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 JUNE 30, 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
UNITY BANCORP, INC.
-------------------
(Exact Name of registrant as specified in its charter)
Delaware 22-3282551
- ------------------------------------- ----------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
64 Old Highway 22, Clinton, Nj 08809
- ------------------------------------ ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 730-7630
Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares outstanding of each of the registrant's classes of common
equity stock, as of July 31, 2001: Common stock, no par value: 4,818,117 shares
outstanding
Page 1 of 28
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PAGE #
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PART I - CONSOLIDATED FINANCIAL INFORMATION
ITEM I - Consolidated Financial Statements (unaudited)
Consolidated Statements of Financial Condition
at June 30, 2001, 2000 and December 31, 2000 2
Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and 2000 3
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 5
Notes to the Consolidated Financial Statements 6
ITEM II - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM III - Quantitative and Qualitative Disclosures about Market Risk 26
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 26
ITEM 2 Changes in Securities and Use of Proceeds 26
ITEM 3 Defaults upon Senior Securities 26
ITEM 4 Submission of Matters to a Vote of Security Holders 27
ITEM 5 Other Information 27
ITEM 6 Exhibits and Reports on Form 8-K 27
Exhibit Index
SIGNATURES 28
Page 2 of 28
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UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<Table>
<Caption>
(IN THOUSANDS) 06/30/01 12/31/00 06/30/00
--------- --------- ---------
ASSETS
Cash and due from banks $ 13,416 $ 13,740 $ 26,245
Federal funds sold 8,000 31,500 8,000
Securities - available for sale 63,185 37,809 38,322
Securities - held to maturity 26,031 33,028 33,670
--------- --------- ---------
Total securities 89,216 70,837 71,992
SBA loans held for sale 8,056 6,741 6,796
SBA loans 29,268 23,436 17,475
Commercial loans 93,323 88,375 101,422
Mortgage loans 79,198 76,924 77,962
Consumer loans 27,828 30,664 82,592
--------- --------- ---------
Total loans 237,673 226,140 286,247
Allowance for loan losses 2,664 2,558 2,466
--------- --------- ---------
Net loans 235,009 223,582 283,781
Premises and equipment, net 8,997 9,380 11,612
Accrued interest receivable 2,564 2,836 3,139
Other assets 1,968 4,128 12,937
--------- --------- ---------
Total assets $ 359,170 $ 356,003 $ 417,706
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 58,343 $ 53,108 $ 60,993
Interest bearing checking 109,127 106,263 124,871
Savings deposits 31,558 30,634 36,528
Time deposits 88,710 95,111 106,486
Time, $100,000 and over 35,090 35,202 55,930
--------- --------- ---------
Total deposits 322,828 320,318 384,808
Other debt 12,895 12,899 3,854
Accrued interest payable 934 667 1,187
Accrued expense and other liabilities 612 805 2,548
--------- --------- ---------
Total liabilities $ 337,269 $ 334,689 $ 392,397
--------- --------- ---------
Commitments and contingencies
Shareholders' equity
Preferred stock, class A, 10%, cumulative and convertable
104 shares authorized, issued and outstanding at
June 30,2001, December 31, 2000 and June 30, 2000 4,929 4,929 4,929
Common stock, no par value, 7,500 shares authorized 26,234 26,234 26,234
Treasury stock, at cost, 157 shares (1,762) (1,762) (1,762)
Retained deficit (7,463) (7,793) (3,136)
Accumulated other comprehensive loss (37) (294) (956)
--------- --------- ---------
Total Shareholders' Equity $ 21,901 $ 21,314 $ 25,309
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 359,170 $ 356,003 $ 417,706
========= ========= =========
Issued common shares 3,864 3,864 3,864
Outstanding common shares 3,707 3,707 3,707
</Table>
See accompanying notes to the consolidated financial statements.
Page 3 of 28
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UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000
------ ------- ------- --------
INTEREST INCOME:
Fed funds sold and interest on deposits $ 379 $ 119 $ 833 $ 129
Securities:
Available for sale 922 646 1,579 1,296
Held to maturity 366 507 839 1,020
------ ------- ------- --------
Total securities 1,288 1,153 2,418 2,316
Loans:
SBA loans 806 604 1,657 1,046
Commercial loans 1,900 2,305 3,785 4,555
Mortgage loans 1,086 1,123 2,225 2,559
Consumer loans 486 1,664 1,043 3,464
------ ------- ------- --------
Total loan interest income 4,278 5,696 8,710 11,624
------ ------- ------- --------
Total interest income 5,945 6,968 11,961 14,069
------ ------- ------- --------
INTEREST EXPENSE:
Interest bearing checking 828 1,331 1,801 2,471
Savings deposits 182 208 360 437
Time deposits 1,929 2,416 3,936 4,688
------ ------- ------- --------
Total deposit interest expense 2,939 3,955 6,097 7,596
Borrowings 193 91 388 675
------ ------- ------- --------
Total interest expense 3,132 4,046 6,485 8,271
------ ------- ------- --------
Net interest income 2,813 2,922 5,476 5,798
Provision for loan losses 150 90 300 336
------ ------- ------- --------
Net interest income after provision for loan losses 2,663 2,832 5,176 5,462
------ ------- ------- --------
NON-INTEREST INCOME:
Deposit service charges 322 273 649 541
Loan and servicing fees 310 301 601 567
Net gains on loan sales 650 1,523 1,052 1,390
Net security gains -- 4 34 5
Other income 158 337 265 479
------ ------- ------- --------
Total non-interest income 1,440 2,438 2,601 2,982
------ ------- ------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 1,683 2,644 3,311 4,945
Occupancy 424 677 837 1,361
Processing and communications 520 563 1,002 1,157
Furniture and equipment 270 399 533 462
Professional fees 205 375 412 663
Deposit insurance 200 44 424 91
Loan servicing costs 64 191 139 518
Other expenses 530 789 778 1,384
------ ------- ------- --------
Total non-interest expense 3,896 5,682 7,436 10,581
------ ------- ------- --------
Net income (loss) before provision (benefit) for income taxes $ 207 $ (412) 341 $ (2,137)
Provision (benefit) for income taxes 5 (173) 11 (882)
------ ------- ------- --------
NET INCOME (LOSS) $ 202 $ (239) $ 330 $ (1,255)
====== ======= ======= ========
Preferred stock dividends - paid and unpaid 131 131 260 156
------ ------- ------- --------
Net income (loss) to common shareholders $ 71 $ (370) $ 70 $ (1,411)
====== ======= ======= ========
Net income (loss) per common share - Basic $ 0.02 $ (0.10) $ 0.02 $ (0.38)
Net income (loss) per common share - Diluted 0.02 (0.10) 0.02 (0.38)
Weighted average shares outstanding - Basic 3,707 3,707 3,707 3,707
Weighted average shares outstanding - Diluted 3,739 3,707 3,720 3,707
</Table>
See accompanying notes to the consolidated financial statements.
Page 4 of 28
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UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
<Table>
<Caption>
Accumulated
Other Total
(IN THOUSANDS) 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 -- -- -- (1,255) -- (1,255)
Unrealized holding loss on securities
arising during the period, net of
tax $55 -- -- -- -- (142) (142)
----- --------
Total comprehensive loss (1,397)
Issuance of common stock, 2 thousand
shares -- 10 -- -- -- 10
Preferred stock dividends paid -- -- -- (25) -- (25)
Issuance of preferred stock 4,929 4,929
------- ------- ------- ------- ----- --------
Balance, June 30, 2000 $ 4,929 $26,234 $(1,762) $(3,136) $(956) $ 25,309
======= ======= ======= ======= ===== ========
Balance, December 31, 2000 $ 4,929 $26,234 $(1,762) $(7,793) $(294) $ 21,314
Comprehensive income:
Net Income -- -- -- 330 -- 330
Unrealized holding gain on securities
arising during the period, net of
tax $152 -- -- -- -- 257 257
----- --------
Total comprehensive income -- -- -- -- -- 587
------- ------- ------- ------- ----- --------
Balance, June 30, 2001 $ 4,929 $26,234 $(1,762) $(7,463) $ (37) $ 21,901
======= ======= ======= ======= ===== ========
</Table>
See accompanying notes to the consolidated financial statements.
Page 5 of 28
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UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
(IN THOUSANDS) 2001 2000
-------- --------
Operating activities:
Net income (loss) $ 330 $ (1,255)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for loan losses 300 336
Depreciation and amortization 462 629
Net gain on sale of securities (34) (5)
Gain on sale of loans (1,052) (1,390)
Loss on sale of fixed assets -- 8
Net change in other assets and liabilities 2,726 1,410
-------- --------
Net cash provided by (used in) operating activities 2,732 (267)
-------- --------
Investing activities:
Purchases of securities held to maturity (9,292) --
Purchases of securities available for sale (38,606) (45)
Maturities and principal payments on securities held to maturity 16,343 580
Maturities and principal payments on securities available for sale 13,279 1,546
Proceeds from sale of securities available for sale 344 52
Proceeds from sale of loans, net 17,193 54,075
Purchase of loans (8,554) --
Net increase in loans (19,678) (16,585)
Purchases in premises and equipment (91) (174)
Proceeds from the sale of fixed assets -- 11
Proceeds from sale of OREO property -- 747
-------- --------
Net cash (used in) provided by investing activities (29,062) 40,207
-------- --------
Financing activities:
Increase in deposits 2,510 27,270
Decrease in borrowings (4) (53,000)
Proceeds from the issuance of common stock -- 10
Proceeds from preferred stock offering, net -- 4,929
Dividends on preferred stock -- (25)
-------- --------
Net cash provided by (used in) financing activities 2,506 (20,816)
-------- --------
Decrease in cash and cash equivalents (23,824) 19,124
Cash and cash equivalents at beginning of year 45,240 15,121
-------- --------
Cash and cash equivalents at end of period $ 21,416 $ 34,245
======== ========
Supplemental disclosures:
Cash:
Interest paid $ 6,218 $ 8,259
Non-Cash investing activities:
Transfer of loan to Other Real Estate Owned 364 141
</Table>
See accompanying notes to the consolidated financial statements.
Page 6 of 28
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UNITY BANCORP, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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"), 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 and six months ended June 30, 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. Management believes the
Company 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 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
Page 7 of 28
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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 among other
reasons operating 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 June 30, 2001, the Company has $647 thousand
of dividends in arrears on its preferred stock. However, subsequent to quarter
end, the Company consummated an exchange offer pursuant to which shares of the
outstanding Series A Preferred stock were exchanged for common stock and
dividend arrears of $627 were settled in exchange for additional shares of
common stock. See Note 6. "Subsequent events"
NOTE 4. EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and dilutive
earnings (loss) per share. Basic net income per common share is calculated by
dividing net income by the weighted average common shares outstanding during the
period. Diluted net income per common share is computed similarly to that of
basic net income per common share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if all potentially dilutive common shares, principally stock options, were
issued during the reporting period.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Three Months ended June 30, Six Months ended June 30,
- -----------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net Income (loss) to common shareholders $ 71 $ (370) $ 70 $ (1,411)
=================================================================================================================
Basic weighted-average common shares outstanding 3,707 3,707 3,707 3,707
Plus: Common stock equivalents 32 -- 13 --
- -----------------------------------------------------------------------------------------------------------------
Diluted weighted -average common shares outstanding 3,739 3,707 3,720 3,707
=================================================================================================================
Net Income (loss) per Common share:
Basic $ 0.02 $ (0.10) $ 0.02 $ (0.38)
Diluted 0.02 (0.10) 0.02 (0.38)
- -----------------------------------------------------------------------------------------------------------------
</Table>
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed.
Statement 142 requires that goodwill and any intangible asset determined to have
an indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of Statement 142.
Page 8 of 28
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The Company is required to adopt the provisions of Statement 141 immediately.
The initial adoption of Statement 141 had no impact on the Company's
consolidated financial statements. The Company is required to adopt Statement
142 effective January 1, 2002. The Company currently has no recorded goodwill or
intangible assets and does not anticipate that the initial adoption of Statement
142 will have a significant impact the Company's consolidated 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 June 30, 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.
NOTE 6. SUBSEQUENT EVENTS
Unity Bancorp, Inc. reported that on July 13, 2001, it had concluded its
exchange offer for shares of its Series A Preferred Stock, with 94 percent of
the 103.5 thousand shares converting to common stock. Under the terms of the
exchange offer, 10.1 shares of common stock and 10.1 common stock purchase
warrants were issued for each share of Series A Preferred Stock. Each warrant
will allow the holder to purchase one share of common stock at an exercise price
of $5.50 for a fifteen-month period ending October 16, 2002. In addition, one
share of common stock and one common purchase warrant were issued in full
satisfaction of each $4.95 of accrued but unpaid dividends on each share of
Series A Preferred Stock tendered. Approximately $627 thousand of unpaid
dividends were settled in the exchange offer. Under the terms of the exchange
offer, approximately 1.1 million shares of common stock and 1.1 million warrants
were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and
the related unpaid dividend. Six thousand shares of Series A Preferred Stock
remains outstanding. As a result of the exchange, the Company will record
approximately $1.8 million non-cash dividend, representing the value of the
additional consideration transferred in the transaction over the fair value of
securities issuable pursuant to the original terms in the third quarter of 2001.
This dividend has no impact on total capital, but will impact earnings per
common share in the third quarter of 2001.
Page 9 of 28
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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. This Form 10-Q contains certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which 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 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
June 30, 2001, the Bank and the Company believe they are in compliance with the
requirements of the agreements.
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 June 30, 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 have 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 June 30, 2001. The Company is continuing to work towards
increasing its capital.
Page 10 of 28
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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.
Page 11 of 28
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UNITY BANCORP
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
(UNAUDITED)
(TAX-EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
JUNE 30, 2001 June 30, 2000
-------------------------------------- --------------------------------------
BALANCE INTEREST RATE Balance Interest Rate
--------- --------- --------- --------- --------- ---------
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits with banks $ 35,073 $ 379 4.33% $ 7,668 $ 119 6.22%
Securities:
Securities available for sale 60,355 922 6.11 39,045 673 6.89
Securities held to maturity 23,999 366 6.12 34,028 507 5.96
--------- --------- --------- --------- --------- ---------
Total securities 84,354 1,288 6.11 73,073 1,180 6.46
--------- --------- --------- --------- --------- ---------
Loans, net of unearned discount:
SBA loans 35,096 806 9.19 24,224 604 9.97
Commercial 86,219 1,900 8.84 103,126 2,305 8.97
Mortgage 73,547 1,086 5.91 75,774 1,123 5.93
Consumer 28,294 486 6.89 85,812 1,664 7.78
--------- --------- --------- --------- --------- ---------
Total loans 223,156 4,278 7.68 288,936 5,696 7.90
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 342,583 5,945 6.95 369,677 6,995 7.58
--------- --------- --------- --------- --------- ---------
Noninterest-earning assets:
Cash and due from banks 10,999 18,992
Allowance for loan losses (2,631) (2,377)
Other assets 13,715 27,194
--------- ---------
Total noninterest-earning assets 22,083 43,809
--------- ---------
Total Assets $ 364,666 $ 413,486
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking $ 108,193 828 3.07 $ 118,309 1,331 4.51
Savings deposits 31,300 182 2.33 36,669 208 2.28
Time deposits 133,046 1,929 5.82 164,269 2,416 5.90
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 272,539 2,939 4.33 319,247 3,955 4.97
--------- --------- --------- --------- --------- ---------
Other borrowed funds 12,904 193 6.00 3,902 91 9.35
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 285,443 3,132 4.40 323,149 4,046 5.02
--------- --------- --------- --------- --------- ---------
Noninterest-bearing liabilities:
Demand deposits 56,210 61,374
Other liabilities 1,430 3,224
--------- ---------
Total noninterest-bearing liabilities 57,640 64,598
Shareholders' equity 21,583 25,739
--------- ---------
Total Liabilities and Shareholders' Equity $ 364,666 $ 413,486
========= =========
NET INTEREST SPREAD 2,813 2.55% 2,949 2.56%
========= =========
Tax-equivalent basis adjustment -- 27
--------- ---------
NET INTEREST INCOME $ 2,813 $ 2,922
========= =========
NET INTEREST MARGIN 3.28% 3.19%
========= =========
</Table>
Page 12 of 28
<Page>
UNITY BANCORP
CONSOLIDATED AVERAGE BALANCE SHEETS WITH RESULTANT INTEREST AND RATES
(UNAUDITED)
(TAX-EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
--------------------------------------------------------------------------------
JUNE 30, 2001 June 30, 2000
--------------------------------------- --------------------------------------
BALANCE INTEREST RATE Balance Interest Rate
--------- -------- --------- --------- --------- ---------
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits with banks $ 34,075 $ 833 4.93% $ 4,126 $ 129 6.30%
Securities:
Securities available for sale 51,461 1,579 6.14 39,144 1,345 6.87
Securities held to maturity 27,904 839 6.01 34,130 1,020 5.98
--------- ------- --------- --------- --------- ---------
Total securities 79,365 2,418 6.09 73,274 2,365 6.46
--------- ------- --------- --------- --------- ---------
Loans, net of unearned discount:
SBA loans 33,667 1,657 9.84 20,894 1,046 10.01
Commercial 86,106 3,785 8.86 103,566 4,555 8.87
Mortgage 75,190 2,225 5.92 86,767 2,559 5.90
Consumer 28,640 1,043 7.34 88,371 3,464 7.90
--------- ------- --------- --------- --------- ---------
Total loans 223,603 8,710 7.82 299,598 11,624 7.80
--------- ------- --------- --------- --------- ---------
Total interest-earning assets 337,043 11,961 7.12 376,998 14,118 7.53
--------- ------- --------- --------- --------- ---------
Noninterest-earning assets:
Cash and due from banks 11,272 17,717
Allowance for loan losses (2,632) (2,321)
Other assets 13,789 29,465
--------- ---------
Total noninterest-earning assets 22,429 44,861
--------- ---------
Total Assets $ 359,472 $ 421,859
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking $ 105,860 1,801 3.43 $ 114,255 2,471 4.36
Savings deposits 30,839 360 2.35 36,463 437 2.42
Time deposits 133,004 3,936 5.97 163,849 4,688 5.77
--------- ------- --------- --------- --------- ---------
Total interest-bearing deposits 269,703 6,097 4.56 314,567 7,596 4.87
--------- ------- --------- --------- --------- ---------
Other borrowed funds 12,903 388 6.06 20,129 675 6.76
--------- ------- --------- --------- --------- ---------
Total interest-bearing liabilities 282,606 6,485 4.61 334,696 8,271 4.98
--------- ------- --------- --------- --------- ---------
Noninterest-bearing liabilities:
Demand deposits 54,065 60,661
Other liabilities 1,329 2,465
--------- ---------
Total noninterest-bearing liabilities 55,393 63,126
Shareholders' equity 21,472 24,037
--------- ---------
Total Liabilities and Shareholders' Equity $ 359,472 $ 421,859
========= =========
NET INTEREST SPREAD 5,476 2.51% 5,847 2.55%
========= =========
Tax-equivalent basis adjustment -- 49
------- ---------
NET INTEREST INCOME $ 5,476 $ 5,798
======= =========
NET INTEREST MARGIN 3.25% 3.10%
========= =========
</Table>
Page 13 of 28
<Page>
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
NET INCOME
Net income for the three months ended June 30, 2001, was $202 thousand, or
$0.02 per basic and diluted common share, compared to net a net loss $239
thousand, or $0.10 loss per basic and diluted common share for the same period
in 2000. Net income for the six months ended June 30, 2001, was $330 thousand,
or $0.02 per basic and diluted share, compared to a net loss of $1.3 million, or
$0.38 loss per basic and diluted share for the same period in 2000. After
consideration of the preferred stock dividends, net income to common
shareholders was $71 thousand for the three months ended and $70 thousand for
the six months ended June 30, 2001, compared to a $370 thousand loss to common
shareholders and a $1.4 million loss to common shareholders, respectively, for
the three and six month periods ended June 30, 2000. The improved operating
results for the three and six months ended were primarily the result of a
decrease in non-interest expense 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. The following are key
performance indicators for the three and six months ended June 30, 2001, and
2000.
<Table>
<Caption>
===================================================================================================================
(In thousands) Three Months ended June 30, Six Months ended June 30,
===================================================================================================================
2001 2000 2001 2000
===================================================================================================================
Net Income (loss) $ 202 $ (239) $ 330 $ (1,255)
Preferred stock dividends - paid and unpaid 131 131 260 156
- -------------------------------------------------------------------------------------------------------------------
Net Income (loss) to common stockholders 71 (370) 70 (1,411)
===================================================================================================================
Net Income (loss) per common share basic and diluted 0.02 (0.10) 0.02 (0.38)
Return on average assets 0.08% (0.36)% 0.04% (0.67)%
Return on average common equity 1.71 (7.12) 0.85 (13.48)
Efficiency ratio 91.61 106.01 92.06 120.51
- -------------------------------------------------------------------------------------------------------------------
</Table>
NET INTEREST INCOME
Interest income was $5.9 million for the three months ended June 30, 2001,
compared to $7.0 million a year ago. Interest-earning assets averaged $342.6
million, a decrease of $27.1 million, or 7.3 percent, compared to the prior year
period. The decreases in average earning assets occurred primarily due to a
$65.8 million decrease in the loan portfolio, partially offset by an increase of
$27.4 million in Federal funds sold and a $21.3 million increase in securities
available for sale. The rate earned on interest-earning assets decreased 63
basis points to 6.95 percent for the three months ended June 30, 2001, compared
to the same period a year ago, primarily due to a lower rate environment and
higher balances in lower yielding investments. The decrease in interest earning
assets contributed $674 thousand to the decline in interest income, while the
decrease in yield contributed $376 thousand to the decline in net interest
income.
Interest expense decreased $914 thousand or 22.6 percent for the three
months ended June 30, 2001, compared to the same period a year ago.
Interest-bearing liabilities averaged $285.4 million for the three months ended
June 30, 2001, a decrease of $37.7 million or 11.7 percent compared to the prior
year period. The decreases in average interest bearing liabilities occurred in
interest-bearing deposits, partially offset by increases in other borrowed
funds. The decrease in interest-bearing liabilities contributed $482 thousand to
the decline in interest expense while the decrease in rate paid on interest
bearing liabilities contributed the remaining $432 thousand decline. The rate
paid on interest bearing liabilities decreased 62 basis points to 4.40 percent.
Total interest-bearing deposits were $272.5 million, a decline of $46.7 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 4.33 percent for the quarter ended June 30, 2001,
a decrease of 64 basis points from last year. The decrease in rate was due the
run off of higher promotional rate time deposits and the lower interest rate
environment.
Net interest income was $2.8 million for the three months ended June 30,
2001, a decrease of $109 thousand or 3.7 percent from the same period 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 3.28 percent for the quarter compared to 3.19 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.
Interest income was $12.0 million for the six months ended June 30, 2001,
compared to $14.1 million a year ago. Interest-earning assets averaged $337.0
million, a decrease of $40.0 million, or 10.6 percent, compared to the prior
year
Page 14 of 28
<Page>
period. The decreases in average earning assets occurred primarily due to a
$76.0 million decrease in the loan portfolio, partially offset by an increase of
$29.9 million in Federal funds sold and a $6.1 million in investment securities.
The rate earned on interest-earning assets decreased 41 basis points to 7.09
percent for the six months ended June 30, 2001, compared to the same period a
year ago, primarily due to a lower rate environment and higher balances in lower
yielding investments. The decrease in interest earning assets contributed $1.8
million to the decline in interest income, while the decrease in yield
contributed $391 thousand.
Interest expense decreased $1.8 million or 21.6 percent for the six months
ended June 30, 2001, compared to the same period a year ago. Interest-bearing
liabilities averaged $282.6 million for the six months ended June 30, 2001, a
decrease of $52.1 million or 15.6 percent compared to the prior year period. The
decreases in average interest bearing liabilities occurred in interest-bearing
deposits and other borrowed funds. The decrease in interest-bearing liabilities
contributed $1.5 million to the decline in interest expense while the decrease
in rate paid on interest bearing liabilities contributed the remaining $332
thousand. The rate paid on interest bearing liabilities decreased 37 basis
points to 4.61 percent. Total interest-bearing deposits were $269.7 million, a
decline of $44.9 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 4.56 percent for the
quarter ended June 30, 2001, a decrease of 31 basis points from last year. The
decrease in rate was due to the run off of higher promotional rate time deposits
and the lower interest rate environment.
Net interest income was $5.5 million for the six months ended June 30,
2001, a decrease of $322 thousand or 5.6 percent from the same period 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 3.25 percent for the six months ended June 30, 2001,
compared to 3.10 percent a year ago.
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volume and rates over the
periods presented. Changes that are not due to volume or rate variances have
been allocated proportionally to both, based on their relative absolute values.
Amounts have been computed on a full tax-equivalent basis, assuming a federal
income tax rate of 34.0 percent.
<Table>
<Caption>
RATE VOLUME TABLE Amount of Increase (Decrease)
-------------------------------------------------------------------------
Three months ended June 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
versus June 30, 2000 VERSUS JUNE 30, 2000
-------------------------------------------------------------------------
Due to change in: Due to change in:
------------------------- ------------------------
ASSETS Volume Rate Total Volume Rate Total
-------------------------------------------------------------------------
Interest Earning Assets
Commercial Loans $ (372) $ (34) $ (406) $ (793) $ 23 $ (770)
SBA Loans 249 (47) 202 629 (18) 611
Mortgage Loans (33) (5) (38) (343) 9 (334)
Consumer Loans (988) (190) (1,178) (2,180) (241) (2,421)
-------------------------------------------------------------------------
Total Loans (1,144) (276) (1,420) (2,687) (227) (2,914)
Available for sale securities 326 (72) 254 379 (144) 235
Held to maturity securities (153) 13 (140) (188) 7 (181)
Federal funds sold and interest bearing 297 (41) 256 730 (27) 703
deposits
-------------------------------------------------------------------------
Total Interest-earning assets (674) (376) (1,050) (1,766) (391) (2,157)
-------------------------------------------------------------------------
Interest bearing checking 12 (46) (34) 4 (96) (92)
High yield checking (145) (339) (484) (229) (364) (593)
Savings deposits (31) 19 (12) (68) 6 (62)
Time deposits (453) (33) (486) (940) 187 (753)
-------------------------------------------------------------------------
Total Interest Bearing Deposits (617) (399) (1,016) (1,233) (267) (1,500)
-------------------------------------------------------------------------
Borrowings 135 (33) 102 (222) (66) (288)
-------------------------------------------------------------------------
Total interest-bearing liabilities (482) (432) (914) (1,455) (332) (1,787)
-------------------------------------------------------------------------
Decrease in tax equivalent net interest income $ (192) $56 $ (136) $ (311) $ (60) $ (371)
-------------------------------------------------------------------------
Decrease in tax equivalent adjustment (27) (49)
------- -------
Decrease in net interest income (109) (322)
======= =======
</Table>
Page 15 of 28
<Page>
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $150 thousand for the three months
ended June 30, 2001, a increase of $60 thousand, compared with $90 thousand for
the same period a year ago. The provision for loan losses totaled $300 for the
six months ended June 30, 2001, a decrease of $36 thousand compared to $336
thousand for the same period a year ago. The decrease for the six month period
ended was primarily attributable to: the decrease in the loan portfolio, the
specific and general reserve factors used to determine reserve levels on certain
types of loans, the analysis of the estimated potential losses inherent in the
loan portfolio based upon the review of particular loans, the credit worthiness
of particular borrowers, and general economic conditions. The 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. As such the
current provision is appropriate under the assessment of the adequacy of the
allowance for loan losses.
Page 16 of 28
<Page>
NON-INTEREST INCOME
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------
(in thousands) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
- --------------------------------------------------------------------------------------------------------------------------
Deposit service charges $ 322 $ 273 17.9% $ 649 $ 541 20.0%
Loan and servicing fees 310 301 3.0 601 567 6.0
Net gains on loan sales 650 1,523 (57.3) 1,052 1,390 (24.3)
Net security gains -- 4 -- 34 5 --
Other income 158 337 (53.1) 265 479 44.7
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 1,440 $ 2,438 (40.9)% 2,601 $ 2,982 (12.8)%
==========================================================================================================================
</Table>
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 $1.4 million for the three months ended June 30,
2001, a decrease of $998 thousand compared with 2000, and was $2.6 million, a
decrease of $381 thousand for the six months ended, compared to the same period
a year ago.
Deposit service charges increased of $49 thousand or 17.9 percent for the
three months ended June 30, 2001, compared to the same period a year ago, an
increased $108 thousand, or 20.0 percent for the six months ended, compared with
the same period a year ago. Deposit service charges increased for the three and
six months ended primarily as a result of improved collection of non-sufficient
and unavailable funds fees.
Loan and servicing fees increased $9 thousand, or 3.0 percent for the
three months ended June 30, 2001, and increased $34 thousand, or 6.0 percent for
the six months ended June 30, 2001. The growth in loan and servicing fees for
the three and six months ended can be attributed to the growth of the serviced
SBA loan portfolio which amounted to $94.6 million at June 30, 2001.
Net gains on loan sales includes 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 $10.4 million in the three months ended, and $16.1 million for the six
months ended 2001, compared to $11.5 million and $16.6 million, respectively,
for the three and six month periods ended 2000. Gains on SBA loan sales were
$650 thousand for the three months ended, and $1.1 million for the six months
ended June 30, 2001 compared to $836 thousand and $1.2 million, respectively,
for the same periods a year ago. Prior period results for the six months ended
also include a $731 thousand loss on the sale of adjustable rate mortgages, and
gains on the sale of mortgages of $918 thousand from CMA.
Other non-interest income decreased $179 thousand for the three months
ended June 30, 2001, compared with 2000 and decreased $214 thousand for the six
months ended, compared with the same period a year ago. The decrease for the
three and six month periods is as a result of the cancellation of life insurance
policies during 2000 and the discontinued operations of CMA.
Page 17 of 28
<Page>
NON-INTEREST EXPENSE
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT
2001 2000 CHANGE 2001 2000 CHANGE
---------- ----------- ----------- ----------- ------------ ----------
Compensation and benefits $ 1,683 $ 2,644 (36.3)% $ 3,311 $ 4,945 (33.0)%
Occupancy 424 677 (37.4) 837 1,361 (38.5)
Processing and communications 520 563 (7.6) 1,002 1,157 (13.4)
Furniture and equipment 270 399 (32.3) 533 462 15.4
Professional services 205 375 (45.3) 412 663 (37.9)
FDIC insurance 200 44 354.5 424 91 365.9
Loan servicing costs 64 191 (66.5) 139 518 (73.2)
Other expense 530 789 (32.8) 778 1,384 (43.8)
- -----------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 3,896 $ 5,682 (31.4)% 7,436 $ 10,581 (29.7)%
- -----------------------------------------------------------------------------------------------------------------------
</Table>
Non-interest expense was $3.9 million for the three months ended and $7.4
million for the six months ended June 30, 2001. Prior period non-interest
expenses include the 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 decreased $961 thousand, or 36.3 percent
for the three months ended June 30, 2001, compared to the same period a year
ago, and decreased $1.6 million, or 33.0 percent for the six months ended June
30, 2001, compared to the same period a year ago. The decrease for the three and
six month periods is related to the reduction in the number of employees and
fewer branches. Total full time equivalent employees amounted to 145 at June 30,
2001, compared to 172 at June 30, 2000.
Occupancy expense decreased $253 thousand, or 37.4 percent for the three
months ended June 30, 2001, compared to the same period a year ago, and
decreased $524 thousand, or 38.5 percent for the six months ended June 30, 2001,
compared to the same period a year ago. The decrease for the three and six month
periods is related to the reduction in the number of branches.
Processing and communications expense decreased $43 thousand, or 7.6
percent for the three months ended June 30, 2001, compared to the same period a
year ago, and decreased $155 thousand, or 13.4 percent for the six months ended
June 30, 2001, compared to the same period a year ago. The decrease for the
three and six month periods 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 decreased $129 thousand, or 32.3 percent
for the three months ended June 30, 2001, compared to the same period a year
ago, and increased $71 thousand, or 15.4 percent for the six months ended June
30, 2001, compared to the same period a year ago. The decrease for the three
months ended is related to the reduction in the number of branches. The increase
for the six months ended June 30, 2001 is related to a $300 thousand one-time
credit received from a data processing vendor in the first quarter of 2000.
Professional fees decreased $170 thousand, or 45.3 percent for the three
months ended June 30, 2001, compared to the same period a year ago, and
decreased $251 thousand, or 37.9 percent for the six months ended June 30, 2001,
compared to the same period a year ago. The decrease is related to lower
consulting and legal fees as the Company incurred a significant amount of
expenses in complying with the stipulations with Regulators in 2000.
Deposit insurance increased $156 thousand for the three months ended June
30, 2001, compared to the same period a year ago and increased $333 thousand for
the six months ended June 30, 2001, compared to the same period a year ago.
Loan servicing expense decreased $127 thousand, or 66.5 percent for the
three months ended June 30, 2001, compared to the same period a year ago, and
decreased $379 thousand, or 73.2 percent for the six months ended June 30, 2001,
compared to the same period a year ago. The decrease in loan servicing expenses
for the three and six month periods ended is a result of the Company billing the
SBA for their share of collection costs on loans serviced on their behalf.
Other expense decreased $259 thousand, or 32.8 percent for the three
months ended June 30, 2001, compared to the same period a year ago, and
decreased $606 thousand, or 43.8 percent for the six months ended June 30, 2001,
compared to the same period a year ago. The decrease is the result of lower
advertising expense and no amortization expense due to the write off of $3.2
million in intangibles related to CMA in the fourth quarter of 2000. Included in
other expense for the three and six months ended June 30, 2001, is $140 thousand
of costs associated with the preferred stock exchange offer.
Page 18 of 28
<Page>
INCOME TAX EXPENSE
As a result of continued losses in 1999 and 2000, the Company recorded a
tax valuation reserve against deferred tax assets, which are dependent on future
taxable income. As a result of profits for the three and six month periods ended
June 30, 2001, the current tax expense reflects the reversal of tax valuation
reserves in an amount equal to the statutory tax rate. The current period tax
expense represents state tax provision for a non-bank company.
Page 19 of 28
<Page>
FINANCIAL CONDITION AT JUNE 30, 2001
Total assets at June 30, 2001, were $359.2 million compared to $417.7
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 used to fund loan volume and investments in securities.
SECURITIES
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 84
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 June 30, 2001, $10.7
million of securities were required to be pledged for governmental deposits.
Securities available for sale were $63.2 million at June 30, 2001, an
increase of $25.4 million, or 67.1 percent from year-end 2000. During the first
six months of 2001, $38.6 million of securities available for sale were
purchased, (predominately collateralized mortgage obligations) and funded by
Federal funds sold and calls and maturities on securities held to maturity and
securities available for sale.
Securities held to maturity were $26.0 million at June 30, 2001, a
decrease of $7.0 million or 21.2 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 June 30,
2001, and December 31, 2000 the market value of held to maturity securities was
$24.2 million and $32.2 million, respectively. The improvement in the market
value of the portfolios was primarily due to the declining interest rate
environment.
LOAN PORTFOLIO
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 increased $11.5 million, or 5.1 percent to $237.7
million at June 30, 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 $29.3
million at June 30, 2001, an increase of $5.8 million from year-end 2000. SBA
loans held for sale, carried at the lower of cost or market, amounted to $8.1
million at June 30, 2001, an increase of $1.3 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 $93.3 million at June 30, 2001,
an increase of $4.9 million from year-end December 2000. The increase in the
portfolio was a result of new originations exceeding prepayments. The company
expects to continue to grow this portfolio in 2001.
Mortgage loans consist of loans secured by residential properties. These
loans amounted to $79.2 million at June 30, 2001, an increase of $2.3 million
from year-end 2000. In June 2001 the company purchased $7.8 million of
residential mortgages. The Company does not originate a material amount of
mortgage loans held for investment.
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 $27.8 million at June 30, 2001 a decrease of $2.8 million from
year-end December 2000. The decrease in the consumer loan portfolio was
primarily the result of auto loan pay-downs.
Page 20 of 28
<Page>
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, however, 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 June 30, 2001 and 2000, and
December 31, 2000:
<Table>
<Caption>
---------------------------------------------------------------
Nonperforming loans
(IN THOUSANDS) JUNE 30, 2001 DECEMBER 31, 2000 JUNE 30, 2000
---------------------------------------------------------------
Nonaccrual by category
Commercial $2,068 $2,064 $1,914
Real Estate 192 807 217
Consumer 19 32 --
- -----------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 2,279 2,903 2,131
=======================================================================================================================
Past Due 90 days or more and still accruing interest
Commercial 383 578 397
Real Estate 1,580 694 498
Consumer 36 -- 25
- -----------------------------------------------------------------------------------------------------------------------
Total accruing loans 90 days or more past due 1,999 1,272 920
=======================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------
Total Non Performing Loans 4,278 4,175 3,051
=======================================================================================================================
OREO Property 507 142 757
- -----------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $4,785 $4,317 $3,808
=======================================================================================================================
Non-Performing assets to total assets 1.33% 1.21% 0.91%
Non-Performing assets to loans and OREO 2.01% 1.91% 1.33%
Allowance for loans losses as a
percentage of non-performing loans 62.27% 61.27% 80.83%
Allowance for loan losses to total loans 1.12% 1.13% 0.86%
---------------------------------------------------------------
</Table>
Nonaccrual loans amounted to $2.3 million at June 30, 2001, a decrease of
$624 thousand from $2.9 million at year-end 2000. Included in nonaccrual loans
at June 30, 2001 are $1.1 million of loans guaranteed by the SBA. Loans, 90 days
or more past due increased $727 thousand from $1.3 million at December 31, 2000
to $2.0 million at June 30, 2001. 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
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 $0.3 million and $0.3 million at
June 30, 2001 and December 31, 2000 respectively.
Page 21 of 28
<Page>
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 $2.7 million, $2.6 million, and $2.5
million at June 30, 2001, December 31, 2000, and June 30, 2000, respectively
with resulting allowance to total loan ratios of 1.12 percent, 1.13 percent and
0.86 percent respectively. The increase in the ratios between June 30, 2001 and
June 30, 2000 is due to the decrease in the loan portfolios, through the 2000
sales.
The following is a reconciliation summary of the allowance for loan losses
the three and six months ended June 30, 2001 and 2000:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 2,550 $ 2,387 $ 2,558 $ 2,173
Provision charged to expense 150 90 300 336
- ----------------------------------------------------------------------------------------------------------
2,700 2,477 2,858 2,509
Charge-offs:
Commercial and industrial 14 28 199 39
Real estate 48 -- 48 19
Consumer 10 8 13 15
- ----------------------------------------------------------------------------------------------------------
Total Charge-offs 72 33 260 73
Recoveries:
Commercial and industrial 5 4 25 5
Real estate 30 14 39 14
Consumer 1 1 2 11
- ----------------------------------------------------------------------------------------------------------
Total recoveries 36 19 66 30
- ----------------------------------------------------------------------------------------------------------
Total net charge-offs 36 11 194 43
- ----------------------------------------------------------------------------------------------------------
Balance, end of period $ 2,664 $ 2,466 $ 2,664 $ 2,466
- ----------------------------------------------------------------------------------------------------------
SELECTED LOAN QUALITY RATIOS:
Net charge offs to average loans 0.06% 0.02% 0.17% 0.03%
Allowance to loan losses to:
Total loans at period end 1.12% 0.86% 1.12% 0.86%
Non-performing loans 62.27% 80.83% 62.27% 80.83%
- ----------------------------------------------------------------------------------------------------------
</Table>
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 first half of the year the Company realized continued
growth in deposits. This growth was achieved through emphasis on customer
Page 22 of 28
<Page>
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 $2.5 million to $322.8 million at June 30, 2001
from $320.3 million at December 31, 2000. The increase in deposits was primarily
the result of a $5.2 million increase in demand deposits and $2.9 million
increase in interest bearing checking, offset by a decline in time deposits
totaling $6.5 million. The decline in time deposits is the result of promotional
high rate deposits maturing in a lower interest rate environment. Included in
time deposits are $26.4 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.
BORROWINGS
Borrowings, which include $10.0 million in advances from the Federal Home
Loan Bank ("FHLB"), and $2.9 million of lease obligations, amounted to $12.9
million at June 30, 2001, unchanged from year-end 2000. The 4.92% borrowings
from the FHLB are callable in December 2001.
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 2.4 percent in a rising rate
environment and a increase of 1.6 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 and cash equivalents amounted to $21.4 million at June 30, 2001, a
decrease of $23.8 million from December 31, 2000. Net cash provided by operating
activities for the six months ended 2001, amounted to $2.7 million, primarily
due to income from operations, the provision for loan losses, depreciation and
amortization and the net change in other assets and liabilities. Included in the
net change in other assets and liabilities is a $1.1 million tax refund. Net
cash used in investing activities amounted to $29.1 million, primarily from the
funding of the loan portfolio, increased investment in securities, partially
offset by maturities of securities and proceeds of loan sales. Net cash provided
by financing activities, amounted to $2.5 million for the quarter ended June 30,
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 June 30, 2001, the Holding Company had $945
Page 23 of 28
<Page>
thousand in cash and $168 thousand in marketable securities. At June 30, 2001,
the holding company has accumulated $647 thousand of dividend payments in
arrears on its preferred stock. However, subsequent to quarter end, the Company
consummated an exchange offer pursuant to which shares of the outstanding Series
A Preferred stock were exchanged for common stock and dividend arrears of $627
were settled in exchange for additional shares of common 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.
Total deposits amounted to $322.8 million as of June 30, 2001. At June 30,
2001, $16.2 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 $8.0 million at
June 30, 2001.
As of June 30, 2001 deposits included $26.4 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 $20.4 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 June 30, 2001, the Bank had
approximately $69.1 million of loan commitments, which will generally either
expire or be funded within one year.
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 June 30, 2001, the Company has $647 of
dividends in arrears on its preferred stock. However, subsequent to quarter end,
the Company consummated an exchange offer pursuant to which shares of the
outstanding Series A Preferred stock were exchanged for common stock and
dividend arrears of $627 were settled in exchange for additional shares of
common stock.
The Company's capital amounts and ratios are presented in the following
table.
Page 24 of 28
<Page>
<Table>
<Caption>
----------------------------------------------------------------------------------------
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
--------------------------- ----------------------------- ---------------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
------------ -------------- --- ------------- ----------- -- ------------- -------------
AS OF JUNE 30, 2001
------------ -------------- --- ------------- ----------- -- ------------- -------------
Leverage Ratio $ 21,911 6.01% >= $ 14,586 4.00% >= $ 18,233 5.00%
------------ -------------- --- ------------- ----------- -- ------------- -------------
Tier I risk-based ratio $ 21,911 9.42% >= $ 9,306 4.00% >= $ 13,958 6.00%
------------ -------------- --- ------------- ----------- -- ------------- -------------
Total risk-based ratio $ 24,575 10.56% >= $ 18,611 8.00% >= $ 23,264 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%
------------ -------------- --- ------------- ----------- -- ------------- -------------
</Table>
The Bank's capital amounts and ratios are presented in the following
table.
<Table>
<Caption>
----------------------------------------------------------------------------------------
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
--------------------------- ----------------------------- ---------------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
------------ -------------- --- ------------- ----------- -- ------------- -------------
AS OF JUNE 30, 2001-
------------ -------------- --- ------------- ----------- -- ------------- -------------
Leverage Ratio (a) $ 20,873 5.73% >= $ 14,564 4.00% >= $ 18,206 5.00%
------------ ------------- --- ------------- ------------ -- ------------- -------------
Tier I risk-based ratio $ 20,873 8.99% >= $ 11,614 4.00% >= $ 13,936 6.00%
------------ ------------- --- ------------- ------------ -- ------------- -------------
Total risk-based ratio $ 23,873 10.13% >= $ 18,582 8.00% >= $ 23,227 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%
------------ ------------- --- ------------- ------------ -- ------------- -------------
</Table>
(a) In connection with the branch expansion the New Jersey Department of
Banking and Insurance imposed a tier 1 capital to total assets ratio of
6%.
Shareholders' equity increased $587 thousand, or 2.8 percent, to $21.9
million at June 30, 2001 compared to $21.3 million at December 31, 2000. This
increase was the result of the $330 thousand net operating profit before unpaid
preferred stock dividend for the first quarter of 2001 and $257 thousand of
accumulated other comprehensive income, as a result of appreciation in the
securities portfolio. As of June 30, 2001, $647 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.
However, subsequent to quarter end, the Company consummated an exchange offer
pursuant to which shares of the outstanding Series A Preferred stock were
exchanged for common stock and dividend arrears of $627 were settled in exchange
for additional shares of common stock. See Note 6. "Subsequent events"
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 25 of 28
<Page>
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 in Management's discussion and analysis.
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. 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. Management believes the
Company 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.
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2001, the Company has $647 of dividends in arrears on its 10
percent cumulative preferred stock. Under regulatory guidelines the Company is
prohibited from making dividend payments. Unity Bancorp, Inc. reported that on
July 13, 2001, it had concluded its exchange offer for shares of its Series A
Preferred Stock, with 94 percent of the 103,500 shares converting. Under the
terms of the exchange offer, 10.1 shares of common stock and 10.1 common stock
purchase warrants were issued for each share of Series A Preferred Stock. Each
warrant will allow the holder to purchase on share of common stock at an
exercise price of $5.50 for a fifteen-month period ending October 16, 2002. In
addition, one share of common stock and one common purchase warrant were issued
in full satisfaction of each $4.95 of accrued but unpaid dividends on each share
of Series A Preferred Stock tendered. Approximately $627 thousand of unpaid
dividends were settled in the exchange offer. Under the terms of the exchange
offer, approximately 1.1 million shares of common stock and 1.1 million warrants
were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and
the related unpaid dividend. Six thousand shares of Series A Preferred Stock
remains outstanding. As a result of the exchange, the Company will record a $1.8
million non-cash dividend, representing the value of the additional
consideration transferred in the transaction over the fair value of securities
issuable pursuant to the original terms. This dividend has no impact on total
capital, but will impact earnings per common share in the third quarter.
Page 26 of 28
<Page>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
The annual meeting of the shareholders of Unity Bancorp was held on May 24,
2001. The following is a description of the matter voted on at the meeting.
PROPOSAL 1 ELECTION OF DIRECTOR
Allen Tucker was nominated for the election to the Board of Directors for a
three year term.
<Table>
<Caption>
SHARES
FOR WITHHELD
----------------------------------------------------------------------
2,960,094 198,970
</Table>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits - None
(b) Reports - None
Page 27 of 28
<Page>
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: August 14, 2001 By: /s/ JAMES A. HUGHES
---------------------------
JAMES A. HUGHES,
Executive Vice President and Chief Financial Officer
Page 28 of 28