SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
--------------
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
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UNITY BANCORP, INC.
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(Exact Name of registrant as specified in its charter)
Delaware 22-3282551
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
64 Old Highway 22, Clinton, NJ 08809
---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 730-7630
--------------
Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
The number of shares outstanding of each of the registrant's classes of common
equity stock, as of April 15, 2001: Common stock, no par value: 3,706,708 shares
outstanding
Page 1 of 26
Page #
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PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM I - Selected consolidated financial data (unaudited) 3
Consolidated Financial Statements (unaudited)
Consolidated Statements of Financial Condition
at March 31, 2001, 2000 and December 31, 2000 4
Consolidated Statements of Operations for the Three Months
ended March 31, 2001 and 2000 and December 31, 2000 5
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months ended March 31, 2001 and 2000 6
Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2001 and 2000 7
Notes to the Consolidated Financial Statements 8
ITEM II - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM III - Quantitative and Qualitative Disclosures about Market Risk 24
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 24
ITEM 2 Changes in Securities and Use of Proceeds 24
ITEM 3 Defaults upon Senior Securities 24
ITEM 4 Submission of Matters to a Vote of Security Holders 24
ITEM 5 Other Information 24
ITEM 6 Exhibits and Reports on Form 8-K 24
Exhibit Index
SIGNATURES 25
Page 2 of 26
SELECTED CONSOLIDATED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar in thousands, except per share data) Quarter Ended March 31st At or for the Years Ended December 31st
- ---------------------------------------------------------------------------------------------------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $6,016 $7,101 $28,017 $ 23,688 $ 17,480
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense 3,353 4,225 16,322 12,738 7,165
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 2,663 2,876 11,695 10,950 10,315
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 150 246 716 1,743 804
- ---------------------------------------------------------------------------------------------------------------------------
Other income 1,161 544 7,666 5,606 4,407
- ---------------------------------------------------------------------------------------------------------------------------
Other expenses 3,540 4,899 23,718 20,578 10,499
- ---------------------------------------------------------------------------------------------------------------------------
Tax expense (benefit) 6 (709) 839 (2,387) 1,282
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 128 (1,016) (5,912) (3,378) 2,137
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share (basic) ($0.00) ($.027) (1.71) (0.91) 0.67
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share (diluted) (0.00) (0.27) (1.71) (0.91) 0.64
- ---------------------------------------------------------------------------------------------------------------------------
Book value per common share 4.38 5.58 4.32 5.88 7.01
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividend on common shares -- -- -- 0.24 0.20
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 367,044 409,715 356,003 438,969 254,612
- ---------------------------------------------------------------------------------------------------------------------------
Loans 223,948 287,069 226,140 322,532 166,792
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses 2,550 2.387 2,558 2,173 1,825
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities 79,163 73,526 70,837 74,349 40,929
- ---------------------------------------------------------------------------------------------------------------------------
Deposits 331,088 377,339 320,318 357,538 226,860
- ---------------------------------------------------------------------------------------------------------------------------
Borrowings 10,000 0 10,000 53,000 ---
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 21,680 25,603 21,314 21,792 26,346
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets .22% (0.94%) (1.44)% (0.94)% 0.93%
- ---------------------------------------------------------------------------------------------------------------------------
Return on average common equity .05% (19.11%) (33.43)% (14.33)% 10.17%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.21% 3.02% 3.19% 3.49% 4.91%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.40% 2.47% 2.61% 3.01% 3.99%
- ---------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to loans(1) 1.18% .85% 1.17% 0.77% 1.12%
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to non-performing loans 44.63% 87.47% 61.27% 137.71% 46.83%
- ---------------------------------------------------------------------------------------------------------------------------
Non-performing loans to total loans 2.51% .95% 1.85% 0.49% 2.34%
- ---------------------------------------------------------------------------------------------------------------------------
Non-performing assets to total assets 1.68% .85% 1.21% 0.70% 1.97%
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .04% .01% .12% 0.59% 0.21%
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS - COMPANY
- ---------------------------------------------------------------------------------------------------------------------------
Leverage ratio 6.12% 5.20% 5.50% 4.35% 10.87%
- ---------------------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio 9.79% 7.70% 9.61% 6.17% 14.85%
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 risk-based capital ratio 10.94% 8.52% 10.76% 6.88% 13.89%
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS - BANK
- ---------------------------------------------------------------------------------------------------------------------------
Leverage ratio 5.80% 4.88% 5.24% 4.01% 7.09%
- ---------------------------------------------------------------------------------------------------------------------------
Tier 1 risk-based capital ratio 9.27% 7.19% 9.12% 5.62% 8.84%
- ---------------------------------------------------------------------------------------------------------------------------
Total risk-based capital ratio 10.42% 8.62% 10 .26% 6.33% 9.80%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes loans held for sale
Page 3 of 26
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(in thousands, except share amounts) 03/31/01 12/31/00 03/31/00
--------- --------- ---------
ASSETS
Cash $ 16,027 $ 13,740 $ 19,464
Fed funds sold 36,500 31,500 3,500
Securities - available for sale 53,497 37,809 39,510
Securities - held to maturity 25,666 33,028 34,016
--------- --------- ---------
Total securities 79,163 70,837 73,526
SBA loans held for sale 7,337 6,741 3,839
SBA loans 26,251 23,436 14,383
Commercial loans 85,971 88,375 104,210
Mortgage loans 76,026 76,924 75,909
Consumer loans 28,363 30,664 88,728
--------- --------- ---------
Total loans 223,948 226,140 287,069
Allowance for loan losses 2,550 2,558 2,387
--------- --------- ---------
Net loans 221,398 223,582 284,682
Premises and equipment, net 9,174 9,380 11,906
Accrued interest receivable 2,810 2,836 3,314
Other assets 1,972 4,128 13,323
--------- --------- ---------
Total assets $ 367,044 $ 356,003 $ 409,715
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 53,046 $ 53,108 $ 58,613
Interest bearing 107,039 106,263 115,716
Savings deposits 31,115 30,634 36,697
Time deposits 98,776 95,111 95,038
Time, $100,000 and over 41,112 35,202 71,275
--------- --------- ---------
Total deposits 331,088 320,318 377,339
Other debt 12,915 12,899 3,876
Accrued interest payable 885 667 1,046
Accrued expense and other liabil ities 476 805 1,849
--------- --------- ---------
Total liabilities $ 345,364 $ 334,689 $ 384,110
--------- --------- ---------
Commitments and contingencies
Shareholders' equity
Preferred stock, class A, 10%, cumulative and convertible
103,500 shares authorized, issued and outstanding 4,929 4,929 4,929
Common stock, no par value, 7,500,000 shares authorized 26,234 26,234 26,224
Treasury stock, at cost, 156,860 shares (1,762) (1,762) (1,762)
Retained deficit (7,665) (7,793) (2,897)
Accumulated other comprehensive loss (56) (294) (889)
--------- --------- ---------
Total Shareholders' Equity $ 21,680 $ 21,314 $ 25,605
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 367,044 $ 356,003 $ 409,715
========= ========= =========
Issued common shares 3,863,568 3,863,568 3,861,568
Outstanding common shares 3,706,708 3,706,708 3,704,708
See accompanying notes to the consolidated financial statements.
Page 4 of 26
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTERS ENDED:
(in thousands, except share and share amounts) 03/31/01 12/31/00 03/31/00
--------- --------- ---------
Interest income:
Fed funds sold and interest on deposits $ 454 $ 899 $ 10
Securities - AFS 657 677 650
Securities - HTM 473 492 513
--------- --------- ---------
Total securities interest income 1,130 1,169 1,163
SBA loans 851 793 442
Commercial loans 1,885 2,079 2,250
Mortgage loans 1,139 1,158 1,436
Consumer loans 557 793 1,800
--------- --------- ---------
Total loan interest income 4,432 4,823 5,928
--------- --------- ---------
Total interest income 6,016 6,891 7,101
Interest expense:
Interest bearing demand deposits 973 1,291 1,140
Savings deposits 178 164 229
Time deposits 2,007 2,448 2,272
--------- --------- ---------
Total deposit interest expense 3,158 3,903 3,641
Borrowings 195 34 584
--------- --------- ---------
Total interest expense 3,353 3,937 4,225
Net interest income 2,663 2,954 2,876
--------- --------- ---------
Provision for loan losses 150 290 246
--------- --------- ---------
Net interest income after provision for loan losses 2,513 2,664 2,630
Non-interest Income:
Deposit service charges 327 326 268
Loan and servicing fees 291 307 266
Gain (loss) on loan sales 402 144 (133)
Net security gains (losses) 34 (2) 1
Other income 107 3,356 142
--------- --------- ---------
Total non-interest income 1,161 4,131 544
Non-interest expense:
Compensation and benefits 1,628 2,014 2,301
Occupancy 413 286 684
Processing and communications 482 598 594
Furniture and equipment 263 554 63
Professional fees 207 506 288
Deposit insurance 224 109 47
Loan servicing costs 75 304 327
Other expenses 248 1,283 595
--------- --------- ---------
Total non-interest expense 3,540 5,654 4,899
--------- --------- ---------
Net income (loss) before provision (benefit) for income taxes $ 134 $ 1,141 $ (1,725)
Provision (benefit) for income taxes 6 2,478 (709)
--------- --------- ---------
Net income (loss) $ 128 $ (1,337) $ (1,016)
========= ========= =========
Preferred stock dividends - paid and unpaid 129 125 25
--------- --------- ---------
Net loss to common shareholders $ (1) $ (1,462) $ (1,041)
========= ========= =========
Net loss per common share - Basic and diluted $ (0.00) $ (0.40) $ (0.27)
Weighted average shares outstanding - Basic and diluted 3,706,708 3,706,708 3,704,708
See accompanying notes to the consolidated financial statements.
Page 5 of 26
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Accumulated
Other Total
(In thousands except share amounts) Preferred Common Treasury Retained Comprehensive Shareholders'
Stock Stock Stock Earnings (Loss) Equity
----------------------------------------------------------------------------------
Balance, December 31, 1999 $ -- $ 26,224 $ (1,762) $ (1,856) $ (814) $ 21,792
==================================================================================
Comprehensive loss:
Net Loss (1,016) (1,016)
Unrealized holding loss on securities
arising during the period, net of tax $46 (75) (75)
---------
Total comprehensive loss (1,091)
---------
Preferred stock dividends paid (25) (25)
Issuance of preferred stock 4,929 4,929
----------------------------------------------------------------------------------
Balance, March 31, 2000 $ 4,929 $ 26,224 $ (1,762) $ (2,897) $ (889) $ 25,605
==================================================================================
Balance, December 31, 2000 $ 4,929 $ 26,234 $ (1,762) $ (7,793) $ (294) $ 21,314
Comprehensive income:
Net Income 128 128
Unrealized holding gain on securities
arising during the period, net of tax $146 238 238
---------
Total comprehensive income 366
----------------------------------------------------------------------------------
Balance, March 31, 2001 $ 4,929 $ 26,234 $ (1,762) $ (7,665) $ (56) $ 21,680
==================================================================================
See accompanying notes to the consolidated financial statements.
Page 6 of 26
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
March 31,
-------------------------------
(In thousands, except per share amounts) 2001 2000
-------------------------------
Operating activities:
Net income (loss) $ 128 $ (1,016)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for loan losses 150 246
Depreciation and amortization 240 314
Net gain on sale of securities (34) (1)
(Gain) loss on sale of loans (402) 133
(Gain) loss on sale of fixed assets (2) 8
Gain on sale of OREO -- (42)
Net change in other assets and liabilities 2,056 (224)
-------------------------------
Net cash provided by (used in) operating activities 2,136 (582)
===============================
Investing activities:
Purchases of securities held to maturity (1,012) --
Purchases of securities available for sale (19,337) (45)
Maturities and principal payments on securities held to maturity 8,374 234
Maturities and principal payments on securities available for sale 3,618 487
Proceeds from sale of securities available for sale 302 28
Proceeds from sale of loans, net 7,526 40,607
Net increase in loans (5,090) (5,309)
Net increase in Federal funds sold (5,000) (3,500)
Increase in capital expenditures (4) (89)
Proceeds from sale of OREO property -- 789
Proceeds from sale of assets (12) 18
-------------------------------
Net cash (used in) provide by investing activities (10,635) 33,220
===============================
Financing activities:
Increase in deposits 10,770 19,801
Increase (decrease) in borrowings 16 (53,000)
Proceeds from preferred stock offering, net -- 4,929
Dividends on preferred stock -- (25)
-------------------------------
Net cash provided by (used in) financing activities 10,786 (28,295)
===============================
Increase in cash 2,287 4,343
===============================
Cash at beginning of year 13,740 15,121
-------------------------------
Cash at end of period $ 16,027 $ 19,464
===============================
Supplemental disclosures:
Cash:
Interest paid $ 3,142 $ 4,378
Non-Cash investing activities:
Transfer of loan to Other Real Estate Owned 140 --
-------------------------------
See accompanying notes to the consolidated financial statements.
Page 7 of 26
UNITY BANCORP, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
NOTE 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary,
Unity Bank (the "Bank", or when consolidated with the Parent Company, the
"Company"), and reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation of interim results. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior years' amounts
to conform to the current year presentation. The financial information has been
prepared in accordance with generally accepted accounting principles and has not
been audited. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the statements of financial condition and
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Estimates that are particularly susceptible to significant changes related
to the determination of the allowance for loan losses. Management believes that
the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions in the
market. The interim unaudited consolidated financial statements included herein
have been prepared in accordance with instructions for Form 10-Q and the rules
and regulations of the Securities and Exchange Commission ("SEC"). The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results, which may be expected for the entire year. As used in
this Form 10-Q, "we" and "us" and "our" refer to Unity Bancorp Inc and its
consolidated subsidiary, Unity Bank, depending on the context. Interim financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 2000,
included in the Company's annual report on Form 10-KSB.
NOTE 2. LITIGATION
The Company may, in the ordinary course of business become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. The company does not
believe that any existing legal claims or proceedings will have a material
impact on the Company's financial position, although they could have a material
impact on the Company's results of operations.
On August 14, 2000, Robert J. Van Volkenburgh resigned from his positions
of Chairman of the Board and Chief Executive Officer of the Company. In February
2001, Mr. VanVolkenburgh filed a complaint in the Superior Court of New Jersey
alleging breach of two agreements. The Company intends to vigorously defend
itself from any claims for payment under the agreements. Counsel has advised the
Company it has strong defenses to any such claims by Mr. VanVolkenburgh and he
is not likely to succeed in this regard. No discovery has taken place. The
Company's position is based upon what it knows as of this date and is subject to
change if future developments warrant it.
NOTE 3. CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines,
which require a bank to maintain certain capital as a percent of assets, and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0 percent and combined tier
1 and tier 2 capital as a percentage of risk-adjusted assets of 8.0 percent. In
addition to the risk-based guidelines, regulators require that a bank which
meets the regulator's highest performance and operation standards maintain a
minimum leverage ratio (tier 1
Page 8 of 26
capital as a percentage of tangible assets) of 4 percent. 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 Company and the Bank entered into stipulations and agreements with each
of their respective regulators on July 18, 2000 because of losses and failure to
meet minimum federal risk-based capital requirements and the New Jersey
Department of Banking and Insurance's required 6.0 percent leverage ratio,
required in connection with the Bank' s 1999 branch expansion.
In accordance with the capital plan, in 2000, the Company raised a net $4.9
million of a newly created class of preferred stock, without Securities and
Exchange Commission registration, and reduced its financial assets through sales
of loan and deposit portfolios. The Company and the Bank have met the federal
minimum risk-based capital requirements since the March 2000 preferred stock
offering. The Bank has until December 2001 to achieve the 6.0 percent Tier 1
leverage ratio required by the New Jersey Department of Banking and Insurance.
Both the Company and the Bank believe that they are in compliance with all other
provisions of the agreements. As of March 31, 2001, the Company has $518 of
dividends in arrears on its preferred stock.
NOTE 4. EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and dilutive
loss per share.
-----------------------------------------
WEIGHTED LOSS
(In thousands, except share data amounts) NET AVERAGE PER
For the quarter-ended March 31, 2000 LOSS SHARES SHARE
-----------------------------------------
Basic loss per share -
Loss to common shareholders $ (1,016) 3,704,708 $(0.27)
Effect of dilutive securities- stock options, and
convertible preferred stock -- -- --
Diluted loss per share - Loss to common -----------------------------------------
shareholders plus assumed conversions $ (1,016) 3,704,708 $(0.27)
=========================================
For the quarter ended March 31, 2001
Basic loss per share -
Loss to common shareholders $ (1) 3,706,708 $(0.00)
Effect of dilutive securities- stock options, and
convertible preferred stock -- -- --
Diluted loss per share - Loss to common -----------------------------------------
shareholders plus assumed conversions $(1) 3,706,708 $(0.00)
=========================================
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and Amendment to FASB Statement No. 133". Statement No. 138 amends
certain aspects of Statement No. 133 to simplify the accounting for derivatives
and hedges under Statement No. 133. Statement No. 138 is effective upon the
company's adoption of Statement. No. 133 (January 1, 2001). The adoption of
Statements No. 133 and 138 did not have a material impact on the Company's
financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (A
Replacement of FASB Statement 125)." SFAS No. 140 supersedes and replaces the
guidance in SFAS No. 125 and, accordingly, provides guidance on the following
topics: securitization transactions involving financial assets; sales of
financial assets such as receivables, loans and securities; factoring
transactions; wash sales; servicing assets and liabilities; collateralized
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations; and extinguishment of liabilities. The provisions of SFAS
No. 140 are effective for transactions entered into after March 31, 2001,
companies with calendar year fiscal year ends that hold beneficial interest from
previous securizations were required to make additional disclosures in their
December 31, 2000 financial statements. The adoption of SFAS No. 140 did not
have a material impact on the Company's financial statements.
Page 9 of 26
ITEM II
UNITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes. When necessary, reclassifications have been made to prior
period data throughout the following discussion and analysis for purposes of
comparability with prior period data. This form 10-Q contains certain "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, and may be identified by the use of such words a "believe",
"expect", "anticipate", "should", "planned", "estimated" and "potential".
Examples of forward looking statements include, but are not limited to,
estimates with respect to the financial condition, results of operations and
business of Unity Bancorp, Inc. that are subject to various factors which could
cause actual results to differ materially from these estimates. These factors
include: changes in general, economic, and market conditions, legislative and
regulatory conditions, or the development of an interest rate environment that
adversely affects Unity Bancorp Inc.'s interest rate spread or other income
anticipated from operations and investments.
OVERVIEW AND STRATEGY
Unity Bancorp, Inc. (the "Parent Company") is incorporated in Delaware and
is a bank holding company under the Bank Holding Company Act of 1956, as
amended. Its wholly owned subsidiary, Unity Bank (the "Bank" or, when
consolidated with the Parent Company, the "Company ") was granted a charter by
the New Jersey Department of Banking and Insurance and commenced operations on
September 13, 1991. The Bank provides a full range of commercial and retail
banking services through 12 branch offices located in Hunterdon, Somerset,
Middlesex, and Union counties in New Jersey. These services include the
acceptance of demand, savings, and time deposits; extension of consumer, real
estate, Small Business Administration and other commercial credits, as well as
personal investment advisory services through the Bank's wholly owned
subsidiary, Unity Financial Services, Inc. Unity Investment Company, Inc. is
also a wholly owned subsidiary of the Bank, used to hold part of the Bank's
investment portfolio.
In the fourth quarter of 2000, the Bank discontinued the operations of
Certified Mortgage Associates, Inc. ("CMA"). This wholly owned subsidiary of the
Bank originated loans and sold residential mortgages. Also in the fourth quarter
of 2000, the Bank sold $48 million of the deposits and facilities of five of its
seventeen branches. Accordingly, the results of operations for the first quarter
of 2001 do not contain income or expenses related to CMA or the sold branches,
as compared to the same period a year ago.
In the second half of 1999, the Company incurred certain losses which,
combined with the Company's asset growth, caused both the Bank's and the
Company's capital ratios to fall below levels required under federal regulation.
As a result of the capital deficiency, in the first quarter of 2000, the Company
and the Bank entered into a Memoranda of Understanding with their primary
regulatory agencies. However, due to continued losses through the first two
quarters of 2000, among other reasons, the Bank and the Company entered into
stipulations and agreements with each of their respective regulators on July 18,
2000. Under these agreements, the Bank and the Company were each required to
take a number of affirmative steps including: hiring an outside consulting firm
to review their respective management structures, adopt strategic and capital
plans which will increase the Bank's leverage ratio to 6.00 percent or above, by
December 31, 2001, review and adopt various policies and procedures, adopt
programs with regard to the resolution of certain criticized assets, and provide
ongoing reporting to the various regulatory agencies with regard to the Bank's
and Company's progress in meeting the requirements of the agreements. The
agreements require the Bank and Company to establish a compliance committee to
oversee the efforts in meeting all requirements of the agreements, and prohibit
the Bank from paying a dividend to the Company and the Company from paying
dividends on its common or preferred stock, without regulatory approval. As of
March 31, 2001, the Bank and the Company believe they are in compliance with the
requirements of the agreements.
Page 10 of 26
As a result of the Company's restructuring efforts in 2000, the Company and
the Bank exceeded the "well capitalized" designation for all federal capital
ratios at March 31, 2001. The Bank is still subject to an order from the New
Jersey Commissioner of Banking and Insurance, under which it is required to
maintain a tier 1 leverage capital ratio of 6.0 percent. The stipulations and
agreements the Company and the Bank has entered into with their respective
Federal Regulators also require the Bank to satisfy this requirement. The Bank
did not meet the 6.0 percent capital requirement imposed under its stipulations
and agreements at March 31, 2001. The Company is continuing to work towards
increasing its capital.
Page 11 of 26
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001
NET INCOME
The Company recorded net income of $128 thousand or $0.00 per diluted
common share for the quarter ended March 31, 2001 compared to net a net loss
$1.0 million, or $0.27 loss per diluted common share for the first quarter of
2000. The improved operating results were primarily the result of a decrease in
non-interest expense and an increase in non-interest income. Non-interest
expense decreased $1.4 million, or 27.7 percent, as a result of the dissolution
of the CMA subsidiary, the reduced number of branches resulting from the sale of
five branches in December 2000, and improved expense control. Non-interest
income increased $617 thousand as a result of a $731 thousand loss on the sale
of mortgage loans in the first quarter of 2000.
NET INTEREST INCOME
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
----------------------------------------------------------------
For the Three months ended March 31 2001 2000
----------------------------------------------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
-------------------------------------------------------------------------------------------------------------------
Assets
Interest Earning Assets
Commercial Loans $ 85,992 $ 1,885 8.89% $ 104,006 $ 2,250 8.77%
SBA Loans 32,221 851 10.71% 17,564 442 10.21%
Mortgage Loans 76,851 1,139 5.93% 97,760 1,436 5.88%
Consumer Loans 28,991 557 7.79% 90,930 1,800 8.03%
----------------------------------------------------------------
Total Loans 224,055 4,432 7.99% 310,260 5,928 7.72%
----------------------------------------------------------------
Securities Available for sale 42,467 657 6.19% 39,243 677 6.90%
Securities Held to maturity 31,852 473 5.94% 34,232 513 5.99%
Federal funds sold and interest bearing 33,257 454 5.54% 816 10 5.01%
deposits
----------------------------------------------------------------
Total Interest-earning assets 331,631 $ 6,016 7.26% 384,551 7,128 7.41%
Non-interest earning assets 25,221 47,946
Allowance for loan losses 2,633 2,265
----------- ----------
Total average assets $ 354,219 $ 430,232
=========== ==========
Liabilities and Equity
Interest-bearing liabilities
Interest bearing checking $ 42,873 $ 145 1.37% $ 44,962 $ 203 1.83%
High yield checking 60,628 828 5.54% 65,239 937 5.82%
Savings deposits 30,373 178 2.38% 36,257 229 2.56%
Time deposits 132,962 2,007 6.12% 163,429 2,272 5.64%
----------------------------------------------------------------
Total Interest Bearing Deposits 266,836 3,158 4.80% 309,887 3,641 4.77%
----------------------------------------------------------------
Other debt 12,902 195 6.13% 36,356 584 6.51%
----------------------------------------------------------------
Total interest-bearing liabilities $ 279,738 $ 3,353 4.86% $ 346,243 $ 4,225 4.95%
----------------------------------------------------------------
Non-interest bearing liabilities 1,225 1,706
Demand deposits 51,896 59,948
Shareholders' equity 21,360 22,335
----------- ----------
Total average liabilities and shareholders'
equity $ 354,219 $ 430,232
=========== ==========
Tax equivalent net interest income 2,663 2,903
----------- --------
Tax equivalent adjustment -- (27)
----------- --------
Net interest income 2,663 2,876
=========== ========
Net interest rate spread 2.40% 2.47%
------- -------
Net interest margin on average earning assets 3.21% 3.02%
----------------------------------------------------------------
Page 12 of 26
The following table presents the major factors by category that contributed
to the changes in net interest income for the three months ended March 31, 2001
compared to the same period a year ago. Amounts have been computed on a full
tax-equivalent basis, assuming a federal income tax rate of 34.0 percent.
RATE VOLUME TABLE
Increase (Decrease)
-----------------------------------------
Due to Change in
-----------------------------------------
Volume Rate Total
----------- ----------- -----------
ASSETS
Interest Earning Assets
Commercial Loans $ (395) $ 30 $ (365)
SBA Loans 387 22 409
Mortgage Loans (310) 13 (297)
Consumer Loans (1,190) (53) (1,243)
----------- ----------- -----------
Total Loans (1,508) 12 (1,496)
Available for sale securities 50 (70) (20)
Held to maturity securities (35) (5) (40)
Federal funds sold and interest bearing
deposits 443 1 444
----------- ----------- -----------
Total Interest-earning assets (1,050) (62) (1,112)
----------- ----------- -----------
Interest bearing checking (7) (51) (58)
High yield checking (63) (46) (109)
Savings deposits (34) (17) (51)
Time deposits (460) 195 (265)
----------- ----------- -----------
Total Interest Bearing Deposits (564) 81 (483)
----------- ----------- -----------
Borrowings (354) (35) (389)
----------- ----------- -----------
Total interest-bearing liabilities (918) 46 (872)
----------- ----------- -----------
Decrease in net interest income $ (132) $ (108) $ (240)
=========== =========== ===========
Net interest income was $2.7 million for the quarter compared to $2.9
million a year ago. The decline in net interest income was a result of the
planned reduction in earning assets as a result of the Company's capital
restoration plan. Net interest margin was 3.21 percent for the quarter compared
to 3.02 percent a year ago. The Company's net interest margin, although improved
from a year ago, continues to be negatively impacted by the declining interest
rate environment and the high cost of time deposits, the majority of which will
reprice this year.
Average interest earning assets were $331.6 million for the three months
ended March 31, 2001, a decrease of $52.9 million, compared to $384.6 million
for the same period a year ago. The decreases in average earning assets occurred
primarily due to a $86.2 million decrease in the average loan portfolio,
partially offset by an increase of $30.0 million in average Federal funds sold.
The rate earned on interest earning assets was 7.26 percent for the three months
ended March 31, 2001, a decrease of 15 basis points from 7.41 percent for the
three months ended March 31, 2000, resulting from higher balances in lower
yielding assets, primarily federal funds sold. Interest income on average
interest earning assets was $6.0 million for the quarter ended March 31, 2001, a
decrease of $1.1 million from the same period a year ago. Of the $1.1 million
decline, $1.0 million is related to the decline in average balances, and $0.1
million is related to the rates earned on these investments.
Average loans amounted to $224.1 million for the three months ended March
31, 2001, a decrease of $86.2 million from the same period a year ago. Consumer,
mortgage and commercial loans all decreased partially offset by an increase in
SBA loans. The decrease in consumer and mortgage loan portfolios is due to loan
sales in 2000 of $37.4 million and $43.0 million, respectively. The decrease in
the commercial loan portfolio is due to prepayments exceeding new volume. The
average rate earned on the loan portfolio was 7.99 percent, an increase of 27
basis points from the same period a year ago.
Average investments amounted to $74.3 million for the three months ended
March 31, 2001, virtually unchanged from the same period a year ago. The average
rate earned on the investment portfolio was 6.08 percent, a decrease of 26 basis
points from the same period a year ago.
Average interest bearing liabilities were $279.7 million for the three
months ended March 31, 2001, a decrease of $66.5 million, compared to $346.2
million for the same period a year ago. The decreases in average
Page 13 of 26
interest bearing liabilities occurred in both interest-bearing deposits and
other debt. The rate paid on interest bearing liabilities was 4.86 percent, a
decrease of 9 basis points from the same period a year ago. Interest expense
amounted to $3.4 million for the quarter ended March 31, 2001, a decrease of
$0.9 million from the same period a year ago. Of the $872 thousand decrease,
$918 thousand is related to the decline in average balance, offset by $46
thousand related to the rates paid on these liabilities.
Total interest-bearing deposits were $266.8 million, a decline of $43.1
million from the same period a year ago. The decline in interest-bearing
deposits was as a result of sales of $48.0 million in deposits in December 2000
and the planned reduction of higher costing governmental time deposits. The rate
paid on interest bearing deposits was 4.80 percent for the quarter ended March
31, 2001, an increase of 3 basis points from last year. The increase in rate was
due to higher promotional rates of interest to attract deposits to newer branch
locations. The promotional rates were offered on time deposits and Top Banana
premium money market product due to the first quarter liquidity needs in 2000.
Other debt was $12.9 million for the quarter ended March 31, 2001, a
decrease of $23.5 million from the same period a year ago.
Non-interest bearing deposits amounted to $51.9 million, 16.3 percent of
total deposits, for the quarter ended March 31, 2001, unchanged from the same
period a year ago. In December 2000, $6.3 million of non-interest bearing
deposits were sold.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $150 thousand for the three months
ended March 31, 2001, a decrease of $96 thousand, compared with $246 thousand
for the same period a year ago. The provision for loan losses approximated net
charge offs for the quarter ended March 31, 2001. The provision is based on
management's assessment of the adequacy of the allowance for loan losses,
described under the section titled Allowance for Loan Losses. Although non-
performing loans have increased over the prior quarter the portfolio of
classified loans declined. As such the current provision is appropriate under
the assessment of the adequacy of the allowance for loan losses.
NON-INTEREST INCOME
Non-interest income consists of service charges on deposits, loan and
servicing fees, gains and losses on sales of securities and loans and other
income. Non-interest income was $1.2 million for the three months ended March
31, 2001, an increase of $617 thousand, compared to the $544 thousand for the
same period a year ago.
Deposit service charges were $327 thousand for the three months ended March
31, 2001, an increase of $59 thousand, or 22.0 percent from the $268 thousand
reported a year ago. Deposit service charges increased as a result of improved
collection of non-sufficient and unavailable funds fees.
Loan and servicing fees increased $25 thousand, to $291 thousand for the
three months ended March 31, 2001, through growth of the serviced SBA loan
portfolio.
Gain (losses) on loan sales reflects the participation in the SBA's
guaranteed loan program. Under the SBA program, the SBA guarantees 75 percent to
85 percent of the principal of a qualifying loan. The guaranteed portion of the
loan is then sold into the secondary market. SBA loan sales, all without
recourse, totaled $7.5 million in the first quarter of 2001, compared to $5.1
million in the first quarter of 2000. Gains on SBA loan sales were $402 thousand
for the three months ended March 31, 2001, compared to $367 thousand for the
same period a year ago. Prior period results also include a $731 thousand loss
on the sale of adjustable rate mortgages, and gains on the sale of mortgages of
$231 thousand from CMA.
Security gains amounted to $34 thousand for the three months ended March
31, 2001, compared to the $1 thousand for the first quarter of 2000.
Other non-interest income amounted to $107 thousand for the three months
ended March 31, 2001, a decrease of $35 thousand as a result of the cancellation
of life insurance policies during 2000. Other income for the quarter ended
December 31, 2000, included a gain of $3.3 million on the sale of five branches
and deposits.
NON-INTEREST EXPENSE
Non-interest expense was $3.5 million for the three months ended March 31,
2001, a decrease of $1.4 million, or 27.7 percent from the same period a year
ago. Prior period non-interest expenses include the
Page 14 of 26
operations of CMA and five additional branches. The reduction in non-interest
expense is directly related to the dissolution of CMA, branch sales and improved
expense control.
Compensation and benefits expense was $1.6 million for the quarter ended
March 31, 2001, a decrease of $673 thousand or 29.2 percent from the same period
a year ago. The decrease is related to the reduction in the number employees and
fewer branches.
Occupancy expense was $413 thousand for the three months ended March 31,
2001, a decrease of $271 thousand or 39.6 percent from the same period a year
ago. The decrease is related to the reduction in the number of branches due to
the branch sales in the fourth quarter of 2000.
Processing and communications expense was $482 thousand for the three
months ended March 31, 2001, a decrease of $112 thousand or 18.9 percent from
the same period a year ago. The decrease is related to the reduction in the
number of branches due to the branch sales in the fourth quarter of 2000.
Furniture and equipment expense was $263 thousand for the three months
ended March 31, 2001, an increase of $200 thousand from the same period a year
ago. Included in the March 31, 2000 furniture and equipment expense was a $300
thousand one-time credit received from a data processing vendor.
Professional fees were $207 thousand for the three months ended March 31,
2001 a decrease of $81 thousand, or 28.1 percent from the same period a year
ago. The decrease is related to the lower consulting fees.
Deposit insurance was $224 thousand for the three months ended March 31,
2001 an increase of $177 thousand from the same period a year ago. The increase
in deposit insurance premiums is the result of a higher risk classification
assessed by the FDIC starting in mid 2000.
Loan servicing expense was $75 thousand for the three months ended March
31, 2001, a decrease of $252 thousand from the same period a year ago. The
decrease is a result of the Company billing the SBA for their share of
collection costs on loans serviced on their behalf.
Other expense was $248 thousand for the three months ended March 31, 2001,
a decrease of $347 thousand or 58.3 percent from the same period a year ago. The
decrease is the result of lower advertising expense and no amortization expense
due to the write off $3.2 million in intangibles related to CMA in the forth
quarter of 2000.
INCOME TAX EXPENSE
In December 2000, the Company substantially increased the tax valuation
reserve against deferred tax assets, which are dependent on future taxable
income. As a result of the first quarter profit, the current tax expense
reflects the reversal of tax valuation reserves. The current period tax expense
represents state tax provision for the investment company.
Page 15 of 26
FINANCIAL CONDITION AT MARCH 31, 2001
Total assets at March 31, 2001, were $367.0 million compared to $409.7
million a year ago and $356.0 million from the year-end 2000. The decline in
assets from a year ago was in accordance with the Company's capital restoration
plan. The increases in assets from December 31, 2000, were the result of deposit
generation primarily invested in securities available for sale and Federal funds
sold.
INVESTMENT PORTFOLIO
March 2001 December 2000
------------------------------------------------------------------------------------------
(in thousands ) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------------------------------------------------------
AVAILABLE FOR SALE
US Treasury $ 6,339 $ 2 $ -- $ 6,340 $ 7,097 $ -- $ (22) $ 7,075
US Government Agencies 6,905 96 (6) 6,996 9,067 24 (39) 9,052
Corporate Debt securities 2,910 - (105) 2,805 964 -- (56) 908
Mortgage backed 34,462 178 (194) 34,446 17,912 5 (275) 17,642
Federal Home Loan Bank stock 2,720 -- -- 2,720 2,720 -- -- 2,720
Equity 254 14 (79) 190 523 -- (111) 412
------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR
SALE $ 53,590 $ 290 $ (383) $ 53,497 $ 38,283 $ 29 $ (503) $ 37,809
==========================================================================================
HELD TO MATURITY
US Government Agencies $ 12,246 $ 15 $ (236) $ 12,025 $ 20,246 $ -- $ (620) $ 19,626
Corporate Debt securities 1,012 9 -- 1,021 -- -- -- --
Mortgage backed securities 12,408 9 (7) 12,410 12,782 -- (255) 12,527
------------------------------------------------------------------------------------------
TOTAL HELD TO MATURITY $25,666 $ 33 $ (243) $ 25,456 $ 33,028 $ -- (875) 32,153
==========================================================================================
Securities available for sale are investments carried at fair value that
may be sold in response to changing market and interest rate conditions or for
other business purposes. Securities held to maturity, which are carried at
amortized cost, are investments for which there is the positive intent and
ability to hold to maturity. Management determines the appropriate security
classification of available for sale or held to maturity at the time of
purchase. The investment security portfolio is maintained for asset-liability
management purposes, an additional source of liquidity, and as an additional
source of earnings. The portfolio is comprised of U.S. Treasury securities,
obligations of U.S. Government and government sponsored agencies, collateralized
mortgage obligations and corporate and equity securities. Approximately 83
percent of the total investment portfolio has a fixed rate of interest. In the
normal course of business, the Company accepts government deposits that require
investment securities to be held as collateral. As of March 31, 2001, $14.0
million of securities were required to be pledged for governmental deposits.
Securities available for sale were $53.5 million at March 31, 2001, an
increase of $15.7 million, or 41.5 percent from year-end 2000. During the
quarter $19.3 million of securities available for sale were purchased,
(predominately collateralized mortgage obligations) and funded by deposit
generation and calls and maturities on securities held to maturity and
securities available for sale.
Securities held to maturity were $25.7 million at March 31, 2001, a
decrease of $7.4 million or 22.3 percent from year-end 2000. The decline in held
to maturity securities was a result of calls and maturities, and their
reinvestment in the securities available for sale portfolio. As of March 31,
2001, and December 31, 2000 the market value of held to maturity securities was
$25.5 million and $32.2 million, respectively. The improvement in the market
value of the portfolios was primarily due to the declining interest rate
environment.
Page 16 of 26
LOAN PORTFOLIO
The following table sets forth the classification of loans by major
category at March 31, 2001, and December 31, 2000.
---------------------------------------------------------
Loans By Type 03/31/2001 12/31/2000
- ------------------------------------------------------------------------------
% of % of
Amount Total Amount Total
-------------------------- --------------------------
SBA Loans $ 33,588 15.0% $ 30,177 13.3%
Commercial 85,971 38.4% 88,375 39.1%
Mortgage 76,026 33.9% 76,924 34.0%
Consumer 28,363 12.7% 30,664 13.6%
-------------------------- --------------------------
Total Loans $ 223,948 100.0% $ 226,140 100.0%
=========================== ==========================
The loan portfolio, which represents the Company's largest asset group, is
a significant source of both interest and fee income. The portfolio consists of
commercial, Small Business Administration ("SBA"), mortgage and consumer loans.
Elements of the loan portfolio are subject to differing levels of credit and
interest rate risk. Loans decreased $2.2 million, or 0.97 percent to $223.9
million at March 31, 2001.
SBA loans originated inside and outside of the Company's market place
provide guarantees of between 75 percent and 85 percent of the principal from
the SBA. SBA loans are generally sold in the secondary market with the
non-guaranteed portion held in the portfolio. SBA loans amounted to $33.6
million at March 31, 2001, an increase of $3.4 million from year-end 2000. The
Company expects to continue to grow this portfolio in 2001.
Commercial loans are made for the purpose of providing working capital,
financing the purchase of equipment, inventory or commercial real estate and for
other business purposes. These loans amounted to $86.0 million at March 31,
2001, a decrease of $2.4 million from year-end December 2000. The reduction in
commercial loans for the quarter was a result of prepayments exceeding new
originations.
Mortgage loans consist of loans secured by residential property. These
loans amounted to $76.0 million at March 31, 2001, a decrease of $900 thousand
from year-end December 2000. Residential mortgages are no longer being
originated for the portfolio. In the fourth quarter of 2000, the Company
established a relationship with First Hallmark Mortgage, under which First
Hallmark will table fund loan originations for resale. There are no incremental
costs incurred by the Company as a result of this relationship.
Consumer loans consist of home equity loans and loans 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. These
loans amounted to $28.4 million at March 31, 2001 a decrease of $2.3 million
from year-end December 2000. The decrease in the consumer loan portfolio was
primarily the result of auto loan pay-downs.
The following table sets forth the repricing of loans for the period ended
March 31, 2001.
------------------------------------------------------------
Within 1 Year 1 - 5 Years After 5 Years Total
------------------------------------------------------------
SBA loans 33,588 -- -- 33,588
Commercial loans 44,984 34,826 6,161 85,971
Mortgage loans 2,440 70,054 3,532 76,026
Consumer loans 17,178 10,007 1,178 28,363
------------ ------------ ----------- ------------
Total loans $ 98,190 $ 114,887 $ 10,871 $ 223,948
============ ============ =========== ============
Page 17 of 26
ASSET QUALITY
Inherent in the lending function is the possibility a customer may not
perform in accordance with the contractual terms of the loan. A borrower's
inability to pay its obligations according to the contractual terms can create
the risk of past due loans and ultimately credit losses, especially on
collateral deficient loans.
Non-performing loans consist of loans that are not accruing interest
(non-accrual loans) as a result of principal or interest being in default for a
period of 90 days or more or when the collectibility of principal and interest
according to the contractual terms is in doubt, and loans past due 90 days or
greater, still accruing interest. Management has evaluated the loans past due 90
days or greater and still accruing interest and determined that they are well
collateralized and in the process of collection. The majority of loans 90 days
past due and still accruing interest are loans where customers continue to make
the monthly principal and interest payments. The loans have matured and are
pending renewal. When a loan is classified as nonaccrual, interest accruals
discontinue and all past due interest previously recognized as income is
reversed and charged against current period income. Generally, until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of a
portion of such payments as interest income.
Credit risk is minimized by loan diversification and adhering to credit
administration policies and procedures. Due diligence on loans begins upon the
origination of a loan with a borrower. Documentation, including a borrower's
credit history, materials establishing the value and liquidity of potential
collateral, the purpose of the loan, the source of funds for repayment of the
loan, and other factors are analyzed before a loan is submitted for approval.
The loan portfolio is then subject to ongoing internal reviews for credit
quality.
The following table sets forth information concerning non-accrual loans and
non-performing assets for the quarters ended March 31, 2001 and 2000, and
December 31, 2000:
----------------------------------------------------------
Nonperforming loans
(In thousands) March 31, 2001 December 31, 2000 March 31, 2000
----------------------------------------------------------
Nonaccrual by category
Commercial $ 2,098 $ 2,064 $ 1,403
Real Estate 1,250 807 214
Consumer 28 32 --
-----------------------------------------------------------------------------------------------------------------
Total 3,376 2,903 1,617
=================================================================================================================
Past Due 90 days or more and still accruing interest
Commercial 845 578 650
Real Estate 1,480 694 448
Consumer 14 -- 14
-----------------------------------------------------------------------------------------------------------------
Total 2,339 1,272 1,112
=================================================================================================================
Total Non Performing Loans 5,715 4,175 2,729
=================================================================================================================
OREO Property 427 142 758
-----------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $ 6,142 $ 4,317 $ 3,487
=================================================================================================================
Non-Performing assets to total assets 1.67% 1.21% 0.85%
Non-Performing assets to loans and OREO 2.74% 1.91% 1.21%
Allowance for loans losses as a
percentage of non-performing loans 45.41% 61.27% 87.47%
----------------------------------------------------------
Nonaccrual loans amounted to $3.4 million at March 31, 2001, an increase of
$0.4 million from $2.9 million at year-end 2000. Included in nonaccrual loans
are $0.7 million of loans guaranteed by the SBA. Loans 90 days or more past due
increased $1.0 million from $1.3 million at December 31, 2000 to $2.3 million at
March 31, 2001. The majority of loans 90 days past due and still accruing
interest are loans where customers continue to
Page 18 of 26
make the monthly principal and interest payments. The loans have matured and are
pending renewal and the Bank has adequate liquidity to fund these loans.
Potential problem loans are those where information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with loan repayment terms. These loans are not included in
non-performing loans as they continue to perform. Potential problem loans, which
consist primarily of commercial loans, were $0.1 million and $0.3 million at
March 31, 2001 and December 31, 2000 respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level deemed sufficient by
management to absorb estimated credit losses as of the balance sheet date.
Management utilizes a standardized methodology to assess the adequacy of the
allowance for loan losses. This process consists of the identification of
specific reserves for identified problem loans based on loan grades and the
calculation of general reserves based on minimum reserve levels by loan type.
Risks within the loan portfolio are analyzed on a continuous basis by
management, and periodically by an independent credit review function and by the
audit committee. A risk system, consisting of multiple grading categories, is
utilized as an analytical tool to assess risk and to quantify the appropriate
level of loss reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current economic conditions and
considers such factors as the financial condition of the borrowers, past and
expected and loss experience, and other factors management feels deserve
recognition in establishing an adequate reserve. This risk assessment process,
which includes the determination of the adequacy of the allowance for loan
losses, is performed at least quarterly, and, as adjustments become necessary,
they are realized in the periods in which they become known.
Provisions charged to expense increase the allowance and the allowance is
reduced by net charge-offs (i.e., loans judged to be not collectable are charged
against the reserve, less any recoveries on such loans). Although management
attempts to maintain the allowance at a level deemed adequate to provide for
potential losses, future additions to the allowance may be necessary based upon
certain factors including obtaining updated financial information about the
borrower's financial condition and changes in market conditions. In addition,
various regulatory agencies periodically review the adequacy of the allowance
for loan losses. These agencies have in the past and may in the future require
the Bank to make additional adjustments based on their judgments about
information available to them at the time of their examination.
The allowance for loan losses totaled $2.5 million, $2.6 million, and $2.4
million at March 31, 2001, December 31, 2000, and March 31, 2000, respectively
with resulting allowance to total loan ratios of 1.14 percent, 1.13 percent and
0.83 percent respectively. The increase in the ratios between March 31, 2001 and
March 31, 2000 is due to the decrease in the loan portfolios, through the 2000
sales.
The following is the allocation of the allowance for loan losses by loan type at
March 31, 2001, and December 31, 2000.
---------------------------------------------------------------------
March, 2001 December 2000
---------------------------------------------------------------------
(In thousands) % of % of % of % of
Amount Allowance All Loans Amount Allowance All Loans
- -------------------------------------------------------------------------------------------------
Balance Applicable to:
SBA loans $ 684 26.8% 15.0% $ 506 19.8% 13.3%
Commercial loans 1,340 52.6% 38.4% 1,522 59.5% 39.1%
Mortgage loans 229 9.0% 33.9% 233 9.1% 34.0%
Consumer loans 297 15.7% 12.7% 297 11.6% 13.6%
---------------------------------------------------------------------
Total $ 2,550 100.0% 100.0% $ 2,558 100.0% 100.0%
=================================================================================================
Page 19 of 26
The following is a reconciliation summary of the allowance for loan losses
for March 31, 2001 and 2000 and December 31, 2000:
--------------------------------------------------------
Allowance for Loan Loss Activity
(In thousands) March 31,2001 December 31, 2000 March 31, 2000
--------------------------------------------------------
Balance at beginning of year $ 2,558 $ 2,545 $ 2,173
Charge-offs:
Commercial and industrial 185 222 --
Real estate -- -- --
Consumer 3 60 43
--------------------------------------------------------
Total Charge-offs 188 282 43
Recoveries:
Commercial and industrial 20 4 1
Real estate 9 1 --
Consumer 1 -- 10
--------------------------------------------------------
Total recoveries 30 5 11
--------------------------------------------------------
Total net charge-offs 158 277 32
--------------------------------------------------------
Provision charged to expense 150 290 246
--------------------------------------------------------
Balance of allowance at end of year $ 2,550 $ 2,558 $ 2,387
========================================================
Net charge-offs to average loans outstanding 0.04% 0.48% 0.01%
Allowance to total loans 1.14% 1.13% 0.85%
--------------------------------------------------------
DEPOSITS
Deposits, which include non-interest and interest bearing demand deposits
and interest-bearing savings and time deposits, are the primary source of the
Company's funds. The Company offers a variety of products designed to attract
and retain customers, with primary focus on building and expanding
relationships. For the March 31, 2001 quarter, the Company realized continued
growth in deposits. This growth was achieved through emphasis on customer
service, competitive rate structures and selective marketing. The Company
attempts to establish a comprehensive relationship with business borrowers,
seeking deposits as well as lending relationships.
Total deposits increased $10.8 million, or 3.4 percent, to $331.1 million
at March 31, 2001 from $320.3 million at December 31, 2000. The increase in
deposits was primarily the result of a $9.6 million increase in time deposits
totaling $139.9 million at March 31, 2001 compared to $130.3 million at December
31, 2000.
Non-interest bearing demand deposits remained relatively unchanged,
totaling $53.0 million at March 31, 2001 compared to $53.1 million at December
31, 2000, representing 16.0 percent of total deposits at March 31, 2001.
Interest bearing and saving deposits increased $1.3 million.
The maturity distribution of time deposits for March 31, 2001 is as follows:
Within 1 to 2 2 to 3 3 to 4 Over
1 year years years years 4 years
-------- ------- ------- ------ --------
$100,000, or more $ 37,546 $ 2,660 $ 906 $ -- $ --
Less than $100,000 $ 79,885 $10,548 $ 7,509 $ 476 $ 358
BORROWINGS
The following table is the period-end and average balance of FHLB borrowings for
the periods ended March 31, 2001, and December 31, 2000.
March 31, 2001 December 31, 2000
---------------------- ----------------------
(In thousands) Amount Rate Amount Rate
---------- -------- ---------- -------
Period end balance $ 10,000 4.92% $ 10,000 4.92%
Average balance $ 10,000 4.92% $1,413 4.92%
Borrowings, primarily from the Federal Home Loan Bank ("FHLB"), amounted
to $12.9 million at March 31, 2001, unchanged from year-end 2000. Included in
other debt are obligations under capital leases.
Page 20 of 26
INTEREST RATE SENSITIVITY
The principal objectives of the asset and liability management function are
to establish prudent risk management guidelines, evaluate and control the level
of interest rate risk in balance sheet accounts, determine the level of
appropriate risk given the business focus, operating environment, capital, and
liquidity requirements, and actively manage risk within the Board approved
guidelines. The Company seeks to reduce the vulnerability of the operations to
changes in interest rates, and actions in this regard are taken under the
guidance of the Asset/Liability Management Committee ("ALCO") of the Board of
Directors. The ALCO reviews the maturities and repricing of loans, investments,
deposits and borrowings, cash flow needs, current market conditions, and
interest rate levels.
The Company utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models to measure the impact of longer-term asset and
liability mismatches beyond two years. The modified duration of equity measures
the potential price risk of equity to changes in interest rates. A longer
modified duration of equity indicates a greater degree of risk to rising
interest rates. Because of balance sheet optionality, an EVPE analysis is also
used to dynamically model the present value of asset and liability cash flows,
with rate shocks of 200 basis points. The economic value of equity is likely to
be different as interest rates change. Like the simulation model, results
falling outside prescribed ranges require action by the ALCO. The Company's
variance in the economic value of equity, as a percentage of assets with rate
shocks of 200 basis points, is a decline of 1.2 percent in a rising rate
environment and a decline of 0.8 percent in a falling rate environment. Both
variances are within the board-approved guidelines of +/- 3.00 percent. At
December 31, 2000 the economic value of equity with rate shocks of 200 basis
points was a decline of 1.5 percent in a rising rate environment and a decline
of 0.08 percent in a falling rate environment.
OPERATING, INVESTING, AND FINANCING CASH
Cash was $16.0 million at March 31, 2001, an increase of $2.3 million from
December 31, 2000. Net cash provided by operating activities, amounted to $2.1
million, primarily due to a $1.8 million tax refund. Net cash used in investing
activities amounted to $10.6 million, primarily from the funding of the loan
portfolio, increased investment in securities available for sale and fed funds,
partially offset by maturities of securities and proceeds of loan sales. Net
cash provided by financing activities, amounted to $10.8 million for the quarter
ended March 31, 2001, attributable to deposit growth.
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.
HOLDING COMPANY
The principal source for funds for the holding company is dividends paid by
the Bank. The Bank is currently restricted from paying dividends to the holding
company. At March 31, 2001, the Holding Company had $955 thousand in cash and
$190 thousand in marketable securities. At March 31, 2001, the holding company
has accumulated $518 thousand of dividend payments in arrears on its preferred
stock.
CONSOLIDATED BANK
Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
principal sources of funds are deposits, scheduled amortization and repayments
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.
Page 21 of 26
Total deposits amounted to $331.1 million as of March 31, 2001. At March
31, 2001, $17.9 million was available for additional borrowings from the FHLB of
New York. Pledging additional collateral in the form of 1-4 family residential
mortgages or investment securities can increase the line with the FHLB. An
additional source of liquidity is Federal Funds sold, which were $36.5 million
at March 31, 2001.
As of March 31, 2001 deposits included $30.5 million of Government
deposits, as compared to $31.7 million at December 31, 2000. These deposits are
generally short in duration, and are very sensitive to price competition. The
Company has significantly reduced its reliance on these deposits as a source of
funds, and believes the current portfolio of these deposits to be appropriate.
Included in the portfolio are $23.7 million of deposits from two municipalities.
The withdrawal of these deposits, in whole or in part would not create a
liquidity shortfall for the Company. At March 31, 2001, the Bank had
approximately $47.9 million of loan commitments, which will generally either
expire or be funded within one year.
Page 22 of 26
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines,
which require a bank to maintain certain capital as a percent of assets, and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0 percent and combined tier
1 and tier 2 capital as a percentage of risk-adjusted assets of 8.0 percent.
In addition to the risk-based guidelines, regulators require that a bank
which meets the regulator's highest performance and operation standards maintain
a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of
4 percent. 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 Company and the Bank
entered into stipulations and agreements with each of their respective
regulators on July 18, 2000 because of losses and failure to meet minimum
federal risk-based capital requirements and the New Jersey Department of Banking
and Insurance's required 6.0 percent leverage ratio, required in connection with
the Bank's 1999 branch expansion.
In accordance with the capital plan, in 2000, the Company raised a net $4.9
million of a newly created class of preferred stock, without Securities and
Exchange Commission registration, and reduced its financial assets through sales
of loan and deposit portfolios. The Company and the Bank have met the federal
minimum risk-based capital requirements since the March 2000 preferred stock
offering. The Bank has until December 2001 to achieve the 6.0 percent Tier 1
leverage ratio required by the New Jersey Department of Banking and Insurance.
Both the Company and the Bank believe that they are in compliance with all other
provisions of the agreements. As of March 31, 2001, the Company has $518 of
dividends in arrears on its preferred stock.
Page 23 of 26
The Company's capital amounts and
ratios are presented in the following table.
-------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective Action
Actual Adequacy Purposes Provisions
-------------------------------------------------------------------------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------------ ----- ------------ ------
AS OF MARCH 31, 2001
-------------------------------------------------------------------------------------------
Leverage Ratio $ 21,696 6.12% >= $ 14,171 4.00% >= $ 17,714 5.00%
-------------------------------------------------------------------------------------------
Tier I risk-based ratio $ 21,696 9.79% >= $ 8,961 4.00% >= $ 13,292 6.00%
-------------------------------------------------------------------------------------------
Total risk-based ratio $ 24,246 10.94% >= $ 17,723 8.00% >= $ 22,154 10.00%
-------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2000
-------------------------------------------------------------------------------------------
Leverage Ratio $ 21,539 5.50% >= $ 15,670 4.00% >= $ 19,474 5.00%
-------------------------------------------------------------------------------------------
Tier I risk-based ratio $ 21,539 9.61% >= $ 8,961 4.00% >= $ 13,442 6.00%
-------------------------------------------------------------------------------------------
Total risk-based ratio $ 24,097 10.76% >= $ 17,922 8.00% >= $ 22,403 10.00%
-------------------------------------------------------------------------------------------
The Bank's capital amounts and ratios are presented in the following table.
-------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective Action
Actual Adequacy Purposes Provisions
-------------------------------------------------------------------------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------------ ----- ------------ ------
AS OF MARCH 31, 2001-
-------------------------------------------------------------------------------------------
Leverage Ratio (a) $ 20,508 5.80% >= $ 14,151 4.00% >= $ 17,689 5.00%
-------------------------------------------------------------------------------------------
Tier I risk-based ratio $ 20,508 9.27% >= $ 8,848 4.00% >= $ 13,272 6.00%
-------------------------------------------------------------------------------------------
Total risk-based ratio $ 23,058 10.42% >= $ 17,696 8.00% >= $ 22,120 10.00%
-------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2000-
-------------------------------------------------------------------------------------------
Leverage Ratio (a) $ 20,394 5.24% >= $ 15,579 4.00% >= $ 19,474 5.00%
-------------------------------------------------------------------------------------------
Tier I risk-based ratio $ 20,394 9.12% >= $ 8,946 4.00% >= $ 13,419 6.00%
-------------------------------------------------------------------------------------------
Total risk-based ratio $ 22,952 10.26% >= $ 17,892 8.00% >= $ 22,365 10.00%
-------------------------------------------------------------------------------------------
(a) In connection with the branch expansion the New Jersey Department of Banking
and Insurance imposed a tier 1 capital to total assets ratio of 6%.
Shareholders' equity increased $0.4 million, 1.7 percent, to $21.7 million
at March 31, 2001 compared to $21.3 million at December 31, 2000. This increase
was the result of the $128 thousand net operating profit before unpaid preferred
stock dividend for the first quarter of 2001 and $238 thousand of accumulated
other comprehensive income, as a result of appreciation in the securities
portfolio. As of March 31, 2001, $518 thousand of preferred dividends were in
arrears. The Company is under agreements with bank regulatory agencies to defer
making any dividend payments on either its common or preferred stock.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto, presented elsewhere herein,
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the operations. Unlike most
industrial companies, nearly all the Company's assets and liabilities are
monetary. As a result, interest rates have a greater impact on performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Page 24 of 26
Looking ahead
This report contains certain forward-looking statements; either expressed or
implied, which are provided to assist the reader to understand anticipated
future financial performance. These forward-looking statements involve certain
risks, uncertainties, estimates and assumptions made by management. Factors that
may cause actual results to differ from those results expressed or implied
include, but are not limited to, the interest rate environment and the overall
economy, the ability of customers to repay their obligations, the adequacy of
the allowance for loan losses, including realizable collateral valuations,
charge offs and recoveries, competition and technological changes. Although
management has taken certain steps to mitigate any negative effect of the
above-mentioned items, significant unfavorable changes could severely impact the
assumptions used and have an adverse affect on profitability.
ITEM III QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2001, there have been no significant changes in the Company's
assessment of market risk as reported in Item 6 of the Company's Form 10-KSB.
See the interest rate sensitivity table in Management's discussion and analysis
under the section Net interest income.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may, in the ordinary course of business become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. The company does not
believe that any existing legal claims or proceedings will have a material
impact on the Company's financial position, although they could have a material
impact on the Company's results of operations.
On August 14, 2000, Robert J. Van Volkenburgh resigned from his positions
of Chairman of the Board and Chief Executive Officer of the Company. In February
2001, Mr. Van Volkenburgh filed a complaint in the Superior Court of New Jersey
alleging breach of two agreements. The Company intends to vigorously defend
itself from any claims for payment under the agreements. Counsel has advised the
Company it has strong defenses to any such claims by Mr. Van Volkenburgh and he
is not likely to succeed in this regard. No discovery has taken place. The
Company's position is based upon what it knows as of this date and is subject to
change if future developments warrant it.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities
As of March 31, 2001, the Company has $518 of dividends in arrears on its
10 percent cumulative preferred stock. Under regulatory guidelines the Company
is prohibited from making dividend payments and based upon the Company's current
financial condition it does not expect to make dividend payments for the
foreseeable future.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
None
(b) Reports
Item 5 - The Registrant issued a press release on February 27,
2001, announcing the Registrant's fourth quarter and year-end 2000
financial results.
Page 25 of 26
SIGNATURES
Pursuant to the requirements 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: May 15, 2001 By: /s/ JAMES A. HUGHES
------------------------
JAMES A. HUGHES,
Executive Vice President and
Chief Financial Officer
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