby employs the Executive as President of UBI and FCB (collectively, the "Position") and the Executive agrees to serve in the employ of UBI and FCB in the Position, for a term of one year (the "Initial Term"), which shall commence on the date hereof (the "Effective Date"), and which, subject to paragraphs 1(b) and (c) hereof, shall terminate on the first anniversary of the Effective Date; provided, however, that no less than 45 days prior to the first anniversary of the Effective Date, Employer shall provide Executive with written notice of its intention to negotiate a renewal of this Agreement or allow the Agreement to terminate; further provided, however, that the foregoing provision shall not in any way be interpreted as granting Executive a right to have this Agreement extended or renewed and further provided that Employers' failure to provide such notice shall not affect the termination of this Agreement upon its first anniversary date. (b) Employer shall have the right to terminate the Executive's employment hereunder prior to the first anniversary of the Effective Date, but if such termination is not for "cause", Executive shall be entitled to receive the compensation and benefits provided for under Section 3(d) hereof. If such termination is for "cause" as defined below, Executive shall not be entitled to receive any compensation from and after the date of such termination. For purposes of this Agreement, "cause" means (i) the Executive's willful and continued failure substantially to perform the duties of the Position, (ii) fraud, misappropriation or other intentional material damage to the property or business of Employer, (iii) the Executive's admission or conviction of, or plea of nolo contendere to, any felony that, in the judgment of the Board of Directors of Employer (the "Board"), adversely affects Employer's reputation or the Executive's ability to perform his duties hereunder; or (iv) Executive's willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order issued by or regulatory consent agreement with any banking regulatory agency having jurisdiction over UBI, FCB or their subsidiaries. (c) This Agreement shall terminate upon Executives' death or his disability, as defined herein. Upon Executives' death or his disability, the obligation of Employer hereunder to pay Executive the compensation called for under Section 3 hereof shall terminate, and Employer's only obligation shall be to pay Executive any and all benefits to which Executive was entitled at the time of such death or disability under any benefits plans of Employer then in place. For purposes of this provision, the term "disability" shall mean permanent and total disability, physical or mental, which, in the reasonable estimation of the Board of Directors, prohibits Executive from performing the duties and services required by the Position. 2. Duties. (a) Subject to the ultimate control and discretion of the Board, the Executive shall serve in the Position and perform all duties and services of an Executive nature commensurate to the Position which the Board may from time to time reasonably assign to the Executive. (b) The Executive shall devote all of the Executive's time and attention during regular business hours to the performance of the Executive's duties hereunder and, during the term of the Executive's employment hereunder, shall not engage in any other business enterprise which requires more than five hours per week of the Executive's personal time or attention, unless granted the prior permission of the Board. The foregoing shall not prevent the Executive's purchase, ownership or sale of investment securities or of any interest in, any business which competes with the business of Employer, provided that such ownership or investment constitutes not more than five percent of the outstanding shares of a corporation whose stock is listed on a National Securities Exchange or on the National Association of Securities Dealers Automated Quotation System, or the Executive's involvement in charitable or community activities, provided that the time and attention which the Executive devotes to such activities does not materially interfere with the performance of the Executive's duties hereunder. 3. Compensation. (a) For all services to be rendered by the Executive under this Agreement, Employer agrees to pay the Executive a salary of not less than $135,000 per annum during the term of this Agreement ("Base Compensation"), payable in accordance with Employer's normal payroll practices as in effect from time to time. In addition, to the extent the Board deems it appropriate, Executive shall be entitled to receive an annual bonus as determined by the Board. (b) The Executive, in his capacity as a Director of Employer, shall receive all usual and customary per meeting Board fees, in accordance with the Board's policies in effect from time to time. Executive shall not be entitled to receive any committee fees, although Executive may be required to serve on one or more committees of the Board. (c) In addition to the compensation provided for under subparagraph (a) hereof, Executive shall be entitled to receive the use, at the Employer's expense, of an automobile of a type and size commensurate with Executive's status as president of the Employer; provided, however, that under no circumstances shall the purchase price for such vehicle, regardless of whether the vehicle is actually purchased by the Employer, leased or otherwise acquired, exceed $35,000. Executive shall also be entitled to receive life insurance with a death benefit equal to at least one times Executive's annual Base Compensation. Finally, Executive shall be entitled to participate in the Employer's existing stock option plan for officers and employees. Pursuant to the Plan, Executive will receive options to purchase 2,500 shares of UBI Common Stock at an exercise price of 85% of the fair market valued of the stock on the date of grant. Such options shall have a term of five years, and be exercisable at any time during their term. (d) If Employer terminates the Executive's employment hereunder, other than in accordance with paragraphs 1(b) for "cause" or (c) hereof, prior to the expiration of the Initial Term, or if Executive voluntarily resigns his employment hereunder prior to the expiration of the Initial Term, Employer shall continue to pay the Executive the Base Compensation provided in paragraph 3(a) hereof, in accordance with Employer's normal payroll practices in effect from time to time, for a period of three (3) months after such termination, and maintain in effect or pay the equivalent value of the medical and other insurance benefits, if any, provided Executive hereunder for a period of eighteen (18) months after such termination. Although Executive shall have no duty to mitigate any damages incurred in connection with his termination by Employer other than in accordance with paragraphs 1(b) or (c) hereunder, in the event Executive obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits in a manner substantially similar to the benefits payable by Employer to Executive hereunder upon the date of his termination, Employer may permanently terminate any duplicative benefit it is otherwise obligated to provide. The foregoing provision entitling Executive to voluntarily terminate his employment hereunder and receive the benefits provided for under this Section 3(d) shall not be effective during the final ninety (90) days of the Initial Term and any subsequent term of this Agreement if the Initial Term is extended or a new term is agreed to. 4. Vacations. The Executive shall be entitled each year to four weeks of vacation time during which vacation the Executive shall continue to receive the compensation provided in paragraph 3 hereof. Each vacation shall be taken by the Executive at such time or times as the Executive reasonably determines, taking into account Executive's duties as set forth in Section 2 hereof and Employer's business needs at any particular time. 5. Expenses. Employer shall promptly reimburse the Executive for all reasonable expenses paid or incurred by the Executive in connection with his employment hereunder upon presentation of expense vouchers or appropriate documentation therefor reasonably requested by Employer. 6. Change in Control. (a) Upon the occurrence of a Change in Control (as herein defined) followed at any time during the term of this Agreement by termination of the Executive's employment, either voluntarily by Executive within six months of such Change in Control in the event he has experienced any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of his principal place of employment by more than 30 miles from its location immediately prior to the Change in Control, or involuntarily by Employer or its successor during the term of this Agreement, other than an involuntary termination of Executive's employment for "cause" as defined in paragraph 1(b) hereof, the Executive shall be entitled to the benefits provided under paragraph (c). (b) A "Change in Control" shall mean: (i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of UBI, or a similar transaction in which UBI is not the resulting entity; (ii) individuals who constitute the Incumbent Board (as herein defined) of UBI cease for any reason to constitute a majority thereof; (iii) an event of a nature that would be required to be reported in response to Item I of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); (iv) Without limitation, a change in control shall be deemed to have occurred at such time as any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act), excluding the trustee of any employee benefit plans or any employee benefit plans established by UBI or FCB from time to time, becomes after the date hereof a "beneficial owner" (as defined in Rule 139(d) under the Exchange Act) directly or indirectly, of securities of UBI representing 25 percent or more of UBI's outstanding securities ordinarily having the right to vote at the election of directors; (v) A tender offer is made for 25 percent or more of the voting securities of UBI and the shareholders owning beneficially or of record 25 percent or more of the outstanding securities of UBI have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. For these purposes, "Incumbent Board" means the Board of Directors on the Effective Date, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board. (c) In the event the conditions of paragraph (a) above are met, Executive shall be entitled to receive the Base Compensation which would otherwise have been payable to Executive through the end of the six (6) month period after such termination. Such payments will be made in accordance with Employer's normal payroll practices in effect at the time of Executive's termination. In addition, Employer shall continue to provide Executive with hospital, health, medical and life insurance, and any other benefits in effect at the time of such termination through the end of such period. Executive shall have no duty to mitigate damages in connection with his termination by Employer or its successor hereunder without cause. However, in the event Executive obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits, in a manner substantially similar to the benefits payable by Employer to Executive upon the date of such termination, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder. 7. Additional Covenants. (a) Confidential Information. Except as required in the performance of his duties hereunder, the Executive shall not use or disclose any Confidential Information (as hereinafter defined) or any know-how or experience related thereto without the express prior written authorization of Employer. Upon termination of his employment, the Executive shall leave with Employer all documents and other items in his possession which contain Confidential Information. For purposes of this paragraph 7(a), the term "Confidential Information" shall mean all information about Employer or relating to any of its services or any phase of its operations not generally known to any of its competitors with which the Executive becomes acquainted during the term of his employment. (b) Specific Performance. Employer and the Executive agree that irreparable damage would occur in the event that the provisions of paragraph 9(a) hereof were not performed in accordance with their specific terms or were otherwise breached. Employer and the Executive accordingly agree that Employer shall be entitled to an injunction or injunctions to prevent a breach of paragraph 7(a) hereof and to enforce specifically the terms and provisions of paragraph 7(a) hereof in addition to any other remedy to which Employer is entitled at law or in equity. 8. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient, if in writing and if sent by registered or certified mail to either party hereto at their respective addresses set forth above. All notices shall be deemed given when mailed. 9. Assignability. The services of the Executive hereunder are personal in nature, and neither this Agreement nor the rights or obligations of Executive hereunder may be assigned , whether by operation of law or otherwise. This Agreement shall be binding upon, and inure to the benefit of, Employer and its successors and assigns. This Agreement shall inure to the benefit of the Executive's heirs, executors, administrators and other legal representatives. 10. Waiver. The waiver by Employer or the Executive of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent or other breach hereof. 11. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without giving effect to principles of conflict of laws. 12. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof and may not be amended, waived, changed, modified or discharged, except by an agreement in writing signed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under their respective hands and seals as of the day and year first above written. ATTEST: UNITY BANCORP, INC. By: /s/ ROBERT J. VAN VOLKENBURGH - -------------------------- ------------------------------- ROBERT J. VAN VOLKENBURGH Chairman of the Board FIRST COMMUNITY BANK By: /s/ WALTER HAZARD ----------------------------- WALTER HAZARD WITNESS: EXECUTIVE: /s/ JOHN F. TREMBLAY - -------------------------- -------------------------------- JOHN F. TREMBLAY EX-13 3 ANNUAL REPORT TO SHAREHOLDERS Mission Statement The Cover The cover illustrates the Company's entrance onto the American Stock Exchange. The common stock trades under the symbol of "UBI" and warrants under "UBI.WS" 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 Financial Highlights (Dollars in thousands, except per share data) - -------------------------------------------------------------------------------- DECEMBER 31, 1997 1996 - -------------------------------------------------------------------------------- FINANCIAL PERFORMANCE Net interest income $8,713 $6,104 Provision for loan losses 497 416 Noninterest income 3,043 2,404 Operating expenses 7,986 6,033 Special SAIF Assessment -- 370 Provision for income taxes 1,259 644 - -------------------------------------------------------------------------------- Net income $2,015 $1,044 ================================================================================ PER SHARE DATA Basic earnings per share $ 1.02 $0.74 Cash dividends $ 0.20 $0.18 Book value $10.07 $9.16 Weighted average shares 1,977,604 1,419,855 FINANCIAL RATIOS Return on assets 1.05% 0.73% Return on equity 10.78% 9.37% Net interest margin 4.72% 4.47% Dividend payout ratio 14.73% 34.37% Tier 1 leverage ratio 9.51% 11.09% FINANCIAL POSITION Assets $213,782 $172,688 Net loans 132,854 96,941 Investment securities 41,308 37,153 Deposits 192,414 153,555 Shareholders' equity 19,990 17,990 ================================================================================ Table of Contents UBI Board of Directors 2 Chairman's Message 3 Group Profiles 7 Financial Review 9 FCB Board of Directors 41 Products & Services 42 Management 44 Corporate Information 45 UBI Directors [PHOTO] seated: Robert Van Volkenburgh, Chairman & CEO. standing left to right: John F. Tremblay, President, David Dallas, Vice Chairman & Secretary, and Charles Loring, Director. not pictured: Peter P. DeTommaso, Director. Corporate Profile - Unity Bancorp, Inc. is a bank holding company incorporated in Delaware under the Bank Holding Company Act of 1956, as amended. Its wholly- owned subsidiary, First Community Bank was granted a charter by the New Jersey Department of Banking and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through seven branch offices located in Hunterdon, Somerset 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, FCB Service Co., Inc. 2 Unity Bancorp, Inc. and Subsidiary Chairman's Message ================================================================================ [PHOTO] Robert Van Volkenburgh Chairman of the Board & Chief Executive Officer Unity Bancorp, Inc. It is with great pleasure that I report on fiscal year 1997, the most profitable year in the history of Unity Bancorp, Inc. The period began with market recognition of the Company's past performance as evidenced by its listing on the American Stock Exchange, and was solidified by accomplishments that translated into record earnings and increased shareholder value. The Corporation nearly doubled its earnings with a 93% increase in net income to $2.01 million for the year ended December 31, 1997, compared to $1.04 million for the year ended December 31, 1996. This record earnings performance resulted in basic earnings per share of $1.02 for the year, a 38% increase over the $.74 basic earnings per share reported for the prior year. Assets continued our strong historical growth trend reaching $214 million at December 31, 1997, an increase of 24% over the 1996 total of $173 million. Net loans increased 37% to $133 million in 1997, compared to $97 million for the prior year. This solid asset growth was funded by the strong demand for commercial loans throughout the market place and the maturity of the branch offices opened in 1996 and 1997. We are pleased by the continued growth of the Corporation's deposit base as First Community Bank's seven full service branches successfully addressed the financial needs of our communities throughout the vibrant markets of Hunterdon, Somerset and Union counties. At year-end 1997, deposits grew 25% to $192 million from $154 million in 1996. Noninterest bearing demand deposits rose 32% to $41 million in 1997 from $31 million in 1996. This deposit growth is a direct result of the growth in our three new full service branches opened in Union County, in 1996 and 1997, in addition to the strong sales efforts in all branches. The Corporation's listing on the American Stock Exchange under the symbol "UBI" on January 13, 1997 marked a significant event in our history. The listing of Unity Bancorp Inc. on the AMEX offers ongoing opportunities to create liquidity in our common stock. At December 31, 1997 the common stock was trading at $19.125, an increase of 32% over the January 13, 1997 price of $14.50. 3 Unity Bancorp, Inc. and Subsidiary Chairman's Message ================================================================================ Net Income (in thousands) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $ 756 1995 $1,005 1996 $1,044 1997 $2,015 As part of Unity Bancorp's December 1996 offering, common stock purchase warrants were issued and may be exercised prior to December 15, 1998. The warrants are also listed on the AMEX and are traded under the symbol "UBI.WS". At year-end 1997, the warrants were trading at $4.25, an increase of 325% over the initial trading price of $1.00 as of January 13, 1997. These warrants will provide additional capital to fund the Corporation's future growth. In recognition of earnings performance and the Company's strong capital position, Unity Bancorp paid cash dividends totaling $.20 in 1997, marking 13 consecutive quarterly cash dividends. Total equity at year end 1997 grew to $20 million from the $18 million reported December 31, 1996, an 11% increase. Presently, market capitalization is in excess of $40 million, a $10 million or 33% increase over the $30 million reported year end 1996. We take this opportunity to recognize the combined efforts of Peter Schoberl, Executive Vice President/Senior Loan Officer; Thomas Maresca, Senior Vice President/Senior Operations Officer and Julie Carlson, Vice President/ Treasurer. As a committee, these individuals managed the Bank during a period of transition in our organization following the resignation of James Hyman on August 31, 1997. Jim had served as Bank President/CEO and President/COO of Unity Bancorp. On October 23, 1997, the Board of Directors welcomed John F. Tremblay as President of First Community Bank and President of Unity Bancorp, Inc. Mr. Tremblay has 28 years of experience in New Jersey banking, most recently as President of a $650 million, 24 branch community bank in Central Jersey. Under his leadership, the Bank will continue to enhance and expand upon its reputation as one of the state's premier community banking institutions. First Community Bank's Linden branch moved out of its temporary quarters in December 1997, into its newly renovated home on North Wood Avenue. Like the other communities the Bank has chosen in expanding its market presence, Linden and the surrounding communities have responded enthusiastically to our unique brand of community banking. On December 25, 1997, First Community Bank proudly launched its first cable television advertising campaign, featuring the slogan, "If we were you, we'd bank with us!" The slogan is illustrated with a variety of comic animals depicting the unfriendly customer service one might receive at a competitor bank. The animals presently include a frustrated Total Assets (in thousands) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $ 78,648 1995 $121,804 1996 $172,688 1997 $213,782 4 Unity Bancorp, Inc. and Subsidiary ================================================================================ Basic Earnings Per Share [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $0.62 1995 $0.83 1996 $0.74 1997 $1.02 orangutan, a prayerful raccoon and a snarling dog. The ads are designed to enhance First Community Bank's identity as the community bank of choice across Hunterdon, Somerset and Union counties. Branch promotions reinforcing the animal advertising theme are in production for the coming year. At year-end we accepted the resignations of Walter M. Hazard, from the Unity Bancorp and First Community Bank Boards and John R. O'Brien from the Bank Board of Directors. Effective February 1998, John Fallone also resigned as Director of First Community Bank. We thank these gentlemen for their valued service to the organization. Mr. Charles S. Loring has been appointed to the Unity Bancorp, Inc. Board of Directors. Mr. Loring has been a Director of First Community Bank and will now bring his professional experience to the corporate board. The year 1998 will be one of continued expansion of shareholder and customer services, technology and our branch network. On January 15, 1998, Unity Bancorp initiated a Dividend Reinvestment Plan ("DRIP") whereby shareholders will be permitted to purchase additional common stock with their quarterly dividends or by cash contributions. Purchases under this plan are made without the expense of broker commissions and provide quarterly statements of transaction activity. Concurrently, the Company approved a stock repurchase program whereby the Company may periodically repurchase up to 100,000 shares of its outstanding common stock. This action enables the Company to fund the DRIP, its stock option plan, and other corporate needs. First Community Bank is filing an application for its eighth full service branch in Whitehouse, Hunterdon County, which we expect to open in the third quarter. We continue to search for additional opportunities to expand our branch network through acquisitions available as a result of industry consolidation. The coming year will see First Community Bank further its goals to aggressively improve the delivery of quality products and customer service. We have expanded both our consumer lending and residential mortgage lending groups. John Podskoc, Senior Vice President for Retail Banking, recently joined the Bank and will focus on expanding our consumer lending function. In January 1998, we began offering Shareholders' Equity (in thousands) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $ 7,360 1995 $ 8,476 1996 $17,990 1997 $19,990 5 Unity Bancorp, Inc. and Subsidiary Chairman's Message ================================================================================ Total Loans (in thousands) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $ 36,421 1995 $ 58,497 1996 $ 96,941 1997 $132,854 overdraft protection in the form of a Personal Access Line (PAL). Later in the first quarter, First Community Bank will offer credit cards. We anticipate significant growth of our retail portfolio through an aggressive marketing program and responsiveness to our customers` needs. First Community Bank will profit from the strength of the economy by satisfying the market's growing appetite for consumer loans. First Community Bank will continue to be a leader in providing for the financial needs of small businesses in our communities by providing responsive personal service to those businesses who are often ignored by large banks engaged in the consolidation process. As a Preferred SBA lender, our market is expanded throughout the states of New Jersey, Pennsylvania, New York and Delaware. Our efforts to provide high quality customer service will continue in 1998 with plans to upgrade our branch information systems to "Autobank," which will provide platform automation and improve operating efficiencies. Plans will be developed to provide personal computer banking and a "customer call" center. We believe we can provide the highest quality customer service and products through the use of technology while maintaining the personal attention our customers deserve, but do not receive from the large out-of-area banks that focus on size alone. We are proud of what Unity Bancorp and First Community Bank achieved during the past year and look forward to even better performances in 1998. Our ability to compete successfully with banks large and small has been proven time and again since we opened for business in 1991. The company's commitment to personalized service is recognized and respected by customers and competitors alike. As a result, Unity Bancorp shareholders have seen their investment grow at an annual rate of return of 35% over the past six years, and we expect that rate of growth to continue. Unity Bancorp is well positioned to achieve its mission of fulfilling the needs of shareholders, customers and employees by being a profitable, sound and responsive community bank. On behalf of the Boards of Directors of both Unity Bancorp, Inc. and First Community Bank, and our Management and Staff, we thank you for your confidence and look forward to your continued support in the year ahead. /s / Robert Van Volkenburgh Robert Van Volkenburgh Chairman of the Board Chief Executive Officer Total Deposits (in thousands) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] 1994 $ 70,695 1995 $110,998 1996 $153,555 1997 $192,414 6 Unity Bancorp, Inc. and Subsidiary Group Profiles ================================================================================ Small Business Capital [PHOTO] standing left to right: Michael S. Chernoff, Nannette A. Derillo, Sanjay Patel. seated: Walter Gorczyca, Michael Downes. The Small Business Lending Group earned the Bronze Small Business Administration Award for the second consecutive year in recognition of First Community's outstanding achievement in generating SBA loans in New Jersey and Eastern Pennsylvania. Additions to our professional staff have greatly enhanced First Community's ability to effectively sell and service loans that assist small business customers in successfully growing their companies. Small business loans rose 39% from $13.8 million in 1996 to $19.2 million in 1997. First Community Bank's legal lending limit now exceeds $2 million based on the strength of the Bank's capital. Greater lending capabilities position our organization at a new level in business development opportunities and augment our lenders' efforts to market First Community's financial services to larger companies. In keeping with our philosophy of encouraging borrowers to maintain deposit accounts with the Bank, lenders capitalized on First Community's expanding presence in Union County by further penetrating that commercial market for loan and deposit business in 1997. In their first year of operation, the Residential Mortgage Group closed over 100 loans financing more than $20 million in home purchases and provided additional revenues to the Bank. Lending [PHOTO] standing left to right: Peter Carone, Walter DeMoss, Ruth Green, Edward Cichone, William Metz. seated: Peter Schoberl, Vito A. de'Marsi, Michael Bono. 7 Unity Bancorp, Inc. and Subsidiary Group Profiles ================================================================================ Operations [PHOTO] standing left to right: John Nalesnik, Julie Y. Carlson, John Kauchak, John Podskoc. seated: Joseph M. Reardon, Thomas Maresca. Finance - The January 13, 1997 listing of Unity Bancorp's common stock on the American Stock Exchange initiated a new era in investor interest in the corporation by enhancing market recognition and broadening investors' opportunities to purchase Unity stock. Site Management - The April 1997 opening of the Bank's Linden office proceeded smoothly from its months of operation in temporary quarters through the December 1997 move into its newly-renovated headquarters on North Wood Avenue. The Bank's seventh full service office includes safe deposit boxes, a night depository, and a 24 HR drive-up ATM. Human Resources - The introduction of Community Notes, a quarterly newsletter was designed to facilitate communications among employees by reporting corporate financial news, product and service information, branch, departmental and individual achievements; and community support activities. Information Systems - Installation of a LAN (Local Access Network) in the Clinton headquarters building marked the first step in a major upgrade to the Bank's computer system. Linking branch and back office operations, the LAN allows staff members to communicate electronically and retrieve customer account information faster than ever before. It will be expanded to the entire branch system during the coming year. Product Development - New products such as the Escrow Accounting ServicE, which combines escrow account funds into a single master account and the overdraft protection afforded by the Bank's new Personal Access Line, are excellent examples of First Community's ongoing commitment to expand its product offerings to meet the diverse and ever changing needs of our business and personal banking customers. By paying an additional 1% in interest, the new Holiday Bonus Club enticed customers to have weekly payments transferred automatically from their First Community Bank checking account into a Holiday Club account. Subscription to ACH origination services enables First Community to better serve customer's funds transfer requirements by electronically processing payroll, EFTS payments, and other invoices. 8 [PHOTO] Financial Review Management Discussion and Analysis 10 Consolidated Balance Sheet 22 Consolidated Statements of Income 23 Consolidated Statements of Changes in Shareholders' Equity 24 Consolidated Statements of Cash Flows 25 Notes to Consolidated Financial Statements 26 Report of Independent Accountants 40 9 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Unity Bancorp, Inc's. consolidated financial statements and the notes relating thereto including herein. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 1997 data. Overview and Strategy Unity Bancorp, Inc. (the "Parent Company") is a bank holding company incorporated in Delaware under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, First Community Bank (the "Bank" or, when consolidated with the Parent Company, the "Company") was granted a charter by the New Jersey Department of Banking and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through seven branch offices located in Hunterdon, Somerset 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, FCB Service Co., Inc. Results of Operations The Company's results of operations depend primarily on its net interest income, which is the difference between the interest earned on its interest-earning assets and the interest paid on funds borrowed to support those assets, such as deposits. Net interest margin is a function of the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, as well as the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amounts of noninterest income, which includes gains on sales of loans, including loans originated under the Small Business Administration's Guaranteed Loan Program, and operating expenses. Net Income The Company increased net income for the year 1997 to a record $2.0 million, or $1.02 basic earnings per share. These results compare to earnings totaling $1.0 million, or $.74 per share for the year 1996. Net income improved by $970 thousand, or 93%, primarily as a result of a $2.5 million increase in net interest income reduced by an increase of $1.6 million in total other expenses. The 43% increase in the Company's net interest income resulted from a $4.2 million, or 38%, increase in total interest income partially offset by a $1.6 million, or 33%, increase in total interest expense. The increase in total interest income was primarily attributable to a $35.9 million, or 37%, increase in the Company's loan portfolio, the Company's highest yielding earning asset. As a result, the average yield on the Company's interest-earning assets increased to 8.13% for the year ended December 31, 1997 from 7.94% for the comparable period of 1996, despite a decrease on the average yield on the Company's loan portfolio. For the year ended December 31, 1996, net income totaled $1.0 million, remaining relatively unchanged from the $1.0 million earned in the comparable period of 1995. Although the Company's net interest income increased by $1.7 million, or 38%, over the comparable period of 1995, the increase was offset by an increase of $2.4 million, or 61%, in total other expenses. The increase in net interest income resulted from an increase of $3.1 million, or 40%, in total interest income partially offset by a $1.4 million increase in total interest expense. The increase in total interest income was attributable to a $38.7 million, or 66%, increase in the Company's loan portfolio. Despite the increase in the loan portfolio, the average yield on interest-earning assets declined to 7.94% for the year ended December 31, 1996 from 8.24% for the comparable period of 1995. The decline in the average yield reflects the repricing of the Company's adjustable rate loans to lower market rates of interest during 1996. In addition, new loans originated during 1996 were at lower rates of interest than those loans originated during 1995, reflecting reduced market rates. Interest expense rose $1.6 million, or 33%, to $6.3 million for the year ended December 31, 1997 compared to $4.8 million for the year ended December 31, 1996, and $1.4 million, or 43%, to $3.3 million for the year ended December 31, 1995. The increases in interest expense over all periods is primarily attributable to a 64% increase in the Company's interest-bearing deposits from December 31, 1995 to December 31, 1997. On a per share basis, basic earnings were $1.02 for the year ended December 31, 1997, $.74 for the year ended December 31, 1996, and $.83 for the year ended December 31, 1995. 10 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ Comparative Average Balance Sheets The following table reflects the components of the Company's 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) the Company's net interest spread (i.e., the average yield on interest-earnings assets less the average rate on interest-bearing liabilities) and (5) the Company's net on average earning assets. Rates/Yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 34%. Interest Data (Dollar Amounts in Thousands - Interest Amounts and Interest Rates/Yields on a Fully Tax-Equivalent Basis)
==================================================================================================================================== Year Ended December 31, 1997 1996 1995 ==================================================================================================================================== Average Rate/ Average Rate/ Average Rate/ Balance Interest Yield Balance Interest Yield Balance Interest Yield ================================================================================================================================== Assets Interest-earning assets: Taxable loans (net of unearned income) $115,558 $11,227 9.72% $ 79,063 $ 7,732 9.78% $44,742 $4,782 10.69% Tax-exempt securities 998 58 5.81% 718 41 5.71% 93 5 5.38% Taxable investment securities 40,021 2,460 6.15% 34,678 2,089 6.02% 31,778 2,074 6.53% Interest-bearing deposits 16,418 636 3.87% 12,907 501 3.88% 12,670 617 4.87% Federal funds sold 12,101 661 5.46% 9,653 512 5.30% 5,012 292 5.83% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 185,096 15,042 8.13% 137,019 10,875 7.94% 94,295 7,770 8.24% Noninterest-earning assets 8,153 5,948 3,328 Allowance for loan losses (1,065) (750) (447) - ---------------------------------------------------------------------------------------------------------------------------------- Total average assets $192,184 $142,217 $97,176 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Interest-bearing liabilities: NOW deposits $ 15,945 $ 351 2.20% $ 13,664 $ 309 2.26% $10,665 $ 275 2.58% Savings deposits 28,534 892 3.13% 23,401 656 2.80% 20,677 626 3.03% Money market deposits 9,163 293 3.20% 6,883 211 3.07% 5,277 197 3.73% Time deposits 85,128 4,732 5.56% 63,353 3,485 5.50% 38,781 2,113 5.45% Other debt 568 44 7.75% 1,041 94 9.03% 1,378 123 8.93% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 139,338 6,312 4.53% 108,342 4,755 4.39% 76,778 3,334 4.34% Noninterest-bearing liabilities 822 928 670 Demand deposits 33,330 21,797 11,887 Shareholders' equity 18,694 11,150 7,841 - ---------------------------------------------------------------------------------------------------------------------------------- Total average liabilities and shareholders' equity $192,184 $142,217 $97,176 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 8,730 $ 6,120 $ 4,436 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest rate spread 3.60% 3.55% 3.90% - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin on average earning assets 4.72% 4.47% 4.70% - ----------------------------------------------------------------------------------------------------------------------------------
11 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================ Volume/ Rate Analysis of Changes in Net Interest Income The following table presents by category the major factors that contributed to the changes in net interest income for each of the years ended December 31, 1997, 1996 and 1995, as compared to each respective previous period. Amounts have been computed on a fully tax-equivalent basis, assuming a Federal income tax rate of 34%.
(Dollar Amounts in Thousands on a Fully Tax-Equivalent Basis) ==================================================================================================================================== Year Ended December 31 Year Ended December 31, 1997 versus 1996 Increase 1996 versus 1995 Increase (Decrease) Due to Change in: (Decrease) Due to Change in: ==================================================================================================================================== Volume Rate Net Volume Rate Net ==================================================================================================================================== Interest-Earning Assets Interest income: Taxable loans (net of unearned income) $ 3,569 $ (51) $ (23) $ 3,668 $ (406) $ (312) Tax-exempt securities 16 1 -- 34 -- 2 Taxable investment securities 322 43 7 189 (160) (15) Interest bearing deposits 136 (1) -- 12 (125) (2) Federal funds sold 130 15 4 270 (26) (24) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income $ 4,173 $ 7 $ (13) $ 4,173 $ (717) $ (351) - ------------------------------------------------------------------------------------------------------------------------------------ Interest-Bearing Liabilities Interest expense: NOW deposits $ 52 $ (8) $ (1) $ 77 $ (34) $ (10) Savings deposits 144 76 17 82 (46) (6) Money market deposits 70 9 3 60 (35) (11) Time deposits 1,198 37 13 1,339 20 13 Other debt (43) (13) 6 (30) 1 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 1,420 100 37 1,528 (94) (14) - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 2,753 $ (93) $ (50) $ 2,645 $ (624) $ (337) - ------------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses For the year ended December 31, 1997, the Company's provision for loan losses was $497 thousand, an increase of $81 thousand, or 19%, over the provision for the year ending December 31, 1996. For the year ended December 31, 1996, the Company's provision for loan losses was $416 thousand, an increase of $188 thousand over the provision of $229 thousand for the year ended December 31, 1995. The increased provisions is the result of loan growth of $36.3 million for 1997 and $38.7 million for 1996 combined with the aging of the Company's loan portfolio. Future provisions for loan losses will be based upon management's assessment of the loan portfolio and its underlying collateral, trends in non performing loans, the current economic conditions and other factors which warrant recognition in order to maintain the allowance at levels sufficient to provide for estimated losses. Other Income Other income, primarily consisting of gains on sales of loans and service fees received from deposit accounts, amounted to $3.0 million for the year ended December 31, 1997, an increase of $639 thousand, or 27%, from the comparable period of 1996. Other income for the year ended December 31, 1996 increased by $1.0 million, or 74%, to $2.4 million compared to $1.4 million in 1995. These increases were primarily attributable to increased gains on sales of loans in both the years ended December 31, 1997 and December 31, 1996, as well as the Company's increasing level of deposit accounts subject to service fees. The Company is an active participant in the United States Small Business Administration's guaranteed loan program. Pursuant to this program, the United States Small Business Administration guarantees between 75% and 90% of the principal balance of any approved loan. After closing such a loan, the Company sells the guaranteed portion of the loan to investors in the secondary market. For the year ended December 31, 1997, the Company recognized gains of $1.7 million from the sale of loans, an increase of $227 thousand, or 15%, compared to the year ended December 31, 1996. For the year ended December 31, 1996, the Company recognized gains of $1.5 million from the sale of loans, an increase of $597 thousand over the $871 thousand recognized for the year ended December 31, 1995. The increases in gain on sale of loans are attributable to the Company's increasing penetration of the small business loan market in the Company's trade areas. 12 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ Other Expenses Other expenses for the year ended December 31, 1997 amounted to $8.0 million, an increase of $1.6 million, or 25%, from the comparable period of 1996 when other expenses totaled $6.4 million. For the year ended December 31, 1996, other expenses increased by $2.4 million, or 61%, compared to $4.0 million for the year ended December 31, 1995. These increases were primarily attributable to increased salary, occupancy and other operating expenses. The increases in salary and occupancy expenses during the years ended December 31, 1997, 1996 and 1995 reflect the Company's expansion through the establishment of new branches. Since the beginning of 1995, the Company has opened new branches in Flemington, Springfield, Scotch Plains, Union and Linden, New Jersey and has relocated its main branch and corporate headquarters from Annandale to a leased facility in Clinton, New Jersey. Increases in other operating expenses reflect increased item processing and servicing charges related to the expanding deposit base, combined with office expenses due to new locations and additional expenses associated with AMEX membership. Income Tax Expense The income tax provisions, which includes both federal and state taxes, for the years ended December 31, 1997, 1996 and 1995 were $1.3 million, $644 thousand and $609 thousand, respectively, representing a 38.5%, 38.1% and 37.7% effective tax rate in each year, respectively. Increases in the provision for income taxes were attributable to increases in income before taxes for all periods reported. Financial Condition At December 31, 1997, the Company's total assets were $213.8 million, compared to $172.7 million at December 31, 1996 and $121.8 million at December 31, 1995. Net loans increased to $132.9 million at December 31, 1997 from $96.9 million at December 31, 1996 and $68.5 million at December 31, 1995. Total deposits increased to $192.4 million at December 31, 1997 from $153.6 million at December 31, 1996 and $111.0 million at December 31, 1995. Loan Portfolio At December 31, 1997, the Company's net loans were $132.9 million, an increase of $35.9 million, or 37%, over total loans at December 31, 1996. The loan portfolio at December 31, 1996 totaled $96.9 million, an increase of $38.4 million, or 66%, over total loans at December 31, 1995. These increases in the loan portfolio reflect the Company's expansion into new lending markets through its new branches as well as its continued penetration of its existing marketplace. The Company's loan portfolio consists of commercial and industrial loans, real estate loans and consumer loans. Commercial and industrial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory and for other business purposes. Real estate loans consist of loans secured by commercial or residential property and loans for the construction of commercial or residential property. Consumer loans are made for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being purchased. The Company's loans are primarily to businesses and individuals located in the Company's trade area. The Company has not made loans to borrowers outside of the United States. Commercial lending activities are focused primarily on lending to small business borrowers. The Company believes that its strategy of customer service, competitive rate structures and selective marketing have enabled the Company to gain entry to the market for local loans. Mergers and lending curtailments at larger banks competing with the Company have also contributed to the Company's successful efforts to attract borrowers. The following table sets forth the classification of the Company's loans by major category as of December 31, 1997, 1996, 1995, 1994 and 1993 respectively:
(Dollars in Thousands) ==================================================================================================================================== December 31, 1997 1996 1995 1994 1993 Amount % Amount % Amount % Amount % Amount % ==================================================================================================================================== Commercial & industrial $ 20,348 15.2% $17,965 18.4% $ 9,125 15.4% $ 6,952 19.1% $ 4,600 18.2% Real estate: Non-residential properties 66,526 49.6% 41,674 42.6% 23,612 40.0% 15,018 41.2% 10,217 40.5% Residential properties 28,891 21.5% 23,044 23.6% 16,034 27.1% 9,514 26.1% 7,041 27.9% Construction 13,014 9.7% 10,223 10.4% 5,705 9.7% 1,293 3.6% 490 1.9% Lease financing -- 0.0% 17 0.0% 83 0.1% 335 .9% 648 2.6% Consumer 5,419 4.0% 4,924 5.0% 4,549 7.7% 3,309 9.1% 2,216 8.8% - ------------------------------------------------------------------------------------------------------------------------------------ Total loans $134,197 100.0% $97,847 100.0% $59,108 100.0% $36,421 100.0% $25,212 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
13 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================ The following table sets forth commercial & industrial and real estate-construction loans as of December 31, 1997 in terms of loan maturities and interest rate sensitivity: (Dollars in Thousands) ========================================================================= Within 1 to 5 After 1 Year Years 5 Years Total ========================================================================= Commercial & industrial $11,192 $ 7,938 $1,218 $20,348 Real estate-construction 9,376 3,638 -- 13,014 - ------------------------------------------------------------------------- Total loans (a) $20,658 $11,576 $1,218 $33,362 - ------------------------------------------------------------------------- (a) Loans due after one year totaling $5,134 have fixed interest rates. The remaining 60% of such loans or $7,660 have floating or adjustable rates. Asset Quality The Company's principal earning assets are its loans. Inherent in the lending function is the possibility a customer may not perform in accordance with the contractual terms of the loan. A borrowers' inability to repay the loan can create the risk of nonaccrual loans, past due loans, restructured loans and potential problem loans. Non-performing assets include loans that are not accruing interest (non-accruing loans) as a result of principal or interest being in default for a period of 90 days or more and loans past due 90 days or greater. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Until the loan becomes current, any payments received from the borrower are applied totally to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. The Company attempts to minimize credit risk by ensuring loan diversification and adhering to the Company's credit administration policies and procedures. Due diligence on loans under consideration begins at the time a borrower and the Company begin to discuss the origination of a loan. Documentation, including a borrower's credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors are analyzed before a loan is submitted for approval. The Company's loan portfolio is also subject to periodic internal review for credit quality. The following table sets forth information concerning the Company's non-performing assets as of the dates indicated:
(Dollars in Thousands) ======================================================================================================== December 31, 1997 1996 1995 1994 1993 ======================================================================================================== Nonaccrual loans $943 $669 $78 $48 $66 Nonaccrual loans to total loans 0.70% 0.68% 0.13% 0.13% 0.26% Non-performing assets to total assets 0.70% 0.50% 0.30% 0.51% 0.10% Allowance for loan losses as a percentage of non-performing loans (a) 88.38% 103.02% 165.29% 93.87% 457.08% - --------------------------------------------------------------------------------------------------------
(a) Includes loans greater than 90 days past due that are still accruing interest. The Company's nonaccrual loans increased by $275 thousand from year end 1996 to $943 thousand at December 31, 1997. This net increase was attributable to the addition of $589 thousand in loans being placed on nonaccrual status partially offset by payments received of $246 thousand and charge-offs of $68 thousand for 1996 nonaccrual loans. At December 31, 1997, $552 thousand in loans were past due greater than 90 days but still accruing interest compared to $191 thousand for the year ending December 31,1996. The interest income that would have been recorded had these loans performed under the original contract terms was not material for the year ended December 31, 1995, $61 thousand for the year ended December 31, 1996 and $92 thousand as of December 31, 1997. At the dates indicated in the above table, there were no concentration of loans exceeding 10% of the total loan portfolio and the Company had no foreign loans. Loans not included in past due, nonaccrual or restructured categories, but where known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms over the next six months, totaled $1.1 million at December 31, 1997. 14 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ Allowance for Loan Losses The Company attempts to maintain an allowance for loan losses at a sufficient level to provide for potential losses in the loan portfolio. Loan losses are charged directly to the allowance when they occur and any subsequent recovery is credited to the allowance. Risks within the loan portfolio are analyzed on a continuous basis by the Company's management, by independent loan review auditors and by the Company's Audit Committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrowers, past and expected loan loss experience, and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known. Additions to the allowance are made by provisions charged to expense whereas the allowance is reduced by net charge-offs (i.e., loans judged to be uncollectible are charged against the reserve, less any recoveries on such loans). Although management attempts to maintain the allowance at a level deemed adequate to provide for potential losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions. In addition, various regulatory agencies periodically review the adequacy of the 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. The Company's allowance for loan losses totaled $1.3 million, $886 thousand and $562 thousand at December 31, 1997, 1996 and 1995, respectively. The increases in the allowance are due to the continued increase in the Company's total loan portfolio. The following is a summary of the reconciliation of the allowance for loan losses for the years ended December 31, 1997, 1996, 1995, 1994 and 1993: Analysis of the Allowance for Loan Losses
(Dollars in Thousands) ========================================================================================================= Year Ended December 31, 1997 1996 1995 1994 1993 ========================================================================================================= Balance at Beginning of Year $ 886 $562 $380 $302 $134 Charge-offs Real estate 55 -- 49 45 -- Consumer 3 6 1 10 15 Commercial and industrial 10 44 -- 28 -- Lease financing -- 43 -- -- -- - --------------------------------------------------------------------------------------------------------- Total charge-offs 68 92 50 83 15 - --------------------------------------------------------------------------------------------------------- Recoveries Real estate 6 -- 3 -- -- - --------------------------------------------------------------------------------------------------------- Total recoveries 6 -- 3 -- -- - --------------------------------------------------------------------------------------------------------- Total net charge offs 62 92 47 83 15 - --------------------------------------------------------------------------------------------------------- Provision charged to expense 498 416 229 161 183 - --------------------------------------------------------------------------------------------------------- Balance of allowance at end of year $1,322 $886 $562 $380 $302 - --------------------------------------------------------------------------------------------------------- Ratio of net charge-offs to average loans outstanding 0.05% 0.12% 0.11% 0.26% 0.08% - --------------------------------------------------------------------------------------------------------- Ratio of allowance to total loans, net of loans held for sale 1.01% 0.93% 1.01% 1.07% 1.22% - ---------------------------------------------------------------------------------------------------------
Allocation of the Allowance for Loan Losses The following table sets forth for each of the Company's major lending areas, the amount and percentage of the allowance for loan losses attributable to such category and the percentage of total loans represented by such category, as of the periods indicated: 15 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================
(Dollars in Thousands) ==================================================================================================================================== Year Ended December 31, 1997 1996 1995 1994 1993 ==================================================================================================================================== % of % of % of % of % of Amount All loans Amount All loans Amount All loans Amount All loans Amount All loans ==================================================================================================================================== Balance Applicable to: Commercial & industrial $ 267 15.2% $152 18.4% $ 96 15.4% $ 62 19.1% $ 50 16.6% Real estate: Non-residential properties 555 49.6% 336 42.6% 187 39.9% 166 41.2% 125 41.4% Residential properties 340 21.5% 247 23.5% 92 27.2% 123 26.2% 91 30.1% Construction 107 9.7% 82 10.5% 121 9.7% 11 3.5% 5 1.7% Lease financing 0 0.0% 4 0.0% 1 0.1% 3 0.9% 7 2.3% Consumer 53 4.0% 65 5.0% 65 7.7% 15 9.1% 24 7.9% - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,322 100.0% $886 100.0% $562 100.0% $380 100.0% $302 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
Investment Securities The Company maintains an investment securities portfolio to fund increased loan demand, temporary deposit outflows, and other liquidity needs that may arise and to provide an additional source of interest income. The portfolio is composed of U.S. Treasury securities, obligations of U.S. Government and government sponsored agencies, selected state and municipal obligations, corporate fixed income securities and equity securities. The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115), effective January 1, 1994. Under SFAS 115, 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. Securities that are bought and held principally for the purpose of resale in the near term are classified as trading securities, which are carried at market value. Realized gains and losses from trading activity and gains and losses from marking the portfolio to market value are included in trading revenue. Securities not classified as securities held to maturity or trading securities are classified as securities available for sale and are stated at fair value. Unrealized gains and losses on securities available for sale are excluded from results of operations and are reported as a separate component of shareholders' equity, net of taxes. Securities classified as available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase regulatory capital or other similar requirement. Management determines the appropriate classification of securities at the time of purchase. At December 31, 1997, $23.9 million of investment securities were classified as held to maturity and $17.4 million were classified as available for sale. At December 31, 1997, no investment securities were classified as trading securities. At December 31, 1997, total investment securities were $41.3 million, an increase from total investment securities of $37.1 million at December 31, 1996, which was an increase from total investment securities of $36.2 million at December 31, 1995. The $4.2 million increase in the Company's investment securities for the year ended December 31, 1997 is primarily attributable to the increase in total deposits. A comparative summary of securities available for sale and held to maturity at December 31, 1997, 1996 and 1995 is follows: Securities
(Dollars in Thousands) ========================================================================================================================= December 31, 1997 1996 1995 ========================================================================================================================= Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ========================================================================================================================= Available for sale U.S. Treasury $ 1,995 $ 2,008 $ 351 $ 352 $ 1,964 $ 1,977 U.S. Government agencies -- -- -- -- 706 720 U.S. Government sponsored agencies and corporations 12,988 12,969 7,460 7,433 7,504 7,564 State and municipal 1,064 1,072 874 874 1,360 1,365 Other 1,355 1,360 2,489 2,494 4,624 4,678 - ------------------------------------------------------------------------------------------------------------------------- Total $17,402 $17,409 $11,174 $11,153 $16,158 $16,304 - ------------------------------------------------------------------------------------------------------------------------- Held to maturity U.S. Government agencies $ 6,452 $ 6,418 $ 7,208 $ 7,190 $ 6,773 $ 6,765 U.S. Government sponsored agencies and corporations 9,014 8,563 10,011 9,461 3,988 3,500 Other 8,433 8,518 8,781 8,596 9,096 8,099 - ------------------------------------------------------------------------------------------------------------------------- Total $23,899 $23,499 $26,000 $25,247 $19,857 $19,264 - -------------------------------------------------------------------------------------------------------------------------
16 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ Contractual Maturity Distribution of Securities
(Dollars in Thousands) ========================================================================================================== December 31, 1997 1996 ========================================================================================================== Amortized Fair Average Amortized Fair Average Cost Value Yield Cost Value Yield ========================================================================================================== Available for sale U.S. Treasury Under 1 year $ 997 $ 999 6.24% $ 351 $ 352 5.93% 1-5 years 998 1,009 6.51% -- -- -- U.S. Government sponsored agencies and corporations Under 1 year 2,997 2,998 6.20% 2,501 2,505 6.29% 1-5 years 6,991 6,971 5.84% 4,959 4,928 5.71% 5-10 years 3,000 3,000 6.82% -- -- -- State and municipal Under 1 year 201 201 3.70% 874 874 3.92% 1-5 years 863 871 4.25% -- -- -- Other Under 1 year -- -- 0.00% 2,024 2,029 5.92% Over 10 years 1,355 1,360 0.00% 465 465 6.69% - ---------------------------------------------------------------------------------------------------------- Total $17,402 $17,409 6.04% $11,174 $11,153 5.78% - ---------------------------------------------------------------------------------------------------------- Held to maturity U.S. Government agencies Over 10 years $ 6,452 $ 6,418 6.42% $ 7,207 $ 7,190 6.17% U.S. Government sponsored agencies and corporations Under 1 year 1,247 1,247 4.66% -- -- -- 1-5 years 3,501 3,500 6.32% 5,242 5,241 6.02% 5-10 years 3,017 2,896 5.37% 3,520 3,361 6.03% Over 10 years 1,249 920 2.83% 1,250 859 3.57% Other 1-5 years 672 674 6.00% 670 670 6.20% Over 10 years 7,761 7,844 6.20% 8,111 7,926 6.11% - ---------------------------------------------------------------------------------------------------------- Total $23,899 $23,499 5.91% $26,000 $25,247 5.98% - ----------------------------------------------------------------------------------------------------------
Deposits Deposits are the Company's primary source of funds. The Company experienced growth in deposit balances of $38.9 million, or 25%, to $192.4 million at December 31, 1997, compared to year end 1996. Deposits increased by $42.6 million, or 38%, to $153.6 million at December 31, 1996 from $111.0 million at December 31, 1995. This growth was achieved through the combination of the Company's expansion of its branch network, its emphasis on customer service, competitive rate structures and selective marketing. The Company attempts to establish a comprehensive relationship with its business borrowers, seeking deposits as well as lending relationships. This approach has helped the Company increase its noninterest-bearing deposits. From December 31, 1995 to December 31, 1997, the Company's level of noninterest-bearing demand deposits increased from $18.7 million, or 17% of total deposits to $41.1 million, or 21% of total deposits, an increase of $22.4 million, or 120%. In addition, the Company's time deposits increased from $50.8 million at December 31, 1995 to $90.2 million at December 31, 1997, an increase of $39.4 million, or 78%. The Company has no foreign deposits, nor are there any material concentrations of deposits. 17 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================ The following table sets forth the average amounts of various types of deposits for each of the periods indicated:
(Dollars in Thousands) ========================================================================================================= Year Ended December 31, 1997 1996 1995 ========================================================================================================= Amount % Amount % Amount % ========================================================================================================= Average Balance: NOW deposits $ 15,945 9.3% $ 13,664 10.6% $10,665 12.2% Savings deposits 28,534 16.6% 23,401 18.1% 20,677 23.7% Money market deposits 9,163 5.3% 6,883 5.3% 5,277 6.0% Time deposits 85,128 49.5% 63,353 49.1% 38,781 44.5% Demand deposits 33,330 19.4% 21,797 16.9% 11,887 13.6% - --------------------------------------------------------------------------------------------------------- Total $172,100 100.0% $129,098 100.0% $87,287 100.0% - ---------------------------------------------------------------------------------------------------------
The Company does not actively solicit short-term deposits of $100,000 or more because of the liquidity risks posed by such deposits. The following table summarizes the maturity distribution of certificates of deposits of denominations of $100,000 or more as of December 31, 1997. (Dollars in Thousands) - ---------------------------------------------------------- Time Deposits ($100,000 and over) Three months or less $11,234 Over three months through six months 3,826 Over six months through twelve months 3,986 Over twelve months 1,881 - ---------------------------------------------------------- Total $20,927 - ---------------------------------------------------------- Interest Rate Sensitivity Analysis The principal objectives of the Company's asset and liability management function are to evaluate the interest rate risk included in certain balance sheet accounts; determine the level of risk appropriate given the Company's business focus, operating environment, capital, and liquidity requirements; establish prudent asset concentration guidelines, and manage the risk consistent with Board approved guidelines. The Company seeks to reduce the vulnerability of its operations to changes in interest rates and to manage the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The Company's actions in this regard are taken under the guidance of the Asset/Liability Committee ("ALCO") of the Board of Directors. The ALCO generally reviews the Company's liquidity, cash flow needs, maturities of investments, deposits and borrowings, current market conditions, and interest rate levels. One of the monitoring tools used by the ALCO is an analysis of the extent to which the Company's assets and liabilities are interest rate sensitive which determines the Company's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. Accordingly, during a period of rising rates, a negative gap may result in the yield on the institution's interest bearing assets increasing at a slower rate than the increase in the cost of interest-bearing liabilities. Conversely, during a period of falling interest rates, an institution with a negative gap would experience a repricing of its interest earning assets at a slower rate than its interest-bearing liabilities which, consequently, may result in its net interest income growing. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities at the periods indicated which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods presented. Except as noted, the amount of assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of the term to repricing or the contractual terms of the asset or liability. The Company's loan prepayment assumptions are based upon actual historic prepayment rates. 18 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================
(Dollars in Thousands) ============================================================================================== December 31, 1997 0-3 Mos 3-12 Mos 1-5 years 5+ years ============================================================================================== Interest-earning assets Loans $ 70,565 $ 90,684 $101,443 $133,254 Investment securities 15,855 20,984 32,781 41,308 Federal Funds sold 13,050 13,050 13,050 13,050 Interest-bearing deposits 12,796 15,569 15,569 15,569 - ---------------------------------------------------------------------------------------------- Total $112,266 $140,287 $162,843 $203,181 - ---------------------------------------------------------------------------------------------- Interest-bearing liabilities NOW deposits $ 20,565 $ 20,565 $ 20,565 $ 20,565 Savings deposits 31,199 31,199 31,199 31,199 Money Market deposits 9,789 9,789 9,789 9,789 Time deposits 25,034 70,286 89,053 90,224 Other debt -- -- -- 335 - ---------------------------------------------------------------------------------------------- Total $ 86,587 $131,839 $150,606 $152,112 - ---------------------------------------------------------------------------------------------- Cumulative Sensitivity Gap $ 25,679 $ 8,448 $ 12,237 $ 51,069 - ----------------------------------------------------------------------------------------------
Operating, Investing and Financing Cash As of December 31, 1997, cash and cash equivalents decreased $830.8 thousand to $32.6 million. Net cash provided by operating activities totaled $873.6 thousand, compared to $355.8 thousand used in 1996. Net cash used in investing activities remained relatively unchanged from $40.4 million in 1997, compared to $40.5 million during the prior year. Net cash provided by financing activities totaled $38.8 million, compared to $49.6 million provided a year earlier, reflecting the Company's deposit growth. For the year ended December 31, 1996, cash and cash equivalents increased $8.8 million to $33.4 million, compared with an increase of $14.6 million during 1995. Net cash provided by operating activities decreased $355.7 thousand primarily due to an increase in gain on loans sold associated with the Company's Small Business Administration loan sales. Cash used in investing activities increased to $40.5 million compared with $27.5 million used in 1995, reflecting the Company's increase in the loan and securities portfolio. Net cash provided in financing activities totaled $49.6 million in 1996 compared with $41.6 million provided a year earlier, primarily attributed to the issuance of common stock and subordinated debt totaling $6.4 million. 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. The Company's principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, sales and maturities of investment securities and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company's total deposits amounted to $192.4 million, $153.6 million and $111.0 million as of December 31, 1997, 1996, and 1995, respectively. The increase in funds provided by deposit inflows during these years has been more than adequate to provide for the Company's lending demand. Through the Company's investment securities portfolio, the Company has generally sought to obtain safe yet slightly higher yields than would have been available to the Company as a net seller of overnight Federal Funds while still maintaining adequate liquidity. The Company also manages its maturity gap by seeking maturities of investment securities which coincide as closely as possible with maturities of deposits. The Company's securities available for sale portfolio is also available as a resource to provide additional liquidity for anticipated loan demand and other liquidity needs. 19 Unity Bancorp, Inc. and Subsidiary Management Discussion and Analysis ================================================================================ Although the Company has traditionally been a net "seller" of Federal Funds (or overnight loans to large banks), the Company does maintain lines of credit through the Federal Home Loan Bank of New York, Summit Bank and PNC Bank for "purchase" of Federal Funds in the event that temporary liquidity needs arise. Management believes that the Company's current sources of funds provide adequate liquidity for the current cash flow needs of the Company. Capital A significant measure of the strength of a financial institution is its capital base. The Company's federal regulators have classified and defined bank capital into the following components: (1) Tier I capital, which includes tangible shareholders' equity for common stock and qualifying preferred stock, and (2) Tier II 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 I capital. Minimum capital levels for banks are regulated by risk-based capital adequacy guidelines which require a bank to maintain certain capital as a percent of the bank's 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 I capital as a percentage of risk-adjusted assets of 4.0% and combined Tier I and Tier II capital as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, the Company's regulators require that a bank which meets the regulator's highest performance and operation standards maintain a minimum leverage ratio (Tier I 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. The following table summarizes the risk-based and leverage capital ratios for the Company at December 31, 1997, as well as the required minimum regulatory capital ratios:
================================================================================================== Minimum Regulatory Well Capitalized December 31, 1997 Requirements Provisions ================================================================================================== Risk-based Capital: Tier I capital ratio 13.39% 4.00% 6.00% Total capital ratio 14.28% 8.00% 10.00% Leverage ratio 9.51% 4.00% 5.00% - --------------------------------------------------------------------------------------------------
Impact of Inflation and Changing Prices The financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 20 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share", and specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS") for entities with publicly held common stock or potential common stock. SFAS 128 replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively. SFAS 128 also requires dual presentation of Basic EPS on the face of the income statement for entities with complex capital structures and a reconciliation of the information utilized to calculate Basic EPS to that used to calculate Diluted EPS. SFAS 128 is effective for financial statement periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period EPS is required to be restated to conform with SFAS 128. The Company expects that the adoption of SFAS 128 will result in Basic EPS being the same as EPS currently reported and Diluted EPS will be lower than currently reported EPS. SFAS No. 129 "Disclosure of Information about Capital Structure", was issued in February 1997. SFAS 129 is effective for periods ending after December 15, 1997. SFAS 129 lists required disclosures about capital structure that had been included in a number of separate statements and opinions of authoritative accounting literature. As such, the adoption of SFAS 129 is not expected to have a significant impact on the disclosures in financial statements of the Company. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Under SFAS 130, comprehensive income is separated into net income and other comprehensive income. Other comprehensive income includes items previously recorded directly in equity, such as unrealized gains or losses on securities available for sale. SFAS 130 is effective for interim and annual periods beginning after December 15, 1997. Comparative financial statements provided for earlier periods are required to be reclassified to reflect application of the provisions of the statement. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes reporting standards for operating segments in annual financial statements and requires those enterprises to report selected financial information about operating segments in interim financial reports to shareholders. SFAS131 is effective for financial statements for periods beginning after December 15, 1997. Readiness for Year 2000 The Company has taken actions to understand the nature and extent of the work required to make its systems, products, and infrastructure Year 2000 compliant. Failure to adequately address any Year 2000 deficiencies in the Company's operations could have a material adverse effect on the Company's results of operations in future periods. However, Management believes that it is taking all necessary steps to ensure that all systems and vendors utilized become Year 2000 compliant prior to year end 1998. This will allow sufficient time for testing, review, and replacement of systems or servicing agents that cannot meet this goal. These efforts should involve minimal costs, and the Company believes, based on available information, that it will be able to manage its total Year 2000 transition without any material effect on its operation, products or services. Management also believes the Company is in compliance with all bank regulatory requirements regarding Year 2000. The Company and the Bank are subject to regulatory examination regarding Year 2000 compliance. 21 Unity Bancorp, Inc. and Subsidiary Consolidated Balance Sheets ================================================================================
December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 19,567,200 $ 15,848,021 Federal funds sold 13,050,000 17,600,000 - ------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents (Notes 2 and 14) 32,617,200 33,448,021 Securities (Notes 2, 3 and 14) Available for sale, at fair value 17,409,103 11,152,967 Held to maturity, at amortized cost (aggregate fair value of $23,499,307 and $25,246,902 in 1997 and 1996, respectively) 23,899,060 25,999,907 - ------------------------------------------------------------------------------------------------------------ Total securities 41,308,163 37,152,874 Loans (including loans held for sale of $2,786,480 and $2,041,650 in 1997 and 1996, respectively) (Notes 2, 4, 5 and 14) 134,196,719 97,847,453 Less: Unearned income 20,734 19,544 Less: Allowance for loan losses 1,321,735 886,465 - ------------------------------------------------------------------------------------------------------------ Net loans 132,854,250 96,941,444 Premises and equipment, net (Notes 2 and 6) 4,268,906 3,103,931 Accrued interest receivable 1,347,860 1,052,809 Other assets (Note 10) 1,385,587 988,597 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 213,781,966 $ 172,687,676 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (Notes 7 and 14) Demand Noninterest-bearing $ 41,093,550 $ 31,385,323 Interest-bearing 29,897,843 21,282,010 Savings 31,199,141 24,976,839 Time (includes deposits $100,000 and over of $20,927,000 and $13,801,000 in 1997 and 1996, respectively) 90,223,951 75,910,888 - ------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 192,414,485 153,555,060 Obligation under capital lease (Note 11) 334,634 380,275 Accrued interest payable 492,627 533,695 Accrued expenses and other liabilities 549,979 228,645 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 193,791,725 154,697,675 - ------------------------------------------------------------------------------------------------------------ Commitments and contingencies (Note 11) Shareholders' equity (Notes 2, 8 and 12) Common stock, no par value, 7,500,000 shares authorized; 1,985,485 and 1,964,113 shares issued and outstanding in 1997 and 1996, respectively 17,127,308 16,867,120 Retained earnings 2,901,175 1,183,357 Unrealized holding loss on securities available for sale, net of tax benefit (38,242) (60,476) - ------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 19,990,241 17,990,001 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 213,781,966 $ 172,687,676 ============================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 Unity Bancorp, Inc. and Subsidiary Consolidated Statements of Income ================================================================================
For the years ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans (Note 2) $11,226,595 $ 7,731,561 $ 4,781,664 Interest on securities 3,137,565 2,616,179 2,696,182 Interest on Federal funds sold 661,294 511,894 291,638 - ---------------------------------------------------------------------------------------------- Total interest income 15,025,454 10,859,634 7,769,484 INTEREST EXPENSE 6,312,366 4,755,958 3,333,866 - ---------------------------------------------------------------------------------------------- NET INTEREST INCOME 8,713,088 6,103,676 4,435,618 Provision for loan losses (Note 2) 497,355 416,456 228,560 - ---------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,215,733 5,687,220 4,207,058 - ---------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposits 757,053 521,597 294,899 Net gain (loss) on sale of securities (Note 3) -- 31,851 (18,999) Gain on sale of loans (Note 2) 1,694,795 1,467,664 871,185 Other income 591,217 383,267 238,093 - ---------------------------------------------------------------------------------------------- Total other income 3,043,065 2,404,379 1,385,178 - ---------------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and employee benefits 3,927,754 2,832,500 1,974,038 Occupancy expense 1,008,902 786,733 237,502 Special SAIF assessment -- 370,141 -- Other operating expenses (Note 15) 3,048,902 2,413,714 1,766,730 - ---------------------------------------------------------------------------------------------- Total other expenses 7,985,558 6,403,088 3,978,270 - ---------------------------------------------------------------------------------------------- Income before provision for income taxes 3,273,240 1,688,511 1,613,966 Provision for income taxes (Notes 2 and 10) 1,258,611 644,078 609,031 - ---------------------------------------------------------------------------------------------- NET INCOME $ 2,014,629 $ 1,044,433 $ 1,004,935 ============================================================================================== BASIC EARNINGS PER SHARE (NOTES 2 AND 9) $1.02 $.74 $.83 DILUTED EARNINGS PER SHARE (NOTES 2 AND 9) $1.01 $.73 $.83 ============================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING (NOTES 2 AND 9) 1,977,604 1,419,855 1,203,774 ==============================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 Unity Bancorp, Inc. and Subsidiary Consolidated Statements of Changes in Shareholders' Equity ================================================================================ For the years ended December 31, 1997, 1996 and 1995
Unrealized Holding Gain (Loss) On Securities Total Common Retained Available Shareholders' Stock Earnings For Sale Equity - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 $ 7,351,889 $ 294,832 $ (286,529) $ 7,360,192 Cash dividend - $.19 per share -- (229,194) -- (229,194) Issuance of common stock 20,000 -- -- 20,000 Net income - 1995 -- 1,004,935 -- 1,004,935 Unrealized gain on securities available for sale, net of taxes -- -- 320,476 320,476 - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 7,371,889 1,070,573 33,947 8,476,409 Cash dividend - $.18 per share -- (359,011) -- (359,011) Stock dividend - 5% 569,922 (572,638) -- (2,716) Issuance of common stock, net of offering expenses (Note 8) 5,405,309 -- -- 5,405,309 Subordinated debt conversion (Note 8) 3,520,000 -- -- 3,520,000 Net income - 1996 -- 1,044,433 -- 1,044,433 Unrealized loss on securities available for sale, net of taxes -- -- (94,423) (94,423) - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 16,867,120 1,183,357 (60,476) 17,990,001 Cash dividend - $.15 per share -- (296,811) -- (296,811) Issuance of common stock, net 260,188 -- -- 260,188 Net income - 1997 -- 2,014,629 -- 2,014,629 Unrealized gain on securities available for sale, net of taxes -- -- 22,234 22,234 - --------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 17,127,308 $ 2,901,175 $ (38,242) $ 19,990,241 =========================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. 24 Unity Bancorp, Inc. and Subsidiary Consolidated Statements of Cash Flows ================================================================================
For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 2,014,629 $ 1,044,433 $ 1,004,935 Adjustments to reconcile net income to net cash provided by operating activities - Provision for loan losses 497,355 416,456 228,560 Depreciation and amortization 446,014 318,447 209,278 Gain on sale of premises and equipment -- -- (1,033) Net (gain) loss on sale of securities -- (31,851) 18,999 Gain on sale of loans (1,694,795) (1,467,664) (871,185) Amortization of securities premiums, net (12,693) 52,062 47,919 Deferred tax benefit (202,542) (78,398) (69,493) Increase in accrued interest receivable (295,051) (194,749) (205,396) Increase in other assets (210,023) (356,830) (89,775) (Decrease) increase in accrued interest payable (41,068) 142,170 257,906 Increase (decrease) in accrued expenses and other liabilities 373,900 (199,836) (30,804) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 873,726 (355,760) 499,911 - -------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of securities available for sale -- 1,234,435 501,779 Purchases of securities held to maturity (10,019,531) (8,029,867) (14,081,604) Purchases of securities available for sale (17,000,390) (8,448,191) (237,700) Maturities and principal payments on securities held to maturity 12,101,389 1,883,254 8,333,727 Maturities and principal payments on securities available for sale 10,813,746 12,190,938 266,097 Proceeds from sale of loans 13,682,371 14,906,898 10,853,327 Net increase in loans (48,397,737) (52,300,301) (32,693,256) Capital expenditures (1,610,990) (1,934,261) (449,995) Proceeds from sale of premises and equipment -- -- 9,500 - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (40,431,142) (40,497,095) (27,498,125) - -------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase in deposits 38,859,425 42,557,436 40,302,577 Proceeds from issuance of subordinated debt -- 2,010,000 1,510,000 Proceeds from issuance of common stock, net 260,188 5,405,309 20,000 Cash dividends and fractional shares paid (395,017) (361,727) (229,194) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 38,724,596 49,611,018 41,603,383 - -------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (830,821) 8,758,163 14,605,169 Cash and cash equivalents at beginning of year 33,448,021 24,689,858 10,084,689 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 32,617,200 $ 33,448,021 $ 24,689,858 ==================================================================================================================== Supplemental Disclosures: Interest paid $ 6,311,489 $ 4,613,788 $ 3,075,960 Income taxes paid 1,282,750 1,152,300 574,511 ====================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of these statements. 25 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ 1. Organization and principles of consolidation The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, First Community Bank (the "Bank", or when consolidated with the Parent Company, "the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank was incorporated in the State of New Jersey on July 27, 1990. The Bank was subsequently granted a charter by the New Jersey Department of Banking and commenced operations on September 13, 1991 after purchasing the deposits of two existing branches of another financial institution through the Resolution Trust Corporation. The Bank currently operates seven branches in Hunterdon, Somerset and Union counties. 2. Summary of significant accounting policies Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts requiring the use of significant estimates include the allowance for loan losses and the fair value disclosures of financial instruments. Actual results could differ from those estimates. Securities The Company classifies its securities into three categories: (1) held to maturity, (2) available for sale and (3) trading. Securities which the Company has the ability and intent to hold until maturity are classified as held to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities which are held for an indefinite period of time which management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increased capital requirements or other similar factors, are classified as available for sale and are carried at fair value. Differences between a security's amortized cost and fair value is charged/credited directly to shareholders' equity, net of income tax effect. The cost of securities sold is determined on a specific identification basis. Gains and losses on sales of securities are recognized in the statements of income on the date of sale. The Company has not classified any of its securities as trading. Loans 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, the accrual of applicable interest is discontinued. Loan origination fees, net of direct loan origination costs, are deferred and are recognized over the estimated life of the related loans as an adjustment of the loan yield. The Company evaluates its loans for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment of a loan is measured based on the present value of expected future cash flows, net of estimated costs to sell, discounted at the loans effective interest rate. Impairment can also be measured based on a loan's observable market price or the fair 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 reflected at the lower of aggregate cost or market value. Allowance for Loan Losses The allowance for loan losses is maintained at a level management considers adequate to provide for potential loan losses. The allowance is increased by provisions charged to expense and reduced by net charge-offs. The level of the allowance is based on management's evaluation of potential losses in the loan portfolio, after 26 Unity Bancorp, Inc. and Subsidiary ================================================================================ consideration of prevailing economic conditions in the Company's market area. Credit reviews of the loan portfolio, designed to identify potential charges to the allowance, are made during the year by management and a loan review consultant. 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. Sale and Servicing SBA Loans The Company originates loans to customers under an SBA program that generally provides for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of each loan to a third party and retains the unguaranteed portion in its own portfolio. To calculate the gain (loss) on sale, the Company's investment in an SBA loan is allocated among the retained portion of the loan, the value of loan servicing and the sold portion of the loan, based on the relative fair market value of each portion. The gain on the sold portion of the loan is recognized. The allocated fair value for loan servicing is reflected as an asset and is classified in loans for financial reporting purposes. As of December 31, 1997 and 1996, the amount of this asset was approximately $1,069,000 and $803,000, respectively. The asset is amortized over an estimated life using a method approximating the effective interest method; in the event future prepayments are significant and future expected cash flows are inadequate to cover the unamortized excess servicing asset, additional amortization would be recognized. Serviced loans sold to other financial institutions are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by outside investors, amounted to approximately $35,738,000 and $26,877,000 at December 31, 1997 and 1996, respectively. Income Taxes Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, amounts due from banks (including certificates of deposit) and Federal funds sold. Generally, Federal funds are sold for a one-day period. At December 31, 1997 and 1996 certain certificates of deposit with maturities in excess of 90 days, amounting to approximately $2,773,000 and $5,327,000, respectively, were included in cash and due from banks. Loans Held for Sale Loans held for sale are carried at the lower of aggregate cost or fair market value. Net Income Per Share The Bank adopted SFAS No. 128, "Earnings per Share" effective December 15, 1997. In accordance with this new accounting standard, basic earnings per share is computed based on the weighted average number of shares outstanding for the periods presented. Diluted earnings per share is computed based on the weighted average number of shares outstanding for the period presented adjusted for the effect of the stock options and warrants outstanding, if dilutive. The Bank restated previously reporting earnings per share for 1996 and 1995 as required by this new accounting standard. New Financial Accounting Standards The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," in June 1997. This statement is effective for years beginning after December 15, 1997. Statement No. 130 requires entities that present a complete set of financial statements to include the components of comprehensive income. Comprehensive income consists of net income or loss for the current period and revenues, expenses, gains, and losses that have been previously excluded from the income statement and were only reported as a component of equity. The effect of adopting Statement No. 130 is not expected to be material to the Company's results of operations or financial position. 27 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ Also in June 1997 the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for all periods beginning after December 15, 1997. Statement No. 131 requires that a company report certain information about operating segments in complete set of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that a company report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosures impact of Statement No. 131 on its financial statements and has not determined if it has any reportable segments. Reclassifications Certain reclassifications have been made to prior years' amounts to conform with the current year presentation. 3. Securities Information with regard to the Company's securities portfolio at December 31, 1997 and 1996 is as follows-
1997 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------------------------------------ Held To Maturity Obligations of U.S. Government agencies $15,466,484 $ 16,429 $(501,913) $14,981,000 Corporate debt securities 497,402 4,448 -- 501,850 Mortgage-backed securities 7,935,174 154,161 (72,878) 8,016,457 ------------------------------------------------------------------------------------------------------ Total Held To Maturity $23,899,060 $175,038 $(574,791) $23,499,307 ====================================================================================================== Available For Sale U.S. Treasury securities $ 1,994,894 $ 12,859 $ -- $ 2,007,753 Obligations of U.S. Government agencies 12,988,282 3,754 (22,755) 12,969,281 Obligations of states & political subdivisions 1,064,363 7,042 -- 1,071,405 Mortgage-backed securities 81,900 -- (414) 81,486 Federal Home Loan Bank stock 517,700 -- -- 517,700 Other corporate stocks 754,923 28,183 (21,628) 761,478 ------------------------------------------------------------------------------------------------------ Total Available For Sale $17,402,062 $ 51,838 $ (44,797) $17,409,103 ====================================================================================================== 1996 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------------------------------------ Held To Maturity Obligations of U.S. Government agencies $17,219,279 $ 33,162 $(601,566) $16,650,875 Corporate debt securities 495,211 3,529 -- 498,740 Mortgage-backed securities 8,285,417 58,491 (246,621) 8,097,287 ------------------------------------------------------------------------------------------------------ Total Held To Maturity $25,999,907 $ 95,182 $(848,187) $25,246,902 ====================================================================================================== Available For Sale U.S. Treasury securities $ 350,593 $ 1,157 $ -- $ 351,750 Obligations of U.S. Government agencies 7,460,618 15,949 (43,418) 7,433,149 Obligations of states & political subdivisions 873,750 630 (325) 874,055 Mortgage-backed securities 101,896 82 -- 101,978 Corporate debt securities 2,024,231 4,804 -- 2,029,035 Federal Home Loan Bank stock 363,000 -- -- 363,000 ------------------------------------------------------------------------------------------------------ Total Available For Sale $11,174,088 $ 22,622 $ (43,743) $11,152,967 ======================================================================================================
28 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ The amortized cost and estimated fair value of securities at December 31, 1997, by contractual maturity, are shown below. Estimated Amortized Fair Cost Value --------------------------------------------------------------------- Held To Maturity Due in one year or less $ 1,247,221 $ 1,247,159 Due after one years through five years 3,998,310 4,001,995 Due after five years through ten years 3,016,647 2,895,850 Due after ten years 7,701,708 7,337,846 Mortgage-backed securities 7,935,174 8,016,457 --------------------------------------------------------------------- $23,899,060 $23,499,307 ===================================================================== Available For Sale Due in one year or less $ 4,194,792 $ 4,198,410 Due after one year through five years 8,852,747 8,849,489 Due after five years through ten years 3,000,000 3,000,540 Mortgage-backed securities 81,900 81,486 Corporate stocks 1,272,623 1,279,178 --------------------------------------------------------------------- $17,402,062 $17,409,103 ===================================================================== Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. In accordance with a special statement issued by the Financial Accounting Standards Board, the Company transferred securities held to maturity with a carrying value of approximately $15,920,000 and an unrealized gain of approximately $145,800 to available for sale in December 1995. The Company also transferred securities classified as available for sale with an amortized cost basis of approximately $6,913,000 and an unrealized loss of $89,000 to held to maturity. The unrealized loss at the date of transfer is being amortized into interest income over the remaining lives of the securities. For the year 1997, there were no sales of securities. Proceeds from sales of securities were $1,234,435 in 1996 and 501,779 in 1995. Gross gains (losses) on sales of securities were $31,851 in 1996 and ($18,999) in 1995. Securities with carrying values aggregating $750,000 were pledged to secure public deposits at December 31, 1997. 4. Loans Loans outstanding by classification as of December 31, 1997 and 1996, are as follows- 1997 1996 -------------------------------------------------------------- Loans secured by real estate- Residential properties $ 28,891,480 $23,043,636 Nonresidential properties 66,526,225 41,673,772 Construction loans 13,013,662 10,222,711 Commercial and industrial loans 20,348,133 17,966,352 Lease financing receivables -- 17,000 Loans to individuals 5,417,219 4,923,982 -------------------------------------------------------------- $134,196,719 $97,847,453 ============================================================== As of December 31, 1997 and 1996, the Bank's recorded investment in impaired loans, defined as nonaccrual loans, was $943,000 and $669,000, respectively, and the related valuation allowance was $204,000 and $76,000, respectively. This valuation allowance is included in the allowance for loan losses in the accompanying balance 29 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ sheet. Interest income that would have been recorded during 1997 had these loans performed under the original contract terms was $92,000. At December 31, 1997, $552,000 in loans were past due greater than 90 days but still accruing interest. As of December 31, 1997, approximately 81% of the Company's loans were secured by real estate. As such, a substantial portion of the Company's borrowers' ability to repay their loans is dependent on the economic environment of the real estate industry in the Company's market area. In the ordinary course of business, the Company may extend credit to officers, directors or their associates. These loans are subject to the Company's normal lending policy. An analysis of such loans, all of which are current as to principal and interest payments, is as follows- Balance at December 31, 1996 $5,906,120 New Loans 9,221,337 Repayments (5,459,497) ------------------------------------------------ Balance at December 31, 1997 $9,667,960 ================================================ 5. Allowance for loan losses The allowance for loan losses is based on estimates. Ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become known, they are reflected in operations in the periods in which they become known. An analysis of the change in the allowance for loan losses during 1997, 1996 and 1995 is as follows-
1997 1996 1995 ---------------------------------------------------------------------------------- Balance at beginning of year $ 886,465 $ 561,931 $380,191 Provision charged to expense 497,355 416,456 228,560 Loans charged-off (68,023) (91,922) (50,257) Recoveries on loans previously charged-off 5,938 -- 3,437 ---------------------------------------------------------------------------------- Balance at end of year $1,321,735 $886,465 $561,931 ==================================================================================
6. Premises and equipment The detail of premises and equipment as of December 31, 1997 and 1996 is as follows-
1997 1996 ----------------------------------------------------------------------------------- Land and buildings $1,746,103 $1,044,241 Furniture, fixtures and equipment 2,181,883 1,463,784 Leasehold improvements 1,465,649 1,274,621 ---------------------------------------------------------------------------------- 5,393,635 3,782,646 ---------------------------------------------------------------------------------- Less: Accumulated depreciation and amortization (1,124,729) (678,715) ---------------------------------------------------------------------------------- $4,268,906 $3,103,931 ==================================================================================
In 1996, the Company entered into a lease for a new branch facility which meets the requirements of capital lease accounting. The net present value of the future minimum lease payments of approximately $380,000 is included in land and buildings. 30 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ 7. Deposits Time deposits in denominations of $100,000 or more totaled $20,927,193 and $13,801,346 at December 31, 1997 and 1996, respectfully. Schedule maturities of certificates of deposit are as follows -
Year Ended December 31, 1997 Over 3 mos Over 1 year 3 mos through through Over or less 1 year 3 years 3 years Total ----------------------------------------------------------------------------------------------------------- $100,000 or more $11,234,124 $ 7,811,673 $ 1,881,396 -- $20,927,193 Less than $100,000 $13,799,948 $37,440,039 $16,886,154 $1,170,617 $69,296,758 =========================================================================================================== Year Ended December 31, 1996 Over 3 mos Over 1 year 3 mos through through Over or less 1 year 3 years 3 years Total ----------------------------------------------------------------------------------------------------------- $100,000 or more $ 6,929,704 $ 6,671,642 $ 200,000 -- $13,801,346 Less than $100,000 $11,819,587 $42,852,175 $4,859,733 $2,578,047 $62,109,542 ===========================================================================================================
8. Shareholders' equity In December 1996, the Company completed a stock offering resulting in the issuance of 401,500 shares of common stock and, attached to each share, a nontransferable warrant to purchase one share of common stock at an exercise price of $15.75 at any time within two years after the offering. During the course of the year, 2,060 warrants were exercised and at December 31, 1997, 399,440 warrants remain outstanding with an expiration date of December 15, 1998. On January 15, 1996, the Company declared a 5% stock dividend and on September 26, 1996, the Company declared a 5 for 4 stock split effective October 28, 1996. All share and per share information for all periods presented in these financial statements has been adjusted to give effect for the stock dividend and the stock split. At December 31, 1995, the Company had $1,510,000 in subordinated notes outstanding. In March 1996, the Company issued an additional $2,010,000 of subordinated debt. During the course of the year, the Company extended offerings to redeem all subordinated notes outstanding in exchange for shares of the Company's common stock at contracted exchange rates of $9.60, $10.00 and $10.80 per share, adjusted for subsequent stock split. The aggregate effect of retiring this debt was an increase to capital of $3,520,000. On April 29, 1994, the Company's shareholders approved the 1994 Employee Nonqualified Stock Option Plan (the Employee Plan) and the 1994 Nonemployee Director Stock Option Plan (the Director Plan). Under the Plans, the Board of Directors may grant options to officers or nonemployee directors to purchase the Company's stock. Option prices of the Plans are determined by the Board, provided however, that the option price of shares may not be less than 85% of the fair market value of shares at the date of grant. The period during which an option under either Plan may be exercised varies, but no option may be exercised after 10 years from the date of grant. As of December 31, 1997, 125,000 shares are reserved for issuance under the Plans. On April 25, 1997, the Company's shareholders approved the 1997 Stock Option Plan. Under the Plan, the Board of Directors may grant incentive stock options ("ISOs") and non-statutory options. Officers, employees and members of the Board of Directors of the Corporation are eligible to participate in the Plan. Options intended to qualify as Incentive Stock Options will be granted only to persons who are eligible to receive such options. The exercise price for options granted under the 1997 Option Plan will be determined by the Board of Directors at the time of grant, but may not be less than 85% of the fair market value of the Common Stock on the date of grant or 100% for any ISO. The term during which each option may be exercised shall be determined by the Board of Directors, but in no event shall an option be exercisable in whole or in part more than ten years from the date of grant. As of December 31, 1997, 50,000 shares are reserved for issuance under the Plan. 31 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ Transactions under the plans are summarized as follows-
Number Exercise Price Weighted Average of Shares Per Share Exercise Price ---------------------------------------------------------------------------------------- Outstanding, December 31, 1995 -- -- -- Options granted 50,199 $9.72-$10.80 $10.54 Options exercised -- -- -- Options expired (200) 9.72 9.72 ---------------------------------------------------------------------------------------- Outstanding, December 31, 1996 49,999 9.72-10.80 10.54 Options granted 40,200 11.47-13.92 12.80 Options exercised (10,312) 9.72-11.47 10.57 Options expired -- -- -- ---------------------------------------------------------------------------------------- Outstanding, December 31, 1997 79,887 $9.72-$13.92 $11.68 ========================================================================================
The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans and accordingly, recorded compensation expense totaling $16,600 in 1997 and $12,800 in 1996 for those options that had an exercise price which was less than the fair market value of the Company's stock on the grant date. Had compensation costs for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below- 1997 1996 --------------------------------------------- Net income- As reported $2,014,629 $1,044,433 Pro forma 1,901,955 913,747 Earnings per share- Basic as reported $1.02 $.74 Pro forma $.96 $.64 Diluted as reported $1.01 $.73 Pro forma $.95 $.64 ============================================= The fair value of each option grant under both 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 1997 and 1996; dividend yields of 1.5% and 0%, expected volatilities of 47.06% and 47.06%, risk-free interest rates of 6.08% and 5.21%, and expected lives of 2.6 years and 2.6 years, respectively. The following table summarizes information about stock options outstanding at December 31, 1997-
Number Number Outstanding at Remaining Exercisable at Exercise Price December 31, 1997 Contractual Life December 31, 1997 ------------------------------------------------------------------------------------------ $13.92 2,500 4.8 years 2,500 13.81 700 4.9 years 700 13.38 24,000 4.0 years 24,000 11.47 8,000 4.0 years 8,000 10.80 38,125 3.0 years 38,125 9.72 6,562 3.0 years 6,562 ------------------------------------------------------------------------------------------ $11.68 79,887 79,887 ===========================================================================================
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 will record an expense equal to the sum of (i) the number of shares granted and (ii) the fair market value of the stock at the date of grant. The Company granted 3,071 shares to its employees in 1995, 32 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ resulting in a charge to operations of approximately $20,000. No shares were granted during 1996 and 9,000 shares were granted to employees and Board members in 1997, amounting to approximately $120,000 in expense. On April 25, 1997, the Company's shareholders approved 50,000 additional shares to be reserved for Stock Bonuses. As of December 31, 1997, the Company has 62,929 shares reserved for issuance under the Stock Bonus Plans. 9. Earnings Per Share The following is a reconciliation of the calculation of basic and dilutive earnings per share-
Net Weighted Earnings For the Year Ended December 31, 1997- Income Average Shares Per Share ------------------------------------------------------------------------------------------------------- Basic earnings per share - Income available to common shareholders $2,014,629 1,977,604 $1.02 ======== Effect of Dilutive Securities - Stock Options and Warrants 21,576 ------------------------------------------------------------------------------------------------------- Diluted earnings per share - Income available to common shareholders plus assumed conversions $2,014,629 1,999,180 $1.01 ======================================================================================================= For the Year Ended December 31, 1996- Basic earnings per share - Income available to common shareholders $1,044,433 1,419,855 $ .74 ======== Effect of Dilutive Securities - Stock Options and Warrants 9,407 ------------------------------------------------------------------------------------------------------- Diluted earnings per share - Income available to common shareholders plus assumed conversions $1,044,433 1,429,262 $ .73 ======================================================================================================= For the Year Ended December 31, 1995- ------------------------------------------------------------------------------------------------------- Basic earnings per share - Income available to common shareholders $1,004,935 1,203,774 $ .83 ======== Effect of Dilutive Securities - None ------------------------------------------------------------------------------------------------------- Diluted earnings per share - Income available to common shareholders plus assumed conversions $1,004,935 1,203,774 $ .83 =======================================================================================================
10. Income taxes The components of the provision for income taxes are as follows-
1997 1996 1995 ---------------------------------------------------------------------------------------- Federal Current $1,220,818 $622,391 $596,270 Deferred benefit (202,542) (78,398) (69,493) ---------------------------------------------------------------------------------------- Total Federal 1,018,276 543,993 526,777 ---------------------------------------------------------------------------------------- State 240,335 100,085 82,254 ---------------------------------------------------------------------------------------- Total provision for income taxes $1,258,611 $644,078 $609,031 =======================================================================================
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-
1997 1996 1995 --------------------------------------------------------------------------------------------- Federal income taxes at statutory rate $1,112,902 $574,093 $548,748 State income taxes, net of Federal income tax effect 158,621 66,056 54,288 Other (12,912) 3,929 5,995 --------------------------------------------------------------------------------------------- Provision for income taxes $1,258,611 $644,078 $609,031 =============================================================================================
33 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ 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, 1997 and 1996 are as follows- 1997 1996 --------------------------------------------------------------------------- Provision for loan losses $465,544 $298,274 Unrealized loss on securities available for sale 23,913 40,317 Other, net (3,288) (31,577) --------------------------------------------------------------------------- Net deferred tax asset $486,219 $307,014 =========================================================================== 11. Commitments and contingencies Lease Obligations 1998 $ 518,000 1999 500,000 2000 470,000 2001 470,000 2002 470,000 Thereafter 1,441,000 ========================== The Company leases its headquarters and three of its branch facilities under operating leases. Future minimum rental payments under these leases, excluding renewal options, are as listed- The Company entered into a lease for its Scotch Plains facility which meets the requirements of capital lease accounting (see Note 6). Future gross lease obligations total approximately $600,000 and will be paid in monthly installments through April, 2006. 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. In managements judgment, the consolidated financial position or results of operations of the Company will not be affected materially by the final outcome of any present legal proceedings. Commitments to Borrowers Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the borrower. The Company was committed to advance approximately $18,367,000 to its borrowers as of December 31, 1997, which commitments generally expire within one year. Standby letters of credit are provided to customers to guarantee their performance, generally in the production of goods and services or under contractual commitments in the financial markets. The Company has entered into standby letters of credit contracts with its customers totaling approximately $712,000 as of December 31, 1997, which generally expire within one year. 12. Regulatory capital The Parent Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Parent Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Parent Company's and the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Parent Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997, that the Parent Company and the Bank meet all capital adequacy requirements to which they are subject. 34 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ As of December 31, 1997, the most recent notification from the Federal Reserve Bank categorized the Parent Company as well capitalized and the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Parent Company and the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed either institution's category. The Parent 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 ------------------------------------------------------------------------------------------------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------------------------------------------------------------------------------------------------------ As of December 31, 1997- Total Capital (to Risk Weighted Assets) $21,280,204 14.28% >/=$11,894,078 >/=8.00% >/=$14,867,597 >/=10.00% Tier I Capital (to Risk Weighted Assets) 19,958,469 13.29% >/=$ 5,947,039 >/=4.00% >/=$ 8,920,558 >/=16.00% Tier I Capital (to Average Assets) 19,958,469 9.51% >/=$ 8,391,353 >/=4.00% >/=$10,489,192 >/=15.00% As of December 31, 1996- Total Capital (to Risk Weighted Assets) 18,841,669 17.24% >/=$ 8,734,729 >/=8.00% >/=$10,929,661 >/=10.00% Tier I Capital (to Risk Weighted Assets) 17,955,204 16.43% >/=$ 4,371,865 >/=4.00% >/=$ 6,557,797 >/=16.00% Tier I Capital (to Average Assets) 17,955,204 11.09% >/=$ 6,477,699 >/=4.00% >/=$ 8,097,123 >/=15.00% ==================================================================================================================
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 ------------------------------------------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------ As of December 31, 1997- Total Capital (to Risk Weighted Assets) $16,318,241 11.03% >/=$11,840,752 >/=8.00% >/=$14,800,940 >/=10.00% Tier I Capital (to Risk Weighted Assets) 14,996,506 10.13% >/=$15,920,376 >/=4.00% >/=$18,880,564 >/=16.00% Tier I Capital (to Average Assets) 14,996,506 7.35% >/=$18,162,141 >/=4.00% >/=$10,202,676 >/=15.00% As of December 31, 1996- Total Capital (to Risk Weighted Assets) 12,355,737 11.32% >/=$18,733,623 >/=8.00% >/=$10,917,028 >/=10.00% Tier I Capital (to Risk Weighted Assets) 11,469,272 10.51% >/=$14,366,811 >/=4.00% >/=$16,500,217 >/=16.00% Tier I Capital (to Average Assets) 11,469,272 7.09% >/=$16,474,880 >/=4.00% >/=$18,093,600 >/=15.00% ==================================================================================================================
35 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================ 13. Employee benefit plans The Bank has a 401(k) savings plan covering substantially all employees. Under the terms of the Plan, an employee can contribute up to 15% of their salary on a tax deferred basis. The Bank will match 50% of an employee's contribution, up to 6% of the employee's salary. Employees become fully vested in the Bank's contribution after six years of service. The Bank contributed $30,620, $32,483 and $7,120 to the Plan in 1997, 1996 and 1995, respectively. The Bank does not currently provide any post retirement or post employment benefits to its employees other than the 401(k) plan. 14. 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 that which similar loans with similar maturities would be made to borrowers with similar credit ratings. 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. 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. Unrecognized Financial Instruments At December 31, 1997, the Bank had standby letters of credit outstanding of $712,000. The fair value of these commitments is nominal. At December 31, 1997, the bank had commitments to extend credit totaling $18,367,000. The Bank does not charge a fee on these loan commitments and, consequently, there is no basis to calculate a fair value. At December 31, 1997, the Bank services loans owned by outside investors in the amount of $35,738,000 at various service fee rates. The fair value approximates the present value of service fees charged to the investors, net of costs to service the loans, under the loan servicing arrangements. 36 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ The estimated fair value of the Company's financial instruments as of December 31, 1997 and 1996 is as follows-
1997 1997 1996 1996 Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------------------------------------------------ Financial assets- Cash and Federal funds sold $ 32,617,200 $ 32,617,200 $ 33,448,021 $ 33,448,021 Securities held to maturity 23,899,060 23,499,307 25,999,907 25,246,902 Securities available for sale 17,409,103 17,409,103 11,152,967 11,152,967 Loans, net of allowance for loan losses 132,854,250 133,953,064 96,941,444 96,670,513 ------------------------------------------------------------------------------------------------------------ Financial liabilities- Total deposits $192,414,485 $192,117,265 $153,555,060 $153,536,409 ============================================================================================================
15. Other operating expenses The components of other operating expenses for the year ended December 31, 1997, 1996 and 1995 are as follows
1997 1996 1995 -------------------------------------------------------------------------------------------- Professional and other fees $ 514,000 $ 315,000 $ 237,000 Office expenses 809,000 615,000 416,000 Advertising expense 272,000 251,000 141,000 Communication expense 212,000 152,000 130,000 Bank services 427,000 333,000 200,000 FDIC insurance assessment 100,000 182,000 167,000 Directors fees 271,000 276,000 187,000 Other expenses 444,000 290,000 288,000 -------------------------------------------------------------------------------------------- $3,049,000 $2,414,000 $1,766,000 ============================================================================================
16. Condensed financial statements of Unity Bancorp, Inc. (Parent Company only)
Balance Sheets ------------------------------------------------------------------------------------------------------------ December 31, 1997 1996 ------------------------------------------------------------------------------------------------------------ Assets Cash and due from Banks $ 2,096,817 $ 6,420,351 Securities available for sale, at fair value 2,769,231 -- Investment in Bank subsidiary 14,989,474 11,465,350 Other assets 145,156 126,329 ------------------------------------------------------------------------------------------------------------ Total assets $20,000,678 $18,012,030 ============================================================================================================ Liabilities and Shareholders' Equity- Other liabilities $ 10,437 $ 22,029 Shareholders' equity 19,990,241 17,990,001 ------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $20,000,678 $18,012,030 ============================================================================================================
37 Unity Bancorp, Inc. and Subsidiary Notes to Consolidated Financial Statements ================================================================================
Income Statements ------------------------------------------------------------------------------------------------------------ December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------------------------ Interest income $ 290,129 $ 11,125 $ 111,368 Dividends from Bank subsidiary (a) 296,811 359,011 292,990 Other income -- 14,616 -- ------------------------------------------------------------------------------------------------------------ Total income 586,940 384,752 404,358 Interest expense -- 93,934 123,243 Other expenses 361,214 60,195 78,762 ------------------------------------------------------------------------------------------------------------ Income before income taxes and equity in undistributed income of subsidiary 225,726 230,623 202,353 Income tax benefit (a) (24,169) (51,355) (36,255) ------------------------------------------------------------------------------------------------------------ Income before equity in undistributed income of subsidiary 249,895 281,978 238,608 Equity in undistributed income of subsidiary 1,764,734 762,455 766,327 ------------------------------------------------------------------------------------------------------------ Net income $2,014,629 $1,044,433 $1,004,935 ============================================================================================================
(a) No Federal income tax is applicable to the dividends and other income received from the Bank since the Parent Company and the Bank file a consolidated income tax return.
Statements Of Cash Flows ------------------------------------------------------------------------------------------------------------ December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------------------------ Operating activities - Net income $2,014,629 $1,044,433 $1,004,935 Adjustments to reconcile net income to net cash provided by operating activities - Equity in undistributed income of subsidiary (1,764,734) (762,455) (766,327) Amortization of securities premiums, net (38,509) -- -- Depreciation and amortization 12,759 12,759 -- Increase in other assets (38,203) (47,583) (21,735) (Decrease) increase in other liabilities (11,592) 310 21,719 ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 174,350 247,464 238,592 ------------------------------------------------------------------------------------------------------------ Investing activities - Maturities on securities available for sale 1,000,000 -- -- Purchases of securities available for sale (3,711,261) -- -- Net decrease (increase) in loans outstanding -- 1,412,184 (1,412,184) Additional equity investment in Bank subsidiary (1,750,000) (2,325,249) -- ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (4,461,261) (913,065) (1,412,184) ------------------------------------------------------------------------------------------------------------ Financing activities - Net decrease in borrowed funds -- -- (74,844) Proceeds from issuance of common stock, net 260,188 5,405,309 -- Proceeds from issuance for subordinated debt -- 2,010,000 1,510,000 Cash dividends and fractional shares paid (296,811) (361,727) (229,194) Net cash (used in) provided by financing activities (36,623) 7,053,582 1,205,962 Net change in cash and cash equivalents (4,323,534) 6,387,981 32,370 Cash and cash equivalents, beginning of year 6,420,351 32,370 -- ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $2,096,817 $6,420,351 $ 32,370 ============================================================================================================ Supplemental disclosures: Interest paid -- $108,516 $98,822 ============================================================================================================
38 Unity Bancorp, Inc. and Subsidiary [GRAPHIC] ================================================================================ 17. Quarterly financial information (unaudited) The following quarterly financial information for the years ended December 31, 1997, and 1996 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.
1997 March June September December 31 30 30 31 ------------------------------------------------------------------------------------------------------------- Total interest income $3,272,497 $3,693,166 $3,976,696 $4,083,095 Total interest expense 1,426,458 1,541,771 1,654,987 1,689,150 ------------------------------------------------------------------------------------------------------------- Net interest income 1,846,039 2,151,395 2,321,709 2,393,945 Provision for loan losses 58,316 176,871 160,400 101,767 ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,787,723 1,974,524 2,161,309 2,292,177 Total other income 564,428 811,871 661,562 1,005,204 Total other expenses 2,155,699 2,324,167 2,247,037 2,517,266 ------------------------------------------------------------------------------------------------------------- Net income $ 196,452 $ 462,228 $ 575,834 $ 780,115 ------------------------------------------------------------------------------------------------------------- Basic earnings per common share $.10 $.23 $.29 $.39 ------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $.10 $.23 $.29 $.38 ============================================================================================================ 1996 March June September December 31 30 30 31 ------------------------------------------------------------------------------------------------------------- Total interest income $2,406,624 $2,542,775 $2,826,894 $3,083,341 Total interest expense 1,050,359 1,085,780 1,268,956 1,350,862 ------------------------------------------------------------------------------------------------------------- Net interest income 1,356,265 1,456,995 1,557,938 1,732,479 Provision for loan losses 139,483 117,805 107,790 51,378 ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,216,782 1,339,190 1,450,148 1,681,101 Total other income 437,512 612,692 682,411 670,793 Total other expenses 1,440,621 1,662,936 2,006,792(a) 1,936,817 ------------------------------------------------------------------------------------------------------------- Net income $ 213,672 $ 288,946 $ 126,738 $ 415,077 ------------------------------------------------------------------------------------------------------------- Basic earnings per common share $.17 $.21 $.09 $.25 ============================================================================================================ Diluted earnings per common share $.17 $.21 $.09 $.25 ============================================================================================================
(a) Includes a special one time SAIF assessment of $370,141. 39 Unity Bancorp, Inc. and Subsidiary Report of Independent Public Accountants ================================================================================ To the Shareholders and Board of Directors of Unity Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. (a Delaware corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Roseland, New Jersey January 28, 1998 40 Unity Bancorp, Inc. and Subsidiary First Community Bank Directors ================================================================================ [PHOTO] [PHOTO] Robert David Van Volkenburgh Dallas [PHOTO] [PHOTO] Peter P. Robert H. DeTommaso Dallas [PHOTO] [PHOTO] Charles S. Peter G. Loring Schoberl [PHOTO] [PHOTO] Allen Samuel Tucker Stothoff [PHOTO] [PHOTO] John F. Robert J. Tremblay van Volkenburgh, Jr., M.D. 41 Products & Services MEDIA ADVERTISING [GRAPHIC] [GRAPHIC] CHECKING NJCC Account Regular Checking If We Were You NOW Account We'd Bank With Us! Money Market Checking Business Checking As seen on local cable stations Prosperity Checking throughout Hunterdon, Somerset and Union Counties. CERTIFICATES OF DEPOSIT Regular Retirement [GRAPHIC] SAVINGS Regular Savings Money Market Savings Money Market Deposit Money Market IRA Holiday Club Accounts [GRAPHIC] [GRAPHIC] CONSUMER LOANS Home Equity Loans BUSINESS LOANS Auto Loans SBA Loans* Personal Loans Commercial Loans Mortgage Loans Construction Loans Personal Access Line Lines of Credit Cash Flow Manager 42 Products & Services [GRAPHIC] OTHER SERVICES =================================== Safe Deposit Boxes Certified Checks Full Service Offices Direct Deposit U.S. Savings Bonds Clinton Traveler's Cheques 64 Old Highway 22 Money Orders 908 730-7300 Wire Transfers Night Depository Flemington Notary Public 110 Main Street Public Funds Depository+ 908 782-2000 Escrow Account ServicE Tenant Security Linden 628 North Wood Avenue 908 925-8353 North Plainfield 450 Somerset Street 908 769-0303 Scotch Plains 2222 South Avenue 908 233-8009 Springfield 733 Mountain Avenue 973 258-0111 Union 952 Stuyvesant Avenue 908 851-9700 24-Hour MAC ATMs available at all offices =================================== Investment Alternatives Fixed & Variable Rate Tax Deferred Annuities Mutual Funds Stocks & Bonds (offered through FCB Service Co., Inc., a New Jersey State licensed insurance agency and a wholly-owned subsidiary of First Community Bank, MDS Bankmark and MDS Securities) * Preferred Lender in New Jersey, Pennsylvania, New York and Delaware + Eligibility Certified under the Governmental Unit Deposit Protection Act (GUDPA) 43 Board of Directors First Community Bank Management Robert Van Volkenburgh * John F. Tremblay John Nalesnik Chairman of the Board President Vice President Chief Executive Officer Credit Administrator Total Packaging Corp. & Peter G. Schoberl Best Packaging & Design Corp. Executive Vice President Edward Dalton Senior Loan Officer Assistant Vice President David Dallas * SBA Loan Specialist Vice Chairman Michael T. Bono Chief Executive Officer Senior Vice President Maria Garciano Dallas Group of America Sr. Business Development Ofc. Assistant Vice President Manager, Springfield Robert H. Dallas Peter Carone President Senior Vice President John J. Kauchak Dallas Group of America Manager, Mortgage Group Assistant Vice President Manager, Information Systems Peter P. DeTommaso * Edward Cichone Retired President Senior Vice President Rose M. Phelan Home Owners Heaven, Inc. Commercial Loan Officer Assistant Vice President Manager, Scotch Plains Charles S. Loring * Vito A. de'Marsi Owner Senior Vice President Michael Riccio Charles S. Loring, CPA Commercial Loan Officer Assistant Vice President Manager, Clinton Peter G. Schoberl Michael F. Downes Executive Vice President Senior Vice President James Tumolo First Community Bank Manager, SBA Group Assistant Vice President Manager, North Plainfield Samuel Stothoff Thomas Maresca President Senior Vice President Linda B. McDermott Samuel Stothoff Company Senior Operations Officer Corporate Secretary Executive Assistant John F. Tremblay * John Podskoc President Senior Vice President Bruce Jala First Community Bank Retail Banking Assistant Treasurer Business Development Officer Allen Tucker Joseph M. Reardon President Senior Vice President Carole Marshall Tucker Enterprises Director of Finance Assistant Treasurer Compliance Specialist Robert J. Julie Y. Carlson van Volkenburgh, Jr., M.D. Vice President Aleta M. Fusco Physician Treasurer Assistant Secretary Investment Counselor Walter J. DeMoss Vice President Leslie Scheiderman Construction Loan Officer Assistant Secretary Manager, Compliance Ruth Green Vice President Business Manager, Flemington William H. Metz Vice President Business Manager, Linden
* Member of Unity Bancorp, Inc. Board of Directors 44 Unity Bancorp, Inc. Corporate Information Administrative Offices Stock Listing Unity Bancorp, Inc. Unity Bancorp, Inc. common stock is traded on 64 Old Highway 22 the American Stock Exchange ("AMEX") under the Clinton, New Jersey 08809 symbol "UBI" and warrants under "UBI.WS". Counsel Common Stock Prices/Dividend Paid Jamieson Moore Peskin & Spicer The table below sets forth by quarter the range of Morristown, New Jersey high, low and quarter-end closing sale prices for Unity Bancorp, Inc. common stock and the cash dividends paid per common share. Auditors Arthur Andersen LLP ===================================================== Roseland, New Jersey Cash 1997 Dividend Registrar & Transfer Agent Quarter High Low Close Paid Shareholder address changes or inquiries ===================================================== regarding shareholder accounts and stock First $17.750 $14.000 $15.500 $0.05 transfers should be directed to: Second $14.500 $13.750 $13.750 $0.05 First City Transfer Company Third $16.500 $13.375 $16.500 $0.05 P.O. Box 170 Fourth $19.375 $16.000 $19.125 $0.05 Iselin, New Jersey 08837-0170 ===================================================== (732) 906-9227 Total $0.20 Financial Information Warrant Purchase Stock Prices Copies of the corporation's annual report on Form 10-K filed with the Securities and The table below sets forth by quarter the range of Exchange Commission may be high, low and quarter-end closing sale prices for obtained: Unity Bancorp, Inc. warrant purchase stock. o by writing to Julie Y. Carlson, VP/Treasurer at corporate headquarters ========================================= o electronically at the SEC's home page at 1997 www.sec.gov Quarter High Low Close ========================================= Investor and Media Inquiries Third $3.000 $1.000 $3.000 Analysts, institutional investors, individual Fourth $5.000 $3.000 $4.500 shareholders and media representatives should contact: John F. Tremblay [GRAPHIC] Shareholder Relations Unity Bancorp, Inc. 64 Old Highway 22 Dividend Reinvestment Clinton, New Jersey 08809 and Stock Purchase Plan (908) 730-7630 or The Unity Bancorp, Inc. dividend L. G. Zangani, Inc. reinvestment and stock purchase plan Financial Public Relations enables holders of common stock to 9 Main Street purchase additional shares of common Flemington, NJ 08822 stock conveniently and without paying (908) 788-9660 brokerage commissions or service charges. A prospectus and enrollment Web Info card may be obtained by writing to Information on UBI & FCB financial results, Shareholders Relations at corporate products and services, and branch locations headquarters. is available on the internet at: www.firstcommunitybankNJ.com
Annual Meeting of Shareholders Shareholders are cordially invited to the Annual Meeting of Shareholders. The Meeting will convene at 3:30 pm, Friday, April 24, 1998, in Unity Bancorp's Corporate Headquarters located at 64 Old Highway 22, Clinton, NJ. 45 [GRAPHIC] [LOGO] UNITY Bancorp, Inc. 64 Old Highway 22 Clinton, New Jersey 08809 800 618-BANK EX-21 4 SUBSIDIARIES OF REGISTRANT The Registrant has one subsidiary, First Community Bank. First Community Bank has a two subsidiaries, FCB Investment Company, and FCB Service Co. EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Unity Bancorp, Inc.: As independent public accountants , we hereby consent to the incorporation by reference of our report dated January 28, 1998 and to all references to our Firm into this Form 10-KSB and into Unity Bancorp, Inc.'s previously filed Registration Statement No. 333-20687 on Form S-8, Registration Statement No. 333-12565 on Form SB-2, as amended by Post-Effective Amendment No. 1 on Form S-3, and Registration Statement No. 333-46509 on Form S-3. ARTHUR ANDERSEN LLP Roseland, New Jersey March 30, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
9 The schedule contains summary financial information extracted from the registrants audited December 31, 1997 financial statements and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 3,399,641 16,167,559 13,050,000 0 17,409,103 23,899,060 23,499,307 134,175,985 1,321,735 213,781,966 192,414,485 0 1,042,606 334,634 0 0 17,127,308 2,862,933 213,781,966 11,226,595 3,137,565 661,294 15,025,454 6,268,591 6,312,366 8,713,088 497,355 0 7,985,558 3,273,240 3,273,240 0 0 2,014,629 1.02 1.01 4.71 943,235 552,218 0 1,078,398 886,465 68,023 5,938 1,321,735 1,321,735 0 0
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