-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BiiC93sKlm16fJJp0UUDMlZ1sc2uUsEtjIRXbi7SyHO0DOhSpu5SA3I1BgEVvQYH 6qWyQGiqiX2Nx6wKw3UjNQ== 0000950110-99-001623.txt : 19991228 0000950110-99-001623.hdr.sgml : 19991228 ACCESSION NUMBER: 0000950110-99-001623 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITY BANCORP INC /DE/ CENTRAL INDEX KEY: 0000920427 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223282551 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: SEC FILE NUMBER: 001-12431 FILM NUMBER: 99780954 BUSINESS ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 BUSINESS PHONE: 9087307630 MAIL ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 10QSB/A 1 FORM 10-QSB/A SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB/A (Mark One) (X) QUARTERLY REPORT, PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______. Commission file number: 1-12431 Unity Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 22-3282551 (State of other jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification) 64 Old Highway 22, Clinton, New Jersey 08809 (Address of principal executive offices) (zip code) (908) 730-7630 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all report required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ The number of shares outstanding of each of the registrant's classes of common equity stock, as of November 12, 1999: 3,704,708 Transitional Small Business Disclosure Format (check one): YES __ NO _X_
Unity Bancorp. Inc. Consolidated Balance Sheets (Unaudited) (Audited) (in thousands, except share amounts) September 30 December 31 1999 1998 ASSETS Cash and Due From Banks $18,467 $15,388 Federal Funds Sold 0 17,100 -------------- --------------- Total Cash and Cash Equivalents 18,467 32,488 -------------- --------------- Securities Available For Sale, At Fair Value 41,530 21,490 Held To Maturity, At Amortized Cost 34,533 19,439 Aggregate Fair Value Of $32,868 and $19,089 -------------- --------------- Total Securities 76,063 40,929 -------------- --------------- Loans, Held For Sale 3,797 3,569 Loans, Held To Maturity 310,944 163,001 -------------- --------------- Loans, Total 314,741 166,570 Less: (Deferred Costs) / Unearned Income (1,280) (222) Less: Loan Loss Reserve 2,237 1,825 -------------- --------------- Net Loans 313,784 164,967 -------------- --------------- Premises and Equipment 12,053 4,559 Accrued Interest Receivable 2,827 1,163 Cash Surrender Value Of Life Insurance 3,991 6,000 Other Assets 10,400 4,506 -------------- --------------- Total Assets $437,585 $254,612 ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Demand $56,778 $50,120 Demand Interest 103,630 40,585 Savings 35,288 34,320 Time, $100,000 and Over 85,004 28,164 Time, Under $100,000 97,215 73,671 -------------- --------------- Time, Total 182,219 101,835 -------------- --------------- Total Deposits 377,915 226,860 -------------- --------------- Borrowed Funds 30,000 0 Obligation Under Capital Lease 3,564 304 Accrued Interest Payable 1,092 408 Accrued Expenses and Other Liabilities 1,088 694 -------------- --------------- Total Liabilities 413,659 228,266 -------------- --------------- Shareholders' Equity Common Stock, $0.00 par, 26,224 23,146 7,500,000 authorized; Issued Shares of 3,861,568 and 3,759,251 Outstanding Shares of 3,704,708 and 3,668,197 Treasury Stock , at cost; (1,762) (1,202) Outstanding Shares of 156,860 and 91,054 Retained Earnings 190 4,534 Accumulated other comprehensive loss (726) (132) -------------- --------------- Total Shareholders' Equity 23,926 26,346 -------------- --------------- Total Liabilities and Shareholders' Equity $437,585 $254,612 ============== ===============
See accompanying notes to financial statements
Unity Bancorp, Inc. (Unaudited) (Unaudited) Consolidated Statements of Operations Three Months Ended Nine Months Ended (in thousands, except per share data) September 30, September 30, (unaudited) 1999 1998 1999 1998 --------------- --------------- ----------- ------------ Interest Income Interest on Loans $5,532 $3,429 $13,257 $9,672 Interest on Securities 1,217 960 2,938 2,768 Interest on Federal Funds Sold 10 143 514 483 --------------- --------------- ----------- ------------ Total Interest Income 6,759 4,532 16,709 12,923 --------------- --------------- ----------- ------------ Interest Expense On Deposits and Borrowed Funds 3,714 1,863 8,657 5,399 --------------- --------------- ----------- ------------ Net Interest Income 3,045 2,669 8,052 7,524 --------------- --------------- ----------- ------------ Provision for Loan Losses 867 197 1,528 474 --------------- --------------- ----------- ------------ Net Interest Income After Provision for Loan Losses 2,178 2,472 6,524 7,050 --------------- --------------- ----------- ------------ Other Income Service Charges On Deposits 215 235 561 667 Gain on Sale of Loans 328 594 3,686 1,660 Gain on Sale of Securities (33) 91 194 233 Other Income 588 233 1,187 620 --------------- --------------- ----------- ------------ Total Other Income 1,098 1,153 5,628 3,180 --------------- --------------- ----------- ------------ Other Expenses Salaries and Employee Benefits 2,043 1,304 6,578 3,738 Occupancy Expense 682 228 1,717 765 Other Operating Expense 3,350 1,042 6,546 3,102 --------------- --------------- ----------- ------------ Total Other Expenses 6,075 2,574 14,841 7,605 --------------- --------------- ----------- ------------ --------------- --------------- ----------- ------------ Income (Loss) Before Income Taxes (2,799) 1,051 (2,689) 2,625 --------------- --------------- ----------- ------------ Provision For Income Taxes (1,118) 388 (1,134) 1,003 --------------- --------------- ----------- ------------ Net Income (Loss) ($1,681) $663 ($1,555) $1,622 =============== =============== =========== ============ --------------- --------------- ----------- ------------ Basic Earnings / (Loss) per Share ($0.45) $0.21 ($0.42) $0.51 --------------- --------------- ----------- ------------ --------------- --------------- ----------- ------------ Diluted Earnings / (Loss) per Share ($0.45) $0.20 ($0.42) $0.48 --------------- --------------- ----------- ------------ Weighted Average Shares Outstanding-Basic 3,721,223 3,211,889 3,729,763 3,167,423 Weighted Average Shares Outstanding- Diluted 3,721,223 3,360,989 3,729,763 3,388,396 Weighted Average Shares Outstanding - Effect of dilutive securities stock options N/A 149,100 N/A 220,973
See accompanying notes to financial statements
Unity Bancorp, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands) For the nine month period ended Sept 30, 1999 1998 Operating activities: Net (loss) / income (1,555) 1,622 Adjustments to reconcile net (loss) / income to net cash provided by operating activities Provision for loan losses 1,528 474 Depreciation and amortization 881 401 Net gain on sale of securities (194) (233) Gain on sale of loans (3,686) (1,660) Stock Grants, from Treasury 424 0 Amortization of securities premiums, net 0 7 Amortization of loan fees and costs 87 0 Increase in accrued interest receivable (1,664) (110) Decrease in other assets (2,802) 62 Proceeds from sale of loans 16,381 13,467 (Decrease) / Increase in accrued interest payable 685 (9) Increase in accrued expenses and other liabilities 394 253 ---------------------------------- Net cash provided by operating activities 10,479 14,274 ---------------------------------- Investing activities: Purchases of securities held to maturity (17,494) (10,928) Purchases of securities available for sale (39,840) (67,414) Maturities and principal payments on securities held to maturity 2,400 14,392 Maturities and principal payments on securities available for sale 4,583 43,975 Proceeds from sale of securities available for sale 14,421 10,505 Proceeds from Bank Owned Life Insurance 2,009 0 Purchases of Loans (56,071) 0 Net increase in loans (107,056) (34,820) Capital expenditures (5,191) (667) Proceeds from sale of Assets 0 10 Cash payment - CMA acquisition (1,700) 0 ---------------------------------- Net cash used in investing activities (203,939) (44,947) ---------------------------------- Financing activities: Increase in deposits 151,055 22,792 Increase in Borrowings 30,000 0 Proceeds from issuance of common stock 0 1,493 Treasury stock purchases (984) (1,190) Cash Dividends (632) (350) ---------------------------------- Net cash provided by financing activities 179,439 22,745 ---------------------------------- Decrease in cash and cash equivalents (14,021) (7,928) ---------------------------------- Cash and cash equivalents at beginning of year 32,488 32,617 ---------------------------------- Cash and cash equivalents at end of period 18,467 24,689 ================================== Supplemental disclosures: Interest paid 7,973 5,408 Income taxes paid 776 1,003 See accompanying notes to financial statements
Unity Bancorp, Inc. Notes to Consolidated Financial Statements (1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, 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 inter-company balances and transactions have been eliminated in consolidation. The financial information has been prepared in accordance with generally accepted accounting principles and has not been audited. Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. These interim financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 1998, included in the Company's annual report on Form 10-KSB. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the year. Reclassifications- Certain reclassifications have been made to prior years' amounts to conform with the current year presentation. (2) COMPREHENSIVE (LOSS) / INCOME Total comprehensive (loss)/income, consisting of net income / (loss) and the change in unrealized gain/loss on securities available for sale, for the nine months ended September 30, 1999 and 1998 was ($2,149) thousand and $1,725 thousand. Total comprehensive (loss)/income for the three months ended September 30, 1999 and 1998 was ($1,860) thousand and $815 thousand. (3) LOANS Total loans outstanding by classification as of September 30, 1999 and December 31, 1998 are as follows: (in thousands) September 30, December 30, 1999 1998 Commercial & industrial $46,799 $41,502 Loans secured by real estate: Non-residential properties 56,729 59,845 Residential properties 163,487 26,565 Construction 15,993 16,218 Loans to individuals 31,733 22,440 --------------- -------------- $314,741 $166,570 =============== ============== As of September 30, 1999 and December 31, 1998, the Bank's recorded investment in impaired loans, defined as nonaccrual loans, was $1.5 million and $2.3 million respectively. At September 30, 1999, $2.0 million in loans were past due greater than 90 days but still accruing interest as compared to December 31, 1998 of $1.6 million. (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 for the nine months ended September 30, 1999 and 1998 are as follows- (in thousands) 1999 1998 Balance at beginning of period, January 1, $1,825 $1,322 Provision charged to expense 1,528 474 Loans charged-off (1,130) (219) Recoveries on loans previously charged-off 14 27 ------------------------------ Balance at end of period, September 30, $2,237 $1,604 ============================== Notes to Consolidated Financial Statements - continued (5) ACQUISITIONS On February 18, 1999, the Company, through its Bank Subsidiary acquired Certified Mortgage Associates Inc. ("CMA"), a Marlboro, New Jersey based correspondent mortgage banker. The Company paid the shareholders of CMA $2.8 million (the "Purchase Price"). The Purchase Price was paid in cash and shares of the Company's common stock, with $1.7 million of the Purchase Price paid in cash and $1.1 million paid in shares of the Company's common stock, valued at the average of the bid ask price for the stock during the first twenty trading days in the thirty day period prior to consummation of the transaction. The Company issued 102,459 shares of its common stock. The transaction was accounted for as a purchase and the company recognized $3.9 million in goodwill. The $2.8 million purchase price will amortize over eight years and $1.1 will amortize over ten years. The Company has entered into a definitive Purchase Agreement dated as of July 23, 1999 pursuant to which it will acquire Einbinder Mortgage Corporation, a New Jersey licensed mortgage banker ("Einbinder"). The Company will pay $600,000 for Einbinder as follows: $150,000 in cash at closing, $350,000 through delivery of a six month promissory note with an interest rate of 10% and the issuance of $100,000 in market value of the Company's common stock. Consummation of the transaction is subject to certain regulatory approvals. The parties are currently in the process of amending the agreement to a lower purchase price of $290,000. The Company anticipates that this transaction will be accounted for using the purchase method of accounting. (6) SHAREHOLDERS' EQUITY The Board of Directors declared a cash dividend on July 13, 1999. Shareholders of record on August 10, 1999, received a $0.06 per share cash dividend paid on August 25, 1999. The Board of Directors, on March 16, 1999, approved a stock repurchase program pursuant to which the Company may repurchase from time to time up to 250,000 shares of its outstanding stock. Shares purchased by the Company through the repurchase program will be used to fund the dividend reinvestment program, the Company's stock option plans and for other corporate purposes. Notes to Consolidated Financial Statements - continued (7) REGULATORY CAPITAL The Parent Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. The Bank's capital amounts and ratios are presented in the following table:
For Capital Actual Adequacy Purposes ----------------------------- --------------------------- Amount Ratio Amount Ratio ----------------------------- --------------------------- As of September 30, 1999- Total Capital (to Risk $ 19,480 6.29%>= $ 24,763 8.00% Weighted Assets) Tier I Capital (to Risk 17,243 5.57%>= 12,381 4.00% Weighted Assets) Tier I Capital (to 17,243 4.28%>= 16,217 4.00% Average Assets) As of December 31, 1998- Total Capital (to Risk $ 18,613 9.80%>= $ 15,190 8.00% Weighted Assets) Tier I Capital (to Risk 16,788 8.84%>= 7,595 4.00% Weighted Assets) Tier I Capital (to 16,788 7.09%>= 9,472 4.00% Average Assets)
The Parent Company's consolidated capital amounts and ratios are presented in the following table:
For Capital Actual Adequacy Purposes ----------------------------- --------------------------- Amount Ratio Amount Ratio ----------------------------- --------------------------- As of September 30, 1999- Total Capital (to Risk $ 22,423 7.20%>= $ 24,930 8.00% Weighted Assets) Tier I Capital (to Risk 20,186 6.48%>= 12,465 4.00% Weighted Assets) Tier I Capital (to 20,186 5.01%>= 16,131 4.00% Average Assets) As of December 31, 1998- Total Capital (to Risk $ 28,271 14.85%>= 15,231 8.00% Weighted Assets) Tier I Capital (to Risk 26,466 13.89%>= $ 7,615 4.00% Weighted Assets) Tier I Capital (to 26,466 10.87%>= 9,723 4.00% Average Assets)
Notes to Consolidated Financial Statements - continued As of September 30, 1999, the most recent notification from the Federal Reserve Bank categorized the Parent Company as under capitalized and the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as under capitalized under the regulatory framework for prompt corrective action. The Company has a 5.01% Tier I Leverage Ratio at September 30, 1999 compared to the federally-mandated minimum Tier I Leverage Ratio of 4.0%, as compared to a 10.87% Ratio at December 31, 1998. The Bank has a 4.28% Tier I Leverage Ratio at September 30, 1999 compared to the federally-mandated minimum Tier I Leverage Ratio of 4.0%, as compared to a 7.09% Leverage Ratio at December 31, 1998. These decreases were primarily due to the capitalization of leases related to the branch expansion program and intangibles associated with the acquisition of CMA. In addition to the capital adequacy requirements of the Federal Reserve Board and the FDIC, discussed above, pursuant to the order of the New Jersey Commissioner of the Department of Banking and Insurance approving our recent acquisition of eight branch offices, the bank is required to maintain a ratio of equity capital to total assets of at least 6% for the next five years of operations. At September 30, 1999, the bank's ratio of equity capital to average total assets was 4.28%. Because the Bank does not currently meet this minimum, it is prohibited from paying dividends to the Parent Company. As a result of the capital deficiency, the Company and the Bank each agreed to enter into a memorandum of understanding with their regulators which require them to raise capital, establish procedures to provide updates to the regulators every 30 days on their progress, adopt certain policies and review their management. In addition, the Company must notify its regulators in writing 30 days prior to any proposal declaration of dividends on its Common Stock. Because the Bank failed to satisfy the minimum total risk-based capital requirement of 8% at September 30, 1999, 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 of this designation, the Bank is required to submit a capital plan to the FDIC by December 15, 1999. In addition, the Bank is generally prohibited from making capital distributions to the holding company, paying management fees to any entity that controls the Bank or increasing its average assets until the capital plan has been approved. (8) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS None (9) IMPAIRED ASSETS During the fourth quarter of 1998, we discovered that we had been the victim of an illegal check kiting scheme to a single customer. During the quarter September 30, 1999, in light of the passage of time without significant recoveries from the Company's ongoing litigation against the other financial institution involved in the scheme and our view of the assets currently available from the debtor and his affiliates to satisfy the Company's claims, management recorded a write down of $786 thousand before tax against this asset. The remaining balance of the asset is $344 thousand, which represents equity in a house owned by the spouse of the debtor, who has agreed to turn the residence over to the Company. (10) POTENTIAL LEASE OBLIGATIONS In August 1999, the Bank entered into leases or sublease for five (5) potential branch locations. Under the terms of these leases or sublease, the annual lease obligation in the base year of the leases or sublease is $428 thousand in the aggregate and $471 thousand on a fully phased in basis beginning in the fourth year of the lease term with increases thereafter based on increases in the consumer price index. The lease terms range from 12 to 18 years. Payments on these five leases or subleases were to commence on January 1, 2000. Subsequent to September 30, 1999, the Bank provided the landlord under the leases or subleases with notice to terminate each of the leases or sublease. Although no legal action has been commenced, the landlord through its counsel, has indicated that the landlord does not agree with the Bank's right to terminate the leases. (11) OTHER EXPENSE The components of other operating expenses for the nine months ended September 30, 1999 and 1998 are as follows: 1999 1998 ------ ------ Professional services $ 761 $ 495 Office expense 1,418 771 Advertising expense 547 279 Communication expense 525 188 Bank services 579 374 FDIC insurance 121 87 Director fees 200 211 Non loan losses (1) 824 22 Loan processing expense 933 317 Amortization of Intangibles 274 9 Other expense 364 349 ------ ------ Total Other Expense $6,546 $3,102 ====== ====== (1) includes a $786 thousand write-down of uncollected assets associated with the check-kiting scheme, disclosed in note #9. 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 our 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 THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998 Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest earning assets and the interest paid on funds borrowed to support those assets, such as deposits. Net interest margin is a function of the difference between the weighted average rate received on interest earning assets and the weighted average rate paid on interest bearing liabilities, as well as the average level of interest earning assets as compared with that of interest bearing liabilities. Results of operations are also affected by the amounts of non-interest income, which includes gains on sales of loans, including loans originated under the SBA's Guaranteed Loan Program and home mortgage loans originated for resale into the secondary market by our CMA subsidiary which was acquired on February 18, 1999, operating expenses, and the provision for loan losses. NET INCOME (LOSS) For the three months ended September 30, 1999, we incurred a net loss of $1.7 million, or a loss of $0.45 per diluted share, compared to net income of $663 thousand, or $0.20 per share, for the three months ended September 30, 1998. The loss incurred for the three months ended September 30, 1999 reflects our non-interest expenses growing faster than our net interest income. Also contributing to the loss was an increase in our provision for loan losses. For the three months ended September 30, 1999, our non-interest expenses increased by $3.5 million, or 136.0%, to $6.1 million from $2.6 million for the three months ended September 30, 1998. Our interest expense increased by $1.9 million, or 99.4%, to $3.7 million from $1.9 million for the comparable 1998 period. Our interest income increased by $2.2 million, or 49.1%, to $6.8 million in the 1999 period from $4.5 million in the 1998 period. Net interest income grew by $376 thousand or 14.1% to $3.0 million in the 1999 period from $2.7 million in the 1998 period. Our other income decreased by $55 thousand, or 4.8%, over the comparable period of 1998 to $1.1 million in 1999 from $1.2 million in 1998. In addition, our provision for loan losses increased for the three months ended September 30, 1999 by 340.1% over the comparable period of 1998 from $197 thousand to $867 thousand for the three months ended September 30, 1999. The increases in our other non-interest expenses reflect the growth of our branch network, as the bank opened ten new branches in the past year, as well as non-interest expense associated with the operation of our CMA subsidiary including amortization of goodwill incurred in connection with our purchase of CMA. Non-interest expense associated with our operation of CMA totaled $2.0 million for the three months ended September 30, 1999. There were no expenses associated with CMA during the same period in 1998. Our increase in interest expense reflects increases in the level of deposits, as well as increases in rates as a promotional tool to 2 attract deposits at our new branches. Our increase in interest income reflects increases in the level of earning assets as a result of increased deposits. Included in our non-interest expense for the three months ended September 30, 1999 was a non-recurring write-down of $786 thousand regarding an uncollected balance the bank has been carrying as an asset and which derived from a previously disclosed check-kiting scheme. In light of the passage of time without significant recoveries from our ongoing litigation against the other financial institution involved in the scheme and our view of the assets currently available from the debtor and his affiliates to satisfy our claims, management elected to record this write-down. The company intends to pursue all legal remedies available to obtain recoveries of uncollected amounts. The remaining balance of this asset is $344 thousand, which represents equity in a house owned by the spouse of the debtor, who has agreed to turn the residence over to us. NET INTEREST INCOME Our net interest income increased by $376 thousand, or 14.1%, to $3.0 million for the three months ended September 30, 1999 from $2.7 million for the three months ended September 30, 1998. The increase was primarily attributable to an increase of $131.4 million in average earning assets for the current three-month period totaling $353.2 million over the prior year's three-month period totaling $221.8 million. The yield on the earning assets decreased from 8.20% for the three months ended September 30, 1998 to 7.67% for the three months ended September 30, 1999, primarily due to the bank's shift to consumer and mortgage lending during a lower rate environment as a response to continued intense competition for commercial loans. During the third quarter, our CMA subsidiary originated $61.1 million in loans for the bank's portfolio and the bank purchased $30.3 million of home equity loans. Increases in interest-earning assets were primarily funded through an increase of $170.5 million, or 82.2%, in average deposits and borrowings to $377.8 million for the three months ended September 30, 1999 from $207.3 million for the comparable period of 1998. During the three months ended September 30, 1999, the cost of our interest bearing liabilities has stayed relatively stable from the prior year period, increasing to 4.53% for the current three-month period from 4.47% for the three months ended September 30, 1998. However, our total cost of funds, including non-interest bearing deposits, increased to 3.93% for the three months ended September 30, 1999 from 3.60% for the three months ended September 30, 1998. The increase in our cost of funds reflects the Company's decision to offer high, promotional rates of interest to attract new customers to our new branch locations, as well as a shift in our deposit portfolio away from non-interest bearing deposits and toward time deposits and our money market product. The promotional rates of interest were offered both on time deposits and through our money market product, which paid an introductory rate of 6.05%. Although we had discontinued offering this product at September 30, 1999, we again offered the product in December 1999 in order to ease liquidity and provide funding for committed loans. These higher rate products and our liquidity needs caused a shift in our deposit portfolio toward higher rate products. Although the average balance on non-interest bearing deposits increased to $49.8 million for the three months ended September 30, 1999 from $40.4 million for the prior year period, non-interest bearing deposits as a percentage of the deposit portfolio decreased to 14.2% for the current year period from 20.1% for the prior year period. These factors resulted in a decline in the company's net interest margin to 3.46% in the 1999 period from 4.84% in the 1998 period. 3 The following table reflects the components of our 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) interest yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities), and (5) our 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%.
Three Months Ended September 30, 1999 vs. September 30, 1998 -------------------------- ------------------------------ AVERAGE RATE/ AVERAGE RATE/ BALANCE INTEREST YIELD BALANCE INTEREST YIELD ------- -------- ----- ------- -------- ----- Assets Interest-earning assets: Taxable loans (net of unearned income) $274,170 $5,532 8.07% $143,436 $3,429 9.56% Tax-exempt securities 2,444 43 7.04% 1,562 41 10.50% Taxable investment securities 74,407 1,155 6.21% 54,109 896 6.62% Interest-bearing deposits 1,419 32 9.02% 12,345 37 1.20% Federal funds sold 729 10 5.49% 10,309 143 5.55% -------- ------ -------- ------ Total interest-earning assets 353,169 6,772 7.67% 221,761 4,546 8.20% Noninterest-earning assets 55,367 5,773 Allowance for loan losses (2,275) (1,433) -------- -------- Total average assets $406,261 $226,101 ======== ======== Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand interest deposits 105,687 1,021 3.86% 33,347 236 2.83% Savings deposits 18,953 81 1.71% 14,671 78 2.13% Money market deposits 17,813 127 2.85% 18,543 162 3.49% Time deposits 153,121 2,002 5.23% 100,092 1,383 5.53% Other debt 32,425 483 5.97% 313 4 6.39% -------- ------ -------- ------ Total interest-bearing liabilities 327,999 3,714 4.53% 166,966 1,863 4.47% Noninterest-bearing liabilities 4,849 6,510 Demand deposits 49,840 40,381 Shareholders' equity 23,570 -------- -------- 12,243 Total average liabilities and -------- shareholders' equity $406,258 $226,100 ======== ======== Net interest income 3,058 2,683 Net interest rate spread 3.14% 3.73% Net interest income/margin on average earning assets 3.46% 4.84%
4 The following table presents by category the major factors that contributed to the changes in net interest income for each of the three-month periods ended September 30, 1999 and 1998. Amounts have been computed on a fully tax-equivalent basis, assuming a federal income tax rate of 34%. Three Months Ended September 30, 1999 Versus 1998 Increase (Decrease) Due to Change In: Volume Rate Net ------ ------- ------ Interest-Earning Assets Interest income: Taxable loans (net of unearned income) $3,128 $(1,025) $2,103 Tax-exempt securities 21 (19) 2 Taxable investment securities 336 (77) 259 Interest bearing deposits (33) 28 (5) Federal funds sold (133) (0) (133) ------ ------- ------ Total interest income $3,319 $(1,093) $2.226 ====== ======= ====== Interest-Bearing Liabilities Interest expense: Demand interest deposits $ 512 $ 273 $ 785 Savings deposits 23 (20) 3 Money market deposits (6) (29) (35) Time deposits 733 (114) 619 Other debt 513 (34) 479 ------ ------- ------ Total interest expense 1,774 76 1,851 ------ ------- ------ Net interest income $1,545 $(1,169) $ 374 ====== ======= ====== PROVISION FOR LOAN LOSSES Our provision for loan losses for the three months ended September 30, 1999 totaled $867 thousand, an increase of $670 thousand over the provision of $197 thousand for the three months ended September 30, 1998. The increase in our provision for the three months ended September 30, 1999 over the comparable prior year period reflects the increase in our loan portfolio and increased charge-offs incurred during the quarter, as well as our analysis of the estimated potential losses inherent in the loan portfolio based upon our review of particular loans, the credit worthiness of particular borrowers and general economic conditions. For the three months ended September 30, 1999, our average loans (net of unearned income) totaled $274.2 million, an increase of $130.7 million, or 91.1% over average total loans of $143.4 million for the three months ended September 30, 1998. In addition, during this period, our ratio of non-performing loans to total loans decreased to .49% from 1.50% at September 30, 1998. OTHER INCOME Our other income, which consists of service charges on deposits, gains on sales of securities and loans and other income decreased by $55 thousand, or 4.8%, to $1.1 million for the three months ended September 30, 1999 from $1.2 million for the three months ended September 30, 1998. This decrease primarily represents a decrease of $266 thousand in the gain on sale of loans and a decrease of $124 thousand on the gain/loss on the sale of securities. Partially offsetting these decreases was our other income, representing other transaction charges and fees on non-deposit 5 services which increased by $355 thousand, or 152.4% to $588 thousand for the three months ended September 30, 1999 from $233 thousand for the comparable period of 1998. We sell loans into the secondary market both through our SBA Guaranteed Loan Program and through our CMA subsidiary. The decline in the gain on sale of loans for the three months ended September 30, 1999 is attributable to a decrease of $186 thousand in the gain on the sale of SBA loans which sales were negatively impacted by lower market prices, a decrease of $67 thousand in the gain on the sale of mortgage loans because of our decision to keep CMA mortgage loans in our portfolio instead of selling them in the secondary market, and a decrease of $13 thousand in the gain on sale of other loans. The increase in our other income of $355 thousand is primarily due to an increase of $285 thousand in mortgage fees, an increase of $25 thousand in interest on the cash surrender value of life insurance, an increase of $25 thousand in transaction charges on non-deposit services, and an increase of $20 thousand in miscellaneous income. OTHER EXPENSES Our other expenses increased to $6.1 million for the three months ended September 30, 1999 from $2.6 million for the comparable period of 1998. We experienced increases of $739 thousand in salaries and benefits which increased to $2.0 million from $1.3 million, $454 thousand in occupancy expenses which increased to $682 thousand from $228 thousand, and $2.3 million in other operating expenses which increased to $3.4 million from $1.0 million during the current three months ended September 1999 compared to the three months ended September 30, 1998. The increases in salary and benefits and occupancy expenses were substantially attributable to the increase in our branch network, as we opened ten additional branches over the past year, as well as administrative expenses from the operation of our CMA subsidiary. Increases reflect the increased lease and other occupancy expenses associated with these branches, as well as increases in salary expenses to hire personnel to operate the branches. In addition, our salary expense increased because of the need to hire additional administrative staff to oversee and administer the growth in our loan portfolio. Other expenses were also impacted by the writedown of $786 thousand related to a check kiting scheme which occurred in the fourth quarter of 1998 and which was previously discussed. 6 The following table presents the breakout of our other operating expenses for the three month period ended September 30, 1999: Three Months Ended September 30, 1999 v. 1998 (Dollars in Thousands) Increase September 30, 1999 September 30, 1998 (Decrease) ------------------ ------------------ ---------- Professional Services $ 305 $ 126 $ 179 Office Expense 573 267 306 Advertising Expense 233 101 132 Communication Expense 249 73 176 Bank Services 219 116 103 FDIC Insurance 57 30 27 Director Fees 21 57 (36) Other Losses 794(1) 17 777 Loan Processing Expense 576 129 447 Goodwill 119 3 116 Other Expense 204 123 81 ------ ------ ------ Total Other Operating Expense $3,350 $1,042 $2,308 ====== ====== ====== (1) Includes a $786 thousand write-down of uncollected assets associated with the check- kiting scheme. The increases in professional services, office expense, communication expense, bank services and FDIC insurance is the result of the addition of ten new branches, our growth in assets and expenses incurred operating our CMA subsidiary. Total other operating expenses incurred in connection with CMA were $520 thousand for the three months ended September 30, 1999. There were no expenses incurred in connection with CMA for the same period in 1998 since CMA was acquired in February, 1999. The increase in advertising expense is the result of increased marketing efforts and the increase in loan processing expense is the result of additional volume and collection activity. Due to our current capital status, we anticipate our FDIC insurance expense will increase. 7 INCOME TAX EXPENSE For the three months ended September 30, 1999, we recognized a tax benefit of $1.1 million related to the loss recognized for the three-month period, as compared to an income tax provision of $388 thousand for the three months ended September 30, 1998. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998 NET INCOME (LOSS) For the nine months ended September 30, 1999, we incurred a net loss of $1.6 million, or a loss of $0.42 per share on a diluted basis, compared to net income of $1.6 million, or $0.48 per share, for the nine months ended September 30, 1998. The loss incurred for the nine months ended September 30, 1999 largely reflects the growth in our non-interest expense due to the opening of ten new branches, non-interest expenses of $3.6 million associated with the operation of our CMA subsidiary and amortization of the goodwill created in our purchase of CMA. For the nine months ended September 30, 1999, our non-interest expenses increased by $7.2 million, or 95.1%, to $14.8 million from $7.6 million for the nine months ended September 30, 1998. Because we acquired CMA using purchase accounting, we recognized goodwill amortization expenses of $265 thousand during the 1999 period. There were $9 thousand in goodwill amortization expenses incurred in 1998, relating to the acquisition of the Bank's first branch from the Resolution Trust Corporation. Also contributing to the loss was an increase in our provision for loan losses. Our provision for loan losses increased for the nine months ended September 30, 1999 by $1.1 million, or 222.4%, over the comparable period of 1998, to $1.5 million compared to $474 thousand. The increase in our provision for loan losses is largely the result of growth in our loan portfolio, an increase in reserve factors we use to determine reserve levels and increased charge-offs incurred during the nine month period ended September 30, 1999, as well as our analysis of the estimated potential losses inherent in our loan portfolio. These increased expenses were partially offset by an increase in net interest income of $528 thousand. Included in our non-interest expense items was a write-down of $786 thousand relating to a check-kiting scheme which occurred in the fourth quarter of 1998. In light of the passage of time without significant recoveries from the company's ongoing litigation against the other financial institution involved in the scheme and the company's view of the assets currently available from the debtor and his affiliates to satisfy the company's claims, management elected to record this write-down. The company intends to pursue all legal remedies available to obtain recoveries of uncollected amounts. The remaining balance of this asset is $344 thousand, which represents equity in a house owned by the spouse of the debtor, who has agreed to turn the residence over to us. NET INTEREST INCOME Our net interest income increased by $528 thousand, or 7.0% to $8.1 million for the nine months ended September 30, 1999 from $7.5 million for the nine months ended September 30, 1998. 8 The increase was the result of an increase in interest income in excess of interest expense. The growth in interest income was primarily attributable to an increase of $85.2 million in average earning assets for the current nine-month period totaling $291.4 million over the prior year's nine-month period totaling $206.2 million. The increases in average earning assets occurred across the entire balance sheet, with increases in the securities portfolio and the loan portfolio. Average loans equalled $212.5 million in the 1999 period, which represented an increase of $76.6 million or 56.4% from the $135.9 million recorded in the 1998 period. Growth in the loan portfolio was primarily comprised of $82.2 million of adjustable rate mortgages originated between April 30, 1999 and September 30, 1999 by the bank's CMA subsidiary and $56.0 million of purchased home equity loans, of which $25.7 million were purchased on May 27, 1999 and $30.3 million were purchased on July 12, 1999. As a result of the increase in mortgages and home equity loans in our portfolio, the nine-month yield on earning assets decreased from 8.38% for the nine months ended September 30, 1998 to 7.66% for the nine months ended September 30, 1999. These loans generally have lower yields than our commercial loans. Increases in interest-earning assets were primarily funded through an increase of $105.7 million, or 52.0% in average deposits and borrowings to $308.8 million for the nine months ended September 30, 1999 from $203.1 million for the comparable period of 1998. During the nine months ended September 30, 1999, the cost of our interest bearing liabilities stayed stable from the prior year period at 4.42%. However, our total cost of funds, including non-interest bearing deposits, increased to 3.74% for the nine months ended September 30, 1999 from 3.54% for the nine months ended September 30, 1998. The increase in our cost of funds reflects the Company's decision to offer high, promotional rates of interest to attract new customers to our new branch locations, as well as a shift in our deposit portfolio toward time deposits and our money market product. The promotional rates of interest were offered both on time deposits and through our money market product, which paid an introductory rate of 6.05%. Although we had discontinued offering this product at September 30, 1999, we again offered the product in December 1999 in order to ease liquidity and provide funding for committed loans. These higher rate products and our liquidity needs caused a shift in our deposit portfolio toward higher rate products and away from non-interest bearing deposits. Although the average balance on non-interest bearing deposits increased to $47.9 million for the nine months ended September 30, 1999 from $40.3 million for the prior year period, non-interest bearing deposits as a percentage of the deposit portfolio decreased to 16.2% for the current year period from 19.9% for the prior year period. As a result of these factors, our net interest margin declined to 3.70% during the 1999 period from 4.89% in the 1998 period. 9 The following table reflects the components of our 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) interest yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities), and (5) our 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%.
Nine Months Ended September 30, 1999 v. 1998 September 30, 1999 September 30. 1998 ----------------------------- ------------------------------- (Dollar Amounts in Thousands - Interest Amounts and Interest Rates/Yields on a Fully Tax Average Rate/ Average Rate/ Equivalent Basis) Balance Interest Yield Balance Interest Yield - ----------------- ------- -------- ----- ------- -------- ----- Assets Interest-earning assets: Taxable loans (net of unearned income) $212,547 $13,257 8.32% $135,928 $ 9,672 9.49% Tax-exempt securities 1,877 114 8.09% 1,633 97 7.92% Taxable investment securities 60,305 2,703 5.98% 51,479 2,572 6.66% Interest-bearing deposits 2,424 160 8.80% 5,408 132 3.25% Federal funds sold 14,213 514 4.82% 11,714 483 5.50% -------- ------- ---- -------- ------- Total interest-earning assets 291,366 16,748 7.66% 206,162 12,956 8.38% Noninterest-earning assets 47,590 20,672 Allowance for loan losses (1,927) (1,339) -------- -------- TOTAL AVERAGE ASSETS $337.029 $225,495 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand interest deposits $ 84,477 $2,470 3.90% $ 34,525 $ 693 2.68% Savings deposits 16,677 230 1.84% 13,371 236 2.35% Money market deposits 17,841 395 2.95% 18,441 481 3.48% Time deposits 129,052 4,957 5.12% 96,159 3,972 5.51% Other debt 12,832 605 6.29% 323 17 7.02% -------- ------- ---- ------- ------ Total interest-bearing liabilities 260,879 8,657 4.42% 162,819 5,399 4.42% Noninterest-bearing liabilities 4,579 1,743 Demand deposits 47,926 40,283 Shareholders' equity 23,645 20,650 -------- -------- TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY $337,029 $225,495 ======== ======== Net interest income 8,091 7,557 Net interest rate spread 3.24% 3.96% Net interest income/margin on average earning assets 3.70% 4.89%
10 The following table presents by category the major factors that contributed to the changes in net interest income for each of the nine-month periods ended September 30, 1999 and 1998. Amounts have been computed on a fully tax- equivalent basis, assuming a federal income tax rate of 34%. Nine Months Ended September 30 (Dollar Amounts in Thousands on a 1999 versus 1998 Increase (Decrease) Fully Tax-Equivalent Basis) Due to Change in: Volume Rate Net Interest-Earning Assets Interest income: Taxable loans (net of unearned income) $ 5,452 $(1,867) $ 3,585 Tax-exempt securities 15 2 17 Taxable investment securities 441 (310) 131 Interest bearing deposits (73) 101 28 Federal funds sold 103 (72) 31 ------- ------- ------- Total interest income $ 5,938 $(2,146) $ 3,792 ======= ======= ======= Interest-Bearing Liabilities Interest expense: Demand interest deposits $ 1,003 $ 774 $ 1,777 Savings deposits 58 (64) (6) Money market deposits (16) (70) (86) Time deposits 1,359 (374) 985 Other debt 658 (70) 588 ------- ------- ------- Total interest expense 3,062 196 3,258 ------- ------- ------- Net interest income $ 2,876 $(2,342) $ 534 ======= ======= ======= PROVISION FOR LOAN LOSSES Our provision for loan losses for the nine months ended September 30, 1999 totaled $1.5 million, an increase of $1.1 million over the provision of $474 thousand for the nine months ended September 30, 1998. The increase in our provision for the nine months ended September 30, 1999 over the comparable prior year period reflects both the increase in our loan portfolio, an increase in the reserve factors we use to determine reserve levels and increased charge-offs incurred during the nine months ended September 30, 1999, as well as our analysis of the estimated potential losses inherent in the loan portfolio based upon our review of particular loans, the credit worthiness of particular borrowers and general economic conditions. For the nine months ended September 30, 1999, our average loans totaled $212.5 million, an increase of $76.6 million, or 56.4% over average total loans of $135.9 million for the nine months ended September 30, 1998. In addition, during this period, our ratio of non-performing loans to total loans decreased to 1.13% from 2.34% at December 31, 1998. OTHER INCOME Our other income, which consists of service charges on deposits, gains on sales of securities and loans and other income increased by $2.4 million, or 77.0%, to $5.6 million for the nine months ended September 30, 1999 from $3.1 million for the nine months ended September 30, 1998. This increase primarily represents an increase of $2.0 million in the gain on sale of loans 11 attributable to $2.7 million in gains on sales of loans by our CMA subsidiary partially offset by a decline of $700 thousand on sales of SBA loans compared to the prior period. SBA loan sales were negatively impacted by lower market prices. In addition, our other income, representing SBA servicing fees and other fee income, increased by $567 thousand to $1.2 million, or 91.5% for the nine months ended September 30, 1999 from $620 thousand for the comparable period of 1998. OTHER EXPENSES Our other non-interest expense increased $7.2 million, or 95.1%, to $14.8 million for the nine months ended September 30, 1999 from $7.6 million for the comparable period of 1998. We experienced increases of $2.8 million in salaries and benefits, which increased to $6.6 million from $3.7 million, $952 thousand in occupancy expenses which increased to $1.7 million from $765 thousand, and $3.4 million in other operating expenses which increased to $6.5 million from $3.1 million during the current nine months compared to the nine months ended September 30, 1998. These increases were substantially attributable to the increase in our branch network, as we opened ten additional branches over the past year, and the acquisition of CMA during February. This acquisition was accounted for as a purchase and the prior period does not reflect any operating expenses associated with CMA. Total non-interest expense associated with CMA for the nine months ended September 30, 1999 were $3.6 million. Increases reflect the increased lease and other occupancy expenses associated with these branches, as well as increases in salary expenses to hire personnel to operate the branches. In addition, our salary expense increased because of the need to hire additional administrative staff to oversee and administer the growth in our loan portfolio. Other expenses were also impacted by the write-down related to the check kiting of $786 thousand, which was previously discussed. 12 The following table presents the breakout of other operating expenses for the nine month period ended September 30, 1999 and 1998: Nine Months Ended September 30, 1999 vs. 1998 (Dollars in Thousands) September September Increase/ 30, 1999 30, 1998 (Decrease) -------- -------- ---------- Professional services $ 761 $ 495 $ 266 Office expense 1,418 771 647 Advertising expense 547 279 268 Communication expense 525 188 337 Bank services 579 374 205 FDIC insurance 121 87 34 Director fees 200 211 (11) Other losses 824(1) 22 802 Loan processing expense 933 317 616 Goodwill 274 9 265 Other expense 364 349 15 ------ ------ ------ Total other expense $6,546 $3,102 $3,444 ====== ====== ====== (1) Includes a $786 thousand write-down of uncollected assets associated with the check-kiting scheme. The increases in professional services, office expense, communication expense, bank services and FDIC insurance is the result of the addition of ten new branches, our growth in assets and expenses incurred operating our CMA subsidiary. Total other operating expenses incurred in connection with CMA were $762 thousand for the nine months ended September 30, 1999. There were no expenses incurred in connection with CMA for the same period in 1998. The increase in advertising expense is the result of increased marketing efforts and the increase in loan processing expense is the result of additional volume and collection activity. INCOME TAX EXPENSE For the nine months ended September 30, 1999, we recognized a tax benefit of $1.1 million related to the loss recognized for the nine-month period, as compared to an income tax provision of $1.0 million for the nine months ended 1998. 13 FINANCIAL CONDITION AT SEPTEMBER 30, 1999 ----------------------------------------- Our total assets at September 30, 1999 increased to $437.6 million, an increase of $183.0 million, or 71.9%, over assets of $254.6 million at December 31, 1998. Net loans increased $148.8 million to $313.8 million, or 90.2%, from $165.0 million at December 31, 1998. Our securities portfolio increased $35.1 million to $76.1 million at September 30, 1999 from $40.9 million at December 31, 1998. Our growth in assets was primarily the result of our branch expansion and related promotional activities, which increased our total deposits. At September 30, 1999, our total deposits increased $151.1 million to $377.9 million, or 66.6%, from total deposits of $226.9 million at December 31, 1998. These increases primarily reflect increases in our premium rate money market account and jumbo certificates of deposit from municipalities in our market area. LOAN PORTFOLIO At September 30, 1999, our net loans totaled $313.8 million, an increase of $148.8 million, or 90.2%, from $165.0 million at December 31, 1998. The increase in the loan portfolio reflects our branch expansion, the purchase of home equity loans, as well as our decision to originate adjustable rate one-to-four family residential mortgages for our portfolio through our CMA subsidiary. The $148.8 million increase in loans was comprised of $80.1 million of ARMS, $54.6 million of home equity loans, $10.1 million of consumer loans and $4.0 million of other commercial loans. At September 30, 1999, the composition of our portfolio changed so that residential, one-to-four family mortgages, including $54.6 million in home equity loans, account for 51.9% of the total portfolio, compared to 15.9% at December 31, 1998. Commercial and industrial loans account for 14.9% of the portfolio at September 30, 1999, compared to 24.9% at December 31, 1998. Loans secured by non-residential properties account for 18.0 % of the portfolio at September 30, 1999, compared to 35.9% of the portfolio at December 31, 1998. Due to the increasing competition for commercial and non-residential loans, we anticipate that the portion of our portfolio consisting of one-to-four family residential home mortgages will continue to increase as loans in process close, however, we are no longer originating residential mortgages for our portfolio. The following table sets forth the classification of our loans by major category at September 30, 1999 and December 31, 1998: September 30, 1999 December 31, 1998 Amount % Amount % -------- ------ -------- ------ (Dollars in Thousands) Commercial and industrial $46,799 14.9% $41,502 24.9% Real Estate Non-residential Properties 56,729 18.0 59,845 35.9 Residential Properties 163,487 51.9 26,565 15.9 Construction 15,993 5.1 16,218 9.8 Consumer 31,733 10.1 22,440 13.5 -------- ------ -------- ------ TOTAL LOANS $314,741 100.0% $166,570 100.0% ======== ====== ======== ====== 14 The following table sets forth the maturities for commercial and industrial loans at September 30, 1999: (Dollars in Thousands) Within 1 year $21,032 1 to 5 years 14,751 After 5 years 11,016 ------- Total $46,799 ======= The following table sets forth the maturity for real estate construction loans at September 30, 1999: (Dollars in Thousands) Within 1 year $11,974 1 to 5 years 4,019 After 5 years 0 ------- Total $15,993 ======= ASSET QUALITY Our principal interest earning assets are our loans. Inherent in the lending function is the possibility that a customer may not perform in accordance with the contractual terms of the loan. A borrower's inability to repay a loan can create the risk of non-accrual loans, past due loans, restructured loans and potential problem loans. 15 The following table sets forth information concerning our non-accrual loans and non-performing assets as of September 30, 1999 and December 31, 1998: Sept. 30, 1999 Dec. 31, 1998 (Dollars in Thousands) Nonaccrual loans by category Real Estate $1,379 $2,297 Installment 38 0 Commercial 130 0 ------ ------- Total $1,547 $2,297 Past due 90 days or more and still accruing interest Real Estate $ 602 $ 790 Installment 11 7 Commercial 1,387 803 ------ ------- Total 2,000 1,600 Total Non-Performing Loans $3,547 $3,897 ====== ======= REO Property 82 0 Total Non-Performing Assets $3,629 $3,897 ====== ====== Non-performing loans to total loans 1.13% 2.34% Non-performing assets to total assets 0.83% 1.53% Allowance for loan losses as a 63.07% 46.83% percentage of non-performing loans (a) - ---------- (a) includes loans greater than 90 days past due that are still accruing interest Our non-accrual loans decreased by $750 thousand from $2.3 million at December 31, 1998 to September 30, 1999, when they totaled $1.5 million. The decrease in non-accrual loans is substantially a result of charge-offs and a $617 thousand nonaccrual loan that was replaced by a new loan to new borrowers. The loans past due 90 days or more and still accruing interest are well collateralized and in the process of collection. Subsequent to September 30, 1999 a non-accrual loan with a balance of $810 thousand was reclassified as an REO property. ALLOWANCE FOR LOAN LOSSES We attempt to maintain an allowance for loan losses at a sufficient level to provide for potential losses in the loan portfolio. Loan losses are charged directly to the allowance when they occur and any subsequent recovery is credited to the allowance. Our allowance for loan losses totaled $2.2 million at September 30, 1999 compared to $1.8 million at December 31, 1998. The increase in the allowance is due to the continued increase in our loan portfolio, an increase in the reserve factors that we use to determine reserve levels and increased charge-offs incurred during the year to date, as well as our analysis of the estimated potential losses inherent in the loan portfolio based upon our review of particular loans, the credit worthiness of particular borrowers and general economic conditions. 16 The following is a summary of the reconciliation for the allowance of loan losses for the nine months ended September 30, 1999 and the year ended December 31, 1998: ANALYSIS OF ALLOWANCE FOR LOAN LOSSES September 30 December 31 1999 1998 (Dollars in Thousands) Balance at Beginning of Period $1,825 $1,322 CHARGE-OFFS Real Estate 764 254 Consumer 39 15 Commercial and industrial 327 60 ------ ------ Total charge-offs $1,130 $329 RECOVERIES Real Estate 3 23 Consumer 11 5 ------ ------ Total recoveries 14 28 ------ ------ Total net charge-offs $1,116 $301 Provision charged to expense 1,528 804 Balance of allowance at end of period $2,237 $1,825 ====== ====== Ratio of net charge-offs to average loans outstanding (1) 0.70% 0.21% Ratio of allowance to total loans, net of loans held for sale 0.72% 1.12% (1) These ratios are annualized. The following table sets forth for each of our major loan categories, the amount and percentage of the allowance for loan losses attributed to such category and a percentage of total loans represented by such category as of September 30, 1999 and December 31, 1998: September 30, 1999 December 31, 1998 ------------------- ------------------- % of % of Amount All loans Amount All Loans ------ --------- ------ --------- (Dollars in Thousands) Balance Applicable to: Commercial & industrial $ 959 14.9% $ 741 24.9% Real estate: Non-residential properties 393 18.0 663 35.9 Residential properties 390 51.9 96 15.9 Construction 221 5.1 160 9.8 Consumer 274 10.1 165 13.5 ------ ----- ------ ----- Total $2,237 100.0% $1,825 100.0% ====== ===== ====== ===== 17 INVESTMENT SECURITIES We maintain an investment security portfolio for asset-liability risk control purposes and to provide an additional source of funds. The portfolio is comprised of US Treasury securities, obligations of US Government and Government-sponsored agencies, selected state and municipal obligations, corporate securities and equity securities. Management determines the appropriate security classification (i.e., available for sale, held to maturity or trading) at the time of purchase. At September 30, 1999, our investment security portfolio totaled $76.1 million, including $41.5 million in securities available for sale and $34.5 million of securities held to maturity. This represented an increase of $35.1 million over total investments securities of $40.9 million at December 31, 1998. At September 30, 1999, no investment securities were classified as trading securities. The increase in investment securities represents the investing of new deposits in excess of loan demand during the first two quarters of the year. A comparative summary of securities available for sale and held to maturity at September 30, 1999 and December 31, 1998 is as follows: September 30, 1999 December 31, 1998 ------------------ ------------------ Amortized Fair Amortized Fair Cost Value Cost Value ------- ------- ------- ------- (Dollars in Thousands) Available for sale U.S. Treasury $ 6,986 $ 6,930 $ 243 $ 244 U.S. Govt. agencies 10,150 9,997 4,371 4,401 Mortgage - backed securities 20,365 19,768 14,910 14,771 State and municipal 656 660 931 945 Corporate Debt Securities 964 917 0 0 Federal Home Loan Bank Stock 2,546 2,546 630 630 Other Corporate Stocks 1,034 713 112 499 ------- ------- ------- ------- Total $42,701 $41,530 $21.697 $21,490 ======= ======= ======= ======= Held to maturity U.S. Govt. agencies $20,244 $19,303 $ 3,757 $ 3,402 Mortgage - backed securities 14,289 13,565 15,182 15,188 Other 00 00 500 499 ------- ------- ------- ------- Total $34,533 $32,868 $19,439 $19,089 ======= ======= ======= ======= 18 The following table sets forth the maturity distribution of our available for sale portfolio at September 30, 1999 and December 31, 1998: September 30, December 31, ---------------------------------------------------- 1999 1998 ---------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------------------------------------------------- (Dollars in thousands) Available for sale Due in one year or less $ 224 $ 225 $ 516 $ 518 Due after one year through five years 9,440 9,373 658 671 Due after five years through ten years 6,000 5,878 0 0 Due after ten years 3,092 3,028 4,371 4,401 Mortgage-backed securities 20,365 19,767 14,910 14,771 Corporate stocks 3,580 3,259 1,242 1,129 ------- ------- ------- ------- Total $42,701 $41,530 $21,697 $21,490 ======= ======= ======= ======= The following tables sets forth the maturity distribution of our held to maturity portfolio at September 30, 1999 and December 31, 1998: September 30, December 31, 1999 1998 ---------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------------------------------------------------- (Dollars in thousands) Held to maturity Due in one year or less $ 0 $ 0 $ 1,507 $ 1,506 Due after one year through five years 11,500 11,191 1,500 1,425 Due after five years through ten years 7,244 6,663 1,250 970 Due after ten years 1,500 1,449 0 0 Mortgage-backed securities 14,289 13,565 15,182 15,188 ------- ------- ------- ------- Total $34,533 $32,868 $19,439 $19,089 ======= ======= ======= ======= 19 DEPOSITS Deposits are our primary source of funds. For the nine months ended September 30, 1999, our total deposits increased by $151.1 million, or 66.6%, to $377.9 million at September 30, 1999 from $226.9 million at December 31, 1998. Because of promotional efforts in connection with our new branches, our interest paying demand deposits, which include our premium rate money market account, increased by $63.0 million to $103.6 million at September 30, 1999 from $40.6 million at December 31, 1998, and our time deposits of over $100 thousand increased by $56.8 million to $85.0 million at September 30, 1999 from $28.2 million at December 31, 1998. In addition, our time deposits of less than $100 thousand increased by $23.5 million to $97.2 million at September 30, 1999 from $73.7 million at December 31, 1998. The result of these promotional activities and increased reliance on time deposits of over $100 thousand was to increase our cost of funds (including non-interest bearing deposits) to 3.74% for the nine months ended September 30, 1999 from 3.46% for the year ended December 31, 1998. Although we had discontinued offering this product at September 30, we reoffered the product in December 1999 in order to ease liquidity and provide funding for committed loans. The following table sets forth the average of various types of deposits for the nine months ended September 30, 1999 and the year ended December 31, 1998:
September 30, 1999 December 31, 1998 ----------------------------- ------------------------------ Average Average Amount % Rate Amount % Rate -------- ----- ---- -------- ----- ---- (Dollars in thousands) Average Balance: Demand deposits $ 47,926 15.5% 0.00% $ 41,250 19.9% 0.00% Demand interest deposits 84,477 27.4 3.90 36,162 17.5 1.63 Savings deposits 16,677 5.4 1.84 13,811 6.7 2.26 Money market deposits 17,841 5.8 2.95 18,557 9.0 5.00 Time deposits 129,052 41.8 5.12 96,969 46.8 5.48 Other debt 12,832 4.1 6.29 319 0.1 7.21 -------- ----- ---- -------- ----- ---- Total $308,805 100.0% 3.74 $207,068 100.0% 3.46 ======== ===== ==== ======== ===== ====
INTEREST RATE SENSITIVITY The principal objectives of our 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 our business focus, operating environment, capital, and liquidity requirements, and actively manage risk within the Board approved guidelines. We seek to reduce the vulnerability of our 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 our maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels. 20 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 assets repricing exceeds the amount of liabilities. 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 September 30, 1999. 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. As an example, the rate on demand interest accounts is expected to increase just 1/3 of a 1% of the change in Federal Funds rate. Accordingly, 1/3 or 33% of the balances are represented on the table as repricing within six months. 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. 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 September 30, 1999, these simulations show that with a 300 basis point increase in interest rates, our net interest income would show a 13.8% decline. A 13.8% decline in net interest income would have resulted in a reduction of $1.8 million in net income. A decline of 300 basis points in interest rates would increase our net interest income 11.4%. These variances in net interest income are not within our 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 21 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 200 basis points. The economic value of equity is likely to be different as interest rates change. Like the simulation model, results falling outside prescribed ranges require action by the ALCO. The bank's variance in the economic value of equity as a percentage of assets with rate shocks of 200 basis points is a decline of 3.14% in a rising rate environment and an increase of 2.4% in a falling rate environment. The decline of 3.14% in the EVPE in a rising interest rate environment is not within board-approved guidelines of +/-3%. 22 The Company is taking several specific actions to bring the gap ratios within board approved levels. Investment portfolio cash flows are utilized to pay down short-term borrowings. Core deposit growth will replace short-term large CD balances. Competitive rates are being offered on longer term certificates of deposit. The Company is focusing on floating rate SBA loan originations.
More Than More Than More Than Six Months One Year Two Years Five Years More Than Under Six Through One Through Two Through Five Through Ten Ten Years and Months Year Years Years Years Not Repricing Total ------ ---- ----- ----- ----- ------------- ----- (Dollars in Thousands) Assets: Cash and other assets -- -- -- -- -- $ 29,935 $ 29,935 Federal funds sold -- -- -- -- -- -- -- Interest bearing -- -- -- -- -- 15,566 15,566 deposits Investment securities $ 10,064 $ 4,790 $ 12,197 $ 28,082 $ 12,289 8,641 76,063 Loans 78,107 23,199 28,565 144,660 30,128 11,362 316,021 TOTAL ASSETS: 88,171 27,989 40,762 172,742 42,417 65,504 437,585 Liabilities and Shareholders' Equity: Noninterest demand -- -- -- -- -- 56,778 56,778 Demand interest deposits 5,768 -- -- 8,216 3,496 -- 17,480 Savings deposits 17,074 -- 2,820 12,202 3,192 -- 35,288 Money market deposits 13,826 -- 6,912 6,913 -- -- 27,651 Time deposits 137,097 15,194 25,832 3,631 465 -- 182,219 Top banana account 58,499 -- -- -- -- -- 58,498 Borrowings 30,000 -- -- -- -- -- 30,000 Other liabilities -- -- -- -- -- 5,744 5,744 Shareholders' Equity -- -- -- -- -- 23,926 23,926 TOTAL LIABILITIES $ 262,264 $ 15,194 $ 35,564 $ 30,962 $ 7,153 $ 86,448 $ 437,585 AND SHAREHOLDERS' EQUITY GAP (174,093) 12,795 5,198 141,780 35,264 (20,944) Cumulative gap (174,093) (161,298) (156,100) (14,320) 20,944 -- Cumulative gap to total (39.8)% (36.9)% (35.7)% (3.3)% 4.8% 0.0% assets
23 LIQUIDITY Bank Holding Company The principal source for funds for the holding company are dividends paid by the bank. The bank is currently restricted from paying dividends to the holding company because its tier 1 capital to average assets ratio is less than six percent. Because of our capital ratios, the company has agreed to enter into a memorandum of understanding with its regulators. The memorandum require the company to raise capital, establish procedures to provide updates to the regulators every 30 days on our progress, adopt certain policies and review our management. In addition, the company must notify its regulators in writing 30 days prior to any proposed declaration of dividends on its common stock. See "Capital." At September 30, 1999 the company had $2.2 million in cash and $713 thousand in marketable securities, valued at fair market value. Bank Liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner. Our 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. Our total deposits amounted to $377.9 million, as of September 30, 1999. We have augmented liquidity from our deposit portfolio with borrowings from the FHLB of New York. At September 30, 1999, the balance of these borrowings was $30 million. At September 30, 1999, we could have borrowed an additional $15 million from the FHLB of New York. As of September 30, 1999, we hold municipal deposits from two municipalities totaling $67.9 million. These deposits are of short duration, and are very sensitive to price competition. If these deposits were to be withdrawn, in whole or in part, it would negatively impact our liquidity. At September 30, 1999, we also had commitments to fund approximately $30 million in residential mortgage loans through our CMA subsidiary. To increase our liquidity, in December 1999 we again offered higher rate money market accounts. Although these accounts may increase our interest expense, they will help us meet our liquidity needs. 24 CAPITAL A significant measure of the strength of a financial institution is its capital base. Our 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, our 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 our branch expansion the New Jersey Department of Banking and Insurance imposed a tier 1 capital to total assets ratio of 6%. At September 30, 1999, the bank's leverage ratio of tier 1 capital to average assets was 4.28%, less than the 6% required by the New Jersey Department of Banking and Insurance. The bank may not pay dividends to the holding company when its ratio is less than six percent. In addition, at September 30, 1999, the company's and the bank's total capital to risk weighted assets were 7.20% and 6.29%, respectively. A minimum rate of 8% is required by the Federal Reserve and FDIC. As a result of the capital deficiency, the company and the bank each agreed to enter into a memorandum of understanding with their regulators which requires them to raise capital, establish procedures to provide updates to the regulators every 30 days on their progress, adopt certain policies and review their management. In addition, the company must notify its regulators in writing 30 days prior to any proposed declaration of dividends on its common stock. Because the bank failed to satisfy the minimum total risk-based capital requirement of 8% at September 30, 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 of this designation, the bank was required to submit a capital plan to the FDIC. In addition, the bank is generally prohibited from making capital distributions to the holding company, paying management fees to any entity that controls the bank or increasing its average assets until the capital plan has been approved. In addition, the Board of Governors of the Federal Reserve System, our primary regulator, will also prevent our ability to pay dividends regardless of whether the bank has sufficient cash. 25 The following table summarizes the holding company's risk based and leverage capital ratios at September 30, 1999, as well as the required minimum regulatory capital ratios: Adequately Well Sept. Dec. Capitalized Capitalized 1999 1998 Requirements Provisions ---- ----- ------------ ---------- Total capital ratio 7.20% 14.85% 8.00% 10.00% Tier 1 capital ratio 6.48% 13.89% 4.00% 6.00% Leverage ratio 5.01% 10.87% 4.00% 5.00% The following table summarizes the bank's risk based and leveraged capital ratios at September 30, 1999, as well as the required minimum regulatory capital ratios. Adequately Well Sept. Dec. Capitalized Capitalized 1999 1998 Requirements Provisions ---- ---- ------------ ---------- Total capital ratio 6.29% 9.80% 8.00% 10.00% Tier 1 capital ratio 5.57% 8.84% 4.00% 6.00% Leverage ratio(1) 4.28% 7.09% 4.00% 5.00% - ---------- (1) The New Jersey Department of Banking and Insurance has imposed a tier 1 capital to average asset ratio of 6%. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITY BANCORP, INC. Date: December 13, 1999 By: /s/ Robert Van Volkenburgh ---------------------------------- Robert Van Volkenburgh Chairman of the Board By: /s/ Kevin Killian ---------------------------------- Kevin Killian, Chief Financial Officer (Principal Financial and Accounting Officer) 26 EX-27 2 FDS --
9 This schedule contains summary financial information extracted from the registrants Unaudited interim financial statements and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1999 SEP-30-1999 6892 11575 0 0 41530 34533 32868 316021 2237 437585 377915 30000 2180 3564 0 0 26224 2298 437585 13257 2938 514 16709 8657 8657 8052 1528 194 6546 2689 2689 0 0 1555 0.42 0.42 0.035 1547 2000 0 0 1825 1130 14 2237 2237 0 0
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