AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 2001
REGISTRATION NO. ___
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UNITY BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6022 22-3282551
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------
UNITY BANCORP, INC.
64 OLD HIGHWAY 22
CLINTON, NEW JERSEY 08809
(908) 730=7630
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES A. HUGHES
CHIEF FINANCIAL OFFICER
UNITY BANCORP, INC.
64 OLD HIGHWAY 22
CLINTON, NEW JERSEY 08809
(908) 730-7630
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ROBERT A. SCHWARTZ, ESQ.
WINDELS MARX LANE & MITTENDORF, LLP
120 ALBANY STREET PLAZA
NEW BRUNSWICK, NEW JERSEY 08901
(732) 448-2548
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
TITLE OF CLASS OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE
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1,150,000 shares of common stock, no par value.......... $ 4.95 $5,692,500 $1,423
1,150,000 common stock purchase warrants ............... N/A N/A N/A
1,150,000 shares of common stock issuable upon the
exercise of warrants ................................. $ 5.50 $6,325,000 $1,581
TOTAL ............................................................................................ $3,004
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(1) Estimated solely for the purpose of calculating the registration fee
calculated pursuant to Rule 457(f) under the Securities Act of 1933 as the
market value of the securities to be canceled in the exchange.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 24, 2001 PROSPECTUS
PRELIMINARY PROSPECTUS
UNITY BANCORP, INC.
EXCHANGE OFFER FOR 103,500 SHARES OF SERIES A PREFERRED STOCK
TERMS OF EXCHANGE OFFER
o We will exchange 10.1 shares of our common stock and 10.1 common stock
purchase warrants for each share of the Series A Preferred Stock, subject
to the adjustments described. Each warrant will allow the holder to
purchase one share of our common stock for an exercise price of $5.50 per
share for a period of fifteen (15) months. In addition, one additional
share of common stock and one additional common stock purchase warrant will
be exchanged in full satisfaction of each $4.95 in accrued but unpaid
dividends through the date of consummation of the exchange offer on each
share of Series A Preferred stock tendered. Both the warrant exercise price
and the number of shares to be issued in satisfaction of the accrued but
unpaid dividends are also both subject to adjustment. Fractional shares to
which a tendering shareholder may be entitled will be rounded up to the
nearest whole share, taking into account the entire number of common shares
each holder is to receive and combining fractional shares to the extent
possible.
o If the trading price of our stock exceeds $4.20 per share, determined in
the way described below, then the assumed per share value of the common
stock for purposes of determining the exchange rate for the Series A
Preferred Stock will be adjusted upward from the $4.95 used to determine
the 10.1 share exchange ratio by an amount equal to the amount the trading
price of our common stock exceeds $4.20 per share. For example, if the
value of our common stock, as determined below, is $4.40 per share, each
share of the Series A common stock would be exchanged for 9.7 shares of our
Preferred Stock and 9.7 common stock purchase warrants (i.e., an assumed
value of $5.15 per common share). In addition, the exercise price for our
warrants will be adjusted upward by the same amount. Therefore, if the
value of our common stock, as determined below, is $4.40 per share, the
exercise price for each warrant would be $5.70. Finally, the assumed valued
used in determining how many shares of our common stock each holder of
Series A Preferred Stock will receive in satisfaction of accrued and unpaid
dividends will also be adjusted upward in the same manner as the exchange
ratio of our common stock and the exercise price of our warrant. Therefore,
if the trading price of our common stock as determined below is $4.40 per
share, a shareholder would receive one share of common stock and one common
stock purchase warrant for each $5.15 in accrued but unpaid dividends. The
value of our common stock will be determined by taking the average closing
price of our common stock on the Nasdaq market for the ten (10) trading
days ending on the day prior to the expiration date of this exchange offer,
as it may be extended from time to time. As of May 22, 2001, the average
closing price for our common stock determined in this manner was $4.235.
o All shares of Series A Preferred Stock that are validly tendered and not
validly withdrawn will be exchanged.
o You may withdraw your tender of Series A Preferred Stock at any time before
the expiration of this exchange offer.
o The exchange offer will expire on June 22, 2001 at 5:00 p.m., New York City
time.
Investment in the common stock and common stock purchase warrants to be
issued in the exchange offer involves risks. See the risk factors section
beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock and common stock
purchase warrants or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
The date of this prospectus is May 24, 2001.
TABLE OF CONTENTS
PAGE
Summary; Background and Description of Business................................2
Summary of the Exchange Offer..................................................4
Summary Consolidated Financial Data............................................8
Risk Factors...................................................................9
Use of Proceeds...............................................................11
Capitalization................................................................12
Market for the Common Stock...................................................12
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................13
Management....................................................................38
Business......................................................................43
Description of Capital Stock..................................................47
Anti=Takeover Provisions......................................................48
The Exchange Offer............................................................49
Certain U.S. Federal Income Tax Consideration.................................55
Plan of Distribution..........................................................56
Where You Can Find More Information...........................................56
Legal Matters.................................................................57
Experts.......................................................................57
Index to Consolidated Financial Statements...................................F-I
SUMMARY
This summary highlights some information from this prospectus. Because this
is only a summary, it does not contain all of the information that may be
important to you. Therefore, you should also read the entire prospectus,
especially "Risk Factors," the consolidated financial statements and the notes
to those statements and the documents we have referred you to.
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER
In March of 2000, we completed the sale of the Series A Preferred Stock to
approximately 31 sophisticated investors without registration under the
Securities Act of 1933. Transfer of the Series A Preferred Stock has therefore
been restricted pursuant to the terms of SEC Rule 144. The Series A Preferred
Stock was originally sold to increase our capital, which had been reduced
through rapid growth and losses we incurred in 1999. The Series A Preferred
Stock provides for a 10% cumulative annual dividend, and provides that the
shares of the Series A Preferred Stock can be converted into common stock at an
assumed price of $7.25 per share (i.e., 6.8966 shares of common stock per
preferred share) and that the Series A Preferred Stock can be redeemed, at our
option, after twenty-four (24) months upon the payment of $50.00 per share plus
all accrued and un-paid dividends. We paid the first required partial period
dividend on the Series A Preferred Stock in April of 2000. However, we have
subsequently been prohibited by our federal and state regulators from paying
dividends on the Series A Preferred Stock, and no dividends beyond the April,
2000 dividend have been paid. As of March 31, 2001 there were $518 thousand in
dividend arrearages accrued on the Series A Preferred Stock, or $5.00 per share
of Series A Preferred Stock. We cannot predict when our regulators might permit
us to begin paying dividends on the Series A Preferred Stock and when we will
have the financial ability to do. Dividends accrue at approximately $130,000, or
$1.25 per Series A Preferred Share, per quarter.
In light of our inability to pay the dividend arrearages on the Series A
Preferred Stock in the foreseeable future and our continued losses through 2000,
which make it likely we may need to raise additional capital in the near term, a
special committee of our Board of Directors concluded it was in our best
interests to convert the Series A Preferred Stock into common stock and retire
the dividend arrearage. To the extent the exchange offer is accepted by holders
of our outstanding Series A Preferred Stock, it will facilitate our ability to
raise capital in the future by reducing the outstanding accrued but unpaid
dividends and by retiring a senior security. Even to the extent that a small
percentage of holders of the Series A Preferred Stock tender, it will reduce the
amount of dividends in arrears and reduce our dividend cost going forward.
In order to induce the holders of the Series A Preferred Stock to
participate in the exchange offer, we are offering a 32% reduction in the
exchange ratio for the Series A Preferred Stock. In addition, for each share of
common stock due to holders in exchange for Series A Preferred Stock, holders
will receive one common stock purchase warrant. Tendering holders of the Series
A Preferred Stock will also receive one share of common stock and one common
stock purchase warrant in satisfaction of each $4.95 in accrued but unpaid
dividends. The 32% reduction in the exchange ratio reduces the assumed price of
the common stock from $7.25 per share (or 6.8996 common shares per preferred
share) to an assumed price of $4.95 per share (or 10.1 common shares per
preferred share), subject to adjustment as described elsewhere in this
prospectus. The shares of our common stock issued to holders of the Series A
Preferred Stock will be in full satisfaction our obligation to pay the dividends
in arrears on those shares of Series A Preferred Stock.
OUR BUSINESS
We are a one-bank holding company incorporated under the laws of the State
of Delaware to serve as a holding company for Unity Bank. The bank is a
full-service commercial bank, providing a wide range of business and consumer
financial services through its main office and twelve (12) branches located in
Clinton, Colonia, Edison, Flemington, Highland Park, Linden, North Plainfield,
Scotch Plains, South Plainfield, Springfield, Union and Whitehouse, New Jersey.
Our primary service area encompasses the Route 22/Route 78 corridor between our
Clinton, New Jersey main office and our Union, New Jersey branch. This service
area includes communities in Essex, Hunterdon, Middlesex, Morris, Somerset,
Union and Warren Counties, New Jersey.
We have been operating under regulatory orders for the past year and
one-half. In the second half of 1999, we incurred certain losses which, combined
with our asset growth, caused our capital ratios to fall below levels required
under federal regulation. As a result of the capital deficiency, in the first
quarter of 2000, we entered into memoranda of understandings with our primary
regulatory agencies. However, due to continued losses through the first two
quarters of 2000, among other reasons, we entered into stipulations and
agreements with each of our respective regulators on July 18, 2000. Under these
agreements, we are required to take a number of affirmative steps, including
hiring an outside consulting firm to review our management structure, adopting
strategic and capital plans which will increase the bank's leverage ratio to 6%
or above, reviewing and adopting various policies and procedures, adopting
programs with regard to the resolution of certain criticized assets, and
providing ongoing reporting to the various regulatory agencies with regard to
our progress in meeting the requirements of the agreements. The agreements
require us to establish a compliance committee of our Board of Directors to
oversee our efforts in meeting all requirements of the agreements, and prohibit
the bank from paying dividends to us and us from paying dividends on our common
or preferred stock, without regulatory approval. As of December 31, 2000, we
believe we are in compliance with the requirements of the agreements.
2
As a result of the regulatory orders and our losses in 1999 and 2000, we
undertook a number of steps during 2000 to restructure our balance sheet,
enhance our capital ratios and restructure our management. In the first quarter
of 2000, we undertook the offering of our Series A Preferred Stock. This
resulted in $4.9 million in proceeds, net of offering expenses.
Also during 2000, we engaged in certain sales of loan packages. In the
first quarter of 2000, we sold $36.4 million in adjustable rate 1=4 family
mortgages, recognizing a loss of $731 thousand. In the third quarter of 2000, we
also sold $44.9 million in home equity loans, recognizing a loss of $1.2
million. The loan sales helped improve our liquidity as well as our capital
ratios by reducing outstanding assets. In addition, the cash from the third
quarter loan sale was used to fund the sale of five (5) of our branches in the
fourth quarter of 2000. The branch sales involved the assumption of $48.0
million in deposits by the acquirers, who also assumed our lease obligations
under the leases for the branch premises. We recognized an after tax gain of
$2.0 million on these sales.
Also in the fourth quarter of 2000, Certified Mortgage Associates, Inc., a
subsidiary of the bank, ceased operations. CMA had been acquired in February
1999. However, CMA had not operated profitably since the second quarter of 1999.
Certain members of management left the employment of CMA in the third and fourth
quarters of 2000 and we elected to have CMA cease operations during the fourth
quarter. In connection with CMA's termination of business, we wrote off $3.2
million in intangibles recorded on the acquisition of CMA, in the third and
fourth quarters of 2000. During August 2000, Mr. Robert J. Van Volkenburgh, our
former Chairman and Chief Executive Officer, resigned from his positions with
us. In February 2001, Mr. Van Volkenburgh filed a complaint in the Superior
Court of New Jersey alleging a breach of certain employment agreements. We
intend to vigorously defend ourselves from any claims for payment under these
agreements. We believe we have strong defenses to the claims made by Mr. Van
Volkenburgh and he is not likely to succeed in this regard. No discovery has
taken place. Our position is based upon what we know as of the date of this
prospectus, and we may change our opinion based on future developments.
Our principal executive offices are located at 64 Old Highway 22, Clinton,
New Jersey 08809, and our telephone number is (908) 730=7630.
3
SUMMARY OF THE EXCHANGE OFFER
THE EXCHANGE OFFER............................... We are offering to exchange 10.1 shares of common stock and
10.1 common stock purchase warrants for each share of Series A
Preferred Stock, subject to adjustment as described below. In
addition, one share of common stock and one common stock
purchase warrant will be exchanged in full satisfaction for
each $4.95 in accrued but unpaid dividends through the
consummation of the exchange offer on each share of Series A
Preferred Stock tendered, again subject to adjustment.
Fractional shares which a tendering shareholder may be entitled
to will be rounded up to the nearest whole share, taking into
account the entire number of common shares each holder is to
receive and combining fractional shares to the extent possible.
THE WARRANTS..................................... Each warrant will allow the holder to purchase one share of OUR
common stock at an exercise price $5.50 per share, subject to
adjustment as described below. The warrants may be exercised
for fifteen (15) months after completion of this exchange
offer. We may permit the warrant holders to satisfy the
exercise price of warrants by surrendering previously
outstanding shares of our common stock in lieu of paying the
exercise price of the warrants in cash. The warrants will be
freely transferable, by the holder. However, we do not expect
there to be a public market for the warrants, as there will be
a limited number of holders.
ADJUSTMENTS TO THE TERMS OF
THE OFFERING .................................... The terms of our exchange offer are subject to adjustment in
the event the trading price of our common stock, determined in
the manner described below, exceeds $4.20 per share. If the
trading price of our common stock exceeds the $4.20 per share,
then the assumed value per share of the common stock for
purposes of determining the exchange rate for the Series A
Preferred Stock will be adjusted upward from the $4.95 used to
determine the 10.1 share exchange ratio by an amount equal to
the amount the trading price of our common stock exceeds $4.20
per share. For example, if the value of our common stock is
$4.40 per share, determined as described below, the assumed
value of our common stock for exchange rate purposes will be
$5.15 per share and each share of the Series A Preferred Stock
would be exchanged for 9.7 shares of our common stock and 9.7
common stock purchase warrants. In addition, the exercise price
for our warrants will be adjusted upward by the same amount.
Therefore, if the value of our common stock, as determined
below, is $4.40 per share, the exercise price for each warrant
would be increased by $0.20, and the exercise price would be
$5.70. Finally, the assumed value used in determining how many
shares of our common stock each holder of Series A Preferred
Stock will receive in satisfaction of accrued and unpaid
dividends will also be adjusted upward in the same manner as
the exchange ratio for our common stock and the exercise price
of our warrant. Therefore, if the trading price of our common
stock, as determined below, is $4.40 per share, a shareholder
would receive one share of common stock and one common stock
purchase warrant for each $5.15 in accrued but unpaid
dividends. The value of our common stock will be determined by
taking the average closing price of our common stock on the
Nasdaq market for the ten (10) trading days ending on the day
prior to the expiration date of this exchange offer, as it may
be extended from time to time. As of May 22, 2001, the average
closing price for our common stock determined in this method
was $4.235.
4
THE COMMON STOCK................................. Our common stock is traded on the Nasdaq market under the
symbol "UNTY". The shares of common stock issued in the
exchange offer will be freely transferable. There are currently
603 record holders of our common stock. As of May 22, 2001, the
last sale price of our common stock on the Nasdaq market was
$4.00. See "Market for Our Common Stock" on page 12.
OUTSTANDING COMMON SHARES........................ Prior to the exchange offer........................3,706,708
Upon consummation of the exchange offer(1).........4,856,708
Upon exercise of the warrants(2).................. 6,006,700
RIGHTS SURRENDERED UPON TENDER
OF PREFERRED STOCK............................... In tendering your shares of Series A Preferred Stock in
exchange for common stock, you will be forfeiting certain
rights which you have under the Series A Preferred Stock. By
its terms, the Series A Preferred Stock is entitled to receive
a 10% annual, cumulative dividend, and we cannot pay dividends
on our common stock until all dividends on the Series A
Preferred Stock have been paid. The dividend on the Series A
Preferred Stock continues to accumulate until the Series A
Preferred Stock is redeemed or is converted into common stock.
We may not redeem the Series A Preferred Stock until March,
2002. If we redeem the Series A Preferred Stock, we must pay
all accrued and unpaid dividends. By accepting the exchange
offer, you will stop the accrual of dividends on your shares,
and you will receive shares of common stock in lieu of all
dividends accrued through the date of exchange. Our common
stock has no dividend preference, and you will receive
dividends only as, when and if declared by the Board of
Directors in compliance with all laws and regulations and
policies governing us. Under our agreements with our
regulators, we are not currently able to pay dividends. In
addition, upon liquidation, the Series A Preferred Stock has a
preferred claim ahead of our common stock upon our assets, up
to the amount of $50.00 per share plus all accrued and unpaid
dividends. Our common stock has no preference upon liquidation.
INTERESTS OF CERTAIN MEMBERS OF
MANAGEMENT IN THE TRANSACTION.................... Members of our Board of Directors and management own 24,400
shares of the Series A Preferred Stock. Members of our Board
and management who accept the offer will receive the same terms
as unaffiliated holders of the Series A Preferred Stock.
CONDITIONS TO THE EXCHANGE
OFFER............................................ The exchange offer is not conditioned upon any minimum amount
of Series A Preferred Stock being tendered for exchange.
However, the exchange offer is subject to customary conditions,
which we may waive. See "The Exchange Offer -- Conditions to
the Exchange Offer."
PROCEDURES FOR TENDERING......................... If you wish to tender your Series A Preferred Stock in the
exchange offer, you must complete and sign the letter of
transmittal for the Series A Preferred Stock according to the
instructions contained in this prospectus. You must then mail,
fax or hand deliver the letter of transmittal, together with
any other required documents, to the exchange agent with the
Series A Preferred Stock to be tendered. You should allow
sufficient time to ensure timely delivery. If you own Series A
Preferred Stock registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, you are urged
to contact that person promptly if you wish to tender Series A
Preferred Stock in the exchange offer. Letters of transmittal
and certificates representing the Series A Preferred Stock
should be sent to us at the address set forth in the letter of
transmittal. We will act as the exchange agent for this offer.
Questions regarding how to tender and requests for information
should also be directed to us. See "The Exchange Offer
Procedures for Tendering Series A Preferred Stock."
--------------------
(1) Assumes all shares of Series A Preferred Stock are tendered for exchange and 1,150,000 common shares are
issued and 1,150,000 warants are issued, both upon exchange of the Series A Preferred Stock and in
satisfaction of accrued and unpaid dividends of $518 thousand through March 31, 2001. Dividends will continue
to accrue through consummation of this exchange offer. Dividends on the oustanding Series A Preferred Stock
accrue at a rate of $1.25 per share per quarter.
(2) Assumes warrants to purchase 1,150,000 shares are exercised.
5
EXPIRATION DATE; WITHDRAWAL...................... The exchange offer will expire on (1) the earlier of June 22,
2001, or the date when all Series A Preferred Stock has been
tendered, or (2) a later date and time to which we may extend
the offering. We will accept for exchange any and all shares of
Series A Preferred Stock that are validly tendered in the
exchange offer prior to 5:00 p.m., New York City time, on the
expiration date. You may withdraw the tender of Series A
Preferred Stock at any time prior to the expiration date. Any
Series A Preferred Stock not accepted for exchange for any
reason will be returned without expense to the tendering holder
as promptly as practicable after the expiration or termination
of the exchange offer. The shares of common stock and common
stock purchase warrants issued in the exchange offer will be
delivered promptly following the expiration date. See "The
Exchange Offer -- Terms of the Exchange Offer; Period for
Tendering Series A Preferred Stock" and "== Withdrawals of
Tenders."
GUARANTEED DELIVERY
PROCEDURES....................................... If you wish to tender your Series A Preferred Stock and (1)
your Series A Preferred Stock is not immediately available or
(2) you cannot deliver your Series A Preferred Stock together
with the letter of transmittal to the exchange agent prior to
the expiration date, you may tender your Series A Preferred
Stock according to the guaranteed delivery procedures contained
in the letter of transmittal. See "The Exchange Offer --
Procedures for Tendering Series A Preferred Stock -- Guaranteed
Delivery Procedures."
TAX CONSIDERATIONS............................... For U.S. federal income tax purposes, the exchange of Series A
Preferred Stock for shares of common stock and common stock
purchase warrants should not be considered a sale or exchange
or otherwise a taxable event to the holders of the stock.
Receipt of shares of common stock in satisfaction of
outstanding dividends in arrears will be deemed taxable
dividends to you. See "Certain U.S. Federal Income Tax
Consequences"
USE OF PROCEEDS.................................. We will receive no proceeds from the exchange offer.
EXCHANGE AGENT................................... We are serving as exchange agent in connection with the
exchange offer for the stock.
CONSEQUENCES OF NOT EXCHANGING
THE SERIES A PREFERRED STOCK..................... If you do not tender your shares of Series A Preferred Stock,
you will continue to hold your shares of Series A Preferred
Stock and continue to have all of the rights and obligations of
the Series A Preferred Stock. Since the Series A Preferred
Stock was issued under an exemption from registration under the
Securities Act of 1933, any transfers of the Series A Preferred
Stock must be undertaken in compliance with the restrictions
contained in SEC Rule 144. In addition, under our agreements
with our various regulators, we are not currently permitted to
6
pay dividends on any of our outstanding securities. We are
unable to determine when these restrictions may be lifted.
Therefore, we do not currently anticipate that holders of the
Series A Preferred Stock will receive current dividends on
their stock, nor will dividends be paid for the foreseeable
future. In addition, under the terms of the Series A Preferred
Stock, we may redeem the Series A Preferred Stock beginning in
March, 2002 for the full stated value of the Series A Preferred
Stock plus any unpaid dividends. However, as a result of our
agreements with our regulators and our capital position, we
will not be able to redeem the Series A Preferred Stock for the
foreseeable future. You may convert your Series A Preferred
Stock into common stock at an assumed price of $7.25 per common
share, a significant premium over the terms of the current
exchange offer. Further, we may require you to convert your
Series A Preferred Shares into common shares at an assumed
price of $7.25 per common share after the Series A Preferred
Stock has been outstanding for twenty-four (24) months and
after our common stock has closed at or above $7.25 for ten
(10) out of fifteen (15) consecutive trading days. These terms
will not be altered by the exchange offer, and any holder of
Series A Preferred shares electing not to participate in the
exchange offer will continue to be bound by these terms.
SUMMARY CONSOLIDATED FINANCIAL DATA
Set forth below is our summary consolidated financial data for the three
(3) years ended December 31, 2000, which are derived from our audited
consolidated financial statements, and at and for the three month periods ended
March 31, 2001 and 2000, which are derived from our unaudited financial
statements at and for such dates. The following summary consolidated financial
data should be read in conjunction with the selected financial data, the
consolidated financial statements and the notes to those statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
7
UNITY BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar in thousands, except per share data) Quarter Ended
March 31st At or for the Years Ended December 31st
-------------------- ----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
SELECTED RESULTS OF OPERATIONS
Interest income $ 6,016 $ 7,101 $ 28,017 $ 23,688 $ 17,480 $ 15,025 $ 10,860
Interest expense 3,353 4,225 16,322 12,738 7,165 6,312 4,756
Net interest income 2,663 2,876 11,695 10,950 10,315 8,713 6,104
Provision for loan losses 150 246 716 1,743 804 497 417
Other income 1,161 544 7,666 5,606 4,407 3,043 2,404
Other expenses 3,540 4,899 23,718 20,578 10,499 7,985 6,403
Tax expense (benefit) 6 (709) 839 (2,387) 1,282 1,259 644
Net income (loss) 128 (1,016) (5,912) (3,378) 2,137 2,015 1,044
PER SHARE DATA
Net income (loss) per common
share (basic) (0.00) (.027) (1.71) (0.91) 0.67 0.65 0.47
Net income (loss) per common
share (diluted) (0.00) (0.27) (1.71) (0.91) 0.64 0.64 0.46
Book value per common share 4.38 5.58 4.32 5.88 7.01 6.39 5.82
Cash dividend on common shares -- -- -- 0.24 0.20 0.20 0.18
SELECTED BALANCE SHEET DATA
Total assets 367,044 409,715 356,003 438,969 254,612 213,782 172,688
Loans 223,948 287,069 226,140 322,532 166,792 134,176 97,827
Allowance for loan losses 2,550 2,387 2,558 2,173 1,825 1,322 886
Investment securities 79,163 73,526 70,837 74,349 40,929 41,308 37,153
Deposits 331,088 377,339 320,318 357,538 226,860 192,414 153,555
Borrowings 10,000 0 10,000 53,000 -- -- --
Shareholders' equity 21,680 25,603 21,314 21,792 26,346 19,990 17,990
FINANCIAL RATIOS
Return on average assets .22% (0.94%) (1.44)% (0.94)% 0.93% 1.05% 0.73%
Return on average common equity .05% (19.11%) (33.43)% (14.33)% 10.17% 10.78% 9.37%
Net interest margin 3.21% 3.02% 3.19% 3.49% 4.91% 4.72% 4.47%
Net interest spread 2.40% 2.47% 2.61% 3.01% 3.99% 3.60% 3.55%
ASSET QUALITY RATIOS
Allowance for loan losses to loans 1.14% .83% 1.13% 0.67% 1.09% 0.99% 0.91%
Allowance for loan losses to
non-performing loans 44.63% 87.47% 61.27% 137.71% 46.83% 88.38% 103.02%
Non-performing loans to total loans 2.51% .95% 1.85% 0.49% 2.34% 1.11% 0.95%
Non-performing assets to total assets 1.68% .85% 1.21% 0.70% 1.97% 0.70% 0.54%
Net charge-offs to average loans .28% .04% .12% 0.59% 0.21% 0.05% 0.12%
CAPITAL RATIOS - COMPANY
Leverage ratio 6.12% 5.20% 5.50% 4.35% 10.87% 9.51% 11.09%
Tier 1 risk-based capital ratio 9.79% 7.70% 9.61% 6.17% 13.89% 13.29% 16.43%
Total risk-based capital ratio 10.94% 8.52% 10.76% 6.88% 14.85% 14.28% 17.24%
CAPITAL RATIOS - BANK
Leverage ratio 5.80% 4.88% 5.24% 4.01% 7.09% 7.35% 7.09%
Tier 1 risk-based capital ratio 9.27% 7.19% 9.12% 5.62% 8.84% 10.13% 10.51%
Total risk-based capital ratio 10.42% 8.62% 10.26% 6.33% 9.80% 11.03% 11.32%
(1) The net interest margin is calculated by dividing net interest income by
average interest earning assets.
(2) The net interest spread is the difference between the weighted average
yield on interest earning assets and the weighed average cost of interest
bearing liabilities.
8
RISK FACTORS
Holders of the Series A Preferred Stock should carefully consider the
information set forth under the caption "Risk Factors" and all other information
set forth in this prospectus before tendering their shares in the exchange
offer. Certain statements in this prospectus are forward-looking and are
identified by the use of forward-looking words or phrases such as "intended,"
"will be positioned," "believes," "expects," is or are "expected" and
"anticipated." These forward-looking statements are based on our current
expectations. The risk factors set forth below are cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statements.
WE ARE CURRENTLY OPERATING UNDER AGREEMENTS WITH OUR PRIMARY REGULATORS.
Due to the significant losses which we incurred in 1999 and 2000, among
other reasons, on July 18, 2000 we entered into stipulations and agreements with
our federal and state regulators. Under these agreements, we are required to
take a number of affirmative steps, including hiring an outside consulting firm
to review our management structures, adopting strategic and capital plans which
will increase the bank's leverage capital ratio to 6% or greater, reviewing and
modifying, where appropriate, or adopting, as appropriate, policies and
procedures governing various aspects of our business, adopting programs with
regard to the resolution of certain criticized assets, and providing on-going
reports to the various regulatory agencies regarding our progress in meeting the
requirements of these agreements. If we fail to comply with the terms of these
agreements, the regulatory authorities may take a variety of actions against us,
including requiring the bank to cease activities the regulators believe to be in
violation with the agreement, requiring us to raise new capital, requiring us to
sell the bank or, ultimately, terminating our Federal deposit insurance.
WE HAVE RECENTLY INCURRED SIGNIFICANT LOSSES.
We incurred net losses from operations in the year ended December 31, 2000
of $5.9 million and in the year ended December 31, 1999 of $3.4 million. There
can be no assurance that we will be able to grow the core deposits of the bank,
restructure our funding mix, originate higher yielding assets and restore the
company to profitability.
THE EXCHANGE OFFER VALUES OUR COMMON STOCK AT A PREMIUM TO CURRENT MARKET PRICE.
Under the terms of the exchange offer, each share of Series A Preferred
Stock with a stated value of $50.00 will be exchanged for 10.1 shares of our
common stock and 10.1 common stock purchase warrants, subject to adjustment as
provided for herein. Assuming no value is attributed to the common stock
purchase warrants, this exchange will value our common stock at a minimum of
$4.95 per share, a significant premium to the current market price for our
common stock. On May 22, the closing price for our common stock on the Nasdaq
market was $4.00. We can give you no assurances that the price for our common
stock will increase to equal or exceed the assumed value of our common stock in
the exchange offer.
OUR NON-PERFORMING ASSETS HAVE SIGNIFICANTLY INCREASED.
From December 31, 1999 to December 31, 2000 our total non-performing assets
have increased by $1.2 million, or 40%. This trend has continued through the
first quarter as our total non-performing assets increased by 42.3% from
December 31, 2000 to March 31, 2001. Our ratio of non-performing assets to loans
and other real estate owned increased to 2.74% at March 31, 2001, from 1.21% at
March 31, 2000. If our non-performing assets continue to increase, we will be
required to take significant additional provisions for loan losses and our net
income will be adversely affected. The level of our non-performing assets is
affected by many factors, including some which are not within our control. These
factors include general economic and business conditions, economic and business
conditions within the New Jersey economy serviced by most of our borrowers,
levels of employment and other economic conditions.
CURTAILMENT OF THE SMALL BUSINESS ADMINISTRATION LOAN PROGRAM COULD NEGATIVELY
AFFECT THE COMPANY.
The bank has generally sold the guaranteed portion and has occasionally
sold part of the unguaranteed portion of SBA loans in the secondary market.
There can be no assurance that the bank will be able to continue originating
these loans, or that a secondary market will exist for, or that the bank will
continue to realize premiums upon the sale of, the guaranteed and unguaranteed
portions of the SBA loans. The federal government presently guarantees 75% to
85% of the principal amount of each qualifying SBA loan. There can be no
assurance that the federal government will maintain the SBA program, or if it
does, that such guaranteed portion will remain at its current funding level.
Furthermore, there can be no assurance that the bank will retain its preferred
lender status, which, subject to certain limitations, allows the bank to approve
and fund SBA loans without the necessity of having the loan approved in advance
by the SBA, or that if it does, that the federal government will not reduce the
amount of such loans which can be made by the bank. In addition, the bank relies
9
on the expertise of a few key officers in its SBA lending. The retention of such
officers is important to the success of the SBA lending and the amount of income
the bank derives from SBA lending. The bank believes that its SBA loan portfolio
does not involve more than a normal risk of collectability. However, since the
bank has sold the guaranteed portion of substantially all of its SBA loan
portfolio, the bank incurs a credit risk on the non-guaranteed portion of the
SBA loans. In the event of default on a SBA loan, the bank's pursuit of remedies
against a borrower is subject to SBA approval, and where the SBA establishes
that its loss is attributable to deficiencies in the manner in which the loan
application has been prepared and submitted, the SBA may decline to honor its
guarantee with respect to the bank's SBA loans or it may seek the recovery of
damages from the bank. The SBA has never declined to honor its guarantees with
respect to the bank's SBA loans, although no assurance can be given that the SBA
would not attempt to do so in the future.
WE MAY BE SUBJECT TO HIGHER OPERATING COSTS AS A RESULT OF GOVERNMENT
REGULATION.
We are subject to extensive federal and state legislation, regulation and
supervision which is intended primarily to protect depositors and the Federal
Deposit Insurance Corporation's Bank Insurance Fund, rather than investors.
Legislative and regulatory changes may increase our costs of doing business or
otherwise adversely affect us and create competitive advantages for non-bank
competitors. In addition, because of our agreements with our regulatory
agencies, our Federal deposit insurance premiums have significantly increased
and will remain higher than premiums charged to our competitor institutions
until our regulatory standing significantly improves. Higher Federal deposit
insurance premiums will continue to place us at a competitive disadvantage.
WE CANNOT PREDICT HOW CHANGES IN TECHNOLOGY WILL IMPACT OUR BUSINESS.
The financial services market, including banking services, is increasingly
affected by advances in technology, including developments in:
o telecommunications;
o data processing;
o automation;
o Internet-based banking;
o telebanking; and
o debit cards and so-called "smart cards."
Our ability to compete successfully in the future will depend on whether we
can anticipate and respond to technological changes. To develop these and other
new technologies we will likely have to make additional capital investments.
Although we continually invest in new technology, we cannot assure you that we
will have sufficient resources or access to the necessary proprietary technology
to remain competitive in the future.
CHANGES IN LOCAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR LOAN PORTFOLIO.
Our success depends to a great extent upon the general economic conditions
of the local markets that we serve. Unlike larger banks that are more
geographically diversified, we provide banking and financial services primarily
to customers in the four counties in central New Jersey markets in which we have
branches, so any decline in the economy of New Jersey could have an adverse
impact on us.
Our loans, the ability of borrowers to repay these loans and the value of
collateral securing these loans, are impacted by economic conditions. In
addition, a large portion of our income is generated from gains on the sale of
SBA loans and the related servicing. Our financial results, the credit quality
of our existing loan portfolio, and the ability to generate new loans with
acceptable yield and credit characteristics may be adversely affected by changes
in prevailing economic conditions, including declines in real estate values,
changes in interest rates, adverse employment conditions and the monetary and
fiscal policies of the federal government. Although economic conditions in our
primary market area are strong and have aided our recent growth, we cannot
assure you that these conditions will continue to prevail. We cannot assure you
that positive trends or developments discussed in this prospectus will continue
or that negative trends or developments will not have a significant adverse
effect on us.
10
OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOSSES.
Like all financial institutions, we maintain an allowance for loan losses
to provide for loan defaults and nonperformance. Our allowance for loan losses
may not be adequate to cover actual losses, and future provisions for loan
losses could materially and adversely affect results of our operations. Risks
within the loan portfolio are analyzed on a continuous basis by management, and
periodically, by an independent loan review function and by the audit committee.
A risk system, consisting of multiple grading categories, is utilized as an
analytical tool to assess risk and the appropriate level of loss reserves. Along
with the risk system, management further evaluates risk characteristics of the
loan portfolio under current economic conditions and considers such factors as
the financial condition of the borrowers, past and expected loan loss
experience, and other factors management feels deserve recognition in
establishing an adequate reserve. This risk assessment process is performed at
least quarterly, and, as adjustments become necessary, they are realized in the
periods in which they become known. The amount of future losses is susceptible
to changes in economic, operating and other conditions, including changes in
interest rates, that may be beyond our control, and these losses may exceed
current estimates. State and federal regulatory agencies, as an integral part of
their examination process, review our loans and allowance for loan losses and
have in the past required an increase in our allowance for loan losses. Although
we believe that our allowance for loan losses is adequate to cover probable and
reasonably estimated losses, we cannot assure you that we will not further
increase the allowance for loan losses or that regulators will not require us to
increase this allowance. Either of these occurrences could adversely affect our
earnings.
WE ARE IN COMPETITION WITH MANY OTHER BANKS, INCLUDING LARGER COMMERCIAL BANKS
WHICH HAVE GREATER RESOURCES THAN US
The banking industry within the State of New Jersey is highly competitive.
The bank's principal market area is served by branch offices of large commercial
banks and thrift institutions. In addition, in 1999 the Gramm-Leach-Bliley
Financial Modernization Act of 1999 was passed into law. The Modernization Act
permits other financial entities, such as insurance companies and securities
firms, to acquire or form financial institutions, thereby further increasing
competition. A number of our competitors have substantially greater resources
than we do to expend upon advertising and marketing, and their substantially
greater capitalization enables them to make much larger loans. Our success
depends a great deal upon our judgment that large and mid-size financial
institutions do not adequately serve small businesses in our principal market
area and our ability to compete favorably for such customers. In addition to
competition from larger institutions, we also face competition for individuals
and small businesses from recently formed banks seeking to compete as "home
town" institutions. Most of these new institutions have focused their marketing
efforts on the smaller end of the small business market we serve.
THERE IS A RISK THAT WE MAY NOT BE REPAID IN A TIMELY MANNER, OR AT ALL, FOR
LOANS WE MAKE
The risk of nonpayment (or deferred or delayed payment) of loans is
inherent in commercial banking. Such non-payment, or delayed or deferred payment
of loans to the bank, if they occur, may have a material adverse effect on our
earnings and overall financial condition. Additionally, in compliance with
applicable banking laws and regulations, the bank maintains an allowance for
loan losses created through charges against earnings. As of March 31, 2001, the
bank's allowance for loan losses was $2.6 million. The bank's marketing focus on
small to medium-size businesses may result in the assumption by the bank of
certain lending risks that are different from or greater than those which would
apply to loans made to larger companies. We seek to minimize our credit risk
exposure through credit controls which include evaluation of potential
borrowers, available collateral, liquidity and cash flow. However, there can be
no assurance that such procedures will actually reduce loan losses.
THE LAWS THAT REGULATE OUR OPERATIONS ARE DESIGNED FOR THE PROTECTION OF
DEPOSITORS AND THE PUBLIC, BUT NOT OUR STOCKHOLDERS
The federal and state laws and regulations applicable to our operations
give regulatory authorities extensive discretion in connection with their
supervisory and enforcement responsibilities, and generally have been
promulgated to protect depositors and the deposit insurance funds and not for
the purpose of protecting stockholders. These laws and regulations can
materially affect our future business. Laws and regulations now affecting us may
be changed at any time, and the interpretation of such laws and regulations by
bank regulatory authorities is also subject to change. We can give no assurance
that future changes in laws and regulations or changes in their interpretation
will not adversely our business.
11
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the common stock
offered in the exchange offer. In the event the warrants are exercised, we will
receive the proceeds from that exercise. Assuming 1,150,000 warrants are issued
as part of the exchange offer, all of those warrants are exercised and that the
exercise price for each of the warrants is $5.50, we would receive $6,325,000 in
proceeds. These proceeds would be used for general corporate purposes, to
augment our capital and to provide additional capital to the bank.
The net proceeds from the sale of the Series A Preferred Stock, after
deducting offering expenses, was approximately $4.9 million. These proceeds were
contributed to the bank to supplement its capital.
CAPITALIZATION
The following table sets forth the capitalization of Unity Bancorp, Inc. as
of March 31, 2001, based on common stock outstanding on that date of 3,706,708
shares:
- on an actual basis; and
- on an as adjusted basis to give effect to the offering of the common
stock, after deduction of estimated offering expenses, assuming all
shares of Series A Preferred Stock outstanding are exchanged for stock
on the terms set forth herein.
- The capitalization information set forth in the table below is
qualified by and should be read in conjunction with the more detailed
consolidated financial statements and the notes to those financial
statements included elsewhere in this prospectus. The table below also
reflects the estimated expenses of the proposed exchange, which must
be recognized when incurred, and a deemed dividend payable to the
preferred holders of $1.9 million (See "The Exchange Offer -
Accounting Treatment").
March 31, As
2001 Adjusted
--------- ---------
Shareholders' equity
Preferred stock class A, 10% cumulative and convertible,
103,500 shares issued and outstanding $ 4,929 $ 0
Common stock, no par value, 7,500,000 shares authorized 26,234 33,098
Treasury stock, at cost, 156,860 shares (1,762) (1,762)
Retained deficit (7,664) (9,699)
Accumulated other comprehensive loss, net of tax benefit (57) (57)
--------- ---------
Total Shareholders' Equity $ 21,680 $ 21,580
--------- ---------
Outstanding Common Shares 3,706,708 4,856,708
12
MARKET FOR THE COMMON STOCK
Our common stock is traded on Nasdaq Market under the symbol "UNTY." The
following table shows the high and low bid price for the common stock on the
Nasdaq Market for the last two fiscal years and for the most recently completed
quarter. High and low bid prices reported on the Nasdaq Market reflect
inter-dealer quotations, without retail markup, markdown or commissions, and may
not necessarily represent actual transactions.
2001
----
High Low Cash Dividend
------ ----- -------------
1st Quarter ........................ $ 4.00 $2.06 $0.00
2nd Quarter (through May 22, 2001).. $ 5.00 $2.93 $0.00
2000
----
High Low Cash Dividend
------ ----- -------------
1st Quarter .................... $ 6.68 $5.25 $0.00
2nd Quarter .................... $ 6.25 $3.50 $0.00
3rd Quarter .................... $ 4.94 $3.44 $0.00
4th Quarter .................... $ 4.38 $2.00 $0.00
1999
----
High Low Cash Dividend
------ ----- -------------
1st Quarter .................... $ 8.50 $4.75 $0.06
2nd Quarter .................... $11.75 $6.38 $0.06
3rd Quarter .................... $12.00 $9.63 $0.06
4th Quarter .................... $11.00 $9.31 $0.06
Under our stipulations and agreements with our federal and state
regulators, we are not allowed to pay cash dividends on our securities. We have
therefore not paid any cash dividends on common stock since the fourth quarter
of 1999.
As of March 31, 2001, we had 603 common shareholders of record.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes relating thereto included herein. When necessary,
reclassifications have been made to prior period's data throughout the following
discussion and analysis for purposes of comparability with prior period data.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001
NET INCOME
We recorded net income of $128 thousand or $0.00 per diluted common share
for the quarter ended March 31, 2001 compared to net a net loss $1.0 million, or
$0.27 loss per diluted common share for the first quarter of 2000. The improved
operating results were primarily the result of a decrease in non-interest
expense and an increase in non-interest income. Non-interest expense decreased
$1.4 million, or 27.7 percent, as a result of the dissolution of our CMA
subsidiary, the reduced number of branches resulting from the sale of five
branches in December 2000, and improved expense control. Non-interest income
increased $617 thousand as a result of a $731 thousand loss on the sale of
mortgage loans in the first quarter of 2000.
NET INTEREST INCOME
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
For the Three months ended March 31 2001 2000
--------------------------------------------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
--------------------------------------------------------------
Assets
Interest Earning Assets
Commercial Loans $ 85,992 $1,885 8.89% $104,006 $2,250 8.77%
SBA Loans 32,221 851 10.71% 17,564 442 10.21%
Mortgage Loans 76,851 1,139 5.93% 97,760 1,436 5.88%
Consumer Loans 28,991 557 7.79% 90,930 1,800 8.03%
--------------------------------------------------------------
Total Loans 224,055 4,432 7.99% 310,260 5,928 7.72%
--------------------------------------------------------------
Securities Available for sale 42,467 657 6.19% 39,243 677 6.90%
Securities Held to maturity 31,852 473 5.94% 34,232 513 5.99%
Federal funds sold and interest bearing deposits 33,257 454 5.54% 816 10 5.01%
--------------------------------------------------------------
Total Interest-earning assets 331,631 $6,016 7.26% 384,551 7,128 7.41%
Non-interest earning assets 25,221 47,946
Allowance for loan losses 2,633 2,265
-------- --------
Total average assets $354,219 $430,232
======== ========
Liabilities and Equity
Interest-bearing liabilities
Interest bearing checking $ 42,873 $ 145 1.37% $ 44,962 $ 203 1.83%
High yield checking 60,628 828 5.54% 65,239 937 5.82%
Savings deposits 30,373 178 2.38% 36,257 229 2.56%
Time deposits 132,962 2,007 6.12% 163,429 2,272 5.64%
--------------------------------------------------------------
Total Interest Bearing Deposits 266,836 3,158 4.80% 309,887 3,641 4.77%
--------------------------------------------------------------
Other debt 12,902 195 6.13% 36,356 584 6.51%
--------------------------------------------------------------
Total interest-bearing liabilities $279,738 $3,353 4.86% $346,243 $4,225 4.95%
---------------------------------------------------------------
Non-interest bearing liabilities 1,225 1,706
Demand deposits 51,896 59,948
Shareholders' equity 21,360 22,335
-------- --------
Total average liabilities and shareholders' equity $354,219 $430,232
======== ========
Tax equivalent net interest income 2,663 2,903
====== ======
Tax equivalent adjustment -- (27)
====== ======
Net interest income 2,663 2,876
====== ======
Net interest rate spread 2.40% 2.47%
==== ====
Net interest margin on average earning assets 3.21% 3.02%
14
The following table presents the major factors by category that contributed
to the changes in net interest income for the three months ended March 31, 2001
compared to the same period a year ago. Amounts have been computed on a full
tax-equivalent basis, assuming a federal income tax rate of 34.0 percent.
RATE VOLUME TABLE
Increase (Decrease)
---------------------------------
Due to Change in
---------------------------------
Volume Rate Total
------- ----- -------
ASSETS
Interest Earning Assets
Commercial Loans $ (395) $ 30 $ (365)
SBA Loans 387 22 409
Mortgage Loans (310) 13 (297)
Consumer Loans (1,190) (53) (1,243)
------- ----- -------
Total Loans (1,508) 12 (1,496)
Available for sale securities 50 (70) (20)
Held to maturity securities (35) (5) (40)
Federal funds sold and interest bearing deposits 443 1 444
------- ----- -------
Total Interest-earning assets (1,050) (62) (1,112)
------- ----- -------
Interest bearing checking (7) (51) (58)
High yield checking (63) (46) (109)
Savings deposits (34) (17) (51)
Time deposits (460) 195 (265)
------- ----- -------
Total Interest Bearing Deposits (564) 81 (483)
------- ----- -------
Borrowings (354) (35) (389)
------- ----- -------
Total interest-bearing liabilities (918) 46 (872)
------- ----- -------
Decrease in tax-equivalent net interest income $ (132) $(108) $ (240)
======= ===== =======
Net interest income was $2.7 million for the quarter compared to $2.9
million a year ago. The decline in net interest income was a result of the
planned reduction in earning assets as a result of the Company's capital
restoration plan. Net interest margin was 3.21 percent for the quarter compared
to 3.02 percent a year ago. The Company's net interest margin, although improved
from a year ago, continues to be negatively impacted by the declining interest
rate environment and the high cost of time deposits, the majority of which will
reprice this year.
Average interest earning assets were $331.6 million for the three months
ended March 31, 2001, a decrease of $52.9 million, compared to $384.6 million
for the same period a year ago. The decreases in average earning assets occurred
primarily due to a $86.2 million decrease in the average loan portfolio,
partially offset by an increase of $30.0 million in average Federal funds sold.
The rate earned on interest earning assets was 7.26 percent for the three months
ended March 31, 2001, a decrease of 15 basis points from 7.41 percent for the
three months ended March 31, 2000, resulting from higher balances in lower
yielding assets, primarily federal funds sold. Interest income on average
interest earning assets was $6.0 million for the quarter ended March 31, 2001, a
decrease of $1.1 million from the same period a year ago. Of the $1.1 million
decline, $1.0 million is related to the decline in average balances, and $0.1
million is related to the rates earned on these investments.
Average loans amounted to $224.1 million for the three months ended March
31, 2001, a decrease of $86.2 million from the same period a year ago. Consumer,
mortgage and commercial loans all decreased partially offset by an increase in
SBA loans. The decrease in consumer and mortgage loan portfolios is due to loan
sales in 2000 of $37.4 million and $43.0 million, respectively. The decrease in
the commercial loan portfolio is due to prepayments exceeding new volume. The
average rate earned on the loan portfolio was 7.99 percent, an increase of 27
basis points from the same period a year ago.
Average investments amounted to $74.3 million for the three months ended
March 31, 2001, virtually unchanged from the same period a year ago. The average
rate earned on the investment portfolio was 6.08 percent, a decrease of 26 basis
points from the same period a year ago.
Average interest bearing liabilities were $279.7 million for the three
months ended March 31, 2001, a decrease of $66.5 million, compared to $346.2
million for the same period a year ago. The decreases in average interest
bearing liabilities occurred in both interest-bearing deposits and other debt.
The rate paid on interest bearing liabilities was 4.86 percent, a decrease of 9
basis points from the same period a year ago. Interest expense amounted to $3.4
million for the quarter ended March 31, 2001, a decrease of $0.9 million from
the same period a year ago. Of the $872 thousand decrease, $918 thousand is
related to the decline in average balance, offset by $46 thousand related to the
rates paid on these liabilities.
15
Total interest-bearing deposits were $266.8 million, a decline of $43.1
million from the same period a year ago. The decline in interest-bearing
deposits was as a result of sales of $48.0 million in deposits in December 2000
and the planned reduction of higher costing governmental time deposits. The rate
paid on interest bearing deposits was 4.80 percent for the quarter ended March
31, 2001, an increase of 3 basis points from last year. The increase in rate was
due to higher promotional rates of interest to attract deposits to newer branch
locations. The promotional rates were offered on time deposits and Top Banana
premium money market product due to the first quarter liquidity needs in 2000.
Other debt was $12.9 million for the quarter ended March 31, 2001, a
decrease of $23.5 million from the same period a year ago.
Non-interest bearing deposits amounted to $51.9 million, 16.3 percent of
total deposits, for the quarter ended March 31, 2001, unchanged from the same
period a year ago. In December 2000, $6.3 million of non-interest bearing
deposits were sold.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $150 thousand for the three months
ended March 31, 2001, a decrease of $96 thousand, compared with $246 thousand
for the same period a year ago. The provision for loan losses approximated net
charge offs for the quarter ended March 31, 2001. The provision is based on
management's assessment of the adequacy of the allowance for loan losses.
NON-INTEREST INCOME
Non-interest income consists of service charges on deposits, loan and
servicing fees, gains and losses on sales of securities and loans and other
income. Non-interest income was $1.2 million for the three months ended March
31, 2001, an increase of $617 thousand, compared to the $544 thousand for the
same period a year ago.
Deposit service charges were $327 thousand for the three months ended March
31, 2001, an increase of $59 thousand, or 22.0 percent from the $268 thousand
reported a year ago. Deposit service charges increased as a result of improved
collection of non-sufficient and unavailable funds fees.
Loan and servicing fees increased $25 thousand, to $291 thousand for the
three months ended March 31, 2001, through growth of the serviced SBA loan
portfolio.
Gain (losses) on loan sales reflects the participation in the SBA's
guaranteed loan program. Under the SBA program, the SBA guarantees 75 percent to
85 percent of the principal of a qualifying loan. The guaranteed portion of the
loan is then sold into the secondary market. SBA loan sales, all without
recourse, totaled $7.5 million in the first quarter of 2001, compared to $5.1
million in the first quarter of 2000. Gains on SBA loan sales were $402 thousand
for the three months ended March 31, 2001, compared to $367 thousand for the
same period a year ago. Prior period results also include a $731 thousand loss
on the sale of adjustable rate mortgages, and gains on the sale of mortgages of
$231 thousand from CMA.
Security gains amounted to $34 thousand for the three months ended March
31, 2001, compared to the $1 thousand for the first quarter of 2000.
Other non-interest income amounted to $107 thousand for the three months
ended March 31, 2001, a decrease of $35 thousand as a result of the cancellation
of life insurance policies during 2000. Other income for the quarter ended
December 31, 2000, included a gain of $3.3 million on the sale of five branches
and deposits.
NON-INTEREST EXPENSE
Non-interest expense was $3.5 million for the three months ended March 31,
2001, a decrease of $1.4 million, or 27.7 percent from the same period a year
ago. Prior period non-interest expenses include the operations of CMA and five
additional branches. The reduction in non-interest expense is directly related
to the dissolution of CMA, branch sales and improved expense control.
Compensation and benefits expense was $1.6 million for the quarter ended
March 31, 2001, a decrease of $673 thousand or 29.2 percent from the same period
a year ago. The decrease is related to the reduction in the number employees and
fewer branches.
16
Occupancy expense was $413 thousand for the three months ended March 31,
2001, a decrease of $271 thousand or 39.6 percent from the same period a year
ago. The decrease is related to the reduction in the number of branches due to
the branch sales in the fourth quarter of 2000.
Processing and communications expense was $482 thousand for the three
months ended March 31, 2001, a decrease of $112 thousand or 18.9 percent from
the same period a year ago. The decrease is related to the reduction in the
number of branches due to the branch sales in the fourth quarter of 2000.
Furniture and equipment expense was $263 thousand for the three months
ended March 31, 2001, an increase of $200 thousand from the same period a year
ago. Included in the March 31, 2000 furniture and equipment expense was a $300
thousand one-time credit received from a data processing vendor.
Professional fees were $207 thousand for the three months ended March 31,
2001 a decrease of $81 thousand, or 28.1 percent from the same period a year
ago. The decrease is related to the lower consulting fees.
Deposit insurance was $224 thousand for the three months ended March 31,
2001 an increase of $177 thousand from the same period a year ago. The increase
in deposit insurance premiums is the result of a higher risk classification
assessed by the FDIC starting in mid 2000.
Loan servicing expense was $75 thousand for the three months ended March
31, 2001, a decrease of $252 thousand from the same period a year ago. The
decrease is a result of our billing the SBA for its share of collection costs on
loans serviced on its behalf.
Other expense was $248 thousand for the three months ended March 31, 2001,
a decrease of $347 thousand or 58.3 percent from the same period a year ago. The
decrease is the result of lower advertising expense and no amortization expense
due to the write off $3.2 million in intangibles related to CMA in the fourth
quarter of 2000.
INCOME TAX EXPENSE
In December 2000, the company substantially increased the tax valuation
reserve against deferred tax assets, which are dependent on future taxable
income. As a result of the first quarter profit, the current tax expense
reflects the reversal of tax valuation reserves. The current period tax expense
represents state tax provision for the investment company.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED
DECEMBER 31, 1999
For the year ended December 31, 2000, we realized an after-tax loss of $5.9
million, or $1.71 per diluted share, compared to a $3.4 million loss, or $0.91
per diluted share a year ago. The losses incurred in 2000 were significantly
impacted by CMA's operating results and the write-off of CMA's goodwill
resulting from the termination of the business. In total, CMA accounted for
approximately $4.4 million of our $5.9 million loss. The two loan sales in the
first and third quarter contributed $1.2 million to our losses, offset by the
$2.0 million (net after-tax) gains on the deposit sales. Excluding the
aforementioned transactions and the additional $1.7 million tax valuation
reserve, our core after-tax operating losses in 2000 were approximately $.7
million.
The core operating losses in 2000 were primarily the result of the expenses
associated with the new branches acquired in 1999, compliance expenses under the
regulatory agreements, and additional expenses related to loan collections and
personnel changes. The losses in 1999 largely reflect growth in non-interest
expenses due to the new branches, a valuation loss reclassifying certain loans
from held-to-maturity to held-for-sale, the write-down of an impaired asset, the
costs associated with the collection of non-performing loans, and the costs of
expanding the loan portfolios.
As a result of the dissolution of CMA, the reduction in the number of
branches and certain other cost saving measures undertaken by management, our
core operating results are expected to improve in 2001.
In 2000, the net losses increased $2.5 million from the prior year. The
change in the components of the net loss from 1999 to 2000 included a $0.7
million increase in net interest income, a $1.0 million decrease in the
provision for loan losses, a $2.1 million increase in non-interest income, a
$3.1 million increase in non-interest expense, and a $3.2 million increase in
the provision for income taxes, related to reserves against our deferred tax
assets.
17
Net interest income, on a tax-equivalent basis for 2000, was $11.8 million
compared to $11.0 million in 1999, an increase of 7.12%. The increase in net
interest income was attributed to a $54.3 million, or 17.2%, increase in average
interest-earning assets. The benefit of the increase in interest-earning assets
was significantly impacted by the increased cost of funds from deposit
promotions, reducing net interest spread from 3.01% in 1999, to 2.61% in 2000.
Non-interest income for 2000 was $7.7 million, an increase of $2.1 million,
or 36.7%, over 1999. The increase over the prior year is the result of the $3.5
million gain on the sales of deposits, primarily offset by losses from the first
and third quarter loan sales.
Non-interest expenses were $23.7 million in 2000, an increase of $3.1
million, or 15.3%, over $20.6 million recorded in 1999. The increase is
primarily attributed to the $3.2 million write-off of CMA goodwill. Included in
non-interest expense for 1999 was a write-down of $786 thousand and legal costs
of $150 thousand relating to a check-kite.
In 1999, we recorded $2.4 million of income tax benefits as a result of
$5.8 million of pre-tax losses. Although pre-tax operating losses were $5.1
million in 2000, we recorded income tax expense of $0.8 million during the
current year, for a net $3.2 million increase in income tax expense. The
increase in income tax expense was the result of the establishment of tax
valuation allowances against our deferred tax assets, which are dependent on
future taxable income.
NET INTEREST INCOME
Our results of operations depend substantially on its net interest income,
which is the difference between the interest earned on its earning assets and
the interest paid on funds borrowed to support those assets, such as deposits.
Net interest margin is a function of the difference between the weighted average
rates received on interest-earning assets as compared with that of
interest-bearing liabilities.
Net interest income, on a tax-equivalent basis increased $0.8 million, or
7.12%, to $11.8 million for 2000 from $11.0 million for 1999. This increase was
due to the growth in interest-earning assets, partially offset by the increase
in the cost of interest-bearing liabilities. On average, interest-earning assets
increased $54.3 million, or 17.2%, to $370.2 million. The increase in
earning-assets was primarily attributed to a $40.5 million increase in average
loans. Total tax-equivalent interest income on earning assets was $28.1 million
for 2000, an increase of $4.4 million over the prior year. Of the $4.4 million
increase, $4.0 million was attributed to increased volume of average interest
earning assets, with the remainder attributed to higher rates earned. The yield
on interest-earning assets was 7.60% in 2000, compared to 7.52 the prior year.
The increase in the yield was primarily related to the investment and Federal
Funds sold portfolios as a result of the higher rate environment in 2000. The
prime-lending rate increased 100 basis points in 2000 to end the year at 9.50%.
The average yield on the loan portfolio was 7.95% in 2000, as compared to 8.02%
in 1999. The decline in the average loan yield can be attributed to lower
yielding mortgage loans closed in late 1999 and the increase in non-performing
loans.
Average interest-bearing liabilities increased 15.7%, or $44.3 million, to
average $326.9 million for 2000. The cost of interest-bearing liabilities
increased from 4.51% in 1999 to 4.99% in 2000. The increase in interest-bearing
liabilities reflects our decision to offer higher promotional rates of interest
to attract new customers to the new branch locations, more competitive rates
paid on money market accounts and the increase in the interest rate environment.
Interest expense on deposits and borrowed funds was $16.3 million in 2000, a
$3.6 million increase over 1999. Of the $3.6 million increase, $1.4 million was
attributed to higher levels of interest-bearing liabilities and the remainder
attributed to increased cost of funds.
Net interest spread, the difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities, declined from 3.01% in
1999, to 2.61% in 2000. The decline in net interest spread is the result of the
increased cost of interest-bearing deposits. As a result of the decline in net
interest spread, net interest margin decreased to 3.19% in 2000, from 3.49% in
1999.
The following table reflects the components of net interest income, setting
forth for the periods presented herein, (1) average assets, liabilities and
shareholders' equity, (2) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (3) average yields earned
on interest-earning assets and average rates paid on interest-bearing
liabilities, (4) net interest spread which is the average yield on
interest-earning assets less the average rate on interest-bearing liabilities
and (5) net interest income/margin on average earning assets. Rates/Yields are
computed on a fully tax-equivalent basis, assuming a federal income tax rate of
34%.
18
COMPARATIVE AVERAGE BALANCE SHEETS
(Dollar amounts in thousands - Interest amounts and interest rates/yields on a
fully tax-equivalent basis.)
2000 1999 1998
---------------------------------------------------------------------------------------
AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/
Year Ended December 31 BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------------------------------------------------------------------------------------------------------------------------------
ASSETS
------
Interest-earning assets:
------------------------
Taxable loans
(net of unearned income) $278,257 $22,133 7.95% $237,799 $19,067 8.02% $143,940 $13,355 9.28%
Tax-exempt securities 3,259 317 9.73% 2,214 200 9.03% 1,615 112 6.94%
Taxable investment securities 69,140 4,411 6.38% 63,279 3,804 6.01% 49,044 3,182 6.49%
Interest-bearing deposits 131 9 6.87% 1,934 171 8.84% 4,140 231 5.58%
Federal funds sold 19,400 1,255 6.47% 10,630 514 4.84% 11,925 638 5.35%
------------------ ------------------ ------------------
Total interest-earning assets $370,187 $28,125 7.60% $315,856 $23,756 7.52% $210,664 $17,518 8.32%
Non-interest earning assets 43,823 47,196 20,525
Allowance for loan losses (2,434) (1,995) (1,409)
-------- -------- --------
Total Assets $411,576 $361,057 $229,780
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-bearing liabilities:
----------------------------
High yield and NOW deposits $ 95,817 $ 3,974 4.15% $ 87,884 $ 3,441 3.92% $ 36,162 $ 591 1.63%
Savings deposits 35,491 1,106 3.12% 17,260 315 1.83% 13,811 312 2.26%
Money market deposits 20,724 831 4.01% 18,053 529 2.93% 18,557 928 5.00%
Time deposits 162,736 9,675 5.95% 139,187 7,212 5.18% 96,969 5,311 5.48%
------------------ ------------------ ------------------
Total interest-bearing deposits $314,768 $15,586 4.95% $262,384 $11,497 4.38% $165,499 $ 7,142 4.32%
Other debt 12,095 736 6.09% 20,159 1,241 6.16% 319 23 7.21%
------------------ ------------------ ------------------
Total interest-bearing liabilities $326,863 $16,322 4.99% $282,543 $12,738 4.51% $165,818 $ 7,165 4.32%
Non-interest-bearing liabilities 2,212 4,280 1,692
Demand deposits 59,885 50,663 41,250
Shareholders' equity 22,616 23,571 21,020
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY $411,576 $361,057 $229,780
-------- -------- --------
Tax equivalent net interest income $11,803 $11,018 $10,353
Net interest spread 2.61% 3.01% 3.99%
Net interest margin 3.19% 3.49% 4.91%
The following table presents the major factors by category that contributed
to the changes in net interest income for each of the years ended December 31,
2000, and 1999 as compared to each respective period. Amounts have been computed
on a fully tax-equivalent basis, assuming a Federal income tax rate of 34%.
(Dollar Amounts in Thousands 2000 VERSUS 1999 1999 VERSUS 1998
on a Fully Tax Equivalent Basis) DUE TO CHANGE IN DUE TO CHANGE IN
VOLUME RATE NET VOLUME RATE NET
---------------------------------------------------------------
INTEREST INCOME:
Net loans $ 3,252 $ (186) $ 3,066 $ 8,707 $ (2,995) $ 5,712
Tax-exempt securities 95 22 117 42 46 88
Taxable investment securities 352 255 607 924 (302) 622
Interest-bearing deposits (159) (3) (162) (123) 63 (60)
Federal funds sold 424 317 741 (69) (55) (124)
---------------------------------------------------------------
Total interest income $ 3,964 $ 405 $ 4,369 $ 9,481 $ (3,243) $ 6,238
INTEREST EXPENSE:
High yield and NOW deposits $311 $ 223 $ 534 $ 845 $ 2,005 $ 2,850
Savings deposits 333 458 791 78 (75) 3
Money market deposits 78 224 302 (25) (374) (399)
Time deposits 1,220 1,234 2,463 2,312 (411) 1,901
---------------------------------------------------------------
Total deposits $ 1,942 $ 2,148 $ 4,090 $ 3,210 $ 1,145 $ 4,355
Other borrowings (496) (10) (506) 1,431 (213) 1,218
---------------------------------------------------------------
Total interest expense $ 1,446 $ 2,138 $ 3,584 $ 4,641 $ 932 $ 5,573
---------------------------------------------------------------
Net interest income $ 2,518 $(1,733) $785 $ 4,840 $ (4,175) $ 665
===============================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on management's evaluation of the
adequacy of the allowance for loan losses which is maintained at a level
sufficient to absorb estimated losses in the loan portfolio as of the balance
sheet date. The provision for loan losses totaled $716 thousand for 2000,
compared to $1.7 million a year ago. In 1999, we recorded $1.4 million of net
charge-offs, compared to $331 thousand of net charge-offs in 2000. The net
charge-offs in 1999 primarily related to one borrower. The lower 2000 provision
for loan losses was a result of the reduced level of charge-offs and the decline
in the size of the loan portfolio, somewhat mitigated by the increased level of
non-performing loans. Total loans at December 31, 1999 were $322.5 million,
compared to $226.1 million at year-end 2000.
19
NON-INTEREST INCOME
Non-interest income consists of service charges on deposits, gains on sales
of securities and loans and other income. Non-interest income was $7.7 million
for 2000, an increase of $2.1 million, or 36.7%, compared to $5.6 million for
1999. The increase in non-interest income was primarily attributed to $3.5
million of gains realized on deposit sales in 2000.
Service charges on deposits increased 50.9% for 2000, and totaled $1.2
million, compared to $778 thousand for the prior year. The increase in deposit
service charges is attributed to the increased level of transaction accounts and
improved collection of deposit fees and account charges for non-sufficient
funds.
The following table shows the total gains on sales of loans for each of the
last three years.
GAIN ON LOAN SALES
(IN THOUSANDS) 2000 1999 1998
--------------------------------
Mortgage loan sales $ 960 $ 3,059 $ 600
SBA loan sales 2,142 1,418 1,794
ARM loan sales/valuation (731) (1,484) --
Home equity loan sales (1,202) -- --
Other loan sales 13 70 --
--------------------------------
Total gain on loan sales $ 1,182 $ 3,063 $2,394
================================
The total gain on loan sales was $1.2 million in 2000, a decrease of $1.9
million, or 61.4%, from $3.1 million realized in 1999. Gains on mortgage loans
declined $2.1 million to $1.0, million, a 68.6% decline from the $3.1 million
gain in 1999. The decline in mortgage loan sales was impacted by lower
origination volumes attributed to the rising rate environment and the closing of
CMA in 2000. As a result of the dissolution of CMA, we will no longer have
significant gains on the sale of mortgages. In the fourth quarter of 2000, we
entered into an agreement with First Hallmark Mortgage, under which we will
perform certain closing services and First Hallmark will fund the loan. We will
receive fees for our services, and there are no incremental costs incurred by we
as a result of this agreement.
Gains on SBA loan sales reflect the participation in the SBA's guaranteed
loan program. Under the SBA program, the SBA guarantees between 75% to 85% of
the principal of a qualifying loan. Generally, the guaranteed portion of the
loan is then sold into the secondary market. Sales of guaranteed SBA loans
totaled $30.4 million in 2000, as compared to $24.3 million of sales the prior
year. These loans are sold servicing retained, and generally yield a servicing
fee of approximately 100 basis points. As a result of the increased volume of
loans sold and higher premiums realized, gains on sales of SBA loans totaled
$2.1 million, an increase of 61.8%, or $0.8 million, over 1999.
In December 1999, $37.8 million of adjustable rate mortgage (ARM) loans
were reclassified from held-to-maturity to held-for-sale at a valuation of $36.4
million. Based on this reclassification, the company reported a valuation loss
of $1.5 million in 1999. This portfolio was sold on March 7, 2000, servicing
released and without recourse, for $35.6 million, resulting in an additional
loss of $0.7 million recorded in 2000.
In order to fund the fourth quarter sale of deposits, on September 29,
2000, we sold, servicing released and without recourse, $44.8 million of home
equity loans originally purchased in 1999, realizing $43.6 million in proceeds
and incurring a $1.2 million loss.
The following table shows the components of other income for each of the
last three years.
OTHER INCOME
(IN THOUSANDS) 2000 1999 1998
------------------------
SBA fees $ 785 $ 671 $635
Loan fees 355 394 70
Income from cash surrender value of life insurance 108 248 --
Non-deposit account charges 225 144 32
Gain on sale of deposits 3,477 -- --
Miscellaneous 357 115 120
------------------------
Total other income $5,307 $1,572 $857
========================
20
Other income increased $3.7 million in 2000, and totaled $5.3 million, as
compared to $1.6 million for 1999. Included in other income for 2000, are $3.5
million of gains from the five-branch deposit sales. The branches were sold to
reduce our operating expenses and to improve our capital ratios. Excluding the
gains on the branch sales, other income increased $0.3 million, to $1.8 million,
a 16.4% increase over the $1.6 million in 1999. The major component of other
income is SBA servicing fees on sold SBA loans. The portfolio of serviced SBA
loans as of December 31, 2000 and 1999 was $86.5 million and $65.7 million,
respectively. As a result of the increase in the serviced portfolio, SBA
servicing fees increased to $0.8 million in 2000 as compared to $0.7 million in
1999. In September, we liquidated the corporate owned life insurance policy on a
senior executive, resulting in a decrease in income on the policy in 2000 from
the prior year.
NON-INTEREST EXPENSES
Total non-interest expenses totaled $23.7 million in 2000, a $3.1 million,
or 15.3%, increase from the $20.6 million in 1999. Salaries and benefits
increased $0.5 million to $9.2 million from $8.7 million in the prior year. The
increase is primarily related to lower levels of deferred salary expense
resulting from lower mortgage originations in 2000. As a result of the
dissolution of CMA and the branch sales, salaries and benefits expense are
expected to be reduced in 2001. As of December 31, 2000 and 1999, there were 133
and 165 full time equivalent employees, respectively.
Occupancy expenses increased $0.2 million to $2.2 million, from $2.4
million in 1999. Occupancy expenses increased as a result of the full year
impact of the branch expansion in 2000 over the prior year. In 2001, occupancy
expense will decline as a result of the reduction in the branch network from 17
to 12 branches and the dissolution of CMA.
The following table presents a breakdown of other operating expenses for
each of the last three years:
OTHER EXPENSE
(IN THOUSANDS) 2000 1999 1998
------------------------------------
Professional services $ 1,471 $1,386 $ 887
Office expenses 1,885 1,986 1,042
Advertising expenses 815 881 370
Communication expenses 877 767 240
Bank services 1,052 802 491
FDIC insurance 311 192 116
Director fees 98 236 298
Operational losses 43 848(1) 370(2)
Loan expense 1,280 1,265 430
Amortization of intangibles 387 393 13
Write-off of CMA intangibles 3,208 -- --
Other expenses 863 729 462
------------------------------------
Total other expense $12,290 $9,485 $4,719
====================================
(1) Includes a $786 thousand write-down of uncollected assets associated with
the check-kiting scheme.
(2) Includes a $300 thousand write-down of uncollected assets associated with
the check-kiting scheme.
Other operational expenses increased $2.8 million to $12.3 million for
2000, compared to $9.5 million in 1999. Included in other expenses in 2000 was
the $3.2 million write-off of intangibles associated with the dissolution of
CMA.
On a year-to-year comparison, 2000 to 1999, most of the operating expenses
are comparable. Professional services for both 1999 and 2000 were impacted by
increased legal expenses associated with suits against the company and increased
accounting and auditing fees as a result of increased regulatory supervision.
Bank services for 2000, which includes item processing costs and third party ATM
charges, increased 31.2% in 2000 to $1.1 million, as a result of the increase in
transactions for the new branches and new account charges.
FDIC insurance premiums increased in 2000 to $0.3 million from $0.2 million
as a result of the increased risk classification assessed by the FDIC in the
first half of 2000. The Bank's risk classification was adjusted downward again
in the second half of 2000, which will increase FDIC insurance premium charges
for 2001.
21
Director's fees declined 58.5% in 2000, as a result of the elimination of
fees paid to the directors for our meetings and a reduction in the number of
directors. Operational losses declined to $43 thousand in 2000, as compared to
$0.8 million in 1999. Included in 1999 was a one-time $786 thousand check kiting
loss. Amortization of intangibles for 1999 and 2000 primarily represents the
normal amortization of goodwill associated with the acquisition of CMA. Because
CMA was dissolved in 2000, and all the related goodwill was expensed, we will
not have amortization of intangibles expense in future periods.
INCOME TAX EXPENSE
For 2000, we reported $0.8 million of income tax expense as compared to a
tax benefit of $2.4 million in 1999. Although we realized a $5.1 million pre-tax
loss in 2000, under current accounting rules tax benefits cannot be recorded
until we generate taxable earnings. We have $5.0 million of gross tax assets
including $2.4 million of deferred tax assets, for which we have established tax
valuation reserves of $2.1 million. The tax benefits recorded in 1999 were
primarily supported by net operating losses in carry-back periods.
FINANCIAL CONDITION
AT MARCH 31, 2001
Total assets at March 31, 2001, were $367.0 million compared to $409.7
million a year ago and $356.0 million from the year-end 2000. The decline in
assets from a year ago was in accordance with our capital restoration plan. The
increases in assets from December 31, 2000, were the result of deposit
generation primarily invested in securities available for sale and Federal funds
sold.
INVESTMENT PORTFOLIO
MARCH 2001 DECEMBER 2000
------------------------------------------- ---------------------------------------------
(in thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------------------------------------- ---------------------------------------------
AVAILABLE FOR SALE
US Treasury $ 6,339 $ 2 $ -- $ 6,340 $ 7,097 $ -- $ (22) $ 7,075
US Government Agencies 6,905 96 (6) 6,996 9,067 24 (39) 9,052
Corporate Debt securities 2,910 -- (105) 2,805 964 -- (56) 908
Mortgage backed 34,462 178 (194) 34,446 17,912 5 (275) 17,642
Federal Home Loan Bank stock 2,720 -- -- 2,720 2,720 -- -- 2,720
Equity 254 14 (79) 190 523 -- (111) 412
------------------------------------------ --------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $53,590 $290 $(383) $53,497 $38,283 $ 29 $(503) $37,809
========================================== ============================================
HELD TO MATURITY
US Government Agencies $12,246 $ 15 $(236) $12,025 $20,246 $ -- $(620) $19,626
Corporate Debt securities 1,012 9 -- 1,021 -- -- -- --
Mortgage backed securities 12,408 9 (7) 12,410 12,782 -- (255) 12,527
------------------------------------------ --------------------------------------------
TOTAL HELD TO MATURITY $25,666 $ 33 $(243) $25,456 $33,028 $ -- $(875) $32,153
========================================== ============================================
22
Securities available for sale are investments carried at fair value that
may be sold in response to changing market and interest rate conditions or for
other business purposes. Securities held to maturity, which are carried at
amortized cost, are investments for which there is the positive intent and
ability to hold to maturity. Management determines the appropriate security
classification of available for sale or held to maturity at the time of
purchase. The investment security portfolio is maintained for asset-liability
management purposes, an additional source of liquidity, and as an additional
source of earnings. The portfolio is comprised of U.S. Treasury securities,
obligations of U.S. Government and government sponsored agencies, collateralized
mortgage obligations and corporate and equity securities. Approximately 83
percent of the total investment portfolio has a fixed rate of interest. In the
normal course of business, we accept government deposits that require investment
securities to be held as collateral. As of March 31, 2000, $14.0 million of
securities were required to be pledged for governmental deposits.
Securities available for sale were $53.5 million at March 31, 2001, an
increase of $15.7 million, or 41.5 percent from year-end 2000. During the
quarter $19.3 million of securities available for sale were purchased,
(predominately collateralized mortgage obligations) and funded by deposit
generation and calls and maturities on securities held to maturity.
Securities held to maturity were $25.7 million at March 31, 2001, a
decrease of $7.4 million or 22.3 percent from year-end 2000. The decline in held
to maturity securities was a result of calls and maturities, and their
reinvestment in the securities available for sale portfolio. As of March 31,
2001, and December 31, 2000 the market value of held to maturity securities was
$25.5 million and $32.2 million, respectively. The improvement in the market
value of the portfolios was primarily due to the declining interest rate
environment.
23
LOAN PORTFOLIO
The following table sets forth the classification of loans by major
category at March 31, 2001, and December 31, 2000.
Loans By Type 03/31/2001 12/31/2000
------------------- -------------------
% of % of
Amount Total Amount Total
------------------- -------------------
SBA Loans $ 33,588 15.0% $ 30,177 13.3%
Commercial 85,971 38.4% 88,375 39.1%
Mortgage 76,026 33.9% 76,924 34.0%
Consumer 28,363 12.7% 30,664 13.6%
------------------- -------------------
Total Loans $223,948 100.0% $226,140 100.0%
=================== ===================
The loan portfolio, which represents our largest asset group, is a
significant source of both interest and fee income. The portfolio consists of
commercial, Small Business Administration ("SBA"), mortgage and consumer loans.
Elements of the loan portfolio are subject to differing levels of credit and
interest rate risk. Loans decreased $2.2 million, or 0.97 percent to $223.9
million at March 31, 2001.
SBA loans originated inside and outside of our market place provide
guarantees of between 75 percent and 85 percent of the principal from the SBA.
SBA loans are generally sold in the secondary market with the non-guaranteed
portion held in the portfolio. SBA loans amounted to $33.6 million at March 31,
2001, an increase of $3.4 million from year-end 2000. We expect to continue to
grow this portfolio in 2001.
Commercial loans are made for the purpose of providing working capital,
financing the purchase of equipment, inventory or commercial real estate and for
other business purposes. These loans amounted to $86.0 million at March 31,
2001, a decrease of $2.4 million from year-end December 2000. The reduction in
commercial loans for the quarter was a result of repayments exceeding new
originations.
Mortgage loans consist of loans secured by residential property. These
loans amounted to $76.0 million at March 31, 2001, a decrease of $900 thousand
from year-end December 2000. Residential mortgages are no longer being
originated for the portfolio. In the fourth quarter of 2000, we established a
relationship with First Hallmark Mortgage, under which First Hallmark will table
fund loan originations for resale. There are no incremental costs incurred by us
as a result of this relationship.
Consumer loans consist of home equity loans and loans for the purpose of
financing the purchase of consumer goods, home improvements, and other personal
needs, and are generally secured by the personal property being purchased. These
loans amounted to $28.4 million at March 31, 2001 a decrease of $2.3 million
from year-end December 2000. The decrease in the consumer loan portfolio was the
result of auto loan pay-downs.
The following table sets forth the repricing of loans for the period
ended March 31, 2001.
Within 1 Year 1 - 5 Years After 5 Years Total
------------- ----------- ------------- --------
SBA loans 33,588 -- -- 33,588
Commercial loans 44,984 34,826 6,161 85,971
Mortgage loans 2,440 70,054 3,532 76,026
Consumer loans 17,178 10,007 1,178 28,363
------- -------- ------- --------
Total loans $98,190 $114,887 $10,871 $223,948
======= ======== ======= ========
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.
24
Non-performing loans consist of loans that are not accruing interest
(non-accrual loans) as a result of principal or interest being in default for a
period of 90 days or more or when the collectibility of principal and interest
according to the contractual terms is in doubt, and loans past due 90 days or
greater, still accruing interest. Management has evaluated the loans past due 90
days or greater and still accruing interest and determined that they are well
collateralized and in the process of collection. The majority of loans 90 days
past due and still accruing interest are loans where customers continue to make
the monthly principal and interest payments. The loans have matured and are
pending renewal. When a loan is classified as nonaccrual, interest accruals
discontinue and all past due interest previously recognized as income is
reversed and charged against current period income. Generally, until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal until such time as management determines that the
financial condition of the borrower and other factors merit recognition of a
portion of such payments as interest income.
Credit risk is minimized by loan diversification and adhering to credit
administration policies and procedures. Due diligence on loans begins upon the
origination of a loan with a borrower. Documentation, including a borrower's
credit history, materials establishing the value and liquidity of potential
collateral, the purpose of the loan, the source of funds for repayment of the
loan, and other factors are analyzed before a loan is submitted for approval.
The loan portfolio is then subject to ongoing internal reviews for credit
quality. In addition, an outside firm has been used to conduct independent
credit reviews.
The following table sets forth information concerning non-accrual loans and
non-performing assets at March 31, 2001 and 2000, and December 31, 2000:
Nonperforming loans
(In thousands) MARCH 31, DECEMBER 31, MARCH 31,
2001 2000 2000
--------------------------------------
Nonaccrual by category
Commercial $2,098 $2,064 $1,403
Real Estate 1,250 807 214
Consumer 28 32 --
---------------------------------------------------------------------------------------------------
Total 3,376 2,903 1,617
---------------------------------------------------------------------------------------------------
Past Due 90 or more and still accruing interest
Commercial 845 578 650
Real Estate 1,480 694 448
Consumer 14 -- 14
---------------------------------------------------------------------------------------------------
Total 2,339 1,272 1,112
---------------------------------------------------------------------------------------------------
Total Non Performing Loans 5,715 4,175 2,729
---------------------------------------------------------------------------------------------------
OREO Property 427 142 758
---------------------------------------------------------------------------------------------------
Total Non-Performing Assets $6,142 $4,317 $3,487
===================================================================================================
Non-Performing assets to total assets 1.68% 1.21% 0.85%
Non-Performing assets to loans and OREO 2.74% 1.91% 1.21%
Allowance for loans losses as a
percentage of non-performing loans 44.63% 61.27% 87.47%
Nonaccrual loans amounted to $3.4 million at March 31, 2001, an increase of
$0.4 million from $2.9 million at year-end 2000. Included in nonaccrual loans
are $0.7 million of loans guaranteed by the SBA. Loans 90 days or more past due
increased $1.0 million from $1.3 million at December 31, 2000 to $2.3 million at
March 31, 2001. The majority of loans 90 days past due and still accruing
interest are loans where customers continue to make the monthly principal and
interest payments. The loans have matured and are pending renewal.
Potential problem loans are those where information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with loan repayment terms. These loans are not included in
non-performing loans as they continue to perform. Potential problem loans, which
consist primarily of commercial loans, were $0.1 million and $0.3 million at
March 31, 2001 and December 31, 2000 respectively.
25
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level deemed sufficient by
management to absorb estimated credit losses as of the balance sheet date.
Management utilizes a standardized methodology to assess the adequacy of the
allowance for loan losses. This process consists of the identification of
specific reserves for identified problem loans based on loan grades and the
calculation of general reserves based on minimum reserve levels by loan type.
Risks within the loan portfolio are analyzed on a continuous basis by
management, and periodically by an independent credit review function and by the
audit committee. A risk system, consisting of multiple grading categories, is
utilized as an analytical tool to assess risk and to quantify the appropriate
level of loss reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current economic conditions and
considers such factors as the financial condition of the borrowers, past and
expected and loss experience, and other factors management feels deserve
recognition in establishing an adequate reserve. This risk assessment process,
which includes the determination of the adequacy of the allowance for loan
losses, is performed at least quarterly, and, as adjustments become necessary,
they are realized in the periods in which they become known.
Provisions charged to expense increase the allowance and the allowance is
reduced by net charge-offs (i.e., loans judged to be not collectable are charged
against the reserve, less any recoveries on such loans). Although management
attempts to maintain the allowance at a level deemed adequate to provide for
potential losses, future additions to the allowance may be necessary based upon
certain factors including obtaining updated financial information about the
borrower's financial condition and changes in market conditions. In addition,
various regulatory agencies periodically review the adequacy of the allowance
for loan losses. These agencies have in the past and may in the future require
the bank to make additional adjustments based on their judgments about
information available to them at the time of their examination.
The allowance for loan losses totaled $2.5 million, $2.6 million, and $2.4
million at March 31, 2001, December 31, 2000, and March 31, 2000, respectively
with resulting allowance to loan ratios of 1.14 percent, 1.13 percent and 0.83
percent respectively. The increase in the ratios between March 31, 2001 and
March 31, 2000 is due to the decrease in the loan portfolios, through the 2000
sales.
The following is the allocation of the allowance for loan losses at March
31, 2001, and December 31, 2000.
March 2001 December 2000
-------------------------------- -------------------------------
(In thousands) % of % of % of % of
Amount Allowance All Loans Amount Allowance All Loans
---------------------------------------------------------------------- --------------------------------
Balance Applicable to:
SBA loans $ 684 26.8% 15.0% $ 506 19.8% 13.3%
Commercial loans 1,340 52.6% 38.4% 1,522 59.5% 39.1%
Mortgage loans 229 9.0% 33.9% 233 9.1% 34.0%
Consumer loans 297 15.7% 12.7% 297 11.6% 13.6%
------------------------------- ------------------------------
Total $ 2,550 100.0% 100.0% $ 2,558 100.0% 100.0%
=============================== ==============================
26
The following is a reconciliation summary of the allowance for loan losses
for March 31, 2001 and 2000 and December 31, 2000:
ALLOWANCE FOR LOAN LOSS ACTIVITY
(In thousands) March 31, 2001 December 31, 2000 March 31, 2000
------------------------------------------------------------
Balance at beginning of quarter $ 2,558 $ 2,545 $ 2,173
Charge-offs:
Commercial and industrial 185 222 --
Real estate -- -- --
Consumer 3 60 43
------------------------------------------------------------
Total Charge-offs 188 282 43
Recoveries:
Commercial and industrial 20 4 1
Real estate 9 1 --
Consumer 1 -- 10
------------------------------------------------------------
Total recoveries 30 5 11
------------------------------------------------------------
Total net charge-offs 158 277 32
------------------------------------------------------------
Provision charged to expense 150 290 246
------------------------------------------------------------
Balance of allowance at end of quarter $ 2,550 $ 2,558 $ 2,387
------------------------------------------------------------
Net charge-offs to average loans outstanding 0.27% 0.48% 0.04%
Allowance for loan losses to total loans 1.14% 1.13% 0.85%
DEPOSITS
Deposits, which include non-interest and interest bearing demand deposits
and interest-bearing savings and time deposits, are the primary source of our
funds. We offer a variety of products designed to attract and retain customers,
with primary focus on building and expanding relationships. For the March 31,
2001 quarter, we realized continued growth in deposits. This growth was achieved
through emphasis on customer service, competitive rate structures and selective
marketing. We attempt to establish a comprehensive relationship with business
borrowers, seeking deposits as well as lending relationships.
Total deposits increased $10.8 million, or 3.4 percent, to $331.1 million
at March 31, 2001 from $320.3 million at December 31, 2000. The increase in
deposits was primarily the result of a $9.6 million increase in time deposits
totaling $139.9 million at March 31, 2001 compared to $130.3 million at December
31, 2000.
Non-interest bearing demand deposits remained virtually unchanged, totaling
$53.0 million at March 31, 2001 compared to $53.1 million at December 31, 2000,
representing 16.0 percent of total deposits at March 31, 2001. Interest bearing
and saving deposits increased $1.3 million.
The maturity distribution of time deposits for March 31, 2001 is as follows:
Within 1 to 2 2 to 3 3 to 4 Over
1 year years years years 4 years
-------- ------- ------- ------ -------
$100,000, or more $ 37,546 $ 2,660 $ 906 $ -- $ --
Less than $100,000 $ 79,885 $10,548 $ 7,509 $ 476 $ 358
BORROWINGS
The following table is the period-end and average balance of FHLB borrowings for
the periods ended March 31, 2001, and December 31, 2000.
March 31, 2001 December 31, 2000
------------------ -------------------
(In thousands) Amount Rate Amount Rate
------- ----- ------- -----
Period end balance $10,000 4.92% $10,000 4.92%
Average balance $10,000 4.92% $ 1,413 4.92%
27
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. We seek 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.
We utilize 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. Our variance in the
economic value of equity, as a percentage of assets with rate shocks of 200
basis points, is a decline of 1.2 percent in a rising rate environment and a
decline of 0.8 percent in a falling rate environment. Both variances are within
the board-approved guidelines of +/= 3.00 percent. At December 31, 2000 the
economic value of equity with rate shocks of 200 basis points was a decline of
1.5 percent in a rising rate environment and a decline of 0.08 percent in a
falling rate environment.
OPERATING, INVESTING, AND FINANCING CASH
Cash was $16.0 million at March 31, 2001, an increase of $2.3 million from
December 31, 2000. Net cash provided by operating activities, amounted to $2.2
million, primarily due to the $1.8 million tax refund. Net cash used in
investing activities amounted to $10.6 million, primarily from the funding of
the loan portfolio, increased investment in securities available for sale and
fed funds, partially offset by maturities of securities and proceeds of loan
sales. Net cash provided by financing activities, amounted to $10.8 million at
March 31, 2001, attributable to deposit growth.
LIQUIDITY
Our liquidity is a measure of its ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner.
Holding Company
The principal source for funds for the holding company is dividends paid by
the bank. The bank is currently restricted from paying dividends to the holding
company. At March 31, 2001, we had $955 thousand in cash and $190 thousand in
marketable securities. At March 31, 2001, the holding company has accumulated
$518 thousand of dividend payments in arrears on its preferred stock.
Consolidated Bank
Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, sales and maturities of investment securities and funds
provided by operations. While scheduled loan payments and maturing investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. Total deposits amounted to $331.1 million as of March 31, 2001. At
March 31, 2001, $17.9 million was available for additional borrowings from the
FHLB of New York. Pledging additional collateral in the form of 1=4 family
residential mortgages or investment securities can increase the line with the
FHLB. An additional source of liquidity is Federal Funds sold, which were $36.5
million at March 31, 2001.
As of March 31, 2001 deposits included $30.5 million of Government
deposits, as compared to $31.7 million at December 31, 2000. These deposits are
generally short in duration, and are very sensitive to price competition. We
have significantly reduced our reliance on these deposits as a source of funds,
and believes the current portfolio of these deposits to be appropriate. Included
in the portfolio are $23.7 million of deposits from two municipalities. The
withdrawal of these deposits, in whole or in part would not create a liquidity
shortfall. At March 31, 2001, the bank had approximately $47.9 million of loan
commitments, which will generally either expire or be funded within one year.
28
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.
Our capital amounts and ratios are presented in the following table.
-------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
AS OF MARCH 31, 2001
Leverage Ratio $ 21,696 6.12% -> $ 14,171 4.00% -> $ 17,714 5.00%
-------------------------------------------------------------------
Tier I risk-based ratio $ 21,696 9.79% -> $ 8,961 4.00% -> $ 13,292 6.00%
-------------------------------------------------------------------
Total risk-based ratio $ 24,246 10.94% -> $ 17,723 8.00% -> $ 22,154 10.00%
-------------------------------------------------------------------
AS OF DECEMBER 31, 2000
-------------------------------------------------------------------
Leverage Ratio $ 21,539 5.50% -> $ 15,670 4.00% -> $ 19,588 5.00%
-------------------------------------------------------------------
Tier I risk-based ratio $ 21,539 9.61% -> $ 8,961 4.00% -> $ 13,442 6.00%
-------------------------------------------------------------------
Total risk-based ratio $ 24,097 10.76% -> $ 17,922 8.00% -> $ 22,403 10.00%
===================================================================
The Bank's capital amounts and ratios are presented in the following table.
-------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------
AS OF MARCH 31, 2001-
Leverage Ratio (a) $ 20,508 5.80% -> $ 14,151 4.00% -> $ 17,689 5.00%
-------------------------------------------------------------------
Tier I risk-based ratio $ 20,508 9.27% -> $ 8,848 4.00% -> $ 13,272 6.00%
-------------------------------------------------------------------
Total risk-based ratio $ 23,058 10.42% -> $ 17,696 8.00% -> $ 22,120 10.00%
-------------------------------------------------------------------
AS OF DECEMBER 31, 2000-
-------------------------------------------------------------------
Leverage Ratio (a) $ 20,394 5.24% -> $ 15,579 4.00% -> $ 19,474 5.00%
-------------------------------------------------------------------
Tier I risk-based ratio $ 20,394 9.12% -> $ 8,946 4.00% -> $ 13,419 6.00%
-------------------------------------------------------------------
Total risk-based ratio $ 22,952 10.26% -> $ 17,892 8.00% -> $ 22,365 10.00%
===================================================================
(a) In connection with the branch expansion the New Jersey Department of Banking
and Insurance imposed a tier 1 capital to total assets ratio of 6%.
Shareholders' equity increased $0.4 million, 1.7 percent, to $21.7 million
at March 31, 2001 compared to $21.3 million at December 31, 2000. This increase
was the result of the $128 thousand net operating profit before unpaid preferred
stock dividend for the first quarter of 2001 and $238 thousand of accumulated
other comprehensive income, as a result of appreciation in the securities
portfolio. As of March 31, 2001, $518 thousand of preferred dividends were in
arrears. We are is under agreements with bank regulatory agencies to defer
making any dividend payments on either its common or preferred stock.
29
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 our 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.
AT DECEMBER 31, 2000
Total assets declined $83.0 million, or 18.9%, to $356.0 million at
December 31, 2000, compared to $439.0 million at December 31, 1999. Net loans
decreased $96.8 million, or 30.2%, to $223.6 million at December 31, 2000,
compared to $320.4 million at December 31, 1999. The securities portfolio,
including held to maturity and available for sale, decreased $3.5 million, or
4.7%, to $70.8 million at December 31, 2000, compared to $74.3 million at
December 31, 1999. The decline in period-end financial assets was a result of
the loan and deposit sales to enhance our liquidity and capital levels. On
average for the year ended December 31, 2000, total assets were $411.6 million,
a $50.5 million increase over the prior year $361.1 million average balance. The
increase in average assets was due to the growth in average loans primarily
attributed to loan originations and loan purchases from the prior year. At
December 31, 2000, we had $31.5 million of Federal Funds sold. There were no
Federal Funds sold for the prior year-end period.
Period-end deposits declined $37.2 million, or 10.4%, to $320.3 million at
December 31, 2000. On average, deposits grew $52.4 million to $314.8 million in
2000, as a result of the 1999 branch expansion and core deposit generation. In
December 2000, $48.0 million of deposits were sold in conjunction with the
branch sales. In addition, in 2000, we reduced higher costing government
deposits by $36.8 million. We do not have any brokered deposits. Total
borrowings declined $43.0 million, from $53.0 million at year-end 1999, to $10.0
million at December 31, 2000. The decline in borrowings reflects our improved
liquidity position, resulting from deposit generation and the reduction in the
loan and investment portfolios.
At December 31, 2000, total shareholders' equity declined $0.5 million to
$21.3 million. Total equity to total assets as of December 31, 2000 and 1999 was
5.99% and 4.96%, respectively. To bolster our capital ratios, in the first
quarter of 2000, we consummated a private placement of approximately $4.9
million (net of $0.3 million of offering expenses) of cumulative preferred
stock. The preferred stock bears a 10% dividend rate. Under regulatory
agreement, we are prohibited from declaring or paying dividends on our preferred
or common stock. As of December 31, 2000, we had accumulated unpaid preferred
dividends of $388 thousand. The increase in our capital from the preferred stock
offering was offset by operational losses incurred in 2000.
LOAN PORTFOLIO
Commercial and industrial loans are made for the purpose of providing
working capital, financing the purchase of equipment or inventory and for other
business purposes. Real estate loans consist of loans secured by commercial or
residential property and loans for the construction of commercial or residential
property. Consumer loans are made for the purpose of financing the purchase of
consumer goods, home improvements, and other personal needs, and are generally
secured by the personal property being purchased. We originate loans under SBA
programs that provide for SBA guarantees of between 75% and 85% of the
principal. The guaranteed portion of the SBA loan is generally sold in the
secondary market with the non-guaranteed portion held in the portfolio. The
loans are primarily to businesses located in New Jersey and its neighboring
states. We have not made loans to borrowers outside of the United States.
Commercial lending activities are focused primarily on lending to small business
borrowers in our marketplace.
Average loans increased $40.5 million, or 17.0%, from $237.8 million in
1999 to $278.3 million in 2000. The increase in average loans is due primarily
to the growth in the loan portfolio which occurred late in 1999. Period-end
loans actually declined $96.4 million, or 30.0%, to $225.1 million at December
31, 2000 compared to $321.5 at December 31, 1999. The decline in the loan
portfolio reflects the first quarter loan sale of $36.4 million of adjustable
rate mortgages and the third quarter loan sale of $44.8 million home equity
loans. As a result of the loan sales and mortgage originations being sold in the
secondary market, residential mortgage loans declined $87.6 million, or 49.2%,
to $90.6 million as of December 31, 2000, from $178.1 million the prior year
end. Residential mortgages are no longer being originated for the portfolio. We
have established a relationship with First Hallmark Mortgage, and in 2001 will
be paid commissions for referred mortgage loan applications. We expect to
continue to grow the higher yielding commercial and SBA loan portfolios.
30
The following table sets forth the classification of loans by major
category for the past five years at December 31:
--------------------------------------------------------------------------------------------------------
Loans by Type 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
% of % of % of % of % of
(In thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
------------------------------------------------------------------------------------------------------------------------------------
Commercial & industrial $ 61,427 27.2 $ 43,523 13.5 $ 41,546 24.9 $ 20,368 15.2 $ 18,002 18.4
Real Estate
Non-residential
properties 48,770 21.6 52,359 16.2 59,884 35.9 66,526 49.6 41,674 42.6
Residential
properties 91,371 40.4 178,963 55.5 26,642 16.0 28,891 21.5 23,044 23.6
Construction 5,784 2.5 17,837 5.5 16,237 9.7 13,014 9.7 10,223 10.4
Consumer 18,788 8.3 29,850 9.3 22,483 13.5 5,419 4.0 4,924 5.0
--------------------------------------------------------------------------------------------------------
Total Loans $ 226,140 100.0% $ 322,532 100.0% $ 166,792 100.0% $ 134,218 100.0% $ 97,867 100.0%
====================================================================================================================================
As the above table depicts, the composition of the loan portfolio has
changed significantly in 2000. As of December 31, 2000, 51.3% of the loan
portfolio is now housed in commercial loans compared to 35.3% at the prior year
end. Total commercial loans, including C&I loan, commercial mortgages, and
construction loans were $116.0 million, an increase from the prior year total of
$113.7 million. The increase in commercial loans was primarily in the SBA
portfolio, which increased $13.3 million, or 79.1%, to $30.2 million from the
prior year $16.9 million. Construction loans declined to $5.8 million from $17.8
million the prior year end. The decline in construction loans was attributed to
the completion of several projects outstanding at year-end 1999. Residential
real estate loans declined $87.6 million as a result of the $81.2 million of
loan sales. Approximately $36.5 million of the residential mortgage portfolio,
with a borrowing value of $27.6 million, is available to collateralize borrowing
from the FHLB of New York. Consumer loans declined $11.1 million to $18.7
million from the prior year primarily as a result of payoffs on indirect auto
loans, which declined $8.2 million, to $14.2 million at December 31, 2000.
There are no concentrations of loans to any borrowers or group of borrowers
exceeding 10% of the total loan portfolio. There are no foreign loans in the
portfolio. As a preferred SBA lender, we do make SBA loans outside of our
marketplace. A portion of the SBA loan portfolio is not located in New Jersey.
The following table shows the maturity distribution of the loan portfolio
and the allocation of floating and fixed interest rates at December 31, 2000.
LOAN MATURITIES AND FLOATING/FIXED INTEREST RATES
--------------------------------------------------------------------
(In thousands) WITHIN 1 YEAR 1 - 5 YEARS AFTER 5 YEARS TOTAL
----------------------------------------------------------------------------------------------------------------
Commercial $ 40,274 $ 13,625 $ 7,528 $ 61,427
Commercial mortgages 20,563 17,057 10,700 48,770
Construction loans 5,740 44 -- 5,784
Residential mortgages 10,501 7,218 73,652 91,371
Consumer loans 2,175 16,472 141 18,788
--------------------------------------------------------------------
Total $ 79,253 $ 54,866 $ 92,021 $ 226,140
====================================================================
Amount of loans based upon:
Fixed interest rates $ 78,118
Floating or adjustable interest rates $ 148,022
-------------
Total $ 226,140
---------------------------------------------------------------------------------------------------=============
ASSET QUALITY
Inherent in the lending function is the possibility a customer may not
perform in accordance with the contractual terms of the loan. A borrower's
inability to repay its obligation can create the risk of nonaccrual loans, past
due loans, and potential problem loans, which can have a material impact on our
results of operations.
Non-performing loans are loans that are not accruing interest (non-accrual
loans) as a result of principal or interest being in default for a period of 90
days or more or when the collectibility of principal and interest according to
the contractual terms is in doubt, and loans past due 90 days or greater, still
accruing interest. Management has evaluated the loans past due 90 days or
greater and still accruing interest and determined that they are both well
collateralized and in the process of collection. When a loan is classified as
nonaccrual, interest accruals discontinue and all past due interest previously
recognized as income is reversed and charged against current period income.
Generally, until the loan becomes current, any payments received from the
borrower are applied to outstanding principal until such time as management
determines that the financial condition of the borrower and other factors merit
recognition of a portion of such payments as interest income.
31
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. In addition, an outside firm has been used to conduct independent
credit reviews.
The following table sets forth information concerning non-performing loans
and non-performing assets at December 31 for the past five years:
------------------------------------------------
(In thousands) 2000 1999 1998 1997 1996
------------------------------------------------
NON-ACCRUAL BY CATEGORY
Commercial $ 2,064 $ 692 $ -- $ -- $ 27
Real Estate 807 720 2,297 861 639
Consumer 32 -- -- 82 3
------------------------------------------------------------------------------------------------------
Total $ 2,903 $ 1,412 $ 2,297 $ 943 $ 669
======================================================================================================
PAST DUE 90 OR MORE AND STILL ACCRUING INTEREST
Commercial $ 578 $ 0 $ 803 $ 346 $ 77
Real Estate 694 159 790 206 156
Consumer -- 7 7 -- 28
------------------------------------------------------------------------------------------------------
Total $ 1,272 $ 166 $ 1,600 $ 552 $ 261
======================================================================================================
------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS $ 4,175 $ 1,578 $ 3,897 $ 1,495 $ 930
======================================================================================================
OREO 142 1,505 -- -- --
Other asset - (1) -- -- 1,131 -- --
------------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING ASSETS $ 4,317 $ 3,083 $ 5,028 $ 1,495 $ 930
======================================================================================================
Non-performing loans to total loans 1.85% 0.49% 2.34% 1.11% 0.95%
Non-performing assets to total assets 1.21% 0.70% 1.97% 0.70% 0.54%
Allowance for loans losses as a
percentage of non-performing loans 61.27% 137.71% 46.83% 88.43% 95.27%
======================================================================================================
(1) Reflects the value of an impaired asset associated with an unauthorized
overdraft
Nonaccrual loans increased $1.5 million from $1.4 million at year-end 1999,
to $2.9 million at December 31, 2000. The increase in nonaccrual loans is due
primarily to increased levels of non-performing commercial accounts. Loans past
due 90 days or more and still accruing increased $1.1 million from December 31,
1999 to $1.3 million primarily as a result of loans which have matured pending
renewal. These loans do not represent a material risk of default to us. Other
real estate owned (OREO) properties declined by $1.4 million in 2000, from $1.5
million at year-end 1999, as a result of sales. OREO are carried at the lower of
cost or market, less estimated selling costs. Total non-performing assets
increased $1.2 million, to $4.3 million at year-end 2000, from $3.1 million the
prior year.
Potential problem loans are those where information about possible credit
problems of borrowers causes management to have doubts as to the ability of such
borrowers to comply with loan repayment terms. These loans are not included in
non-performing loans as they continue to perform. Potential problem loans, which
consist primarily of commercial loans, were $0.3 million and $0.4 million at
December 31, 2000 and 1999, respectively.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level sufficient to absorb
estimated credit losses in the financial statements as of the balance sheet
date. Management utilizes a standardized methodology to assess the adequacy of
the allowance for loan losses. This process consists of the identification of
specific reserves for identified problem loans based on loan grades and the
calculation of general reserves based on minimum reserve levels by loan type.
Risks within the loan portfolio are analyzed on a continuous basis by
management, and periodically by an independent credit review function and by the
audit committee. A risk system, consisting of multiple grading categories, is
utilized as an analytical tool to assess risk and to quantify the appropriate
level of loss reserves. Along with the risk system, management further evaluates
risk characteristics of the loan portfolio under current economic conditions and
considers such factors as the financial condition of the borrowers, past and
expected loan loss experience, and other factors management feels deserve
recognition in establishing an adequate reserve. This risk assessment process
which includes the determination of the adequacy of the allowance for loan
losses, is performed at least quarterly, and, as adjustments become necessary,
they are realized in the periods in which they become known.
32
Additions to the allowance are made by provisions charged to expense and
the allowance is reduced by net charge-offs (i.e., loans judged to be not
collectable are charged against the reserve, less any recoveries on such loans).
Although management attempts to maintain the allowance at a level deemed
adequate to provide for potential losses, future additions to the allowance may
be necessary based upon certain factors including obtaining updated financial
information about the borrower's financial condition and changes in market
conditions. In addition, various regulatory agencies periodically review the
adequacy of the allowance for loan losses. These agencies have in the past and
may in the future require the Bank to make additional adjustments based on their
judgments about information available to them at the time of their examination.
The allowance for loan losses totaled $2.6 million as of December 31, 2000,
compared to $2.2 million the prior year end. The increase in the allowance for
the current year is due the current provision for loan losses or $0.7 million
exceeding $0.3 million of net charge-offs. Although the loan portfolio declined
in 2000, the allowance for loan losses was increased due to a shift in the
portfolio from loans secured by residential properties to commercial loans and
an increase in non-performing loans. Commercial loans generally have a higher
risk of loss than a loan secured by residential real estate.
The following is a reconciliation summary of the allowance for loan losses
for the past five years:
------------------------------------------------------
(In thousands) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------
Balance at beginning of year $ 2,173 $ 1,825 $ 1,322 $ 886 $ 562
Charge-offs:
Commercial and industrial 278 432 60 10 44
Real estate 19 871 254 55 --
Consumer 75 130 15 3 49
------------------------------------------------------
Total Charge-offs 372 1,433 329 68 93
Recoveries:
Commercial and industrial 12 16 -- -- --
Real estate 17 2 23 6 --
Consumer 12 20 5 -- --
------------------------------------------------------
Total recoveries 41 38 28 6 --
------------------------------------------------------
Total net charge-offs $ 331 $ 1,395 $ 301 $ 62 $ 93
------------------------------------------------------
Provision charged to expense $ 716 $ 1,743 $ 804 $ 498 $ 417
------------------------------------------------------
Balance at end of year $ 2,558 $ 2,173 $ 1,825 $ 1,322 $ 886
======================================================
Net charge-offs to average loans 0.12% 0.59% 0.21% 0.05% 0.12%
Allowance to total loans (1) 1.17% 0.77% 1.12% 1.01% 0.93%
----------------------------------------------------------------------------------------------------
(1) Total loans exclude loans held for sale.
The ratio of allowance to total loans, excluding loans held for sale,
increased to 1.17% in 2000 from .77% in 1999, due to the decline in the loan
portfolio and the shift in the portfolio mix. At December 31, 1999, the
residential mortgage portfolio was $178.1 million as compared to $90.6 million
at December 31, 2000. Residential mortgage loans have a general reserve rate of
.25%. As of December 31, 2000, the commercial and industrial portfolio increased
$17.9 million, to $61.3 million. Commercial and industrial loans have general
reserve rates of 1.00% to 1.25% depending on the product. As a result of the
shift in the portfolio from being predominately retail in 1999 to commercial in
2000, the decrease in loans, and the increase in non-performing loans, the level
of the allowance to total loans increased. In addition, in 1999 the Company
carried a portfolio of purchased loans valued at the amount of undiscounted
estimated future cash collections and therefore had no allocated allowance. This
portfolio was sold in 2000.
The following table sets forth, for each of the major lending areas, the
amount of the allowance for loan losses allocated to each category and the
percentage of total loans represented by such category, as of December 31, of
each year. The allocated allowance is the total of identified specific and
general reserves by loan. The allocation is made for analytical purposes and is
not necessarily indicative of the categories in which future losses may occur.
The total allowance is available to absorb losses from any segment of the
portfolio.
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
(In thousands) % of % of % of % of % of
Amount All Loans Amount All Loans Amount All Loans Amount All Loans Amount All Loans
------------------------------------------------------------------------------------------------------------------------------------
Balance Applicable to:
Commercial & Industrial $ 1,332 27.2% $ 738 13.5% $ 741 24.9% $ 267 15.2% $ 152 18.4%
Real Estate:
Non-residential
properties 641 21.6% 404 16.2% 663 35.9% 555 49.6% 336 42.6%
Residential properties 298 40.4% 461 55.5% 96 16.0% 340 21.5% 247 23.6%
Construction 98 2.5% 316 5.5% 160 9.7% 107 9.7% 82 10.4%
Consumer 189 8.3% 254 9.3% 165 13.5% 53 4.0% 69 5.0%
-------------------------------------------------------------------------------------------------------
Total $ 2,558 100.0% $ 2,173 100.0% $ 1,825 100.0% $ 1,322 100.0% $ 886 100.0%
------------------------------------------------------------------------------------------------------------------------------------
33
INVESTMENT SECURITY PORTFOLIO
Securities available for sale are investments carried at fair value that
may be sold in response to changing market and interest rate conditions or for
other business purposes. Securities held to maturity, which are carried at
amortized cost, are investments for which there is the positive intent and
ability to hold to maturity. The investment security portfolio is maintained for
asset-liability management purposes, an additional source of liquidity, and as
an additional source of earnings. The portfolio is comprised of U.S. Treasury
securities, obligations of U.S. Government and government sponsored agencies
mortgage-backed securities, corporate debt securities and equity securities.
Management determines the appropriate security classification of available for
sale or held to maturity at the time of purchase.
Average investments increased $6.9 million in 2000, to average $72.4
million. At December 31, 2000, the investment security portfolio totaled $70.8
million, comprised of $37.8 million in securities available for sale and $33.0
million in securities held to maturity. The total investment portfolio declined
$3.5 million, or 4.7%, from the prior year balance of $74.3 million. The decline
in investment securities primarily represents payments and maturities of
investments, reinvested in other financial assets.
The tax-equivalent yield on the investment portfolios for 2000 was 6.53%,
as compared to 6.11% for the prior year. The increase in the yield was a result
of paydown and maturities of lower yielding securities and the repricing of
floating rate investments in a rising rate environment. Approximately 85% of the
investment portfolio has a fixed rate of interest.
Net gains on sales of securities for 2000 were $3.0 thousand, as compared
to $193.0 thousand for the year ended December 31, 1999. As of year-end 2000 and
1999, the total net unrealized loss on the investment portfolios was $1.3
million and $3.3 million, respectively. The improvement in the market value of
the portfolio was primarily due to the declining interest rate environment at
the end of 2000.
In the normal course of business, the company accepts government deposits,
for which investment securities are required to be held as collateral. As of
December 31, 2000, $20.1 million of securities were required to be pledged for
these deposits.
DEPOSITS
Deposits, which include non-interest bearing demand deposits and
interest-bearing savings and time deposits, are the primary source of our funds.
For the year, we realized continued growth in average deposits. This growth was
achieved through the expansion of the branch network, emphasis on customer
service, competitive rate structures and selective marketing. We attempt to
establish a comprehensive relationship with business borrowers, seeking deposits
as well as lending relationships.
The following are average deposits for each of the last three years.
------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------
(In Thousands) Amount % Amount % Amount %
----------------------------------------------------------------------------------------------
High-yield and NOW deposits $ 95,817 25.6% $ 87,884 28.1% $ 36,162 17.5%
Savings deposits 35,491 9.5% 17,260 5.5% 13,811 6.6%
Money market deposits 20,724 5.5% 18,053 5.8% 18,557 9.0%
Time deposits 162,736 43.4% 139,187 44.4% 96,969 46.9%
Demand deposits 59,885 16.0% 50,663 16.2% 41,250 20.0%
------------------------------------------------------------
Total deposits $ 374,653 100.0% $ 313,047 100.0% $ 206,749 100.0%
============================================================
On average, total deposits grew 19.7%, or $61.6 million, for 2000, to
average $374.7 million. The increase in average deposits was primarily the
result of deposit generation related to the new branch openings in 1999,
partially offset by a reduction in higher-costing municipal deposits. As a
result of the $48.0 million of deposit sales and the $36.8 million planned
reduction of municipal deposits, period end deposits declined 10.4%, or $37.2
million, from the prior year end to $320.3 million at December 31, 2000.
The following are period-end deposit balances for each of the last three
years.
------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------
(In Thousands) Amount % Amount % Amount %
---------------------------------------------------------------------------------------------
High-yield and NOW deposits $ 100,121 31.3% $ 104,343 29.2% $ 40,585 17.9%
Savings deposits 23,223 7.2% 18,448 5.2% 15,098 6.7%
Money market deposits 13,552 4.2% 19,462 5.4% 19,222 8.4%
Time deposits 130,314 40.7% 150,206 42.0% 101,835 44.9%
Demand deposits 53,108 16.6% 65,079 18.2% 50,120 22.1%
------------------------------------------------------------
Total deposits $ 320,318 100.0% $ 357,538 100.0% $ 226,860 100.0%
============================================================
34
Non-interest bearing demand deposits represented 16.6% of total deposits at
December 31, 2000, down from 18.2% in 1999. The decline in non-interest bearing
deposits can be attributed to the migration of customer balances to
interest-bearing accounts. The average cost of interest bearing deposits in 2000
was 4.95% compared to 4.38% for 1999. The increase in the cost of deposits can
be attributed to the increase in interest rates and higher costing promotional
deposit rates that were offered in late 1999 and early 2000. The increase in the
cost of deposits was the primary cause of the decline in our net interest margin
in 2000.
BORROWED FUNDS
Borrowed funds consist of advances from the Federal Home Loan Bank of New
York. These borrowings are used as a source of liquidity or to fund asset growth
not supported by deposit generation. Residential mortgages collateralize the
borrowings from the FHLB. As of December 31, 2000, total borrowings were $10.0
million, a decline of $43.0 million from the prior year end. The decline in
borrowings was a result of increased liquidity generated from loan sales and
deposit generation. At December 31, 2000, we had $17.6 million of additional
availability at the FHLB. The $10.0 million FHLB borrowing at December 31, 2000
is a ten-year borrowing at a cost of 4.92% and is callable after November 2001.
ASSET/LIABILITY MANAGEMENT
Based on our business, the two largest risk we face are credit risk and
market risk. Market risk is primarily limited to interest rate risk, which is
the impact that changes in interest rates would have on future earnings. This
risk is managed by the Asset/Liability Committee (ALCO). The principal
objectives of the ALCO are to establish prudent risk management guidelines,
evaluate and control the level of interest rate risk in balance sheet accounts,
determine the level of appropriate risk given the business focus, operating
environment, capital, and liquidity requirements, and actively manage risk with
the Board approved guidelines. The ALCO reviews the maturities and repricing of
loans, investments, deposits and borrowings, cash flow needs, current market
conditions, and interest rate levels.
We use various techniques to evaluate risk levels on both a short and
long-term basis. One of the monitoring tools is the "gap" ratio. A gap ratio, as
a percentage of assets, is calculated to determine the maturity and repricing
mismatch between interest rate-sensitive assets and interest rate-sensitive
liabilities. A gap is considered positive when the amount of interest
rate-sensitive assets repricing exceeds the amount of interest rate-sensitive
liabilities repricing in a designated time period. A positive gap should result
in higher net interest income with rising interest rates, as the amount of the
assets repricing exceed the amount of liabilities repricing. Conversely, a gap
is considered negative when the amount of interest rate-sensitive liabilities
exceeds interest-rate-sensitive assets, and lower rates should result in higher
net interest income.
The following table sets forth the gap ratio at December 31, 2000.
Assumptions regarding the repricing characteristics of certain assets and
liabilities are critical in determining the projected level of rate sensitivity.
Certain savings and interest checking accounts are less sensitive to market
interest rate changes than other interest bearing sources of funds. Core
deposits, such as demand interest, savings, and money market deposits, are
allocated based on their expected repricing in relation to changes in market
interest rates.
----------------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
SIX MONTHS ONE YEAR TWO YEARS FIVE YEARS TEN YEARS
UNDER SIX THROUGH THROUGH THROUGH THROUGH TEN AND NOT
(In thousands) MONTHS ONE YEAR TWO YEARS FIVE YEARS YEARS REPRICING TOTAL
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash & due from banks $ 0 $ 0 $ 0 $ 0 $ 0 $ 13,740 $ 13,740
Fed Funds sold 31,500 0 0 0 0 0 31,500
Investment Securities 16,197 3,710 14,103 20,802 9,026 6,999 70,837
Loans 81,972 10,841 16,515 107,829 4,908 4,075 226,140
Other assets 0 0 0 0 0 13,786 13,789
----------------------------------------------------------------------------------------------
Total Assets $129,669.00 $ 14,551.00 $ 30,618.00 $128,631.00 $13,934.00 $38,600.00 $356,006.00
356,003
==============================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY
Non interest demand $ 0 $ 0 $ 0 $ 0 $ 0 $ 53,108 $ 53,108
Savings and checking 94,550 0 5,201 30,006 7,139 0 136,896
Time deposits 68,285 41,327 6,616 13,824 262 0 130,314
Other debt 0 0 0 10,000 0 0 10,000
Other liabilities 0 0 0 0 0 4,371 4,371
Shareholders' equity 0 0 0 0 0 21,314 21,314
----------------------------------------------------------------------------------------------
Liabilities and shareholders' $162,835.00 $ 41,327.00 $ 11,817.00 $ 53,830.00 $ 7,401.00 $ 78,793 $356,003.00
equity 162,835
==============================================================================================
GAP $ (33,166) $ (26,776) $ 18,801 $ 74,801 $ 6,533 $ (40,193) --
CUMULATIVE GAP $ (33,166) $ (59,942) $ (41,141) $ 33,660 $ 40,193 --
Cumulative Gap to total assets -9.3% -16.8% -11.6% 9.5% 11.3% 0.0% 0.0%
----------------------------------------------------------------------------------------------
35
Repricing of mortgage-related investments are shown by contractual
amortization and estimated prepayments based on the most recent 3-month constant
prepayment rate. Callable agency securities are shown based upon their
option-adjusted spread modified duration date ("OAS"), rather than the next call
date or maturity date. The OAS date considers the coupon on the security, the
time to next call date, the maturity date, market volatility, and current rate
levels. Fixed rate loans are allocated based on expected amortization.
At December 31, 2000, there was a six-month liability-sensitive gap of
$33.2 million and a one-year liability gap of $59.9 million, as compared to
$157.9 million and $168.3 million for the prior year, respectively. The
improvement in the liability gap is primarily a result of the reduction in
borrowed funds and the increase in Federal funds sold.
Other models are also used in conjunction with the static gap table, which
is not able to capture the risk to changing spread relationships over time, the
effects of projected growth in the balance sheet, or dynamic decisions such as
the modification of investment maturities as a rate environment unfolds. For
these reasons, a simulation model is used, where numerous interest rate
scenarios and balance sheets are combined to produce a range of potential income
results. Net interest income is managed within guideline ranges for interest
rates rising or falling by 300 basis points. Results outside of guidelines
require action by the ALCO to correct the imbalance. Simulations are typically
created over a 12=24 month time horizon. At December 31, 2000 these simulations
show that with a 300 basis point immediate increase in interest rates, net
interest income would increase by approximately $.4 million, or 3.3%. An
immediate decline of 300 basis points in interest rates would decrease net
interest income by approximately $.3 million or 2.9%. These variances in net
interest income are within the board-approved guidelines of +/= 7%.
Finally, to measure the impact of longer-term asset and liability
mismatches beyond two years, we utilize Modified Duration of Equity and Economic
Value of Portfolio Equity ("EVPE") models. The modified duration of equity
measures the potential price risk of equity to changes in interest rates. A
longer modified duration of equity indicates a greater degree of risk to rising
interest rates. Because of balance sheet optionality, an EVPE analysis is also
used to dynamically model the present value of asset and liability cash flows,
with rate shocks of 200 basis points. The economic value of equity is likely to
be different as interest rates change. Like the simulation model, results
falling outside prescribed ranges require action by the ALCO. Our variance in
the economic value of equity, as a percentage of assets with rate shocks of 200
basis points, is a decline of 1.5% in a rising rate environment and a decline of
0.08% in a falling rate environment. The decline in the EVPE is within
board-approved guidelines of +/= 3.00%.
OPERATING, INVESTING, AND FINANCING
Cash and cash equivalents increased $30.1 million to $45.2 million at
December 31, 2000 from $15.1 million at December 31, 1999. Net cash used in
operating activities decreased $3.8 million, totaling $2.7 million at December
31, 2000 compared to a $6.5 million in 1999. This was primarily due to the $5.9
million loss reduced by the intangible write-off of $3.2 million and a $3.5
million gain on sale of deposits. Net cash provided by investing activities
increased $297.4 million to $104.7 million in 2000, compared to cash used by
investing activities in 1999 of $192.7 million. This was primarily from loan
sales and fewer loan originations in 2000. Net cash used in financing activities
increased $253.7 million to $71.8 million for 2000, compared to $181.8 million
provided in 1999. This change was attributable to the deposit sale in 2000, the
reduction of borrowed funds and the increase in deposits in 1999.
LIQUIDITY
Our liquidity is a measure of our ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner.
BANK HOLDING COMPANY
The principal sources of funds for our holding company are dividends paid
by the bank. Under regulatory agreement, the Bank is currently restricted from
paying dividends to us because its tier 1 capital to average assets ratio is
less than six percent. We are also under agreement with its regulators not to
pay dividends on our preferred or common stock. Excluding the payment of
dividends to shareholders, we only pay expenses that are specifically for the
benefit of us, rather than the bank. Other than our investment in the bank, we
do not actively engage in other transactions or business. As a result the annual
expenses are not material. At December 31, 2000 we had $0.7 million in cash and
$.4 million in marketable securities, valued at fair market value.
36
CONSOLIDATED BANK
Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, sales and maturities of investment securities and funds
provided by operations. While scheduled loan payments and maturing investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
Total deposits and borrowings amounted to $330.3 million, as of December
31, 2000. We have augmented our liquidity with $10.0 million in borrowings from
the FHLB of New York. At December 31, 2000, $17.6 million was available for
additional borrowings from the FHLB of New York. Pledging additional collateral
in the form of 1=4 family residential mortgages or investment securities can
increase the line with the FHLB. An additional source of liquidity is Federal
Funds sold, which were $31.5 million at December 31, 2000 and loans held for
sale.
As of December 31, 2000 deposits included $31.7 million of Government
deposits, as compared to $68.5 million the prior year end. These deposits, are
generally short in duration, and are very sensitive to price competition. We
have significantly reduced our reliance on these deposits as a source of funds,
and believes the current portfolio of these deposits to be appropriate. Included
in the portfolio are $25.9 million of deposits from two municipalities. The
withdrawal of these deposits, in whole or in part, would not create a liquidity
shortfall. At December 31, 2000, the Bank had approximately $42.0 million of
loan commitments, which will either expire or be funded, generally within one
year.
Management believes our liquidity profile was significantly enhanced in
2000. This area will be actively monitored in 2001.
CAPITAL
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines
which require a bank to maintain certain capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, regulators require that a bank
which meets the regulator's highest performance and operation standards maintain
a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of
4%. For those banks with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be
proportionately increased. Minimum leverage ratios for each bank are evaluated
through the ongoing regulatory examination process. In connection with the
branch expansion the New Jersey Department of Banking and Insurance imposed a
tier 1 leverage ratio of 6% for the Bank. Due to losses incurred during 1999, we
failed to meet the total risk-based capital requirement of 8% at both September
30, 1999 and December 31, 1999. Because the Bank failed to satisfy the minimum
capital requirements, it was deemed to be "undercapitalized" under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Act and the
regulations of the FDIC.
The following table summarizes our risk-based and leverage capital ratios
at December 31, 2000 and 1999, as well as the required minimum regulatory
capital ratios:
-----------------------------------------------
ADEQUATELY WELL
CAPITALIZED CAPITALIZED
COMPANY 2000 1999 REQUIREMENTS PROVISIONS
----------------------------------------------------------------------------------------
Leverage ratio 5.50% 4.35% 4.00% 5.00%
Tier 1 risk-based capital ratio 9.61% 6.17% 4.00% 6.00%
Total risk-based capital ratio 10.76% 6.88% 8.00% 10.00%
----------------------------------------------------------------------------------------
The following table summarizes the Bank's risk based and leveraged capital
ratios at December 31, 2000 and 1999, as well as the required minimum regulatory
capital ratios.
-----------------------------------------------
ADEQUATELY WELL
CAPITALIZED CAPITALIZED
BANK 2000 1999 REQUIREMENTS PROVISIONS
----------------------------------------------------------------------------------------
Leverage ratio (1) 5.24% 4.01% 4.00% 5.00%
Tier 1 risk-based capital ratio 9.12% 5.62% 4.00% 6.00%
Total risk-based capital ratio 10.26% 6.33% 8.00% 10.00%
----------------------------------------------------------------------------------------
(1) The New Jersey Department of Banking and Insurance has imposed a ratio of
6%.
37
At December 31, 2000, shareholders' equity was $21.3 million, a $0.5
million decline from the prior year end. The reduction in shareholders' equity
was a result of the $5.9 million operating loss, somewhat offset by the $4.9
million of proceeds from the preferred stock offering and $0.5 million of
unrealized gains on securities available for sale. At December 31, 2000, there
were $388 thousand of preferred stock dividends in arrears that have not been
declared.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED
DECEMBER 31, 1998
For the year ended 1999, we incurred a loss of $3.4 million, or $0.91 loss
per basic and diluted share, compared to net income of $2.1 million, or $0.67
earnings per basic share and $0.64 earnings per share diluted for 1998. The loss
largely reflects the growth in non-interest expense due to the opening of nine
new branches, a realized valuation loss as a result of reclassifying certain
loans from held-to-maturity to held-for-sale, the write-down of an impaired
asset and legal costs associated with an unauthorized overdraft that was
detected in the fourth quarter of 1998, the costs associated with the collection
of non-performing loans, the costs of maintaining expanding loan portfolios,
along with an increase in the provision for loan losses.
The changes in the components of net income included a $0.6 million
increase in net interest income before provision for loan losses, a $0.9 million
increase in the provision for loan losses, a $1.2 million increase in
non-interest income, a $10.1 million increase in non-interest expense, and a
$3.7 million decrease in the provision for income taxes.
NET INTEREST INCOME
Net interest income increased $0.6 million, or 6.2% to $10.9 million for
1999 from $10.3 million for 1998. The growth in interest income was primarily
attributable to an increase of $105.2 million (49.9%) in average earning assets
for 1999 totaling $315.9 million over the prior year's $210.7 million. The
increases in average earning assets occurred across the entire balance sheet,
with most increases in the loan portfolio. Average loans equaled $237.8 million
in 1999, which represented an increase of $93.9 million (65.3%) from the $143.9
million recorded in 1998. Growth in the loan portfolio was primarily comprised
of $101.9 million of residential adjustable rate mortgages (ARM) and $56.0
million of purchased home equity loans. The 1999 yield on average earning assets
decreased to 7.52% for 1999 from 8.32% for 1998, partially offsetting the volume
related gains in interest income, as a result of the increased mortgages in the
portfolio.
Increases in interest-earning assets were primarily funded through an
increase of $126.2 million (61.0%) in average deposits and borrowings to $333.2
million for 1999 from $207.0 million for 1998. Average deposits increased $106.3
million to $313.0 million for 1999 from $206.7 million in 1998. Average
borrowings increased $19.8 million to $20.2 million for 1999 from $0.3 million
in 1998.
During 1999, the cost of interest bearing liabilities increased to 4.51%
for 1999 from 4.32% for 1998. The increase in interest-bearing liabilities and
the cost of funds reflects our decision to offer higher, promotional rates of
interest to attract new customers to the new branch locations, as well as a
shift in the deposit structure toward time deposits and the money market
product. The promotional rates of interest were offered both on time deposits
and through the money market product, which paid an introductory rate of 6.05%.
Although this product was discontinued at September 30, 1999, the product was
again offered in December 1999 in order to ease liquidity and provide funding
for committed loans. As a result of these higher costing deposits, net interest
margin declined to 3.49% during 1999 from 4.91% in 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $1.7 million for 1999, a 116.8%
increase over the prior year's provision of $0.8 million. The increase in the
provision is primarily attributable to the growth in the loan portfolio of
$155.9 million (93.0%) and the 1999 net charge-offs of $1.4 million, primarily
related to one borrower. In addition, the change is attributable to an increase
in the reserve factors used to determine reserve levels on certain types of
loans. During 1999, the ratio of non-performing loans to total loans decreased
to 0.49% at December 31, 1999 from 2.34% at December 31, 1998.
38
NON-INTEREST INCOME
Non-interest income increased $1.2 million, or 27.2%, to $5.6 million for
1999 from $4.4 million for 1998. This increase is a result of a $0.7 million
increase in loan sale gains and a $0.7 million increase in other income. The
$0.7 million increase in loan sale gain is primarily from an increase in
mortgage loan sales of $2.4 million, less a held for sale valuation loss of $1.4
million and a decrease in SBA loan sale gains of $0.3 million.
Mortgage loan sale gains increased $2.4 million, totaling $3.0 million for
1999 compared to $0.6 million for 1998. The mortgage loan sale gains are the
result of loans simultaneously funded by purchasing investors at the time of
closing by the Bank's mortgage subsidiary, CMA.
The gain on sale of SBA loans reflects the participation in the SBA's
guaranteed loan program. SBA sales without recourse totaled $24.3 million in
1999. In 1998, SBA sales without recourse totaled $20.6 million. Commercial loan
sale gains were $70 thousand in 1999, based on $3.0 million loans sold without
recourse. There were no such sales in 1998.
At December 31, 1999, $37.8 million of ARM loans were reclassified from
held-to-maturity to held-for-sale. Based on December 31, 1999 market values,
this resulted in an after tax realized valuation loss of $891 thousand. These
adjustable rate one-to-four family mortgages (ARM's) were sold on March 7, 2000,
resulting in an additional after tax loss of $439 thousand in 2000.
In addition to the loans sales, other income, representing SBA servicing
fees, loan fees, income on cash surrender value of life insurance, non-deposit
account transaction charges, and other fee income increased $0.7 million (83.5%)
to $1.6 million for 1999 compared to $0.9 million for 1998. The primary
increases were loan fees of $323 thousand (459.5%) primarily associated with the
mortgage originations, income on cash surrender value of insurance of $248
thousand, and non-deposit account transaction charges of $112 thousand primarily
as a result of automated teller machine charges to non-customers of the Bank.
Deposit service charges decreased from 1998's $901 thousand to 1999's $778
thousand, a 13.74% decrease. The decrease in deposit service charges was
primarily the result of customers maintaining appropriate balances.
NON-INTEREST EXPENSE
Other non-interest expense increased $10.1 million, or 96.0%, to $20.6
million for 1999 from $10.5 million for 1998. Salaries and benefits increased
$4.0 million to $8.7 million from $4.7 million, occupancy expenses increased
$1.4 million to $2.4 million from $1.0 million, and other operating expenses
increased $4.7 million to $9.4 million to $4.7 million for 1999 compared to
1998. These increases were substantially attributable to the growth in the
branch network, as ten additional branches were opened, the acquisition of CMA
during February 1999, the $786 thousand write-down and $ 150 thousand legal
costs associated with a check-kiting scheme that occurred in the fourth quarter
of 1998, the costs associated with the collection of non-performing loans and
the costs of administering the expanding loan portfolios. In addition, salary
expense increased because of the need to hire additional administrative staff.
The prior period does not reflect any operating expenses associated with CMA.
Total non-interest expense associated with CMA for 1999 was $4.8 million.
The increases in professional services, office expense, communication
expense, bank services and FDIC insurance is the result of the addition of ten
new branches, growth in assets, and CMA expenses. Goodwill amortization expenses
relating to the acquisition of CMA totaled $380.8 thousand during the 1999
period. As a result of 1999's loss, a tax benefit of $2.4 million was recorded,
compared to a provision of $1.3 million in the prior year.
MANAGEMENT
In accordance with our Certificate of Incorporation and Bylaws, the Board
of Directors has fixed the number of directors constituting the Board at five.
The following tables set forth for each of our directors their names, their
ages, a brief description of their recent business experience, including present
occupations and employment, certain directorships held by each, the year in
which each became a director and the year in which their terms as director
expire.
39
----------------------------------------------------------------------------------------------
NAME, AGE AND POSITION WITH PRINCIPAL OCCUPATION DURING PAST FIVE DIRECTOR TERM
COMPANY(1) YEARS SINCE(2) EXPIRES
----------------------------------------------------------------------------------------------
Allen Tucker, 75 President, Tucker Enterprises 1995 2004
Vice-Chairman Real Estate Builder & Investor
----------------------------------------------------------------------------------------------
David D. Dallas, 46 Chairman and Corporate Secretary of the 1990 2002
Chairman and Company; Chairman of the Bank; Chief
Corporate Secretary Executive Officer of Dallas Group of
America (Chemicals)
----------------------------------------------------------------------------------------------
Peter P. DeTommaso, 75 Retired President Home Owners Heaven, Inc. 1991 2002
Director (Hardware and Lumber Retail)
----------------------------------------------------------------------------------------------
Charles S. Loring, 59 Owner, Charles S. Loring, 1990 2003
Director Certified Public Accountant
----------------------------------------------------------------------------------------------
------------
(1) Each director of the Company is also a director of the Bank.
(2) Includes prior service on the Board of Directors of the Bank.
None of our directors is also a director of any other company registered
pursuant to Section 12 of the Securities Exchange Act of 1934 or any company
registered as an investment company under the Investment Company Act of 1940.
COMPENSATION OF DIRECTORS
Directors do not receive cash compensation for their service on our Board
of Directors. However, directors are eligible to participate in the 1994 Stock
Option and Stock Bonus Plans for Non-Employee Directors, the 1997 Stock Option
and Bonus Plans, the 1998 Stock Option Plan and the 1999 Stock Option Plan, all
as described below.
Directors of the bank receive $300 for attendance at each Bank Board of
Directors meeting, $150 for attendance at each Bank Committee meeting, and $75
for attendance at each meeting of the Compliance Committee. In addition, Bank
directors also participate in our various stock option plans.
We maintain the 1994 Stock Option Plan for Non-Employee Directors (the
"Directors Plan") which provides for options to purchase shares of Common Stock
to be issued to non-employee directors. Individual directors to whom options are
granted under the Directors Plan are selected by the Board of Directors, which
has the authority to determine the terms and conditions of options granted under
the Directors Plan and the exercise price therefore. For the fiscal year ended
December 31, 2000, no options were granted to non-employee directors under the
Directors Plan.
We maintain the 1994 Stock Bonus Plan (the "1994 Bonus Plan"), under which
25,548 shares of Common Stock are currently reserved for issuance. Officers,
employees and directors may participate in the 1994 Bonus Plan. Our Board of
Directors administers and supervises the 1994 Bonus Plan. The Board has the
authority to determine the employees or directors who will receive awards under
the 1994 Bonus Plan and the number of shares awarded to each recipient. During
2000, no members of the Company's Board of Directors received grants of Common
Stock under the 1994 Bonus Plan.
We maintain the 1997 Stock Bonus Plan (the "1997 Bonus Plan") under which
the Board of Directors may authorize grants of up to 78,750 shares of Common
Stock in the form of bonuses. Members of the Board of Directors and officers are
eligible to participate in the 1997 Bonus Plan. The 1997 Bonus Plan is
administered by the Board of Directors, which has the authority to determine the
participants to whom bonuses will be granted, the amount of any bonus, and any
terms and conditions which may be attached to any shares underlying a bonus.
During 2000, no members of the Board of Directors received grants of Common
Stock under the 1997 Bonus Plan.
We maintain the 1997, 1998 and 1999 Stock Option Plans, under which options
to purchase shares of the common stock may be granted to members of the Board of
Directors and officers and employees. The terms of all three plans are
substantially similar. These plans are administered by the Board of Directors,
which has the authority to select the persons to whom stock options will be
granted. Options granted under these plans may either be incentive stock options
under the Internal Revenue Code of 1986, as amended or non-qualified options.
Incentive stock options granted under the plans must have an exercise price of
100% of the fair market value of our common stock on the date of grant.
Non-qualified stock options may have an exercise price of not less than 85% of
the fair market value of the common stock on the date of grant, with the actual
exercise price determined by the Board of Directors. The 1997 Stock Option Plan
provides for the grant of options for up to 78,750 shares of common stock; the
1998 Stock Option Plan provides for the grant of options for up to 236,250
shares of common stock; and the 1999 Stock Option Plan provides for the grant of
options for up to 300,000 shares of common stock. In 2000, no members of the
Board of Directors received grants of options to purchase shares of Common Stock
under these plans.
40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following tables set forth, as of March 15, 2001, certain information
concerning the ownership of shares of Common Stock by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
issued and outstanding Common Stock, (ii) each director and nominee for director
of the Company, (iii) each named executive officer described in this Proxy
Statement under the caption "Executive Compensation," and (iv) all directors and
executive officers of the Company as a group.
-------------------------------------------------------------------------------------------------------------
NAME AND POSITION NUMBER OF SHARES PERCENT
WITH COMPANY(1) BENEFICIALLY OWNED (2) OF CLASS
-------------------------------------------------------------------------------------------------------------
David D. Dallas, Chairman and Corporate Secretary 497,279(3) 12.97%
-------------------------------------------------------------------------------------------------------------
Peter P. DeTommaso, Director 186,170(4) 5.00%
-------------------------------------------------------------------------------------------------------------
Charles S. Loring, Director 129,328(5) 3.48%
-------------------------------------------------------------------------------------------------------------
Allen Tucker, Director 86,109(6) 2.31%
-------------------------------------------------------------------------------------------------------------
Anthony J. Feraro, President and Chief Executive Officer of 18,925(7) 0.51%
the Company and the Bank
-------------------------------------------------------------------------------------------------------------
James Hughes, Exec. V.P. and Chief Financial Officer of the 0 0.00%
Company and the Bank
-------------------------------------------------------------------------------------------------------------
James Loney, Exec. V.P. and Chief Operating Officer of 0 0.00%
the Bank
-------------------------------------------------------------------------------------------------------------
Kevin J. Killian, former Exec. V.P. and Chief Financial 32,627 (8) 0.84%
Officer of the Company and the Bank
-------------------------------------------------------------------------------------------------------------
Robert J. Van Volkenburgh, Sr., former Chairman and 523,377(9) 13.81%
Chief Executive Officer of the Company and the Bank
-------------------------------------------------------------------------------------------------------------
Directors and Executive Officers of the Company as a Group 1,473,815(10) 36.73%
(9 persons)
-------------------------------------------------------------------------------------------------------------
5% Shareholders:
Robert Dallas, Director of the Bank 451,557(11) 11.84%
-------------------------------------------------------------------------------------------------------------
========================
(1) The address for Kevin J. Killian is 43 Doyle Lane, Belle Mead, New Jersey
08502. The address for Robert J. Van Volkenburgh is P.O. Box 5301, Clinton,
New Jersey 08809. The address for all other listed persons is c/o Unity
Bank, 64 Old Highway 22, Clinton, New Jersey 08809.
(2) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares owned (i) by a spouse, minor children or
relatives sharing the same home, (ii) by entities owned or controlled by
the named person, and (iii) by other persons if the named person has the
right to acquire such shares within sixty (60) days by the exercise of any
right or option. Unless otherwise noted, all shares are owned of record and
beneficially by the named person.
41
(3) Includes 50,925 shares issuable upon the exercise of immediately
exercisable options held by Mr. Dallas and 6,900 shares issuable upon the
conversion of preferred shares. Also includes 6,743 shares held by Jessica
Lynn Dallas and 6,743 shares held by David Tyler Dallas, Mr. Dallas' minor
children. Shares also disclosed as beneficially owned by Mr. Dallas include
35,147 shares held by Dallas Group of America, Inc. Employees' Profit
Sharing Trust, 101,295 shares held by Dallas Group of America, Inc.,
105,478 shares and 69,000 shares issuable upon the conversion of the
Company's Series A Preferred Stock (the "Preferred Stock") held by Dallas
Financial Holdings, LLC and 28,666 shares held by Trenton Liberty Ins. Co.
These shares are also disclosed as beneficially owned by Mr. Robert Dallas.
(4) Includes 163,210 shares owned jointly with Mr. DeTommaso's spouse. Also
includes 8,474 shares issuable upon the exercise of immediately exercisable
options and 9,660 shares issuable upon conversion of Preferred Stock.
(5) Includes 9,898 shares held by Mr. Loring's spouse in her name, 21,600
shares owned jointly with his spouse, and 12,048 shares held by The Loring
Partnership. Mr. Loring disclaims beneficial ownership of the shares held
by his spouse. Also includes 7,340 shares issuable upon the exercise of
immediately exercisable options and 6,900 shares issuable upon conversion
of Preferred Stock.
(6) Includes 12,443 shares issuable upon the exercise of immediately
exercisable options, 6,900 shares issuable upon the conversion of Preferred
Stock, and 18,427 shares held by his spouse in her name. Mr. Tucker
disclaims beneficial ownership of the shares held by his spouse.
(7) Includes 2,757 shares held by Mr. Feraro's spouse in her own name, and
13,800 shares issuable upon conversion of Preferred Stock.
(8) Includes 6,900 shares issuable upon the conversion of Preferred Stock, and
23,925 shares issuable upon the exercise of immediately exerciseable
options.
(9) The Company is not aware of whether Mr. Van Volkenburgh's ownership is of a
direct or indirect nature.
(10) Includes 79,182 shares issuable upon the exercise of immediately
exercisable options and 202,860 shares issuable upon conversion of
Preferred Stock.
(11) Includes 6,587 shares held by Mr. Dallas' son, 31,238 shares issuable upon
the exercise of immediately exercisable options held by Mr. Dallas and
6,900 shares issuable upon the conversion of Preferred Stock. Also
disclosed as beneficially owned by Mr. Dallas are 35,147 shares held by
Dallas Group of America, Inc. Employees' Profit Sharing Trust, 101,295
shares held by Dallas Group of America, Inc., 105,478 shares and 69,000
shares issuable upon the conversion of Preferred Stock held by Dallas
Financial Holdings, LLC and 28,666 shares held by Trenton Liberty Ins. Co.
These shares are also disclosed as beneficially owned by Mr. David Dallas.
EXECUTIVE COMPENSATION
The following table sets forth a summary for the last three fiscal years of
the cash and non-cash compensation awarded to, earned by, or paid to the Chief
Executive Officer of the Company and each highly compensated executive officer
of the Company or the Bank whose individual remuneration exceeded $100,000 for
the last fiscal year.
42
SUMMARY COMPENSATION TABLE
CASH AND CASH EQUIVALENT FORMS
OF REMUNERATION
-----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-----------------------------------------------------------------------------------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
NAME AND PRINCIPAL YEAR SALARY BONUS COMPENSATION STOCK OPTIONS/
POSITION ($) ($) ($)(1) AWARDS($) SARs(#)
-----------------------------------------------------------------------------------------------------------------------------------
Anthony J. Feraro 2000 250,000 125,000 38,865 0 0
President & Chief Executive
Officer of the Bank
-----------------------------------------------------------------------------------------------------------------------------------
1999 33,065(2) 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------------
Kevin J. Killian
Former Executive Vice 2000 124,000 0 5,400 0 0
President & Chief Financial
Officer of the Bank
-----------------------------------------------------------------------------------------------------------------------------------
1999 112,121 2,440(4) 0 0 20,000
-----------------------------------------------------------------------------------------------------------------------------------
1998 41,735(3) 0 0 0 8,925
-----------------------------------------------------------------------------------------------------------------------------------
Robert J.
Van Volkenburgh, Sr. 2000 137,778 0 3,900 0 0
Former Chairman &
Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------------------------
1999 280,000 114,718(6) 6,450 0 0
-----------------------------------------------------------------------------------------------------------------------------------
1998 125,000(5) $124,658(7) $6,150 0 94,763
-----------------------------------------------------------------------------------------------------------------------------------
(1) Other annual compensation includes director fees, if applicable, insurance
premiums and the personal use of automobiles, if applicable.
(2) Mr. Feraro was hired as the Company's Chief Operating Officer and Executive
Vice President in November 1999.
(3) Mr. Killian was hired as the Company's Chief Financial Officer in July 1998
and continued in that capacity until December 2000.
(4) Represents the value of 227 shares issued to Mr. Killian under the
Company's 1994 Stock Bonus Plan.
(5) Consists of Mr. Van Volkenburgh's annual retainer as Chairman of the Board.
(6) Represents the value of 10,713 shares issued to Mr. Van Volkenburgh under
the Company's 1997 Stock Bonus Plan.
(7) Represents the value of 9,450 shares issued to Mr. Van Volkenburgh under
the Company's 1997 Stock Bonus Plan.
In December, 2000 the Company hired Mr. James A. Hughes as its Chief
Financial Officer. Mr. Hughes' annual salary is $125,000.
43
EMPLOYMENT AGREEMENTS
On October 18, 1999, we entered into an employment agreement with Mr.
Anthony J. Feraro to serve as Executive Vice President and Chief Operating
Officer. Mr. Feraro was subsequently promoted to President and Chief Executive
Officer.
Mr. Feraro's employment agreement provides for a two=year term,
automatically renewable on each anniversary date for an additional one-year
period unless, 90 days prior to such anniversary date, either party provides
written notice of its intention not to renew. The employment agreement provides
that Mr. Feraro will receive an annual base salary, to be reviewed annually by
the Board of Directors. Mr. Feraro's initial salary under the agreement is
$250,000. In addition, under his employment agreement, Mr. Feraro was entitled
to receive a $125,000 bonus assuming he met certain performance related criteria
during the six (6) months ended March 31, 2000. The Board concluded that Mr.
Feraro satisfied those criteria and so paid his $125,000 bonus. Mr. Feraro's
employment agreement also provides for the payment to him of commissions based
upon the origination of SBA loans of up to $75,000 per year. In light of our
performance and our regulatory capital position, Mr. Feraro has agreed to waive
his right to these commissions. The agreement permits us to terminate Mr.
Feraro's employment for cause at any time. The agreement defines cause to mean
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation or final cease and desist order for
material breach of any provision of this agreement. In the event that Mr. Feraro
is terminated for any reason other than cause during the first year of the
agreement, Mr. Feraro will be entitled to receive his then-current base salary
for 12 months. If such termination occurs during the second year of his
employment, Mr. Feraro will be entitled to receive his then-current base salary,
pro rated, for a period of nine months. Thereafter, if Mr. Feraro's employment
is terminated without cause, Mr. Feraro will be entitled to receive his
then-current base salary, pro rated, for a period of three months. Mr. Feraro
has the right to terminate his employment upon the occurrence of a change in
control and shall be entitled to receive a lump sum payment equal to his
then-current base salary. The employment agreement also prohibits Mr. Feraro
from competing with the Bank for a period of one year following the termination
of his employment.
STOCK BENEFIT PLANS FOR EMPLOYEES
We maintain the 1994 Incentive Stock Option Plan (the "Employee Plan"),
under which 35,049 shares of common stock are currently reserved for issuance,
subject to adjustments as set forth therein. Officers and other key employees
(including officers and employees who are directors), may participate in the
Employee Plan. The Board of Directors administers the Employee Plan, and has the
authority to determine the employees who will receive options under the Employee
Plan, the terms and conditions of options granted under the Employee Plan and
the exercise price therefor.
We maintain the 1994 Stock Bonus Plan (the "1994 Bonus Plan"), under which
25,548 shares of common stock are currently reserved for issuance. Officers and
other key employees may participate in the 1994 Bonus Plan. Our Board of
Directors administers and supervises the 1994 Bonus Plan. The Board has the
authority to determine the employees or directors who will receive awards under
the 1994 Bonus Plan and the number of shares awarded to each recipient.
In addition, officers and employees are eligible to participate in each of
the 1997, 1998 and 1999 Stock Option Plans and the 1997 Stock Bonus Plan,
discussed under the heading "Compensation of Directors."
No stock options were granted to any named executive officer in 2000.
At year-end 2000, no executive officers listed in the summary compensation
table had outstanding stock options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS/SARS
NUMBER OF SECURITIES AT FY-END ($)
UNDERLYING UNEXERCISED (BASED ON $2.00
SHARES VALUE OPTIONS/SARS AT FY-END PER SHARE)
ACQUIRED ON REALIZED (#) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------
Anthony Feraro N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------
Kevin Killian N/A N/A 23,925(E)/5,000(U) N/A(1)
----------------------------------------------------------------------------------------------------------
Robert J. Van Volkenburgh N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------
==================
(1) None of these options were in the money at year end.
44
CERTAIN TRANSACTIONS WITH MANAGEMENT
The Bank has made in the past and, assuming continued satisfaction of
generally applicable credit standards, expects to continue to make loans to
directors, executive officers and their associates (i.e. corporations or
organizations for which they serve as officers or directors or in which they
have beneficial ownership interests of ten percent or more). These loans have
all been made in the ordinary course of the Bank's business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present other unfavorable features.
We lease our headquarters and our Scotch Plains office from partnerships
consisting of Messrs. D. Dallas, R. Dallas and R. Van Volkenburgh. Under the
leases for these facilities, the partnerships received in 2000 rental payments
of $569,347. we believe that these rent payments reflect market rents and that
the leases reflect terms, which are comparable to those which could have been
obtained in a lease with an unaffiliated third party. The annual base rent will
increase by the higher of the Urban Consumer Price Index or 3% annually.
BUSINESS
We are a Delaware corporation and bank holding company registered under the
Bank Holding Company Act. Our principal activities are owning and supervising
our bank subsidiary, Unity Bank. The bank engages in the general business of
commercial banking. We are also an active participant in the Small Business
Administration's guaranteed loan program. Our deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation up to applicable
limits. We provide a wide-range of commercial banking products and services,
including personal and business checking accounts and time deposits, money
market accounts and regular savings accounts, as well as commercial, consumer
and mortgage loans.
LOANS
We lend to individuals and businesses for personal and commercial purposes.
We emphasize the origination of loans with adjustable rates of interest tied to
our prime rate. The interest rates on these adjustable rate loans are repriced
from time to time to reflect changes, up or down, in the prime rate. In order to
be competitive with other banking institutions in our trade area, we charge
rates which are generally comparable to those charged by other lenders.
The following is a summary of the components of our loan portfolio:
SBA Loans
We have been very active in providing loans to small businesses through the
United States Small Business Administration guaranteed loan program. Under the
SBA program, loans are available to small businesses which meet certain
criteria. Up to 85% of the principal of a loan to a qualified business may be
guaranteed by the United States Government. We sell the guaranteed portion of
SBA loans into the secondary market and derive premium income. Our ability to
offer SBA loans on an ongoing basis is dependent upon, among other factors,
appropriation of funds by the federal government to the SBA program. The SBA has
designated us a "preferred lender" for the states of New Jersey, Delaware, New
York and Pennsylvania. This means that we may originate SBA guaranteed loans
without prior SBA approval.
Commercial Loans
Our commercial loans are generally secured by business assets, personal
guarantees of the principals of closely held businesses and often by the
personal assets of such principals. The loans are made to small and mid-sized
businesses in our trade area. Federal and state law and regulations restrict how
much any bank may lend to a single customer with the restrictions stated as a
percentage of our primary capital. We believe that we can attract commercial
borrowers by providing competitive rates, superior service, local
decision-making and flexibility in loan structure.
45
Consumer Loans
We grant home equity loans and both secured and unsecured personal loans to
finance the purchase of automobiles, durable goods or other consumer goods. We
believe that competitive interest rates and superior service (which includes,
among other things, convenience, personal attention and prompt local
decision-making) are important competitive factors in attracting personal loans
from credit-worthy consumers.
We strive to offer competitive rates for our services, thereby encouraging
consumers and business entities in our service area to avail themselves of our
credit and non-credit products services.
Lending Limit
Under New Jersey law, our per customer legal lending limit is 15% of our
equity capital for most loans, and 25% of equity capital for loans secured by
readily marketable collateral. Based on our equity capital at December 31, 2000,
our legal lending limit for most loans was approximately $3.1 million, while our
lending limit for loans secured by readily marketable collateral was $ 5.1
million. In order to compete for customer relationships with larger institutions
having higher regulatory lending limits, we from time to time engaged in loan
participation agreements with other financial institutions in order to make
loans, which would otherwise be above our lending limit. We expect to continue
to engage in participation relationships as we seek to grow our customer base.
EMPLOYEES
As of December 31, 2000, we had 115 full time employees and 24 part-time
employees. Our employees are not members of any collective bargaining group, and
we consider our relations with our employees to be good.
COMPETITION
We face stiff competition for deposits and creditworthy borrowers. We
compete with both New Jersey and regionally based commercial banks, savings
banks and savings and loan associations, most of which have assets, capital and
lending limits greater than ours. Other competitors include mutual funds,
mortgage bankers, insurance companies, stock brokerage firms, regulated small
loan companies, credit unions and issuers of commercial paper and other
securities. In addition, in 1999 the Gramm-Leach-Bliley Financial Modernization
Act was passed into law. The Modernization Act permits certain financial
entities, such as insurance companies and securities firms, to acquire or form
financial institutions. The Modernization Act will increase competition in the
financial services industry.
In addition to having established deposit bases and loan portfolios,
competitor institutions, particularly the large regional commercial and savings
banks, have the ability to finance extensive advertising campaigns and to
allocate considerable resources to locations and products perceived as
profitable. Significantly, these institutions have larger lending limits and, in
certain cases, lower funding costs (the price a bank must pay for deposits and
other borrowed monies used to make loans to customers) than we do. Many of these
institutions also offer certain services, such as trust services, which we do
not currently offer.
We seek to meet the competitive advantages of these larger institutions
principally on the basis of high quality, personal service to customers,
customer access to decision makers, and competitive interest rates and fees. In
addition, to augment our regulatory legal lending limit, we enter into loan
participations with other financial institutions, enabling us to meet the credit
needs of customers with larger borrowing requirements.
LEGAL PROCEEDINGS
We are a party to routine litigation incidental to our business. Except as
discussed below, we believe that none of these proceedings would, if adversely
determined, have a material effect on our consolidated financial condition or
materially impact our results of operations
During August, 2000, Mr. Robert J. Van Volkenburgh, our former Chairman of
the Board and Chief Executive Officer, resigned from his positions with us. In
February, 2001, Mr. Van Volkenburgh filed a complaint in the Superior Court of
New Jersey alleging breach of certain employment agreements. We intend to
vigorously defend ourselves from any claims for payment under these agreements.
We believe we have strong defenses to the claims made by Mr. Van Volkenburgh and
he is not likely to succeed in this regard. No discovery has taken place. Our
position is based upon what we know as of the date of this prospectus, and we
may change our opinion based on future developments.
46
PROPERTIES
We conduct business through twelve (12) offices, including our home office
at 64 Old Highway 22, Clinton, New Jersey. The following table provides certain
information about these properties.
Leased Date Leased Lease 2000 Annual
Location or Owned or Acquired Expiration Rental Fee
-------- -------- ----------- ---------- ----------
Clinton, NJ Leased 1996 2006 $ 423,520
Flemington, NJ Leased 1998 2003 55,725
North Plainfield, NJ Owned 1991 -- --
Springfield, NJ Leased 1998 2003 27,000
Union, NJ Leased 1996 2006 57,600
Linden, NJ Owned 1991 -- --
South Plainfield, NJ Leased 1999 2024 78,000
Edison, NJ Leased 1999 2024 90,000
Colonia, NJ Leased 1995 2005 30,780
Whitehouse, NJ Owned 1998 -- --
Highland Park, NJ Leased 1999 2024 65,000
Scotch Plains, NJ Leased 1996 2006 70,812
SUPERVISION AND REGULATION
We and our bank subsidiary are extensively regulated under federal and New
Jersey law. These laws and regulations are primarily intended to protect
depositors and the deposit insurance fund of the Federal Deposit Insurance
Corporation, not our shareholders. The following information is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Any
change in applicable laws, regulations or regulatory policies may have a
material effect on our business, operations and prospects. We are unable to
predict the nature or extent of the effects that fiscal or monetary policies,
economic controls or new federal or state legislation may have on our business
and earnings in the future.
BANK HOLDING COMPANY REGULATION
General. As a bank holding company registered under the Bank Holding
Company Act, we are subject to the regulation and supervision of the Board of
Governors of the Federal Reserve System. We are required to file with the
Federal Reserve Board annual reports and other information regarding our
business operations and those of our subsidiaries. Under the Bank Holding
Company Act, our activities and those of our subsidiaries are limited to
banking, managing or controlling banks, furnishing services to or performing
services for our subsidiaries or engaging in any other activity which the
Federal Reserve Board determines to be so closely related to banking or managing
or controlling banks as to be properly incident thereto.
The Bank Holding Company Act requires, among other things, the prior
approval of the Federal Reserve Board if a bank holding company proposes to
o acquire all or substantially all of the assets of any other bank,
o acquire direct or indirect ownership or control of more than 5% of the
outstanding voting stock of any bank (unless it owns a majority of
such bank's voting stocks) or
o merge or consolidate with any other bank holding company.
47
The Federal Reserve Board will not approve any acquisition, merger, or
consolidation that would have a substantially anticompetitive effect, unless the
anti-competitive impact of the proposed transaction is clearly outweighed by a
greater public interest. When reviewing acquisitions or mergers, the Federal
Reserve Board also considers capital adequacy and other financial and managerial
resources and future prospects of the companies and the banks concerned,
together with the convenience and needs of the community to be served.
The Bank Holding Company Act also prohibits, with certain limited
exceptions, a bank holding company from (i) acquiring or retaining direct or
indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company, or (ii) engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries. However, such
activities will not be prohibited if such non-banking business is determined by
the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such
determinations, the Federal Reserve Board is required to weigh the expected
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices.
Federal laws and regulations impose a number of obligations and
restrictions on bank holding companies and their bank subsidiaries that are
designed to minimize potential loss in the event the bank becomes in danger of
default. The Federal Reserve Board policies require a bank holding company to
serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions. The Federal
Reserve Board also has the authority to require a bank holding company to
terminate any activity or to give up control of a non-bank subsidiary if the
Federal Reserve Board's determines that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary.
Capital Adequacy Guidelines for Bank Holding Companies. In January 1989,
the Federal Reserve Board adopted risk-based capital guidelines for bank holding
companies. These guidelines are designed to make regulatory capital requirements
more sensitive to differences in risk profile among banks and bank holding
companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $150 million or more.
The minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least 4% of the total capital is required to be "Tier 1 Capital," consisting
of common Shareholders' equity and qualifying preferred stock, less certain
goodwill items and other intangible assets. The remainder ("Tier 2 Capital") may
consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted
assets, (b) non-qualifying preferred stock, (c) hybrid capital instruments, (d)
perpetual debt, (e) mandatory convertible securities, and (f) qualifying
subordinated debt and intermediate-term preferred stock up to 50% of Tier 1
capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the
Federal Reserve Board (determined on a case by case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk weights of 0%, 20%, 50% and
100%. In addition, certain off-balance sheet items are given similar credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for performing first mortgage loans fully secured by residential property which
carry a 50% risk weighting. Most investment securities (including, primarily,
general obligation claims of states or other political subdivisions of the
United States) are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk weight. In converting off-balance sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations are given a 100% risk weighting.
Transaction related contingencies such as bid bonds, standby letters of credit
backing nonfinancial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity or more than one year) have a 50% risk
weighing. Short-term commercial letters of credit have a 20% risk weighting and
certain short-term unconditionally cancelable commitments have a 0% risk
weighting.
In addition to the risk-based capital guidelines, the Federal Reserve Board
has adopted a minimum Tier 1 capital (leverage) ratio, under which a bank
holding company must maintain a minimum level of Tier 1 capital to average total
consolidated assets of at least 3% in the case of a bank holding company that
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a leverage ratio of at least 100 to 200 basis points above the
stated minimum.
48
BANK REGULATION
As a New Jersey-chartered commercial bank, we are subject to the
regulation, supervision, and control of the New Jersey Department of Banking and
Insurance. As an FDIC-insured institution, we are subject to regulation,
supervision and control of the FDIC, an agency of the federal government. The
regulations of the FDIC and the New Jersey Department of Banking and Insurance
impact virtually all of our activities, including the minimum level of capital
we must maintain, our ability to pay dividends, our ability to expand through
new branches or acquisitions and various other matters.
Insurance Deposits. Our deposits are insured up to a maximum of $100,000
per depositor under the Bank Insurance Fund of the FDIC. The FDIC has
established a risk-based assessment system for all insured depository
institutions. Under the risk based assessment system, deposit insurance premium
rates range from 0-27 basis points of assessed deposits. In addition, we are
required to pay an assessment which is used to repay amounts borrowed by the
Federal Financing Corporation to help pay for the thrift bailout of the 1980s.
This payment, equal to .0013% of assessed deposits, is in addition to the
deposit insurance premiums discussed above. For the year ended December 31,
2000, we paid $311 thousand in deposit insurance premiums. This expense is
expected to significantly increase in 2001.
Capital Adequacy Guidelines. The FDIC has promulgated risk-based capital
guidelines which are designed to make regulatory capital requirements more
sensitive to differences in risk profile among banks, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets. Under
these guidelines, assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. These guidelines are substantially similar to the Federal Reserve
Board guidelines discussed above.
In addition to the risk-based capital guidelines, the FDIC has adopted a
minimum Tier 1 capital (leverage) ratio. This measurement is substantially
similar to the Federal Reserve Board leverage capital measurement discussed
above.
In addition to the capital adequacy requirements of the Federal Reserve
Board and the FDIC discussed above, pursuant to the stipulations and agreements
with our federal and state regulators, the bank is required to maintain a
leverage ratio of equity capital to average assets of at least 6%.
Dividends. The bank may pay dividends as declared from time to time by the
Board of Directors out of funds legally available, subject to certain
restrictions. Under the New Jersey Banking Act of 1948, the bank may not pay a
cash dividend unless, following the payment, the bank's capital stock will be
unimpaired and the bank will have a surplus of no less than 50% of the bank's
capital stock or, if not, the payment of the dividend will reduce the surplus.
In addition, the bank cannot pay dividends in such amounts as would reduce the
bank's capital below regulatory imposed minimums. Currently, the bank may not
pay any dividends.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The company is incorporated under the laws of the State of Delaware.
Therefore the rights of holders of the company's stock will be governed by the
Delaware General Corporation Law and the company's Certificate of Incorporation.
The authorized capital stock of the company consists of 7,500,000 shares of
common stock without par value and 500,000 shares of preferred stock, without
par value. As of March 31, 2001, 3,706,708 shares of common stock were issued
and outstanding and 103,500 shares of Class A Preferred Stock were issued and
outstanding.
COMMON STOCK
Dividend Rights
The holders of the company's common stock will be entitled to dividends,
when, as, and if declared by the company's Board of Directors, subject to the
restrictions imposed by Delaware law. The only statutory limitation applicable
to the company is that dividends must be paid out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared or out of the preceding year's net profit. However, as a practical
matter, unless the company expands its activities, its only source of income
will be the bank. Therefore, the dividend restrictions applicable to the bank
described under the heading "SUPERVISION AND REGULATION" will continue to impact
the company's ability to pay dividends.
49
Voting Rights
Each share of the company's common stock is entitled to one vote per share.
Cumulative voting is not permitted. Under Delaware Law, a merger or
consolidation may be approved by a majority of the votes cast at a meeting at
which a quorum is present. Also, Delaware law permits the Board of Directors to
authorize certain mergers, amend the certificate of incorporation in certain
respects and take similar actions without a shareholder vote.
Delaware law also permits a corporation to adopt provisions in its
certificate of incorporation requiring greater than a majority vote to approve
specified actions. The company has not adopted such provisions. Delaware law
also permits a corporation in its certificate of incorporation to classify its
directors so that different classes are elected at different annual meetings,
and the company's Certificate of Incorporation does so provide for a classified
Board. See "Directors" below.
Preemptive Rights
Under Delaware law, shareholders may have preemptive rights if these rights
are provided in the certificate of incorporation. The Certificate of
Incorporation of the company does not provide for preemptive rights.
Appraisal Rights
Under Delaware law, dissenting shareholders of the company have appraisal
rights (subject to the broad exception set forth in the next sentence) upon
certain mergers or consolidations. Appraisal rights are not available in any
such transaction if shares of the corporation are listed for trading on a
national securities exchange or designated as a national market system security
on the Nasdaq system held of record by more than 2,000 holders.
Directors
Under Delaware law and the Company's Certificate of Incorporation, the
company is to have a minimum of 3 directors and a maximum of 25, with the number
of directors at any given time to be fixed by the Board of Directors. In
addition, the company's Certificate of Incorporation provides that the Board of
Directors is to be divided into three classes, consisting of as nearly an equal
number of directors as possible, with the term of office of one class expiring
each year.
PREFERRED STOCK
The preferred stock may be issued from time to time in one or more classes
or series when authorized by the company's Board of Directors, up to the number
of authorized but unissued shares of preferred stock set forth in the company's
certificate of incorporation, as amended from time to time. The series
designation, dividend rate (or method of determining dividend rate), redemption
prices and other terms of each series are determined by the Board of Directors
to the extent not fixed by the Certificate of Incorporation. The dividend rate,
dividend payment dates, redemption, and the other terms and provisions of the
preferred stock will be set forth in this Memorandum. Currently, the Series A
Preferred Stock is the only outstanding preferred stock.
WARRANTS
If all shares of the Series A Preferred Stock are tendered for exchange, we
will issue warrants to purchase 1,150,000 shares of our common stock. Each
warrant will entitle the holder to purchase one share of our common stock at a
purchase price of $5.50, as adjusted for stock dividends, stock splits and
certain other capital transactions. As discussed elsewhere herein, the initial
exercise price of the warrants is also subject to adjustment based upon the
average closing price of our common stock for the ten (10) trading days prior to
our acceptance of tenders. We may permit the exercise price for the warrants to
be satisfied through the surrender of previously outstanding shares of our
common stock, at our discretion. Shares will be valued at their then fair market
value, based upon the average closing price for our stock on the Nasdaq market
for the five (5) trading days prior to exercise. The warrants may be exercised
for a period of fifteen (15) months after their issuance. Any warrant not
exercised on or before the expiration date will expire and no longer be
exercisable. Holders of the warrants do not have the rights and privileges of
holders of our common stock.
We will deliver to investors participating in the exchange offer
certificates representing the warrants. Each warrant certificate will indicate
the total number of shares for which the warrant may be exercised. Because of
the limited number of warrants to be issued, we will not retain a separate
warrant agent, and we will act as the transfer agent for recording transfers of
the warrants. We do not anticipate that any secondary market for the warrants
will develop, due to the limited number of outstanding warrants and the small
number of holders.
50
Each warrant may be exercised by surrendering the warrant certificate, with
the form of election to purchase properly completed and executed, together with
the payment of the exercise price, to us. The warrants may be exercised in whole
or in part while they are still outstanding, but no fractional shares of common
stock will be issued upon exercise of a warrant.
ANTI-TAKEOVER PROVISIONS
Under the Federal Change in Bank Control Act, a 60-day prior written notice
must be submitted to the Federal Reserve Board if any person, or any group
acting in concert, seeks to acquire 10% or more of any class of outstanding
voting securities of the company, unless the Federal Reserve Board determines
that the acquisition will not result in a change of control of the company.
Under the Control Act, the Federal Reserve Board has 60 days within which to act
on such notice taking into consideration certain factors, including the
financial and managerial resources of the acquirer, the convenience and needs of
the community served by the bank holding company and its subsidiary banks and
the antitrust effects of the acquisition. Under the Bank Holding Company Act, a
company is generally required to obtain prior approval of the Federal Reserve
Board before it may obtain control of a bank holding company. Control is
generally described to mean the beneficial ownership of 25% or more of all
outstanding voting securities of a company.
Pursuant to the company's Certificate of Incorporation, the Board of
Directors of the company is divided into three classes, each of which shall
contain approximately one-third of the whole number of the members of the Board.
Each class shall serve a staggered term, with approximately one-third of the
total number of directors being elected each year. The company's Certificate of
Incorporation and Bylaws provide that the size of the Board shall be determined
by a majority of the directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created by
an increase in the number of directors or resulting from death, resignation,
retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote of
the directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to use its voting power to gain control of the
Board of Directors without the consent of the incumbent Board of Directors of
the company.
Certain provisions of Delaware law are designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law,
is intended to discourage certain takeover practices by impeding the ability of
a hostile acquirer to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, with the number of shares outstanding
for this purpose calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain business
combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Certificate of Incorporation or Bylaws electing not to be governed by Section
203. At the present time, the Board of Directors does not intend to propose any
such amendment.
51
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING SERIES A PREFERRED STOCK
The Series A Preferred Stock was sold by us on March 23, 2000 to 31
sophisticated investors in a private placement not registered under the
Securities Act of 1933. As set forth in this prospectus and in the accompanying
letter of transmittal, we will accept for exchange any and all Series A
Preferred Stock that is properly tendered on or prior to the expiration date and
not withdrawn as permitted below. The term "expiration date" means 5:00 p.m.,
New York City time on June 22, 2001; provided however, that if we extend the
period of time for which the exchange offer is open, the term "expiration date"
means the latest time and date to which the exchange offer is extended.
We will exchange 10.1 shares of our common stock and 10.1 common stock
purchase warrants for each share of the Series A Preferred Stock as long as the
trading price of our common stock does not exceed $4.20 per share, determined in
the way described below. Each warrant will allow the holder to purchase one
share of our common stock for an exercise price of $5.50 per share for a period
of fifteen (15) months. In addition, one additional share of common stock and
one additional common stock purchase warrant will be exchanged in full
satisfaction of each $4.95 in accrued but unpaid dividends through the date of
consummation of the exchange offer on each share of Series A Preferred stock
tendered. Fractional shares to which a tendering shareholder may be entitled
will be rounded up to the nearest whole share, taking into account the entire
number of common shares each holder is to receive and combining fractional
shares to the extent possible. If the trading price of our stock exceeds $4.20
per share, then the assumed per share value of the common stock for purposes of
determining the exchange rate for the Series A Preferred Stock will be adjusted
upward from the $4.95 used to determine the 10.1 share exchange ratio by an
amount equal to the amount the trading price of our common stock exceeds $4.20
per share. For example, if the value of our common stock, as determined below,
is $4.40 per share, each share of the Series A common stock would be exchanged
for 9.7 shares of our Preferred Stock and 9.7 common stock purchase warrants. In
addition, the exercise price for our warrants will be adjusted upward by the
same amount. Therefore, if the value of our common stock, as determined below,
is $4.40 per share, the exercise price for each warrant would be $5.70. Finally,
the assumed valued used in determining how many shares of our common stock each
holder of Series A Preferred Stock will receive in satisfaction of accrued and
unpaid dividends will also be adjusted upward in the same manner as the exchange
ratio of our common stock and the exercise price of our warrant. Therefore, if
the trading price of our common stock as determined below is $4.40 per share, a
shareholder would receive one share of common stock and one common stock
purchase warrant for each $5.15 in accrued but unpaid dividends. The value of
our common stock will be determined by taking the average closing price of our
common stock on the Nasdaq market for the ten (10) trading days ending on the
day prior to the expiration date of this exchange offer, as it may be extended
from time to time. As of May 22, 2001, the average closing price for our common
stock determined in this manner was $4.235.
As of the date of this prospectus, 103,500 shares of Series A Preferred
Stock are outstanding. This prospectus, together with the letter of transmittal,
is first being sent on or about the date set forth on the cover page to all
holders of Series A Preferred Stock at the addresses set forth in the security
register we maintain. Our obligation to accept Series A Preferred Stock for
exchange is subject to conditions set forth under "-- Conditions to the Exchange
Offer" below.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any Series A Preferred Stock, by mailing written
notice of an extension to the holders of Series A Preferred Stock as described
below. During any extension, all Series A Preferred Stock previously tendered
will remain subject to the exchange offer and may be accepted for exchange by
us. Any Series A Preferred Stock not accepted for exchange for any reason will
be returned without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
We will mail written notice of any extension, amendment, non-acceptance or
termination to the holders of the Series A Preferred Stock as promptly as
practicable. This notice will be mailed to the holders of record of the Series A
Preferred Stock no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date or other event
giving rise to the notice requirement.
BACKGROUND OF AND REASONS FOR THE EXCHANGE OFFER
Due to losses incurred in 1999 and our significant expansion in 1998 and
1999, we failed to satisfy a federal minimum capital requirement and also failed
to satisfy a requirement imposed on us by the New Jersey Department of Banking
and Insurance that the bank maintain a leverage capital ratio of 6%. As part of
an effort to recapitalize and return to profitability, we issued the Series A
Preferred Stock in March of 2000 and paid the first required partial period
dividend payment on the Series A Preferred Stock in April of 2000. However, due
to continued losses in 2000, among other things, we entered into stipulations
and agreements with our federal and state regulators which require, among other
things, that we cease all dividend payments on any outstanding securities,
including the Series A Preferred Stock. Due to this requirement, at March 31,
2001 there were $518 thousand of preferred stock dividends in arrears, or $5.00
per Series A Preferred Share.
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Because of our continued losses in 2000, it is likely we will be required
to raise additional capital in the foreseeable future. Our Board believes it
likely that it would be difficult for us to raise additional capital,
particularly in the form of common stock, with an outstanding senior security on
which we had dividends in arrears. The Board therefore elected to explore the
concept of undertaking an exchange offer for the Series A Preferred Stock, under
which the Series A Preferred Stock would be exchanged for shares of our common
stock. The Board appointed a special committee to review the issue, to determine
whether to undertake an exchange offer and to determine the terms of the
exchange offer. The special committee determined that the exchange offer would
be in our best interests by eliminating or substantially reducing the dividend
arrearages and eliminating or substantially reducing the outstanding Series A
Preferred Stock, thereby putting us in a better financial position to redeem the
remaining outstanding preferred stock in the future, and reducing our dividend
cost going forward. In order to induce the holders of the Series A Preferred
Stock to tender into this exchange offer, we are offering a discount of
approximately 32% from the conversion ratio currently provided for under the
preferred stock as well as the common stock purchase warrant. Holders of the
Series A Preferred Stock are under no obligation to tender into the exchange
offer, and they may continue to hold their Series A Preferred Stock until we
redeem it or until such holder elects to convert the Series A Preferred Stock
into common stock under the existing terms of the Series A Preferred Stock.
COMPARISON OF THE RIGHTS OF OUR COMMON STOCK AND THE SERIES A PREFERRED STOCK.
The terms of our common stock are governed by our certificate of
incorporation and the Delaware General Corporation Law. The terms of the Series
A Preferred Stock are governed by the certificate of designations which we have
filed with the Secretary of State of Delaware. The following is a summary of the
most material differences between our common stock and the Series A Preferred
Stock:
Voting Rights
The Series A Preferred Stock does not have voting rights, except in certain
limited circumstances provided for under Delaware law. Our common stock has
voting rights on all matters required to be presented to the shareholders under
the Delaware corporation law, including the election of directors (which must be
approved by the majority of the votes cast at a duly convened meeting) and
certain corporate transactions, such as a merger, consolidation or sale of all
of the assets of the corporation. In addition, holders of our common stock are
entitled to vote on certain benefit plans, such as the adoption of stock option
plans.
Dividends
The Series A Preferred Stock is entitled to a cumulative 10% dividend to be
paid quarterly as, when and if declared by our Board of Directors. Until such
time as all accrued dividends are paid the outstanding Series A Preferred Stock,
no dividends may be paid on our common stock. Since dividends on the Series A
Preferred Stock are cumulative, any dividends not declared and paid when due are
not lost, but rather continue as an obligation of the company to pay to the
holders of the Series A Preferred Stock. Holders of our common stock are
entitled to dividends as when and if declared by our Board of Directors, subject
to legal or regulatory restrictions on payment. Under the Delaware General
Corporation Law, a corporation may not pay dividends if the payment would render
the corporation insolvent. As a bank holding company, we are not generally
permitted to pay dividends if the payment would reduce our capital level below
these required under federal regulation. As discussed elsewhere in this
prospectus, under our agreement with our regulators, we are not currently
permitted to pay dividends on any of our outstanding securities.
Redemption Rights
We may redeem the Series A Preferred Stock at any time and from time to
time commencing in March 2002. In order to redeem the Series A Preferred Stock,
we must pay the $50.00 stated value for each share of the stock plus the accrued
and any unpaid dividends. We have no right to redeem our common stock. Subject
to any regulatory restrictions, we may offer to repurchase shares of our common
stock from time to time. However, due to the terms of our regulatory agreements,
we are not currently permitted to repurchase or redeem any of our outstanding
securities.
Payments Upon Liquidation
Upon a liquidation, the Series A Preferred Stock is entitled to a preferred
claim, ahead of our common stock, on our assets for an amount equal to $50.00
per share and all accrued and un-paid dividends. Upon a liquidation, our common
stock will share rateably in all assets remaining after satisfaction of all
prior claims, including those of our creditors.
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PROCEDURES FOR TENDERING SERIES A PREFERRED STOCK
To tender in the exchange offer, a preferred stockholder must complete,
sign and date the letter of transmittal, or a facsimile of the letter of
transmittal, have the signatures guaranteed if required by the letter of
transmittal, and mail or otherwise deliver the letter of transmittal or a
facsimile, together with the Series A Preferred Stock and any other required
documents, to us in our capacity as exchange agent. The exchange agent must
receive these documents at the address set forth below prior to 5:00 p.m., New
York City time on the expiration date.
By executing a letter of transmittal, each holder will make to us the
representations set forth below under the heading "-- Resale of New Shares."
The tender by a holder and the acceptance by us will constitute an
agreement between the holder and us in accordance with the terms subject to the
conditions set forth in this prospectus and in the letter of transmittal.
The method of delivery of Series A Preferred Stock and the letter of
transmittal and all other required documents to the exchange agent is at the
election and risk of the holder. Instead of delivery by mail, it is recommended
that preferred holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the us, in our capacity
as exchange agent, before the expiration date. Holders may request their
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for them.
Any beneficial owner whose Series A Preferred Stock is registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and instruct
the registered holder to tender on the beneficial owner's behalf.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution (as defined below)
unless the shares of Series A Preferred Stock tendered:
- are signed by the registered holder, unless the holder has completed
the box entitled "special exchange instructions" or "special delivery
instructions" on the letter of transmittal; or
- are tendered for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "eligible institution").
If a letter of transmittal is signed by a person other than the registered
holder of any shares of Series A Preferred Stock listed on the letter of
transmittal, the shares of Series A Preferred Stock must be endorsed or
accompanied by a properly completed stock power, signed by the registered holder
as the registered holder's name appears on the Series A Preferred Stock, with
the signature guaranteed by an eligible institution.
If a letter of transmittal or any Series A Preferred Stock or stock powers
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or other acting in a fiduciary or representative
capacity, the persons should so indicate when signing. Unless waived by us,
evidence satisfactory to us of their authority to so act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time or
receipt, acceptance of tendered Series A Preferred Stock and withdrawal of
tendered Series A Preferred Stock will be determined by us in our sole
discretion. This determination will be final and binding. We reserve the
absolute right to reject any and all shares of Series A Preferred Stock that are
not properly tendered or any Series A Preferred Stock our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
shares of Series A Preferred Stock. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Preferred Stock
must be cured within the time period we determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of Series A
Preferred Stock, none of us, or our agents or any other person will incur any
liability for failure to give this notification. Tenders of Series A Preferred
Stock will not be deemed to have been made until defects or irregularities have
been cured or waived. Any shares of Series A Preferred Stock received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in letter of
transmittal, as soon as practicable following the expiration date.
54
GUARANTEED DELIVERY PROCEDURE
Holders who wish to tender their Series A Preferred Stock and (1) whose
Series A Preferred Stock is not immediately available, (2) who cannot deliver
their Series A Preferred Stock, the letter of transmittal or any other required
documents to the exchange agent or (3) who cannot complete the procedures for
book-entry transfer, prior to the expiration date, may effect a tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, we, as exchange agent, receive from the
eligible institution a properly completed and duly executed notice of
guaranteed delivery by facsimile transmission, mail or hand delivery;
- setting forth the name and address of the holder;
- setting forth the certificate number(s) of the shares of Series A
Preferred Stock and the amount tendered, stating that the tender is
being made; and
- guaranteeing that, within three NEW YORK STOCK EXCHANGE trading days
after the expiration date, the letter of transmittal or facsimile
together with the certificate(s) representing the Series A Preferred
Stock or a book-entry confirmation of the Series A Preferred Stock
into the exchange agent's account at the book-entry transfer facility
and any other documents required by the letter of transmittal, will be
deposited by the eligible institution with the exchange agent; and
- a properly completed and executed letter of transmittal for facsimile,
as well as the certificate(s) representing all tendered Series A
Preferred Stock in proper form for transfer and all other documents
required by the letter of transmittal, are received by the exchange
agent within three NEW YORK STOCK EXCHANGE trading days after the
expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their Series A Preferred Stock according to
the guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided in this prospectus, tenders of Series A
Preferred Stock may be withdrawn at any time prior to 5:00 p.m., New York City
time on the expiration date.
To withdraw a tender of Series A Preferred Stock in the exchange offer, a
written or facsimile transmission notice of withdrawal must be received by the
exchange agent at the address set forth below prior to 5:00 p.m., New York City
time, on the expiration date. Any notice of withdrawal must:
- specify the name of the person having deposited the Series A Preferred
Stock to be withdrawn (the "depositor");
- identify the shares of Series A Preferred Stock to be withdrawn,
including the certificates number(s) and number of shares of the
Series A Preferred Stock;
- be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the Series A Preferred Stock
were tendered, including any required signature guarantees, or be
accompanied by documents of transfer sufficient to have transfer of
the Series A Preferred Stock registered into the name of the person
withdrawing the tender; and
- specify the name in which any of the Series A Preferred Stock is to be
registered, if different from that of the depositor.
All questions as to the validity, form and eligibility, including time or
receipt, of the notices will be determined by us. Our determination will be
final and binding on all parties. Any Series A Preferred Stock so withdrawn will
be deemed not to have been validly tendered for purposes of the exchange offer
and no common stock or common stock purchase warrants will be issued in exchange
unless the shares of Series A Preferred Stock so withdrawn are validly
retendered. Any Series A Preferred Stock which have been tendered but which are
not accepted for exchange will be returned to their holder without cost to the
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn Series A Preferred Stock
may be retendered by following one of the procedures described above under "--
Procedures for Tendering Series A Preferred Stock" at any time prior to the
expiration date.
55
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other terms of the exchange offer, we will not be
required to accept for exchange, or exchange common stock or common stock
purchase warrants for, any shares Series A Preferred Stock, and may terminate
the exchange offer before the acceptance of the Series A Preferred Stock if, in
our sole judgment, the exchange offer would violate any law, statute, rule or
regulation or an interpretation thereof of the Staff of the Commission. If we
determine in our sole discretion that this condition is not satisfied, we may:
- refuse to accept any Series A Preferred Stock and return all tendered
Series A Preferred Stock to the tendering holders;
- extend the exchange offer and retain all Series A Preferred Stock
tendered prior to the expiration date, subject, however, to the rights
of holders to withdraw the Series A Preferred Stock (see "--
Withdrawals of Tenders"); or
- waive the unsatisfied conditions with respect to the exchange offer
and accept all validly tendered Series A Preferred Stock which have
not been withdrawn. If the waiver constitutes a material change to the
exchange offer, we will promptly disclose the waiver by means of a
prospectus supplement that will be distributed to the registered
holders, and we will extend the exchange offer for a period of five to
ten business days, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the exchange
offer would otherwise expire during that five to ten business-day
period.
EXCHANGE AGENT
We will as the exchange agent for the exchange offer of the Series A
Preferred Stock. The executed letter of transmittal should be directed to us, as
exchange agent, at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent, addressed as follows:
By mail or by hand: Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
Attention: Corporate Secretary
By Facsimile: (908) 730-8781
Confirm Facsimile by Telephone: (908) 713-4304
Delivery of a letter of transmittal to an address other than that for the
exchange agent as set forth above or transmission of instructions via facsimile
other than as set forth above does not constitute a valid delivery of a letter
of transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer.
TRANSFER TAXES
Holders who tender their Series A Preferred Stock for exchange generally
will not be obligated to pay any transfer tax in connection with the exchange.
However, holders who instruct us to register common stock and common stock
purchase warrants in the name of a person other than the registered tendering
holders, or request that Series A Preferred Stock not tendered or not accepted
in the exchange offer be returned to a person other than the registered
tendering holder, will be responsible for the payment of any applicable transfer
tax.
56
ACCOUNTING TREATMENT
When convertible preferred stock is converted to common securities pursuant
to an inducement offer, the fair value of all securities and other consideration
(including warrants) transferred in the transaction to the holders of the
convertible preferred stock over the fair value of securities issuable under the
original conversion terms is subtracted from net earnings to arrive at net
earnings available to common shareholders in the calculation of earnings per
share. All costs of the exchange offer are to be expensed in the period
incurred.
According to the original terms of the Series A Preferred Stock, each share
of Series A Preferred Stock is convertible at an assumed value of $7.25 per
share of common (i.e., each Preferred share is convertible into 6.896 shares of
our common stock). To induce the preferred holders to convert, the exchange
ratio has been increased to an assumed value of $4.95, subject to adjustment as
described elsewhere herein. As a result, the preferred holder will receive and
additional 3.20 shares of common stock. In addition, the preferred holders will
receive warrants, which have an estimated fair value or $0.54 per warrant based
solely upon application of the Black-Scholes option valuation model. For
accounting purposes, the total value of the additional shares and warrants
issued will result in an additional dividend to the preferred holders. The
amount of the dividend will increase the retained deficit and increase common
stock by an equal amount.
The cost of the exchange will reduce our total capital. Both the conversion
of preferred to common and the payment of dividends will have no impact on total
capital.
Assuming 10.1 shares of common stock and 10.1 warrants are issued to
holders of the Series A Preferred Stock, and assuming a market value of $4.20
for our common stock, the amount of the dividend for accounting purposes only,
which will be subtracted from earnings available for common shares, will be
approximately $1.9 million.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material United States federal income tax
consequences to the holders of shares of Series A Preferred Stock who, pursuant
to the exchange described herein, exchange such shares for shares of common
stock and the warrants. Unless otherwise stated, this summary deals only with
shares of common stock and the warrants held as capital assets by persons who
exchange shares of Series A Preferred Stock. It does not deal with special
classes of holders such as banks, thrifts, real estate investment trusts,
regulated investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors, foreign governments or with persons that hold
shares of common stock, the warrants or Series A Preferred Stock as a position
in a "straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to stockholders, partners or beneficiaries of a holder of shares of
common stock or the warrants. Further, it does not include any description of
any alternative minimum tax consequences or the tax laws of any state, local or
foreign government that may be applicable to persons holding shares of common
stock or the warrants or to a holder's decision to exchange shares of Series A
Preferred Stock for shares of common stock or the warrants. This summary is
based on the Internal Revenue Code of 1986, the Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, in effect as
of the date hereof, all of which are subject to change, possibly on a
retroactive basis.
Because the extent to which the holders will participate in the exchange
offer cannot be predicted, this discussion is qualified as to certain matters,
as set forth below. Holders should also note that these opinions are not binding
on the Internal Revenue Service or the courts and that we have not sought, and
do not intend to seek, a ruling from the Service as to the United States federal
income tax consequences of the exchange offer.
ALL HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF AN EXCHANGE
OF SHARES OF SERIES A PREFERRED STOCK FOR SHARES OF COMMON STOCK AND THE
WARRANTS RECEIVED IN THE EXCHANGE OFFER IN LIGHT OF THEIR OWN PARTICULAR
CIRCUMSTANCES.
FEDERAL INCOME TAX TREATMENT OF THE EXCHANGE
The exchange should be viewed for federal income tax purposes as a
"recapitalization" within the meaning of Section 368(a)(1)(E) of the Code, and
thus tax-free except as noted below.
The result of this exchange may be to increase the interest of the holders
of the Series A Preferred Stock in our earnings and profits. However, no taxable
income will result from this increase, except as discussed below under the
heading, "Federal Income Tax Treatment of Accrued But Unpaid Dividends." See,
Treasury Regulation Section 1.305-5(d) Example 2. This exchange should be
regarded as an isolated transaction that is not part of a plan to increase
periodically the proportionate interest of any stockholder in the assets or
earnings and profits of the Company.
57
Gain, loss and tax basis, determined as described below, must be calculated
separately for each block of Series A Preferred Stock (i.e., Series A Preferred
Stock acquired at the same time in a single transaction) held by a holder.
In addition, corporate holders should also refer to the discussion below
entitled "Corporate Stockholders" for special rules concerning the taxation of
dividends received by corporations.
If the exchange is not treated as a "recapitalization" for United States
federal income tax purposes, then the distribution of the common stock and
warrants to the holders of the Series A Preferred Stock would be governed by
Sections 301 and 305 of the Code. Section 305(b)(4) will treat the distribution
as a taxable stock dividend. Pursuant to Section 301, a holder (i) will not
recognize any loss on the exchange, and (ii) will recognize dividend income
(rather than capital gain) in an amount equal to the fair market value of the
common stock, to the extent of the holder's proportionate share of our current
or accumulated earnings and profits, and (iii) will recognize gain to the extent
that such fair market value exceeds the dividend income and the holder's
adjusted basis. The following discussion assumes that the exchange will be
treated as a recapitalization for federal income tax purposes.
EXCHANGE OF SERIES A PREFERRED STOCK FOR COMMON STOCK AND WARRANTS
The exchange of Series A Preferred Stock for shares of common stock and
warrants will not be a taxable exchange for United States federal income tax
purposes, but nonetheless may be taxable to the limited extent discussed below
under the heading, "Federal Income Tax Treatment of Accrued But Unpaid
Dividends." The exchanging holder's tax basis in the shares of common stock and
warrants received in the exchange will equal such holder's basis in the Series A
Preferred Stock surrendered and the holding period for such common stock and
warrants will be the same as for the surrendered Series A Preferred Stock.
Though the gain from additional property, including securities received
pursuant to an exchange offer must be recognized by a holder for tax purposes,
rights to acquire securities, such as the warrants in this exchange offer, are
treated as securities with no principal amount and therefore no gain must be
recognized for federal income tax purposes upon receipt of the warrants.
FEDERAL INCOME TAX TREATMENT OF ACCRUED BUT UNPAID DIVIDENDS
We intend to give holders that exchange shares of Series A Preferred Stock
having accrued and unpaid dividends additional shares of common stock in full
satisfaction of the accrued and unpaid dividends. Each holder receiving such
shares of common stock will recognize dividend income in an amount equal to the
amount of dividends in arrears with respect to the shares of Series A Preferred
Stock tendered in the exchange offer. (Depending on the fair market value of the
shares of the Common stock, a lesser amount may be taxable. See, Treasury
Regulation Sections 1.305-7(c) and 1.368-2(e)(5)).
SALE OF COMMON STOCK
A holder that sells shares of common stock received in the exchange offer
will recognize gain or loss equal to the difference between its adjusted tax
basis in the shares of common stock sold and the amount realized on such sale.
Generally, such gain or loss will be capital gain or loss. Whether the capital
gain or loss is long-term will be determined by the holding period for such
shares of common stock. A holder's adjusted tax basis in such shares of common
stock and the holding period for such shares of common stock will be determined,
in part by reference to the holder's basis and holding period in the Series A
Preferred Stock exchanged for such shares of common stock. The same rules apply
to the warrants. See "--Exchange of Series A Preferred Stock for common stock
and warrants" above, for a specific description of the determination of basis
and holding periods for shares of common stock and warrants received in the
Exchange Offer.
Shares of common stock purchased through the exercise of any warrants
received will be taxed similarly upon the sale of such shares of common stock,
with the holding period determined from the date of the exercise of the
warrants.
58
PLAN OF DISTRIBUTION
We will receive no proceeds in connection with the exchange offer.
The Series A Preferred Stock was issued to a limited number of
sophisticated investors without the participation of any underwriter or broker.
The exchange offer is also being undertaken by us without the participation on
our behalf of any underwriter or broker. Shares and warrants received directly
by investors who are not our affiliates may be freely resold, although we do not
expect to any market to develop for the warrants due to the limited number
outstanding and the small number of holders. Shares of common stock and warrants
received by our affiliates may be resold in compliance with the requirements of
SEC Rule 144.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Therefore we file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Those reports, proxy
statements and other information may be obtained:
- At the Public Reference Room of the Securities and Exchange
Commission, Room 1024 -- Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549;
- At the public reference facilities at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center,
13th Floor, New York, New York 10048 or Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
- By writing to the Securities and Exchange Commission, Public Reference
Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549;
- At the offices of The Nasdaq Stock Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006; or
- From the Internet site maintained by the Securities and Exchange
Commission at http://www.sec.gov, which contains reports, proxy and
information statements and other information regarding issuers that
file electronically with the Securities Exchange Commission.
Some locations may charge prescribed or modest fees for copies.
LEGAL MATTERS
Certain legal matters relating to the issuance of the common stock and
common stock purchase warrants will be passed upon for Unity Bancorp, Inc. by
Windels Marx Lane & Mittendorf, LLP, New Brunswick, New Jersey.
EXPERTS
The consolidated financial statements of Unity Bancorp, Inc. as of December
31, 2000 and 1999, and for the years then ended, have been included herein and
in the Registration Statement in reliance upon the report of KPMG LLP,
Independent Certified Public Accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements as of and for the year ended December 31, 1998
included in this prospectus and elsewhere in this Registration Statement on Form
S-4 have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
Consolidated Statements of Financial Condition as of March 31, 2001,
December 31, 2000 And March 31, 2000 ................................................................ F-1
Consolidated Statements of Operations for the three months ended March,
31, 2001, December 31, 2000 and March 31, 2000 ...................................................... F-2
Consolidated Statements of Changes in Shareholders' Equity for the
three months ended March 31, 2001 and 2000 .......................................................... F-3
Consolidated Statements of Cash Flows for the three months ended March
31, 2001 and March 31, 2000 ......................................................................... F-4
Notes to Unaudited Consolidated Condensed Financial Statements (unaudited) .......................... F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Independent Auditor's Report ........................................................................ F-7
Report of Independent Public Accountants ............................................................ F-8
Consolidated Balance Sheets as of December 31, 2000 and 1999......................................... F-9
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 .......... F-10
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998 ................................................................... F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 ................................................................... F-12
Notes to Consolidated Financial Statements .......................................................... F-13
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share amounts) (UNAUDITED) (AUDITED) (UNAUDITED)
03/31/01 12/31/00 03/31/00
-------- -------- --------
ASSETS
Cash $ 16,027 $ 13,740 $ 19,464
Fed funds sold 36,500 31,500 3,500
Securities - available for sale 53,497 37,809 39,510
Securities - held to maturity 25,666 33,028 34,016
--------- --------- ---------
Total securities 79,163 70,837 73,526
SBA loans held for sale 7,337 6,741 3,839
SBA loans 26,251 23,436 14,383
Commercial loans 85,971 88,375 104,210
Mortgage loans 76,026 76,924 75,909
Consumer loans 28,363 30,664 88,728
--------- --------- ---------
Total loans 223,948 226,140 287,069
Allowance for loan losses 2,550 2,558 2,387
--------- --------- ---------
Net loans 221,398 223,582 284,682
Premises and equipment, net 9,174 9,380 11,906
Accrued interest receivable 2,810 2,836 3,314
Other assets 1,972 4,128 13,323
--------- --------- ---------
Total assets $ 367,044 $ 356,003 $ 409,715
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing $ 53,046 $ 53,108 $ 58,613
Interest bearing 107,039 106,263 115,716
Savings deposits 31,115 30,634 36,697
Time deposits 98,776 95,111 95,038
Time, $100,000 and over 41,112 35,202 71,275
--------- --------- ---------
Total deposits 331,088 320,318 377,339
Other debt 12,915 12,899 3,876
Accrued interest payable 885 667 1,046
Accrued expense and other liabilities 476 805 1,849
--------- --------- ---------
Total liabilities $ 345,364 $ 334,689 $ 384,110
========= ========= =========
Commitments and contingencies
Shareholders' equity
Preferred stock, class A, 10%, cumulative and convertible
103,500 shares authorized, issued and outstanding 4,929 4,929 4,929
Common stock, no par value, 7,500,000 shares authorized 26,234 26,234 26,224
Treasury stock, at cost, 156,860 shares (1,762) (1,762) (1,762)
Retained deficit (7,665) (7,793) (2,897)
Accumulated other comprehensive loss (56) (294) (889)
--------- --------- ---------
Total Shareholders' Equity $ 21,680 $ 21,314 $ 25,605
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 367,044 $ 356,003 $ 409,715
========= ========= =========
Issued common shares 3,863,568 3,863,568 3,861,568
Outstanding common shares 3,706,708 3,706,708 3,704,708
See accompanying notes to the consolidated financial statements.
F-1
UNITY BANCORP, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED: (unaudited) (audited) (unaudited)
(in thousands, except share and share amounts) 03/31/01 12/31/00 03/31/00
------------ ------------ -------------
Interest income:
Fed funds sold and interest on deposits $ 454 $ 899 $ 10
Securities - AFS 657 677 650
Securities - HTM 473 492 513
--------- --------- ---------
Total securities interest income 1,130 1,169 1,163
SBA loans 851 793 442
Commercial loans 1,885 2,079 2,250
Mortgage loans 1,139 1,158 1,436
Consumer loans 557 793 1,800
--------- --------- ---------
Total loan interest income 4,432 4,823 5,928
--------- --------- ---------
Total interest income 6,016 6,891 7,101
Interest expense:
Interest bearing demand deposits 973 1,291 1,140
Savings deposits 178 164 229
Time deposits 2,007 2,448 2,272
--------- --------- ---------
Total deposit interest expense 3,158 3,903 3,641
Borrowings 195 34 584
--------- --------- ---------
Total interest expense 3,353 3,937 4,225
Net interest income 2,663 2,954 2,876
--------- --------- ---------
Provision for loan losses 150 290 246
--------- --------- ---------
Net interest income after provision for loan losses 2,513 2,664 2,630
Non-interest Income:
Deposit service charges 327 326 268
Loan and servicing fees 291 307 266
Gain (loss) on loan sales 402 144 (133)
Net security gains (losses) 34 (2) 1
Other income 107 3,356 142
--------- --------- ---------
Total non-interest income 1,161 4,131 544
Non-interest expense:
Compensation and benefits 1,628 2,014 2,301
Occupancy 413 286 684
Processing and communications 482 598 594
Furniture and equipment 263 554 63
Professional fees 207 506 288
Deposit insurance 224 109 47
Loan servicing costs 75 304 327
Other expenses 248 1,283 595
--------- --------- ---------
Total non-interest expense 3,540 5,654 4,899
--------- --------- ---------
Net income (loss) before provision (benefit) for income taxes $ 134 $ 1,141 $ (1,725)
Provision (benefit) for income taxes 6 2,478 (709)
--------- --------- ---------
Net income (loss) $ 128 $ (1,337) $ (1,016)
========= ========= =========
Preferred stock dividends - paid and unpaid 129 125 25
--------- --------- ---------
Net loss to common shareholders $ (1) $ (1,462) $ (1,041)
========= ========= =========
Net loss per common share - Basic and diluted $ (0.00) $ (0.40) $ (0.27)
Weighted average shares outstanding - Basic and diluted 3,706,708 3,706,708 3,704,708
See accompanying notes to the consolidated financial statements.
F-2
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
------------------------------------------------------------------------------------
Accumulated
Other Total
Preferred Common Treasury Retained Comprehensive Shareholders'
(In thousands except share amounts) Stock Stock Stock Earnings (Loss) Equity
------------------------------------------------------------------------------------
Balance, December 31, 1999 $ -- $26,224 $ (1,762) $(1,856) $ (814) $ 21,792
------------------------------------------------------------------------------------
Comprehensive loss:
Net Loss (1,016) (1,016)
Unrealized holding loss on securities
arising during the period, net of tax $46 (75) (75)
-------------
Total comprehensive loss (1,091)
-------------
Preferred stock dividends paid (25) (25)
Issuance of preferred stock 4,929 4,929
------------------------------------------------------------------------------------
Balance, March 31, 2000 $4,929 $26,224 $ (1,762) $(2,897) $ (889) $ 25,605
------------------------------------------------------------------------------------
Balance, December 31, 2000 $4,929 $26,234 $ (1,762) $(7,793) $ (294) $ 21,314
Comprehensive income:
Net Income 128 128
Unrealized holding gain on securities
arising during the period, net of tax $146 238 238
-------------
Total comprehensive income 366
------------------------------------------------------------------------------------
Balance, March 31, 2001 $4,929 $ 26,234 $ (1,762) $(7,665) $ (56) $ 21,680
====================================================================================
See accompanying notes to the consolidated financial statements.
F-3
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------------------------
For the three months ended
March 31,
----------------------------
(In thousands, except per share amounts) 2001 2000
----------------------------
Operating activities:
Net income (loss) $ 128 $ (1,016)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for loan losses 150 246
Depreciation and amortization 240 314
Net gain on sale of securities (34) (1)
(Gain) loss on sale of loans (402) 133
(Gain) loss on sale of fixed assets (2) 8
Gain on sale of OREO -- (42)
Net change in other assets and liabilities 2,056 (224)
----------------------------
Net cash provided by (used in) operating activities 2,136 (582)
============================
Investing activities:
Purchases of securities held to maturity (1,012) --
Purchases of securities available for sale (19,337) (45)
Maturities and principal payments on securities held to maturity 8,374 234
Maturities and principal payments on securities available for sale 3,618 487
Proceeds from sale of securities available for sale 302 28
Proceeds from sale of loans, net 7,526 40,607
Net increase in loans (5,090) (5,309)
Net increase in Federal funds sold (5,000) (3,500)
Increase in capital expenditures (4) (89)
Proceeds from sale of OREO property -- 789
Proceeds from sale of assets (12) 18
----------------------------
Net cash (used in) provide by investing activities (10,635) 33,220
============================
Financing activities:
Increase in deposits 10,770 19,801
Increase (decrease) in borrowings 16 (53,000)
Proceeds from preferred stock offering, net -- 4,929
Dividends on preferred stock -- (25)
----------------------------
Net cash provided by (used in) financing activities 10,786 (28,295)
----------------------------
Increase in cash 2,287 4,343
----------------------------
Cash at beginning of year 13,740 15,121
----------------------------
Cash at end of period $16,027 $19,464
----------------------------
Supplemental disclosures:
Cash:
Interest paid $ 3,142 $ 4,378
Non-Cash investing activities:
Transfer of loan to Other Real Estate Owned 140 --
============================
See accompanying notes to the consolidated financial statements.
F-4
UNITY BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
NOTE 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary,
Unity Bank (the "Bank", or when consolidated with the Parent Company, the
"Company"), and reflect all adjustments and disclosures which are, in the
opinion of management, necessary for a fair presentation of interim results. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior years' amounts
to conform to the current year presentation. The financial information has been
prepared in accordance with generally accepted accounting principles and has not
been audited. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the statements of financial condition and
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Estimates that are particularly susceptible to significant changes related
to the determination of the allowance for loan losses. Management believes that
the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions in the
market. The interim unaudited consolidated financial statements included herein
have been prepared in accordance with instructions for Form 10-Q and the rules
and regulations of the Securities and Exchange Commission ("SEC"). The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results, which may be expected for the entire year. As used in
this Form 10-Q, "we" and "us" and "our" refer to Unity Bancorp Inc and its
consolidated subsidiary, Unity Bank, depending on the context. Interim financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 2000,
included in the Company's annual report on Form 10-KSB.
NOTE 2. LITIGATION
The Company may, in the ordinary course of business become a party to
litigation involving collection matters, contract claims and other legal
proceedings relating to the conduct of its business. The company does not
believe that any existing legal claims or proceedings will have a material
impact on the Company's financial position, although they could have a material
impact on the Company's results of operations.
During August, 2000, Mr. Robert J. Van Volkenburgh, our former Chairman of
the Board and Chief Executive Officer, resigned from his positions with us. In
February, 2001, Mr. Van Volkenburgh filed a complaint in the Superior Court of
New Jersey alleging breach of certain employment agreements. We intend to
vigorously defend ourselves from any claims for payment under these agreements.
We believe we have strong defenses to the claims made by Mr. Van Volkenburgh and
he is not likely to succeed in this regard. No discovery has taken place. Our
position is based upon what we know as of the date of this prospectus, and we
may change our opinion based on future developments.
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 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.
F-5
In accordance with the capital plan, in 2000, the Company raised a net $4.9
million of a newly created class of preferred stock, without Securities and
Exchange Commission registration, and reduced its financial assets through sales
of loan and deposit portfolios. The Company and the Bank have met the federal
minimum risk-based capital requirements since the March 2000 preferred stock
offering. The Bank has until December 2001 to achieve the 6.0 percent Tier 1
leverage ratio required by the New Jersey Department of Banking and Insurance.
Both the Company and the Bank believe that they are in compliance with all other
provisions of the agreements. As of March 31, 2001, the Company has $518 of
dividends in arrears on its preferred stock.
NOTE 3. EARNINGS PER SHARE
The following is a reconciliation of the calculation of basic and dilutive
(loss) earnings per share.
---------------------------------------
WEIGHTED LOSS
(In thousands, except share data amount)s NET AVERAGE PER
For the quarter-ended March 31, 2000 LOSS SHARES SHARE
---------------------------------------
Basic loss per share -
Loss to common shareholders $(1,016) 3,704,708 $(0.27)
Effect of dilutive securities- stock options, and
convertible preferred stock -- -- --
Diluted loss per share - Loss to common ---------------------------------------
shareholders plus assumed conversions $(1,016) 3,704,708 $(0.27)
=======================================
For the quarter ended March 31, 2001
Basic loss per share -
Loss to common shareholders $(1) 3,706,708 $(0.00)
Effect of dilutive securities- stock options, and
convertible preferred stock -- -- --
Diluted loss per share - Loss to common ---------------------------------------
shareholders plus assumed conversions $ (1) 3,706,708 $(0.00)
=======================================
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, and Amendment to FASB Statement No. 133". Statement No. 138 amends
certain aspects of Statement No. 133 to simplify the accounting for derivatives
and hedges under Statement No. 133. Statement No. 138 is effective upon the
company's adoption of Statement. No. 133 (January 1, 2001). The adoption of
Statements No. 133 and 138 did not have a material impact on the Company's
financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (A
Replacement of FASB Statement 125)." SFAS No. 140 supersedes and replaces the
guidance in SFAS No. 125 and, accordingly, provides guidance on the following
topics: securitization transactions involving financial assets; sales of
financial assets such as receivables, loans and securities; factoring
transactions; wash sales; servicing assets and liabilities; collateralized
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations; and extinguishment of liabilities. The provisions of SFAS
No. 140 are effective for transactions entered into after March 31, 2001,
companies with calendar year fiscal year ends that hold beneficial interest from
previous securizations were required to make additional disclosures in their
December 31, 2000 financial statements. The adoption of SFAS No. 140 did not
have a material impact on the Company's financial statements.
F-6
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Unity Bancorp, Inc:
We have audited the accompanying consolidated balance sheets of Unity
Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Unity Bancorp, Inc. and
subsidiary as of December 31, 2000 and 1999 and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Short Hills, New Jersey
February 28, 2001
F-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Unity Bancorp, Inc.:
We have audited the accompanying consolidated statement of income, changes in
shareholders' equity, and cash flows of Unity Bancorp, Inc. (a Delaware
corporation) and subsidiary for the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Unity
Bancorp, Inc. and subsidiary for the year ended December 31, 1998, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 22, 1999
F-8
UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
--------------------------
DECEMBER 31, 2000 1999
--------------------------
ASSETS
Cash and due from banks $ 13,740 $ 15,121
Federal funds sold 31,500 0
Securities:
Available for sale 37,809 40,099
Held to maturity, (fair value of $32,153 and $32,270) 33,028 34,250
---------------------------
Total securities 70,837 74,349
---------------------------
Loans held for sale - SBA loans 6,741 3,745
Loans held for sale - ARM loans 0 36,362
Loans held to maturity 219,399 282,425
---------------------------
Total loans 226,140 322,532
Less: Allowance for loan losses 2,558 2,173
---------------------------
Net loans 223,582 320,359
---------------------------
Premises and equipment, net 9,380 12,370
Accrued interest receivable 2,836 2,862
Other assets 4,128 13,908
---------------------------
Total Assets $356,003 $438,969
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits
Non-interest bearing demand deposits $ 53,108 $ 65,079
Interest bearing demand and saving deposits 136,896 142,253
Certificates of deposit, under $100,000 95,112 79,104
Certificates of deposit, $100,000 and over 35,202 71,102
---------------------------
Total Deposits 320,318 357,538
---------------------------
Borrowed funds 10,000 53,000
Obligation under capital leases 2,899 4,096
Accrued interest payable 667 1,199
Accrued expenses and other liabilities 805 1,344
---------------------------
Total liabilities 334,689 417,177
---------------------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock class A, 10% cumulative and convertible,
103,500 shares issued and outstanding 4,929 0
Common stock, no par value, 7,500,000 shares authorized,
3,863,568 shares issued and 3,706,708 outstanding in 2000;
3,861,568 shares issued and 3,704,708 outstanding in 1999 26,234 26,224
Treasury stock, at cost, 156,860 shares (1,762) (1,762)
Retained deficit (7,793) (1,856)
Accumulated other comprehensive loss, net of tax benefit (294) (814)
---------------------------
Total shareholders' equity 21,314 21,792
---------------------------
Total Liabilities and Shareholders' Equity $356,003 $438,969
===========================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-9
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and share amounts)
-----------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-----------------------------------------
Interest Income:
Interest on loans $ 22,132 $ 19,067 $ 13,355
Interest on securities 4,630 4,107 3,487
Interest on Federal funds sold 1,255 514 638
-----------------------------------------
Total interest income 28,017 23,688 17,480
Interest expense on deposits 15,586 11,497 7,142
Interest expense on borrowings 736 1,241 23
-----------------------------------------
Total interest expense 16,322 12,738 7,165
-----------------------------------------
Net interest income 11,695 10,950 10,315
Provision for loan losses 716 1,743 804
-----------------------------------------
Net interest income after provision for loan losses 10,979 9,207 9,511
Non-interest income:
Service charges on deposit accounts 1,174 778 901
Gain on sale of loans, net 1,182 3,063 2,394
Net gain on sale of securities 3 193 255
Other income 5,307 1,572 857
-----------------------------------------
Total non-interest income 7,666 5,606 4,407
Non-interest expense:
Salaries and employee benefits 9,198 8,710 4,743
Occupancy expense 2,230 2,383 1,037
Other operating expenses 12,290 9,485 4,719
-----------------------------------------
Total non-interest expense 23,718 20,578 10,499
-----------------------------------------
(Loss) Earnings before provision (benefit) for income taxes (5,073) (5,765) 3,419
Provision (benefit) for income taxes 839 (2,387) 1,282
-----------------------------------------
Net (loss) earnings $ (5,912) $ (3,378) $ 2,137
=========================================
Preferred stock dividends - paid and unpaid 413 0 0
-----------------------------------------
Net (loss) earnings to common shareholders $ (6,325) $ (3,378) $ 2,137
=========================================
(Loss) Earnings per Share - Basic $ (1.71) $ (0.91) $ 0.67
(Loss) Earnings per Share - Diluted $ (1.71) $ (0.91) $ 0.64
Weighted Average Common Shares Outstanding - Basic 3,706,047 3,723,448 3,198,813
Weighted Average Common Shares Outstanding - Diluted 3,706,047 3,723,448 3,358,844
-----------------------------------------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-10
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
---------------------------------------------------------------------------------
ACCUMULATED
RETAINED OTHER TOTAL
COMMON PREFERRED EARNINGS TREASURY COMPREHENSIVE SHAREHOLDERS'
---------------------------------------------------------------------------------
Balance, December 31, 1997 $17,127 $ 0 $ 2,901 $ 0 $ (38) $19,990
======= ====== ======= ====== ===== =======
Comprehensive income:
Net Income 2,137 2,137
Cumulative effect of implementation of
FASB 133 on unrealized gain on
securities available for sale, net 71 71
of taxes
Unrealized holding loss on
securities arising during the
period, net of tax of $101 (165) (165)
-----
Total comprehensive income 2,043
Common stock - cash dividends: -----
$0.20 per share (504) (504)
Issuance of common stock
Warrant conversion 5,649 5,649
Dividend reinvestment plan (10) 195 185
Grants and option, 17,701 shares 380 268 648
Purchase of treasury stock, 97,700 shares (1,665) (1,665)
-----------------------------------------------------------------------------
Balance, December 31, 1998 $23,146 $ 0 $ 4,534 $(1,202) $(132) $26,346
=============================================================================
Comprehensive loss:
Net Loss (3,378) (3,378)
Unrealized holding loss on
securities arising during the
period, net of tax of $418 (682) (682)
-----
Total comprehensive loss (4,060)
-----
Common stock - cash dividends:
$0.24 per share (854) (854)
Common stock - stock dividend 2,158 (2,158)
Issuance of common stock
CMA acquisition, 102,459 shares 1,100 1,100
Warrants and Grants, 26,752 shares (180) 423 243
Purchase of treasury stock, 92,700 shares (983) (983)
-----------------------------------------------------------------------------
Balance, December 31, 1999 $26,224 $ 0 $(1,856) $(1,762) $(814) $21,792
=============================================================================
Comprehensive loss:
Net Loss (5,912) (5,912)
Unrealized holding gain on
securities arising during the
Period, net of tax of $319 520 520
-----
Total comprehensive loss (5,392)
-----
Preferred stock dividends paid (25) (25)
Issuance of common stock:
2,000 shares 10 10
Issuance of preferred stock 4,929 4,929
-----------------------------------------------------------------------------
Balance, December 31, 2000 $26,234 $4,929 $(7,793) $(1,762) $(294) $21,314
=============================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-11
UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) earnings $ (5,912) $ (3,378) $ 2,137
Adjustments to reconcile net (loss) earnings to net cash used in operating
activities
Write-off of intangible 3,208 0 0
Provision for loan losses 716 1,743 804
Depreciation, amortization, and accretion, net 1,639 1,590 447
Deferred tax provision (benefit) 839 496 (262)
Net gain on sale of securities (3) (193) (255)
Gain on sale of loans (1,182) (3,063) (2,394)
Gain on sale of deposits (3,477) 0 0
Stock grants 10 286 268
Loss on sale of furniture, fixtures & equipment 205 0 0
Write-down and gain on sale of other real estate owned 112 0 0
Decrease (Increase) in accrued interest receivable and other assets 2,192 (5,451) (1,672)
(Decrease) increase in accrued interest payable, accrued expenses, and other
liabilities (1,071) 1,441 28
----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,724) (6,529) (899)
----------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of securities held to maturity 0 (17,494) (14,064)
Purchases of securities available for sale (145) (39,596) (86,763)
Maturities and principal payments on securities held to maturity 1,222 2,683 18,523
Maturities and principal payments on securities available for sale 2,449 5,175 56,596
Proceeds from sale of securities available for sale 509 14,899 26,243
Purchases of loans 0 (56,070) 0
Proceeds from sale of loans 112,944 27,343 20,626
Net increase in loans (15,701) (126,523) (51,149)
Redemption (purchase) of bank owned life insurance 2,203 3,895 (6,000)
Capital expenditures (825) (5,291) (1,733)
CMA acquisition 0 (1,700) 0
Proceeds from sale of ORE property 1,251 0 0
Proceeds from sale of FF&E 775 0 0
----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities 104,682 (192,679) (37,721)
----------------------------------------------------------------------------------------------------------------------
Financing activities:
Increase in deposits 10,821 130,678 34,446
Sale of deposits (44,564) 0 0
(Decrease) increase in borrowings (43,000) 53,000 0
Proceeds from issuance of preferred stock, net 4,929 0 0
Proceeds from issuance of common stock, net 0 0 6,019
Treasury stock purchases 0 (983) (1,665)
Treasury stock DRIP dividends 0 0 195
Cash dividends on preferred stock (25) 0 0
Cash dividends on common stock 0 (854) (504)
----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (71,839) 181,841 38,491
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 30,119 (17,367) (129)
Cash and cash equivalents at beginning of year 15,121 32,488 32,617
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 45,240 $ 15,121 $ 32,488
----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Cash paid:
Interest paid $ 16,854 $ 11,947 $ 7,250
Income taxes (received) paid (143) 775 1,476
Non-cash investing activities:
Transfer to other real estate owned from loans 299 759 0
----------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OVERVIEW
The accompanying consolidated financial statements include the accounts of
Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary,
Unity Bank (the "Bank", or when consolidated with the Parent Company, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The Parent Company is a bank holding company incorporated in Delaware under
the Bank Holding Company Act of 1956, as amended. The Bank was granted a charter
by the New Jersey Department of Banking and Insurance and commenced operations
on September 13, 1991. The Bank provides a full range of commercial and retail
banking services through 12 branch offices located in Hunterdon, Somerset,
Middlesex, and Union counties in New Jersey. These services include the
acceptance of demand, savings, and time deposits; extension of consumer, real
estate, Small Business Administration and other commercial credits, as well as
personal investment advisory services through the Bank's wholly-owned
subsidiary, Unity Financial Services, Inc. Unity Investment Services, Inc. is
also a wholly-owned subsidiary of the Bank, used to hold part of the Bank's
investment portfolio. In the fourth quarter of 2000, the Bank discontinued the
operations of Certified Mortgage Associates, Inc ("CMA"), which it had acquired
in the first quarter of 1999 and accounted for under the purchase method of
accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Amounts requiring the use of significant estimates include the
allowance for loan losses, valuation of deferred tax assets, the carrying of
loans held for sale and other real estate owned, and the fair value disclosures
of financial instruments. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and
Federal funds sold.
SECURITIES
The Company classifies its securities into two categories, held to maturity
and available for sale. Securities are classified as securities held to maturity
based on management's intent and ability to hold them to maturity. Such
securities are stated at cost, adjusted for unamortized purchase premiums and
discounts using a method that approximates a level yield. Securities not
classified as securities held to maturity are classified as securities available
for sale and are stated at fair value. Unrealized gains and losses on securities
available for sale are excluded from results of operations and are reported as a
separate component of shareholders' equity, net of taxes. Securities classified
as available for sale include securities that may be sold in response to changes
in interest rates, changes in prepayment risks, or for asset/liability
management purposes. The cost of securities sold is determined on a specific
identification basis. Gains and losses on sales of securities are recognized in
the statements of operations on the date of sale.
LOANS HELD TO MATURITY AND LOANS HELD FOR SALE
Loans held to maturity are stated at the unpaid principal balance, net of
unearned discounts and net deferred loan origination fees and costs. Loan
origination fees, net of direct loan origination costs, are deferred and are
recognized over the estimated life of the related loans as an adjustment of the
loan yield.
Interest is credited to operations primarily based upon the principal
amount outstanding. When management believes there is sufficient doubt as to the
ultimate collectibility of interest on any loan, interest accruals are
discontinued and all past due interest previously recognized as income is
reversed and charged against current period earnings. Loans are returned to an
accrual status when collectibility is reasonably assured and when the loan is
brought current as to principal and interest.
The Company evaluates its loans for impairment. A loan is considered
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The Company has defined impaired loans to be all
non-accrual loans. Impairment of a loan is measured
F-13
based on the present value of expected future cash flows, net of estimated costs
to sell, discounted at the loan's effective interest rate. Impairment can also
be measured based on a loan's observable market price or the fair value of
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company establishes a
valuation allowance, or adjusts existing valuation allowances, with a
corresponding charge or credit to the provision for loan losses.
Loans held for sale are SBA loans, and for 1999, certain ARM loans, and are
reflected at the lower of aggregate cost or market value.
The Company originates loans to customers under a SBA program that
generally provides for SBA guarantees of 75% to 85% of each loan. The Company
generally sells the guaranteed portion of each loan to a third party and retains
the servicing. The non-guaranteed portion is generally held in the portfolio.
Serviced loans sold to others are not included in the accompanying
consolidated balance sheets. Income and fees collected for loan servicing are
credited to non-interest income when earned.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management considers
adequate to provide for probable loan losses as of the balance sheet date. The
allowance is increased by provisions charged to expense and is reduced by net
charge-offs. The level of the allowance is based on management's evaluation of
probable losses in the loan portfolio, after consideration of prevailing
economic conditions in the Company's market area.
Credit reviews of the loan portfolio, designed to identify potential
charges to the allowance are made during the year by management. A risk rating
system, consisting of multiple grading categories, is utilized as an analytical
tool to assess risk and the appropriate level of loss reserves. Along with the
risk system, management further evaluates risk characteristics of the loan
portfolio under current economic conditions and considers such factors as the
financial condition of the borrowers, past loan loss experience, and other
factors management feels deserve recognition in establishing an adequate
reserve. This risk assessment process is performed at least quarterly, and, as
adjustments become necessary, they are realized in the periods in which they
become known. Although management attempts to maintain the allowance at a level
deemed adequate to provide for probable losses, future additions to the
allowance may be necessary based upon certain factors including changes in
market conditions. In addition, various regulatory agencies periodically review
the adequacy of the Company's allowance for loan losses. These agencies may
require the Company to make additional provisions based on their judgments about
information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets, ranging from one to twenty years. Capitalized leases on
certain branches are included in premises and equipment and are amortized over
the lease life.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at the fair value less estimated
selling costs (net realizable value "NRV") at the date of acquisition, with a
charge to the allowance for loan losses for any excess over NRV. Subsequently,
other real estate owned is carried at the lower of cost or NRV, as determined by
current appraisals. Certain costs incurred in preparing properties for sale are
capitalized to the extent that the appraisal amount exceeds the carry value, and
expenses of holding foreclosed properties are charged to operations as incurred.
AMORTIZATION OF INTANGIBLE ASSETS
The Company recorded $3.9 million of intangible assets, associated with the
1999 acquisition of Certified Mortgage Associates, Inc., (CMA). In 2000, CMA's
operations were discontinued and as a result, the intangible asset, net of
accumulated amortization, was written-off. As of December 31,2000, the Company
has no intangible assets.
INCOME TAXES
The Company accounts for income taxes according to the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates applicable to taxable income for the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
F-14
Valuation reserves are established against certain deferred tax assets when
the collectibility of the deferred tax assets cannot be reasonably assured.
Increases or decreases in the valuation reserve are charged or credited to
income tax provision (benefit).
(LOSS) EARNINGS PER COMMON SHARE
Basic (loss) earnings per common share is computed by dividing the net
(loss) earnings to common shareholders for the period by the weighted average
number of common shares outstanding for the period. Diluted (loss) earnings per
common share is computed by dividing net (loss) earnings to common shareholders
for the period by the weighted average number of common shares outstanding for
the period presented adjusted for the effect of the stock options and warrants
outstanding, under the treasury stock method. In periods where there is a net
loss, diluted loss per common share equals basic loss per common share as
inclusion of options and warrants outstanding would cause an anti-dilutive
effect.
The conversion of the 10% cumulative preferred stock into common stock will
be considered dilutive and included in the calculation of diluted earnings per
share under the treasury stock when the Company's quarterly basic earnings per
share are in excess of $0.18.
COMPREHENSIVE (LOSS) EARNINGS
Comprehensive (loss) earnings consists of net (loss) earnings for the
current period and the change in unrealized (loss) gain on securities available
for sale, net of tax that was reported as a component of shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". The interpretation
clarifies certain issues with respect to the application of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). The interpretation results in a number of changes in the
application of APB Opinion No. 25 including the accounting for modifications to
equity awards as well as extending APB Opinion No. 25 accounting treatment to
options granted to outside directors for their services as directors. The
provisions of the interpretation were effective July 1, 2000 and apply
prospectively, except for certain modifications to equity awards made after
December 15, 1998. The initial adoption of the interpretation did not have a
significant impact on the Company's financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment to FASB Statement No. 133". Statement No. 138 amends
certain aspects of Statement No. 133 to simplify the accounting for derivatives
and hedges under Statement No. 133. Statement No 138 is effective upon the
company's adoption of Statement No. 133 (January 1, 2001). The initial adoption
of Statements No. 133 and 138 did not have a material impact on the Company's
financial statements.
In September 2000, the FASB issued SFAS No.140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (A
Replacement of FASB Statement 125)." SFAS No. 140 supersedes and replaces the
guidance in SFAS No. 125 and, accordingly, provides guidance on the following
topics: securitization transactions involving financial assets; sales of
financial assets such as receivables, loans and securities; factoring
transactions; wash sales; servicing assets and liabilities; collateralized
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations; and extinguishment of liabilities. While most of the
provisions of SFAS No.140 are effective for transactions entered into after
March 31, 2001, companies with fiscal year ends that hold beneficial interest
from previous securizations will be required to make additional disclosures in
their December 31, 2000 financial statements. The initial adoption of SFAS No.
140 is not expected to have a material impact on the Company's financial
statements.
2. SECURITIES
Information on the Company's securities portfolio at December 31, 2000 and
1999 is as follows:
F-15
--------------------------------------------------------------------------------------------
2000 1999
(In thousands) Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
AVAILABLE FOR SALE: --------------------------------------------------------------------------------------------
US Treasury $ 7,097 $ 0 $ (22) $ 7,075 $ 6,988 $0 $ (91) $ 6,897
US Government Agencies 9,067 24 (39) 9,052 9,742 0 (260) 9,482
Mortgage-backed 17,912 5 (275) 17,642 19,808 0 (718) 19,090
States & political 0 0 0 0 655 2 0 657
Federal Home Loan Bank stock 2,720 0 0 2,720 2,675 0 0 2,675
Corporate debt 964 0 (56) 908 964 0 (42) 922
Equity 523 0 (111) 412 580 0 (204) 376
--------------------------------------------------------------------------------------------
Total securities available
for sale $38,283 $29 $(503) $37,809 $41,412 $2 $(1,315) $40,099
HELD TO MATURITY:
US Government Agencies $20,246 $ 0 $(620) $19,626 $20,245 $0 $(1,128) $19,117
Mortgage-backed 12,782 0 (255) 12,527 14,005 0 (852) 13,153
--------------------------------------------------------------------------------------------
Total securities held to
maturity $33,028 $ 0 $(875) $32,153 $34,250 $0 $(1,980) $32,270
============================================================================================
The table below provides the remaining contractual maturities and yields of
securities within the investment portfolios. The carrying value of securities at
December 31, 2000, is primarily distributed by contractual maturity.
Mortgage-backed securities and other securities, which may have principal
prepayment provisions, are distributed based on contractual maturity. Expected
maturities will differ materially from contractual maturities as a result of
early prepayments and calls. The total weighted average yield excludes equity
securities.
-----------------------------------------------------------------------------------------
Within After one year After five years After Total
one year through five years through ten years ten years Carrying
-----------------------------------------------------------------------------------------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Value Yield
---------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE AT FAIR
VALUE:
US Government and Federal $9,151 5.35% $ 998 6.75% $4,845 6.48% $ 1,133 7.37% $16,127 5.92%
agencies
Other Securities
Mortgage-backed 0 -- 0 -- 937 5.80% 16,705 6.54% 17,642 6.50%
Other Debt 0 -- 0 -- 0 -- 908 7.59% 908 7.59%
Equities, net 412 -- 2,720 -- 0 -- 0 -- 3,132 --
-----------------------------------------------------------------------------------------
Total Other 412 -- 2,720 -- 937 5.80% 17,613 6.60% 21,682 6.56%
-----------------------------------------------------------------------------------------
$9,563 5.35% $ 3,718 6.75% $5,782 6.37% $18,746 6.64% $37,809 6.26%
=========================================================================================
HELD TO MATURITY AT COST:
US Government and Federal $2,000 5.51% $12,500 5.70% $4,246 5.07% $ 1,500 7.39% $20,246 5.68%
agencies
Mortgage-backed 0 -- 0 -- 352 5.99% 12,430 6.41% 12,782 6.40%
-----------------------------------------------------------------------------------------
$2,000 5.51% $12,500 5.70% $4,598 5.14% $13,930 6.51% $33,028 5.96%
=========================================================================================
For 2000, gross security gains and losses were $4,600 and ($2,100)
respectively and for 1999, gross security gains and losses were $287,000 and
($94,000), respectively. For 1998, securities gains and losses were $320,000 and
($65,000), respectively. In 2000, securities with carrying values aggregating
$30,737,000 were pledged to secure public deposits. In 1999, securities with
carrying values aggregating $18,668,000 were pledged to secure public deposits
and $49,794,000 was pledged to secure borrowings. In 1998, securities with
carrying values aggregating $10,117,000 were pledged to secure public deposits.
F-16
3. LOANS
Loans outstanding by classification as of December 31, 2000 and 1999 are as
follows:
----------------------------
(In thousands) 2000 1999
----------------------------
Commercial & industrial $ 61,427 $ 43,523
Loans secured by real estate:
Non-residential properties 48,770 52,359
Residential properties 91,371 178,963
Construction 5,784 17,837
Loans to individuals 18,788 29,850
----------------------------
Total loans $226,140 $322,532
============================
SBA loans held for sale, totaling $6.7 million and $3.7 million at December
31, 2000 and 1999, respectively, are included in the commercial and industrial
totals. ARM loans held for sale, totaling $36.4 million at December 31, 1999 are
included in residential properties. There were no ARM loans held for sale at
December 31, 2000.
SBA loans sold to others and serviced by Unity are not included in the
accompanying consolidated balance sheets. The total amount of such loans
serviced, but owned by outside investors, amounted to approximately $86,544,000
and $65,712,000 at December 31, 2000 and 1999, respectively.
As of December 31, 2000 and 1999, the Bank's recorded investment in
impaired loans, defined as nonaccrual loans, was $2,903,000 and $1,412,000,
respectively, and the related valuation allowance was $417,000 and $219,000,
respectively. This valuation allowance is included in the allowance for loan
losses in the accompanying balance sheets. Interest income that would have been
recorded had these impaired loans performed under the original contract terms
was $313,000 in 2000, $206,000 in 1999 and $227,000 in 1998. Average impaired
loans for 2000 and 1999 were $2,326,000 and $1,472,000 respectively. At December
31, 2000, $1,272,000 of loans was past due greater than 90 days but still
accruing interest as compared to $166,000 at December 31, 1999. Management has
evaluated these loans and determined that they are both well collateralized and
in the process of collection.
The majority of the Company's loans are secured by real estate, a portion
of which are located outside of New Jersey.
In the ordinary course of business, the Company may extend credit to
officers, directors or their associates. These loans are subject to the
Company's normal lending policy. An analysis of such loans, all of which are
current as to principal and interest payments, is as follows:
(In thousands)
Loans to officers, directors or their associates at December 31, 1999 $ 3,893
New loans 1,441
Reductions through resignations (743)
Repayments (2,590)
---------
Loans to officers, directors or their associates at December 31, 2000 $ 2,001
=========
4. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on estimates. Ultimate losses may
vary from current estimates. These estimates are reviewed periodically and, as
adjustments become known, they are reflected in operations in the periods in
which they become known.
An analysis of the change in the allowance for loan losses during 2000,
1999, and 1998 is as follows:
(IN THOUSANDS) 2000 1999 1998
------ ------ ------
Balance at beginning of year $2,173 $1,825 $1,322
Provision charged to expense 716 1,743 804
Loans charged-off (372) (1,433) (329)
Recoveries on loans previously charged-off 41 38 28
------ ------ ------
Balance at end of year $2,558 $2,173 $1,825
====== ====== ======
F-17
5. PREMISES AND EQUIPMENT
The detail of premises and equipment as of December 31, 2000 and 1999 is as
follows:
-------------------------
(In thousands) 2000 1999
-------------------------
Land and buildings $2,793 $ 2,780
Capital leases 2,714 3,971
Furniture, fixtures and equipment 5,079 6,036
Leasehold improvements 2,119 2,321
-------------------------
Gross premises and equipment 12,705 15,108
Less: Accumulated depreciation and amortization (3,325) (2,738)
-------------------------
Net premises and equipment $9,380 $12,370
=========================
The Company has four capital lease locations that are sublet or assigned to
a third party, with the third party paying rent in equal amounts as per the
lease agreement between the Company and the lessor. Depreciation of premises and
equipment totaled $1,251,000, $956,000, and $427,000 in 2000, 1999, and 1998,
respectively.
6. OTHER ASSETS
The detail of other assets as of December 31, 2000 and 1999 are as follows:
-------------------------
(In thousands) 2000 1999
-------------------------
Intangibles $ 0 $ 3,595
Income taxes receivable 2,591 2,489
Net deferred tax asset 276 1,431
Prepaid Expenses 589 704
Cash surrender value of life insurance 0 2,203
Other real estate owned 142 1,505
Other Assets 530 1,981
---------------------------
Total Other Assets $5,948.00 $13,908
===========================
On December 30, 1998, the Company purchased life insurance policies on its
key directors and executive officers. In 1999, all policies, except one, were
canceled. This policy was canceled in 2000.
In 2000, the Company wrote off approximately $3.2 million of goodwill
intangible recognized in the 1999 acquisition of CMA.
7. DEPOSITS
The maturity distribution of time deposits for December 31, 2000 is as
follows:
-----------------------------------------------------------------
WITHIN 1 ONE TO TWO TWO TO THREE THREE TO FOUR OVER FOUR
(IN THOUSANDS) YEAR YEARS YEARS YEARS YEARS
----------------------------------------------------------------------------------------------------
At December 31, 2000
$100,000 or more $32,387 $1,127 $1,482 $ 206 $ 0
Less than $100,000 $77,227 $5,490 $5,485 $6,506 $404
-----------------------------------------------------------------
8. BORROWINGS
The following table is the period-end and average balance of FHLB
borrowings for the last two years with resultant rates:
----------------------------------------------
(amounts in thousands) 2000 1999
----------------------------------------------
FHLB Borrowings Amount Rate Amount Rate
-----------------------------------------------------------------------------------------
At December 31, $10,000 4.92% $53,000 5.66%
Year-to-date average $ 8,289 6.16% $16,971 5.59%
----------------------------------------------
The ten year borrowings at December 31, 2000 are callable after November
2001.
F-18
9. COMMITMENTS AND CONTINGENCIES
FACILITY LEASE OBLIGATIONS
The Company operates twelve branches, five branches under operating leases,
including its headquarters, four branches under capital leases and three
branches are owned. In addition, the Company has long term leases on four other
locations, which are sublet to a third party, with the third party paying rent
in equal amounts as per the lease agreement between the Company and the lessor.
The leases contractual expiration range between the years 2006 and 2014. The
following schedule summarizes the contractual rent payments for the future
years.
------------------------------------------------------------------------------------------------------------------------
(In thousands)
YEAR OPERATING LEASE RENTAL CAPITAL LEASE RENTAL RENT FROM SUBLET
---- PAYMENTS PAYMENTS LOCATIONS NET RENT EXPENSE
------------------------------------------------------------------------------------------------------------------------
2001 $632 $ 739 $ 347 $1,024
2002 645 758 358 1,045
2003 626 775 368 1,033
2004 584 802 379 1,007
2005 560 821 390 991
Thereafter 87 2,371 1,244 1,214
----------------------------------------------------------------------------------------------
Total rent expense, including the payments made under capital leases,
totaled $915,000, $1,290,000, and $619,000 for 2000, 1999 and 1998,
respectively.
LITIGATION
We 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 our business. Other than as set forth below, we do
not believe that any existing legal claims or proceedings will have a material
impact on our financial position, or materially impact our results of
operations.
August 14, 2000, Robert J. Van Volkenburgh, our former Chairman and Chief
Executive Officer, resigned from his positions with us. In February 2001, Mr.
Van Volkenburgh filed a complaint in the Superior Court of New Jersey alleging a
breach of certain employment agreements. We intend to vigorously defend
ourselves from any claims for payment under these agreements. We believe we have
strong defenses to the claims made by Mr. Van Volkenburgh and he is not likely
to succeed in this regard. No discovery has taken place. Our position is based
upon what we know as of the date of this prospectus, and we may change our
opinion based on future developments.
COMMITMENTS TO BORROWERS
Commitments to extend credit are legally binding loan commitments with set
expiration dates. They are to be disbursed, subject to certain conditions, upon
request of the borrower. The Company was committed to advance approximately
$42,193,000 to its borrowers as of December 31, 2000, as compared to $65,013,000
at December 31, 1999. At December 31, 2000, $13,580,000 of these commitments
expires after one year, as compared to $8,213,000 a year earlier.
10. SHAREHOLDERS' EQUITY
In April 1998, the Company declared a 3 for 2 stock split and a 5% stock
dividend was declared on November 23, 1998, for shareholders of record on
December 21, 1998 payable January 8, 1999. All share and per share information
for all periods presented in these financial statements has been adjusted to
give effect to the stock dividends and the stock splits.
On March 13, 2000, the Company completed an offering of shares of a newly
created class of preferred stock. The offering was undertaken without
registration with the Securities and Exchange Commission to a limited number of
sophisticated investors. The preferred stock bears a cumulative dividend rate of
10%, and is convertible into shares of the Company's common stock at an assumed
value of $7.25 per common share. The Company also has rights to force conversion
of its preferred stock into common stock starting in March 2002 at an assumed
common stock price of $7.25 per share. The Company obtained $5.2 million in
proceeds from this offering. The Company issued 103,500 shares of the preferred
stock, which are convertible into 713,793 shares of the Company's common stock
at a conversion rate of 6.8966 common. The accounting, legal and consulting
costs to issue the preferred stock totaled $0.3 million and were applied against
the proceeds.
The Company is prohibited under regulatory order, from paying dividends to
its shareholders, and the Bank is prohibited from paying a dividend to the
Company. At December 31, 2000, there were $388 thousand of preferred stock
dividends in arrears that have not been declared.
F-19
11. OTHER INCOME
The other income components for the years ended December 31, 2000, 1999,
and 1998 are as follows:
----------------------------------
(IN THOUSANDS) 2000 1999 1998
----------------------------------
SBA Fees $ 785 $ 671 $635
Loan Fees 355 394 70
Income from cash surrender value of life insurance 108 248 --
Non-deposit account transaction charges 225 144 32
Gain on sale of deposits 3,477 -- --
Other income 357 115 120
----------------------------------
Total other income $5,307 $1,572 $857
==================================
12. OTHER OPERATING EXPENSES
The other operating expense components for the years ended December 31,
2000, 1999, and 1998 are as follows:
----------------------------------
(IN THOUSANDS) 2000 1999 1998
----------------------------------
Professional services $ 1,471 $1,386 $ 887
Office expenses 1,885 1,986 1,042
Advertising expenses 815 881 370
Communication expenses 877 767 240
Bank services 1,052 802 491
FDIC insurance 311 192 116
Director fees 98 236 298
Operational losses 43 848 (1) 370 (2)
Loan expense 1,280 1,265 430
Amortization of intangibles 387 393 13
Write-off of CMA intangibles 3,208 -- --
Other expenses 863 729 462
-----------------------------------
Total other expense $12,290 $9,485 $4,719
===================================
(1) Includes a $786 thousand write-down of uncollected assets associated with
the check-kiting scheme.
(2) Includes a $300 thousand write-down of uncollected assets associated with
the check-kiting scheme.
13. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
-----------------------------------
(IN THOUSANDS) 2000 1999 1998
-----------------------------------
Federal--Current (benefit) provision $ (24) $(2,239) $1,274
--Deferred (benefit) provision (936) 496 (262)
-----------------------------------
Total Federal (benefit) provision $ (960) $(1,743) $1,012
-----------------------------------
State--Current (benefit) provision 25 (644) 270
--Deferred (benefit) provision (316) 0 0
-----------------------------------
Total State (benefit) provision $ (291) $ (644) $ 270
-----------------------------------
Valuation allowance 2,090 0 0
-----------------------------------
Total (benefit) provision for income taxes $ 839 $(2,387) $1,282
===================================
A reconciliation between the reported income taxes and the amount computed
by multiplying income before taxes by the statutory Federal income tax rate is
as follows:
-----------------------------------
(IN THOUSANDS) 2000 1999 1998
-----------------------------------
Federal income taxes at statutory rate $(1,725) $(1,960) $1,162
State income taxes, net of Federal income tax effect 95 (425) 178
-----------------------------------
Other 379 (25) (58)
-----------------------------------
Valuation allowance 2,090 0 0
-----------------------------------
Provision (benefit) for income taxes $ 839 $(2,387) $1,282
===================================
F-20
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. The components of the net deferred tax asset at December 31, 2000
and 1999 are as follows:
----------------------
(In thousands) 2000 1999
----------------------
Federal alternative minimum tax credit $ 70 $ 0
Allowance for loan losses 818 550
Unrealized loss on securities available for sale 180 499
Deferred loan costs (370) (591)
State net operating loss carry-forward 1,606 576
Mark to market valuation - loans held for sale 0 461
Other, net 62 (64)
----------------------
Net deferred tax asset $ 2,366 $1,431
Less: valuation allowance (2,090) 0
----------------------
Net deferred tax asset $ 276 $1,431
======================
The Company computes deferred income taxes under the asset and liability
method. Deferred income taxes are recognized for tax consequences of "temporary
differences" by applying enacted statutory tax rates to differences between the
financial reporting and the tax basis of existing assets and liabilities. A
deferred tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions subject to
reduction of the asset by a valuation allowance.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets may not be realized. The Company has
provided a valuation allowance of $2.1 million which reduced the deferred tax
asset to $276,000.
At December 31, 2000, the Company has available for federal and state tax
purposes, pre-tax net operating loss carryforwards of approximately $2.5 million
and $13.0 million, respectfully. Utilization of such net operating losses may be
significantly curtailed if a significant change of ownership occurs.
14. LOSS PER COMMON SHARE
The following is a reconciliation of the calculation of basic and dilutive
loss per common share. All share amounts have been restated to include the
effect of a 5% stock dividend paid on January 8, 1999.
---------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 2000 1999 1998
---------------------------------------------
Net (loss) income $(5,912) $(3,378) 2,137
Less: Paid and unpaid preferred stock dividends 413 0 0
---------------------------------------------
Net loss to common shareholders $(6,325) $(3,378) 2,137
---------------------------------------------
Weighted average common shares outstanding 3,706,047 3,723,448 3,198,813
Plus: Common stock equivalents 0 0 160,031
---------------------------------------------
Diluted average common shares outstanding 3,706,047 3,723,448 3,358,844
---------------------------------------------
Net loss per common share - basic $ (1.71) $ (0.91) $0.67
Net loss per common share - diluted $ (1.71) $ (0.91) $0.64
=============================================
15. REGULATORY MATTERS
A significant measure of the strength of a financial institution is its
capital base. Federal regulators have classified and defined capital into the
following components: (1) tier 1 capital, which includes tangible shareholders'
equity for common stock and qualifying preferred stock, and (2) tier 2 capital,
which includes a portion of the allowance for loan losses, certain qualifying
long-term debt and preferred stock which does not qualify for tier 1 capital.
Minimum capital levels are regulated by risk-based capital adequacy guidelines
which require a bank to maintain certain capital as a percent of assets and
certain off-balance sheet items adjusted for predefined credit risk factors
(risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1
capital as a percentage of risk-adjusted assets of 4.0% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.
In addition to the risk-based guidelines, regulators require that a bank
which meets the regulator's highest performance and operation standards maintain
a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of
4%. For those banks with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be
proportionately increased. Minimum leverage ratios for each bank are evaluated
through the ongoing regulatory examination process.
F-21
In connection with the Bank's branch expansion the New Jersey Department of
Banking and Insurance imposed a tier leverage ratio of 6% for the Bank. Due to
losses incurred during 1999, the Company and the Bank failed to meet the total
risk-based capital requirement of 8% at both September 30, 1999 and December 31,
1999. Because the Bank failed to satisfy the minimum capital requirements, it
was deemed to be "undercapitalized" under the Prompt Corrective Action
provisions of the Federal Deposit Insurance Act and the regulations of the FDIC.
Because the Company and the Bank failed to maintain minimum levels of
required capital the Bank and the Company were required to raise additional
capital. As a result of the capital deficiency, in the first quarter of 2000,
the Bank and the Company entered into Memoranda of Understanding with their
primary regulatory agencies. However, due to continued losses through the first
two quarters of 2000, and among other reasons, the Bank and Company entered into
stipulations and agreements with each of their respective regulators on July 18,
2000. Under these agreements, the Bank and the Company were each required to
take a number of affirmative steps including; hiring an outside consulting firm
to review the management structures, adopt strategic and capital plans which
will increase the Bank's leverage ratio to 6% or above, review and adopt various
policies and procedures, adopting programs with regard to the resolution of
certain criticized assets, and providing ongoing reporting to the various
regulatory agencies with regard to the Bank's and Company's progress in meeting
the requirements of the agreements. The agreements require the Bank and Company
to establish a compliance committee to oversee the efforts in meeting all
requirements of the agreements, and prohibited the Bank from paying a dividend
to the Company and the Company from paying dividends on its common or preferred
stock, without regulatory approval.
In accordance with the capital plan submitted to the regulators, during the
first quarter of 2000, the Company undertook an offering of shares of a newly
created class of preferred stock. The offering was undertaken without
registration with the Securities and Exchange Commission to a limited number of
sophisticated investors. The preferred stock bears a dividend rate of 10%, and
is convertible into shares of the Company's common stock at an assumed value of
$7.25 per common share. The Company obtained $5.2 million in gross proceeds from
this offering. The accounting, legal and consulting costs to issue the preferred
stock totaled $.3 million and were applied against the proceeds. The Holding
Company contributed $5.1 million of capital to the Bank in 2000.
In addition to the issuance of preferred stock, the Company under the
capital restoration plan agreed to improve capital by reducing its financial
assets. Pursuant to the plan, the Bank sold $36.4 million in adjustable rate
one-to-four family mortgages (ARM's) on March 7, 2000. In the third quarter, the
Bank entered into agreements to sell the deposits of five of its branches. The
transaction closed in December 2000, and the Bank realized a $3.5 million gain
on the sale of deposits, including the write-off of certain equipment in the
branches. In order to fund the sale of the branches, $44.8 million of home
equity loans were sold.
As a result of the preferred stock offering and the reduction of assets
through both loan sales and the sale of deposits and branches, both the Company
and the Bank meet the minimum federal capital adequacy requirements at December
31, 2000. The Bank has until December 2001 to achieve the 6% Tier 1 leverage
ratio required by the New Jersey Department of Banking and Insurance.
The Company's actual capital amounts and ratios are presented in the
following table.
------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2000-
Leverage ratio $21,539 5.50% => $15,670 4.00% => $19,588 5.00%
Tier I risk-based ratio $21,539 9.61% => $ 8,961 4.00% => $13,442 6.00%
Total risk-based capital $24,097 10.76% => $17,922 8.00% => $22,403 10.00%
ratio
AS OF DECEMBER 31, 1999-
Leverage ratio $18,883 4.35% => $17,348 4.00% < $21,685 5.00%
Tier I risk-based ratio $18,883 6.17% => $12,241 4.00% => $18,361 6.00%
Total risk-based capital $21,056 6.88% < $24,481 8.00% < $30,602 10.00%
ratio
------------------------------------------------------------------------------------
F-22
The Bank's actual capital amounts and ratios are presented in the following
table.
-----------------------------------------------------------------------------------
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
-------------------- -----------------------
(In thousands) Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------
(a)
AS OF DECEMBER 31, 2000-
Leverage ratio $20,394 5.24% => $15,579 4.00% => $19,474 5.00%
Tier I risk-based ratio $20,394 9.12% => $ 8,946 4.00% => $13,419 6.00%
Total risk-based capital $22,952 10.26% => $17,892 8.00% => $22,365 10.00%
ratio
AS OF DECEMBER 31, 1999-
(a)
Leverage ratio $17,215 4.01% => $17,181 4.00% < $21,476 5.00%
Tier I risk-based ratio $17,215 5.62% => $12,260 4.00% < $18,390 6.00%
Total risk-based capital $19,388 6.33% < $24,520 8.00% < $30,651 10.00%
ratio
-----------------------------------------------------------------------------------
16. EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) savings plan covering substantially all employees.
Under the Plan, an employee can contribute up to 15% of their salary on a tax
deferred basis. The Bank may also make discretionary contributions to the Plan.
The Bank contributed $42,000 and $39,000 to the Plan in 2000 and 1999,
respectively.
The Bank does not currently provide any post retirement or post employment
benefits to its employees other than the 401(k) plan.
The Company has five stock option Plans. These Plans allow the Board of
Directors to grant options to officers, employees and members of the Board.
Option prices are determined by the Board, provided however, that the option
price may not be less than 85% of the fair market value of the shares at the
date of the grant. The period during which the option is vested varies, but no
option may be exercised after 10 years from the date of the grant. As of
December 31, 2000, 811,876 shares have been reserved for issuance under the
Plans, 363,655 shares have been issued, leaving 448,221 shares available.
Transactions under these five stock option plans are summarized as follows:
----------------------------------------------
EXERCISE WEIGHTED
NUMBER OF PRICE PER AVERAGE
SHARES SHARE EXERCISE
PRICE
----------------------------------------------
Outstanding, December 31, 1997 125,824 $ 6.17 - $ 8.84 $ 7.41
--------
Options granted 363,322 10.59 - 15.24 11.14
Options exercised (46,560) 6.17 - 11.21 7.90
Options expired (20,476) 11.19 - 11.21 11.20
--------
Outstanding, December 31, 1998 422,110 $ 6.17 - $15.24 $10.38
========
Options granted 143,100 9.88 - 13.50 11.21
Options exercised 0
Options expired (36,990) 9.88 - 15.24 10.95
--------
Outstanding, December 31, 1999 528,220 $ 6.17 - $13.69 $10.57
========
Options granted 88,500 2.81 - 8.00 6.31
Options exercised 0
Options expired (315,864) 5.88 - 13.50 10.44
--------
Outstanding, December 31, 2000 300,856 $ 2.81 - $13.69 $ 9.45
---------------------------------------------
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its Option Plans. Under APB Opinion 25,
compensation costs for the stock option is not recognized. The Company's net
loss and loss per common share would have been reduced to the pro forma amounts
indicated in the following schedule had there been compensation costs for the
Company's stock option plans, based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123. The
estimated fair value of each award option was $4.59, $6.19, and $2.29 in 2000,
1999 and 1998, respectively.
F-23
SFAS 123 Proforma Restatement
(In thousands, except per share amounts) 2000 1999 1998
----------------------------------
Net loss-
As reported $(6,325) $(3,378) $2,137
Pro forma $(6,569) $(3,909) $1,638
Loss per share-
Basic as reported $ (1.71) $ (0.91) $ 0.67
Diluted as reported $ (1.71) $ (0.91) $ 0.64
Basic - Pro forma $ (1.77) $ (1.05) $ 0.51
Diluted - Pro forma $ (1.77) $ (1.05) $ 0.49
The fair value of each option grant under the Plans is estimated as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2000, 1999 and 1998; dividend
yields of 0.0%, 0.0%, and 2.0% respectively, expected volatility of 90.0%,
90.0%, and 33.8% respectively, risk-free interest rates of 5.55%, 5.75%, and
5.48% respectively, and expected lives of 3.4, 3.8, and 2.6 respectively.
The following table summarizes information about stock options outstanding
at December 31, 2000:
--------------------------------------------------------------------------------------------------------
SHARES SHARES
EXERCISE OUTSTANDING AT REMAINING EXERCISABLE AT
PRICE DECEMBER 31, 2000 CONTRACTUAL LIFE DECEMBER 31, 2000
--------------------------------------------------------------------------------------------------------
< $3.99 15,000 9.7 years 0
$4.00 - $5.99 13,500 9.5 years 200
$6.00 - $7.99 38,192 5.3 years 31,892
$8.00 - $9.99 33,750 5.0 years 19,350
$10.00 - $11.99 197,789 2.2 years 157,469
> $12.00 2,625 2.5 years 2,625
------------------- ------------------
$ 9.45 * 300,856 211,536
=================== ==================
* Weighted average exercise price
---------------------------------------------------------------------------------------------------------
Select key employees and Board members are eligible to participate in the
Company's two Stock Bonus Plans. Under the Plans, the Company may award stock
grants to those employees and Board members at its discretion. The Company
records an expense equal to the number of shares granted multiplied by the fair
market value of the stock at the date of grant. The Company granted 26,894
shares to employees and Board members in 1999, resulting in approximately
$289,000 in expense, compared to 24,573 shares in 1998, resulting in
approximately $320,000 in expense. No shares were granted in 2000. As of
December 31, 2000, the Company has 47,646 shares reserved for issuance under the
Stock Bonus Plans.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates for financial instruments are made at a discrete
point in time based upon relevant market information and information about the
underlying instruments.
Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgment regarding a number of
factors. These estimates are subjective in nature and involve some
uncertainties. Changes in assumptions and methodologies may have a material
effect on these estimated fair values. In addition, reasonable comparability
between financial institutions may not be likely due to a wide range of
permitted valuation techniques and numerous estimates which must be made. This
lack of uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying value is a reasonable
estimate of fair value.
SECURITIES
For the held to maturity and available for sale portfolios, fair values are
based on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
F-24
LOANS
The fair value of loans is estimated by discounting the future cash flows
using current market rates that reflect the credit, collateral, and interest
rate risk inherent in the loan.
DEPOSIT LIABILITIES
The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the future cash flows using
current market rates.
BORROWINGS
The fair value of the borrowings are estimated by discounting the projected
future cash flows using current market rates.
UNRECOGNIZED FINANCIAL INSTRUMENTS
At December 31, 2000, the Bank had standby letters of credit outstanding of
$282,000, as compared to $299,000 at December 31, 1999. The fair value of these
commitments is nominal.
The Bank does not generally charge a fee on loan commitments and,
consequently, there is no basis to calculate a fair value.
F-25
Below is the Company's estimated financial instruments fair value as of
December 31, 2000 and 1999:
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
--------------------------------------------------------------
Financial assets-
Cash and Federal funds sold $ 45,240 $ 45,240 $ 15,121 $ 15,121
Securities held to maturity $ 33,028 $ 32,153 $ 34,250 $ 32,270
Securities available for sale $ 37,809 $ 37,809 $ 40,099 $ 40,099
Loans, net of allowance for possible loan losses $223,582 $221,124 $320,359 $316,374
Financial liabilities- Total deposits $320,318 $320,579 $357,538 $356,843
Financial liabilities- Borrowings $ 10,000 $ 10,040 $ 53,000 $ 53,000
--------------------------------------------------------------
F-26
18. CONDENSED FINANCIAL STATEMENTS OF UNITY BANCORP, INC. (PARENT COMPANY ONLY)
-------------------------
Balance Sheets DECEMBER 31
-------------- -------------------------
(in thousands) 2000 1999
ASSETS: -------------------------
Cash $ 721 $ 606
Securities available for sale 412 376
Investment in Bank subsidiary 20,169 20,122
Other assets 117 756
-------------------------
Total assets $21,419 $21,860
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities $ 105 $ 68
Shareholders' equity 21,314 21,792
-------------------------
Total liabilities and shareholders' equity $21,419 $21,860
=========================
---------------------------------------
Statements of Operations DECEMBER 31
------------------------ ---------------------------------------
(in thousands) 2000 1999 1998
---------------------------------------
Interest income $ 97 $ 187 $ 229
Interest expense 15 0 0
---------------------------------------
Net interest income 82 187 229
Gain on sale of available for sale securities 4 205 212
Dividends from Bank subsidiary 0 0 505
---------------------------------------
Total income 86 392 946
Compensation 79 431 227
Other expenses 594 618 438
---------------------------------------
(Loss) income before income tax benefit and equity in undistributed loss of
subsidiary (587) (657) 281
Income tax benefit (199) (223) (76)
---------------------------------------
(Loss) income before equity in undistributed loss of subsidiary (388) (434) 357
Equity in undistributed (loss) income of subsidiary (5,524) (2,944) 1,780
---------------------------------------
Net loss $(5,912) $(3,378) $2,137
---------------------------------------
----------------------------------------
Statements of Cash Flows
------------------------ DECEMBER 31
(in thousands) ----------------------------------------
2000 1999 1998
----------------------------------------
Operating Activities:
---------------------
Net (loss) earnings $(5,912) $(3,378) $2,137
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Equity in undistributed (loss) income of subsidiary 5,524 2,944 (1,780)
Depreciation and amortization 0 13 13
Stock grants 10 0 0
Gain on sale of securities available for sale (4) (205) (212)
Decrease (increase) in other assets 605 (454) 41
(Decrease) increase in other liabilities 35 (5) (64)
----------------------------------------
Net cash used in (provided by) operating activities 258 (1,085) 135
----------------------------------------
Investing Activities:
---------------------
Sales and maturities on securities available for sale 62 2,834 5,741
Purchases of securities available for sale 0 (2,803) (3,449)
Additional equity investment in bank subsidiary (5,109) (3,640) 0
Cash payment - CMA acquisition 0 (1,700) 0
----------------------------------------
Net cash used in by investing activities (5,047) (5,309) 2,292
----------------------------------------
Financing Activities:
--------------------
Proceeds from issuance of preferred stock, net 4,929 0 0
Proceeds from issuance of common stock, net 0 0 6,019
Payment to repurchase common stock, net 0 (983) (1,202)
Cash dividends and fractional shares paid (25) (854) (504)
----------------------------------------
Net cash provided (used in) by financing activities $ 4,904 $(1,837) $4,313
----------------------------------------
Net increase (decrease) in cash and cash equivalents 115 (8,231) 6,740
Cash beginning of year 606 8,837 2,097
----------------------------------------
Cash end of year $ 721 $ 606 8,837
----------------------------------------
Supplemental disclosures: Interest paid $ 15 $ 0 $ 0
----------------------------------------
F-27
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information for the years ended December
31, 2000 and 1999 is unaudited. However, in the opinion of management, all
adjustments, which include normal recurring adjustments necessary to present
fairly the results of operations for the periods, are reflected. Results of
operations for the periods are not necessarily indicative of the results of the
entire year or any other interim period.
(In thousands, except per share data)
------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
---- ------------------------------------------------------------
Total interest income $ 7,101 $6,968 $ 7,057 $ 6,891
Total interest expense 4,225 4,046 4,114 3,937
------------------------------------------------------------
Net interest income 2,876 2,922 2,943 2,954
Provision for loan losses 246 90 90 290
------------------------------------------------------------
Net interest income after provision for loan losses 2,630 2,832 2,853 2,664
Total non-interest income 544 2,437 554 4,131
Total non-interest expense 4,899 5,681 7,484 5,654
------------------------------------------------------------
Net loss before tax (1,725) (412) (4,077) 1,141
------------------------------------------------------------
Income tax (benefit) provision (709) (173) (757) 2,478
------------------------------------------------------------
Net loss from operations $(1,016) $ (239) $(3,320) $(1,337)
------------------------------------------------------------
Paid and unpaid preferred stock dividends 25 131 132 125
------------------------------------------------------------
Net loss to common shareholders $(1,041) $ (370) $(3,452) $(1,462)
------------------------------------------------------------
Basic and diluted loss per common share $ (0.27) $(0.11) $ (0.93) $ (0.40)
------------------------------------------------------------
1999 March 31 June 30 September 30 December 31
---- ------------------------------------------------------------
Total interest income $ 4,589 $ 5,361 $ 6,759 $ 6,979
Total interest expense 1,992 2,951 3,714 4,081
------------------------------------------------------------
Net interest income 2,597 2,410 3,045 2,898
Provision for loan losses 61 600 867 215
------------------------------------------------------------
Net interest income after provision for loan losses 2,536 1,810 2,178 2,683
Total non-interest income 1,690 2,840 1,098 (22)
Total non-interest expense 3,432 5,334 6,075 5,737
------------------------------------------------------------
Net income (loss) before tax 794 (684) (2,799) (3,076)
------------------------------------------------------------
Income tax (benefit) provision 293 (309) (1,118) (1,253)
------------------------------------------------------------
Net income (loss) from operations $ 501 $ (375) $ (1,681) $ (1,823)
------------------------------------------------------------
Basic and diluted earnings (loss) per common share $ 0.13 $ (0.10) $ (0.45) $ (0.49)
------------------------------------------------------------
F-28
UNITY BANCORP, INC.
Unity Bancorp, Inc.
Exchange Offer for
SERIES A PREFERRED STOCK
----------------------------
PROSPECTUS
May 24, 2001
----------------------------
EXCHANGE AGENT:
UNITY BANCORP, INC.
64 OLD HIGHWAY 22
CLINTON, NEW JERSEY 08809
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by Section 145 of the Delaware General Corporation Law, Unity
Bancorp, Inc.'s Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to Unity Bancorp, Inc. or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of
Unity Bancorp, Inc. provide that the Registrant shall indemnify its directors
and officers under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and Unity Bancorp, Inc. is
required to advance expenses to its officers and directors as incurred in
connection with proceedings against them for which they may be indemnified.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
ITEM 21. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3 (i) Certificate of Incorporation of the Company, as amended (2)
3 (ii) By-laws of the Company (1)
4 (i) Form of Stock Certificate (2)
4 (ii) Form of Warrant Certificate
5 Opinion of Windels Marx Lane & Mittendorf, LLP
10 (i) 1994 Stock Option Plan for Non-Employee Directors (1)
10 (ii) Stock Bonus Plan (2)
10 (iii) 1997 Stock Option Plan (3)
10 (iv) 1997 Stock Bonus Plan (3)
10 (v) 1998 Stock Option Plan (4)
10 (vi) Employment Agreement with Anthony J. Feraro (5)
21 Subsidiaries of the Registrant
23 (i) Consent of KPMG LLP
23 (ii) Consent of Arthur Andersen LLP
24 Power of Attorney
99 (i) Letter to Shareholders, dated May 24, 2001
99 (ii) Letter of Transmittal
99 (iii) Notice of Guaranteed Delivery
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's
Registration Statement on Form S-4, Registration No. 33-76392.
(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's
Registration Statement on Form SB-2, Registration No. 333-12565.
(3) Incorporated by reference from Exhibits B and C from the Company's
Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
(4) Incorporated by reference form Exhibit A from the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.
(5) Incorporated by reference from Exhibit 10 (vi) of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Clinton,
State of New Jersey, on the 23 day of May, 2001
UNITY BANCORP, INC.
By: /s/ Anthony J. Feraro
------------------------------------
Anthony J. Feraro
President & Chief Executive Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3 (i) Certificate of Incorporation of the Company, as amended (2)
3 (ii) By-laws of the Company (1)
4 (i) Form of Stock Certificate (2)
4 (ii) Form of Warrant Certificate
5 Opinion of Windels Marx Lane & Mittendorf, LLP
10 (i) 1994 Stock Option Plan for Non-Employee Directors (1)
10 (ii) Stock Bonus Plan (2)
10 (iii) 1997 Stock Option Plan (3)
10 (iv) 1997 Stock Bonus Plan (3)
10 (v) 1998 Stock Option Plan (4)
10 (vi) Employment Agreement with Anthony J. Feraro (5)
21 Subsidiaries of the Registrant
23 (i) Consent of KPMG LLP
23 (ii) Consent of Arthur Andersen LLP
24 Power of Attorney
99 (i) Letter to Shareholders, dated May 24, 2001
99 (ii) Letter of Transmittal
99 (iii) Notice of Guaranteed Delivery
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant's
Registration Statement on Form S-4, Registration No. 33-76392.
(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant's
Registration Statement on Form SB-2, Registration No. 333-12565.
(3) Incorporated by reference from Exhibits B and C from the Company's
Definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
(4) Incorporated by reference form Exhibit A from the Company's definitive Proxy
Statement for its 1998 Annual Meeting of Shareholders.
(5) Incorporated by reference from Exhibit 10 (vi) of the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1999.