SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2003
OR
o
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)
New Jersey
22-3282551
(State or Other Jurisdictionof Incorporation or Organization)
(I.R.S. EmployerIdentification No.)
64 Old Highway 22, Clinton, NJ
08809
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code (908) 730-7630
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act) Yes o No ý
The number of shares outstanding of each of the registrant’s classes of common equity stock, as of August 10, 2003: common stock, no par value: 5,399,196 shares outstanding
PART I
-
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheetsat June 30, 2003, 2002 and December 31, 2002
Consolidated Statements of Income for the three and six monthsended June 30, 2003 and 2002
Consolidated Statements of Changes in Shareholders’ Equityfor the six months ended June 30, 2003 and 2002
Consolidated Statements of Cash Flowsfor the six months ended June 30, 2003 and 2002
Notes to the Consolidated Financial Statements
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
ITEM 4
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
Changes in Securities and Use of Proceeds
Defaults upon Senior Securities
Submission of Matters to a Vote of Security Holders
ITEM 5
Other Information
ITEM 6
Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
2
Part 1.-Consolidated Financial Information
Item 1.-Consolidated Financial Statements
Unity Bancorp, Inc
Consolidated Balance Sheets
(unaudited)
(in thousands)
06/30/03
12/31/02
06/30/02
Assets
Cash and due from banks
$
14,907
12,237
14,409
Federal funds sold and money market investments
19,000
18,000
24,000
Securities:
Available for sale
58,731
55,570
42,941
Held to maturity
21,053
26,184
23,848
Total securities
79,784
81,754
66,789
Loans:
SBA held for sale
12,176
14,396
10,583
SBA held to maturity
51,319
49,784
40,490
Commercial
182,113
163,813
148,562
Residential mortgage
47,198
56,297
70,447
Consumer
32,415
27,504
Total loans
325,221
311,794
296,266
Less: Allowance for loan losses
4,649
4,094
3,563
Net loans
320,572
307,700
292,703
Premises and equipment, net
8,475
8,669
8,960
Accrued interest receivable
2,397
2,579
2,248
Other assets
3,635
1,935
1,227
Total assets
448,770
432,874
410,336
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
Non-interest bearing
90,593
75,567
69,287
Interest bearing checking
183,068
176,640
149,656
Savings deposits
36,452
34,663
33,217
Time deposits, under $100,000
66,389
75,883
82,313
Time depostis, $100,000 and over
20,596
19,832
32,839
Total deposits
397,098
382,585
367,312
Other debt
12,717
12,768
12,809
Trust preferred securities
9,000
—
Accrued interest payable
200
280
440
Accrued expense and other liabilities
517
1,135
1,664
Total liabilities
419,532
405,768
382,225
Commitments and contingencies
Shareholders’ equity
Preferred stock, class A, 10%, 104 shares authorized 6 thousand issued and outstanding
285
Common stock, no par value, 12,500 shares authorized
31,827
34,584
Retained deficit
(2,639
)
(5,006
(6,969
Accumulated other comprehensive income
50
211
Total Shareholders’ Equity
29,238
27,106
28,111
Total Liabilities and Shareholders’ Equity
Issued common shares
5,393
5,646
Outstanding common shares
See Accompanying Notes to the Consolidated Financial Statements
3
Unity Bancorp
Consolidated Statements of Income
For the three monthsended June 30,
For the six monthsended June 30,
(in thousands, except per share amounts)
2003
2002
Interest income:
Fed funds sold and interest on deposits
41
31
57
61
559
729
1,104
1,520
282
388
589
721
841
1,117
1,693
2,241
SBA loans
1,019
885
2,061
1,784
Commercial loans
3,263
2,636
6,282
4,899
Residential mortgage loans
763
1,069
1,640
2,112
Consumer loans
363
389
747
778
Total loan interest income
5,408
4,979
10,730
9,573
Total interest income
6,290
6,127
12,480
11,875
Interest expense:
Interest bearing demand deposits
683
675
1,471
1,247
102
188
208
355
Time deposits
667
1,125
1,411
2,307
Other debt and trust preferred securities
307
196
608
393
Total interest expense
1,759
2,184
3,698
4,302
Net interest income
4,531
3,943
8,782
7,573
Provision for loan losses
400
975
850
1,575
Net interest income after provision for loan losses
4,131
2,968
7,932
5,998
Non-interest Income:
Deposit service charges
523
366
1,093
709
Loan and servicing fees
484
367
905
719
Net gains on SBA loan sales
687
1,101
1,506
1,885
Net security gains
45
228
128
Other income
249
300
463
712
Total non-interest income
1,988
2,362
4,095
4,253
Non-interest expense:
Compensation and benefits
1,952
1,930
3,862
3,738
Occupancy
460
398
938
806
Processing and communications
548
561
1,122
1,072
Furniture and equipment
278
264
519
549
Professional fees
195
158
447
311
Deposit insurance
15
39
77
Loan servicing costs
166
135
286
202
Other expenses
587
415
1,051
797
Total non-interest expense
4,201
3,900
8,256
7,552
Net income before provision for income taxes
1,918
1,430
3,771
2,699
Provision for income taxes
703
514
1,404
961
Net income
1,215
916
2,367
1,738
Preferred stock dividends
7
Net income to common shareholders
909
1,723
Net income per common share - Basic
0.23
0.17
0.44
0.32
Net income per common share - Diluted
0.22
0.16
0.42
0.30
Weighted average shares outstanding – Basic
5,477
5,433
Weighted average shares outstanding – Diluted
5,610
5,834
5,640
5,830
4
Consolidated Statements of Changes in Shareholders’ Equity
For the Six months ended June 30, 2003 and 2002
(In thousands)
PreferredStock
CommonStock
RetainedDeficit
AccumulatedOtherComprehensive Income (loss)
TotalShareholders’Equity
Balance, December 31, 2001
33,248
(8,692
(5
24,836
Comprehensive income:
Net Income
Unrealized holding gain on securities arising during the period, net of tax $116
257
Total comprehensive income
1,954
(15
Warrant exercises (255 shares)
1,279
Benefit plans (9 shares)
Balance, June 30, 2002
Balance, December 31, 2002
Net unrealized holding loss on securities arising during the period, net of tax $144
(235
2,132
Balance, June 30, 2003
See Accompanying Notes to the Consolidated Financial Statements.
5
Consolidated Statements of Cash Flows
For the six months ended June 30,
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
479
610
Net gain on sale of securities
(448
(228
Write-down on AFS security
Gain on sale of SBA loans held for sale
(1,506
(1,885
Origination of SBA loans held for sale
(14,650
(20,664
Proceeds from the sale of SBA loans
18,376
29,685
Net change in other assets and other liabilities
(2,410
Net cash provided by operating activities
3,358
11,379
Investing activities:
Purchases of securities held to maturity
(2,216
(6,526
Purchases of securities available for sale
(42,322
(9,827
Maturities and principal payments on securities held to maturity
7,347
3,601
Maturities and principal payments on securities available for sale
23,201
14,628
Proceeds from sale of securities available for sale
16,108
12,605
Purchase of loans
(3,835
(10,373
Net increase in loans
(12,223
(21,668
Purchases of premises and equipment
(210
(877
Net cash used in investing activities
(14,150
(18,437
Financing activities:
Increase in deposits
14,513
27,358
Decrease in borrowings
(51
(44
Proceeds from the issuance of common stock
1,336
Dividends on preferred stock
Net cash provided by financing activities
14,462
28,635
Increase in cash and cash equivalents
3,670
21,577
Cash and cash equivalents at beginning of year
30,237
16,832
Cash and cash equivalents at end of period
33,907
38,409
Supplemental disclosures:
Cash:
Interest paid
3,778
4,228
Income taxes paid
2,578
Non-cash investing activities:
Transfer of loans to Other Real Estate Owned
186
6
Notes to the Consolidated Financial Statements (Unaudited)
June 30, 2003
NOTE 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Unity (NJ) Statutory Trust I and Unity Bank (the “Bank”, or when consolidated with the Parent Company, the “Company”), reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of interim results. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The financial information has been prepared in accordance with generally accepted accounting principles and has not been audited. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant changes related to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market. The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2003 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 subsidiaries, Unity Bank and Unity (NJ) Statutory Trust I, 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, 2002, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans have an exercise price equal to the market value of their underlying common stock on the date of grant. The following is the expanded disclosure of SFAS 148, for the three and six months ended June 30, 2003 and 2002.
SFAS 148 Proforma Restatement
Three months ended June 30,
Six months ended June 30,
(In thousands, except per share data)
Net income to common shareholders as reported:
As reported
Pro forma
1,167
832
2,271
1,584
Income per share:
Basic as reported
Basic Pro forma
0.15
0.29
Diluted as reported
Diluted Pro forma
0.21
0.14
0.40
0.27
NOTE 2. Litigation
On February 20, 2003, the Bank was named as a defendant in a lawsuit initiated by Commerce Bank, N.A. and Commerce Bank/Shore, N.A. in the Superior Court of New Jersey, Essex County alleging that the Bank, as payor of certain checks written against certain deposit accounts held at the Bank, improperly refused to honor approximately $4,000,000 of checks. Commerce Bank, N.A. and Commerce Bank/Shore, N.A. have petitioned the Superior Court of New Jersey, Essex County for compensatory and consequential damages of $4,028,584, interest, attorney’s fees and costs of suit. The Bank has reviewed the relevant circumstances and believes that it acted properly and that the outcome of the lawsuit will not have a material impact on the consolidated financial position or results of operations of the Company.
From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition, or operating results of the Company.
NOTE 3. Earnings per share
The following is a reconciliation of the calculation of basic and dilutive earnings per share. Basic net income per common share is calculated by dividing net income to common shareholders by the weighted average common shares outstanding during the reporting period. Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options and warrants, were issued during the reporting period. On January 27, 2003 the Company announced a 5% stock dividend payable on March 12, 2003, and, accordingly, all share amounts have been restated to include the effect of the dividend.
Three Months ended June 30,
Six Months ended June 30,
Net Income to common shareholders
1,251
Basic weighted-average common shares outstanding
Plus: Common stock equivalents
217
357
247
397
Diluted weighted –average common shares outstanding
Net Income per Common share:
Basic
Diluted
NOTE 4. Recent accounting pronouncements
Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. Statement 150 requires instruments within its scope to be classified as a liability (or, in some cases, as an asset). Statement 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (i.e. July 1, 2003 for calendar year entities). For financial instruments created before June 1, 2003 and still existing at the beginning of the interim period of adoption, transition generally should be applied by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attributes of the Statement. The adoption of Statement 150 did not have any effect on the Company’s consolidated financial statements.
Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued on April 30, 2003. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement is not expected to have a significant effect on the Company’s consolidated financial statements.
8
ITEM 2.
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 2002 consolidated financial statements and notes. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”. Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic, and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Unity Bancorp, Inc.’s interest rate spread or other income anticipated from operations and investments.
Overview and Strategy
Unity Bancorp, Inc. (the “Parent Company”) is incorporated in New Jersey and is a bank holding company under the Bank Holding Company Act of 1956, as amended. It’s wholly-owned subsidiary, Unity Bank (the “Bank” or, when consolidated with the Parent Company, the “Company”) was granted a charter by the New Jersey Department of Banking and Insurance and commenced operations on March 13, 1991. The Bank provides a full range of commercial and retail banking services through 12 branch offices located in Hunterdon, Somerset, Middlesex, and Union counties in New Jersey. These services include the acceptance of demand, savings, and time deposits; extension of consumer, real estate, Small Business Administration and other commercial credits, as well as personal investment advisory services through the Bank’s wholly-owned subsidiary, Unity Financial Services, Inc. Unity Investment Company, Inc. is also a wholly-owned subsidiary of the Bank, used to hold a portion of the Bank’s investment portfolio.
9
Consolidated Average Balance Sheets with resultant Interest and Rates
(Tax-equivalent basis, dollars in thousands)
Three Months Ended
June 30, 2002
Balance
Interest
Rate
Interest-earning assets:
Federal funds sold, interest-bearing deposits with banks and money market investments
11,058
1.49
%
7,850
1.58
56,557
567
4.01
52,097
5.60
22,865
4.93
24,608
6.31
79,422
849
4.28
76,705
5.82
Loans, net of unearned discount:
65,950
6.18
54,946
6.44
176,984
7.39
144,404
7.32
Residential Mortgages
50,050
6.10
71,066
6.02
30,198
4.82
26,250
5.94
323,182
6.70
296,666
6.72
Total interest-earning assets
413,662
6,298
381,221
6.43
Noninterest-earning assets:
14,964
12,154
Allowance for loan losses
(4,591
(3,514
14,216
12,165
Total noninterest-earning assets
24,589
20,805
Total Assets
438,251
402,026
Interest-bearing liabilities:
Interest-bearing checking
184,592
1.48
141,044
1.92
36,001
1.14
32,488
2.32
89,898
2.98
122,037
3.70
Total interest-bearing deposits
310,491
1,452
1.88
295,569
2.70
Other borrowed funds
21,902
5.62
13,442
5.85
Total interest-bearing liabilities
332,393
2.12
309,011
2.83
Noninterest-bearing liabilities:
Demand deposits
76,168
64,559
Other liabilities
1,265
1,940
Total noninterest-bearing liabilities
77,433
66,499
28,425
26,516
Net interest spread
4,539
3.98
3.60
Tax-equivalent basis adjustment
(8
Net interest margin
4.39
4.14
10
Six months ended
8,692
1.32
7,763
55,141
1,112
4.03
54,775
5.55
24,331
4.84
22,701
6.35
79,472
1,701
77,476
5.79
67,290
6.13
54,374
6.56
172,286
7.35
134,036
7.37
52,771
6.22
71,209
5.93
29,370
5.13
26,386
5.95
321,717
6.71
286,005
6.73
409,881
12,488
6.12
371,244
6.42
14,995
13,378
(4,465
(3,431
13,636
12,092
24,166
22,039
434,047
393,283
181,637
1.63
134,551
1.87
35,367
1.19
32,274
2.22
91,729
3.10
122,558
3.80
308,733
3,090
2.02
289,383
3,909
2.72
21,905
13,731
5.77
330,638
2.26
303,114
2.86
74,539
62,525
1,096
1,729
75,635
64,254
27,774
25,915
8,790
3.86
3.56
4.29
4.08
11
Results of Operations for the three and six months end June 30, 2003
Net income for the three months ended June 30, 2003, was $1.2 million, or $0.23 per basic and $0.22 per diluted common share, compared to a net income of $916 thousand, or $0.17 per basic and $0.16 per diluted common share for the same period in 2002. Net income for the six months ended June 30, 2003, was $2.4 million, or $0.44 per basic and $0.42 per diluted common share, compared to a net income of $1.7 million, or $0.32 per basic and $0.30 per diluted common share for the same period in 2002. The improved operating results for the three and six months ended June 30, 2003 were primarily the result of increases in net interest income, and continued expense controls. The following are key performance indicators for the three and six months ended June 30, 2003, and 2002.
Net Income to common stockholders
Net Income per common share-basic
Net Income per common share-diluted
Performance Ratios:
Return on average assets
1.11
0.91
1.10
0.89
Return on average common equity
17.14
13.90
17.19
13.56
Efficiency ratio
64.81
64.18
64.72
65.11
*The efficiency ratio is calculated by taking total non-interest expenses, divided by total interest income plus total non-interest income less securities gains.
Net Interest Income
Interest income was $6.3 million for the three months ended June 30, 2003, an increase of $171 thousand or 2.8 percent, compared to $6.2 million a year ago. Interest-earning assets averaged $413.7 million, an increase of $32.4 million, or 8.5 percent, compared to the prior year period. The increases in average earning assets occurred primarily due to a $26.5 million increase in the loan portfolio. The rate earned on interest-earning assets decreased 33 basis points to 6.10 percent for the three months ended June 30, 2003, compared to the same period a year ago, due to a lower rate environment. Of the $171 increase in interest income $550 thousand is attributable to an increase in interest earning assets, offset by a decline of $379 thousand due to the reduction in yield.
Interest expense was $1.8 million for the three months ended June 30, 2003, a decrease of $425 thousand or 19.5 percent, compared to $2.2 million the same period a year ago. Interest-bearing liabilities averaged $332.4 million for the three months ended June 30, 2003, an increase of $23.4 million, or 7.6 percent, compared to $309.0 million for the prior year period. The increases in average interest bearing liabilities was the result of an increase in interest-bearing deposits and other borrowed funds utilized to fund loan growth. The rate paid on interest bearing liabilities for the three months ended June 30, 2003 decreased 71 basis points to 2.12 percent from the same period in 2002.
Total interest-bearing deposits were $310.5 million on average, an increase of $14.9 million or 5.0 percent compared to $295.6 million from the same period a year ago. The increase in average interest-bearing deposits was as a result of increases in interest-bearing demand deposits, partially offset by the reduction of time deposits. The rate paid on interest bearing deposits was 1.88 percent for the three months ended June 30, 2003, a decrease of 82 basis points from the same period a year ago.
Net interest income was $4.5 million for the three months ended June 30, 2003, an increase of $588 thousand, or 14.9 percent, compared to the $3.9 million from the same period a year ago. The rise in net interest income was due to the increase in net interest spread earned on a larger portfolio of net earning assets. The net interest spread (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) was 3.98 percent for the three months ended June 30, 2003 compared to 3.60 percent for the same period a year ago. Net interest margin (net interest income as a percentage of average interest earning assets) was 4.39 percent for the three months ended June 30, 2003 compared to 4.14 percent for the same period a year ago.
Interest income was $12.5 million for the six months ended June 30, 2003, an increase of $613 thousand or 5.2 percent, compared to $11.9 million a year ago. Interest-earning assets averaged $409.9 million, an increase of $38.6 million, or 10.4 percent, compared to the prior year period. The increases in average earning assets occurred due to a $35.7 million increase in the loan portfolio, and a $2.0 million increase in the securities portfolio. The rate earned on interest-earning assets decreased 30 basis points to 6.12 percent for the six months ended June 30, 2003, compared to the same period a year ago, due to a lower rate environment and partially offset by an increase in interest earning assets. Of the $613 increase in interest income $1.4 million is attributable to an increase in interest earning assets, offset by a decline of $761 thousand due to the reduction in yield.
12
Interest expense was $3.7 million for the six months ended June 30, 2003, a decrease of $604 thousand or 14.0 percent, compared to $4.3 million the same period a year ago. Interest-bearing liabilities averaged $330.6 million for the six months ended June 30, 2003, an increase of $27.5 million, or 9.1 percent, compared to $303.1 million for the prior year period. The increases in average interest bearing liabilities was the result of an increase in interest-bearing deposits and other borrowed funds utilized to fund loan growth. The rate paid on interest bearing liabilities decreased 60 basis points from the same period in 2002 to 2.26 percent.
Total interest-bearing deposits were $308.7 million on average, an increase of $19.4 million or 6.7 percent compared to $289.4 million from the same period a year ago. The increase in average interest-bearing deposits was as a result of increases in interest-bearing demand deposits, partially offset by the reduction of time deposits. The rate paid on interest bearing deposits was 2.02 percent for the six months ended June 30, 2003, a decrease of 70 basis points from the same period a year ago.
Net interest income was $8.8 million for the six months ended June 30, 2003, an increase of $1.2 million, or 16.0 percent, compared to the $7.6 million from the same period a year ago. The rise in net interest income was due to the increase in net interest spread earned on a larger portfolio of net earning assets. The net interest spread (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) was 3.86 percent for the six months ended June 30, 2003 compared to 3.56 percent for the same period a year ago. Net interest margin (net interest income as a percentage of average interest earning assets) was 4.29 percent for the six months ended June 30, 2003 compared to 4.08 percent for the same period a year ago.
The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volume and rates over the periods presented. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Amounts have been computed on a full tax-equivalent basis, assuming a federal income tax rate of 34.0 percent.
Rate Volume Table
Amount of Increase (Decrease)
Three months ended June 30, 2003versus June 30, 2002
Six months ended June 30, 2003versus June 30, 2002
Due to change in:
Volume
Total
Interest Income
SBA
171
(37
134
(123
277
602
25
627
1,396
(13
1,383
(320
14
(306
(571
99
(472
53
(79
(26
83
(114
(31
Total Loans
506
(77
429
1,308
(151
1,157
Available for sale securities
58
(220
(162
(418
(408
Held to maturity securities
(80
(106
49
(181
(132
Federal funds sold and interest bearing deposits
(2
(11
(4
Total Interest Earning assets
550
(379
1,374
(761
613
Interest Expense
182
(174
224
19
(105
(86
(178
(147
(263
(195
(458
(517
(896
Total Interest Bearing Deposits
(62
(474
(536
(88
(731
(819
Borrowings
119
111
227
(12
215
(482
(425
139
(743
(604
493
103
596
1,235
(18
1,217
Tax equivalent adjustment
Increase in net interest income
588
1,209
Provision for Loan Losses
The provision for loan losses was $400 thousand for the three months ended June 30, 2003 and $850 thousand for the six months ended June 30, 2003, a decrease of $575 thousand, and $725 thousand, respectively, from the comparable periods in 2002. The decrease from a year ago was primarily attributable to lower levels of charge offs, during the first six months of 2003 “See Financial Condition-Asset Quality.” The provision is based on management’s assessment of the adequacy of the allowance for loan losses, described under the caption “Financial Condition-Allowance for Loan Losses.” The current provision is considered appropriate under the assessment of the adequacy of the allowance for loan losses.
13
Non-Interest Income
PercentChange
42.9
54.2
31.9
25.9
(37.6
(20.1
345
51.3
428
87.7
Valuation write-down on security
(300
(100.0
(17.0
(35.0
(15.8
)%
(3.7
Non-interest income consists of service charges on deposits, loan and servicing fees, net gains on sales of securities and loans and other income. Non-interest income was $2.0 million for the three months ended June 30, 2003, an decrease of $374 thousand compared with 2002, and was $4.1 million for the six months ended June 30, 2003, an decrease of $158 thousand, compared to the same period a year ago.
Deposit service charges increased $157 thousand, or 42.9 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $384 thousand, or 54.2 percent, for the six months ended June 30, 2003, compared with the same period a year ago. Deposit service charges increased for the three and six months as a result of higher fees and the growth in the deposit base.
Loan and servicing fees increased $117 thousand, or 31.9 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $186 thousand, or 25.9 percent, for the six months ended June 30, 2003, compared to the same period a year ago. The growth in loan and servicing fees for the three and six months ended is attributed to the growth of the serviced SBA loan portfolio, which amounted to $134.5 million at June 30, 2003, compared to $116.2 million at June 30, 2002.
Net gains on loan sales includes participation in the SBA’s guaranteed loan program. Under the program, the SBA guarantees up to 75 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 $7.8 million in the three months ended, and $16.8 million for the six months ended June 30, 2003, compared to $13.6 million and $27.8 million, respectively, for the three and six month periods ended June 30, 2002. Gains on SBA loan sales were $687 thousand for the three months ended, and $1.6 million for the six months ended June 30, 2003 compared to $1.1 million and $1.9 million, respectively, for the same periods a year ago. The decrease in gains on the sale of SBA loans is a result of lower volume of SBA loans sold partially offset by higher premiums received on sales and higher servicing fees.
Net security gains increased $117 thousand, or 51.3 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $200 thousand, or 87.7 percent, for the six months ended June 30, 2003, compared to the same period a year ago. Security gains for the three months ended June 30, 2003, were partially offset by a $300 thousand valuation write-down on a $1.0 million asset-backed AFS security. Although the Company continues to receive all contractual payments, and the bond is rated A- by Moodys, the default rates on the underlying collateral is higher than anticipated. If the underlying collateral continues to deteriorate the future market value of the bond may be impaired.
Other non-interest income decreased $51 thousand for the three months ended June 30, 2003, compared with 2002 and decreased $249 thousand for the six months then ended, compared with the same period a year ago. The decrease was primarily due to an decrease in commercial loan referral fees which amounted to $24 thousand for the three months ended and $73 thousand for the six months ended June 30, 2003, compared to $194 thousand and $491 thousand, respectively for the three and six month periods ended 2002.
Non-Interest Expense
1.1
3.3
15.6
16.4
(2.3
4.7
5.3
(5.5
Professional services
23.4
43.7
(61.5
(59.7
23.0
41.6
Other expense
41.4
7.7
9.3
Compensation and benefits expense increased $22 thousand, or 1.1 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $124 thousand, or 3.3 percent for the six months ended June 30, 2003, compared to the same period a year ago. The increase in compensation and benefits was a result of merit increases effective January 1, 2003, and an increase in the employee base. Total full time equivalent employees amounted to 171 at June 30, 2003, compared to 153 at June 30, 2002.
Occupancy expense increased $62 thousand, or 15.6 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $132 thousand, or 16.4 percent, for the six months ended June 30, 2003, compared to the same period a year ago. The increase for the three and six months ended was due to higher property taxes, depreciation and maintenance expenses.
Processing and communications expense decreased $13 thousand, or 2.3 percent, for the three months ended June 30, 2003, compared to the same period a year ago and increased $50 thousand, or 4.7 percent, for the six months ended June 30, 2003 compared to the same period a year ago. The increase is primarily as a result of higher items processing costs related to the growth in the deposit and loan portfolios and the increase in postage rates.
Furniture and equipment expense increased $14 thousand, or 5.3 percent, for the three months ended June 30, 2003, compared to the same period a year ago and decreased $30 thousand, or 5.5 percent for the six months ended June 30, 2003, compared to the same period a year ago. The increase for the three months ended is primarily related to an increase in maintenance expense. The decline in furniture and equipment for the six months ended is primarily related to lower depreciation expense as a result of assets being fully depreciated.
Professional fees increased $37 thousand, or 23.4 percent, for the three months ended June 30, 2003, compared to the same period a year ago and increased $136 thousand or 43.7 percent for the six months ended June 30, 2003, compared to the same period a year ago. The increase for the three and six months ended is due to legal fees related to the law-suit initiated by Commerce Bank, N.A. See “Part II-Other Information-Item 1. Legal Proceedings”.
Deposit insurance decreased $37 thousand for the three months ended June 30, 2003, compared to the same period a year ago, and decreased $46 thousand for the six months ended June 30, 2003, compared to the same period a year ago. The decrease for the three and six months ended is due to a reduced insurance premium assessment.
Loan servicing expense increased $31 thousand, or 23.0 percent for the three months ended June 30, 2003, compared to the same period a year ago, and increased $84 thousand, or 41.6 percent for the six months ended June 30, 2003, compared to the same period a year ago. The increase in loan servicing expenses for the three and six month periods is primarily related to higher legal costs related to loan collections on the commercial and SBA portfolios.
Other expense increased $172 thousand, or 41.4 percent, for the three months ended June 30, 2003, compared to the same period a year ago, and increased $254 thousand or 31.9 percent, for the six months ended June 30, 2003 compared to the same period a year ago. The increase is the result of higher stationary and supplies expense, taxes on OREO properties, higher advertising expenses a credit for data processing expense that was received in 2002.
Income Tax Expense
For the second quarter of 2003, the provision for income taxes was $703 thousand compared to $514 thousand for the same period a year ago and was $1.4 million for the six months ended June 30, 2003 compared to $961 thousand for the same period a year ago. The current 2003 tax provision represents an effective tax rate of approximately 37 percent as compared 36 percent for the prior year. Management anticipates an effective rate of approximately 37 percent for the remainder of 2003.
Financial Condition at June 30, 2003
Total assets at June 30, 2003 were $448.8 million compared to $410.3 million a year ago and $432.9 million from year-end 2002. The increases in assets were the result of deposit generation used to fund loan growth.
Securities
Securities available for sale are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Securities held to maturity, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as 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 91 percent of the total investment portfolio has a fixed rate of interest. In the normal course of business, the Company accepts government deposits that require investment securities to be held as collateral. As of June 30, 2003, $1.0 million of securities were required to be pledged for governmental deposits.
Securities available for sale were $58.7 million at June 30, 2003, an increase of $3.2 million from year-end 2002. During the first six months of 2003, $42.3 million of securities available for sale were purchased, partially offset by $23.2 million of maturities and paydowns and $16.1 million in securities sales. The yield on securities available for sale was 4.03 percent for the six months ended June 30, 2003, compared to 5.55 percent a year ago, reflecting declines in market rates of interest. Included in securities available for sale at June 30, 2003 is a $300 thousand reserve for an asset-backed security. Although the Company continues to receive all contractual payments and the bond is rated A- by Moodys, the default rates on the underlying collateral is higher than anticipated, which may cause a future default on the bond’s cash flows.
Securities held to maturity were $21.1 million at June 30, 2003, a decrease of $5.1 million, or 19.6 percent, from year-end 2002. During the first six months of 2003, $2.2 million of held to maturity securities were purchased and primarily funded by $7.3 million of maturities and paydowns. The yield on securities held to maturity was 4.84 percent for the six months ended June 30, 2003 compared to 6.35 for the same period a year ago, reflecting the maturity of higher yielding investments and the declines in market rates of interest. As of June 30, 2003 and December 31, 2002, the market value of held to maturity securities was $21.7 million and $26.1 million, respectively.
Loan Portfolio
The loan portfolio, which represents the Company’s largest asset group, is a significant source of both interest and fee income. The portfolio consists of commercial, Small Business Administration (“SBA”), residential mortgage and consumer loans. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Loans increased $13.4 million, or 4.3 percent to $325.2 million at June 30, 2003, from year-end 2002.
SBA loans provide guarantees of up to 75 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 $51.3 million at June 30, 2003, an increase of $1.5 million from year-end 2002. SBA loans held for sale, carried at the lower of aggregate cost or market, amounted to $12.2 million at June 30, 2003, a decrease of $2.2 million from year-end 2002. The SBA held for sale portfolio decreased due to increased loan sales in 2003. The yield on SBA loans which are generally floating and tied to prime was 6.13 percent for the six months ended June 30, 2003 compared to 6.56 percent for the same period a year ago.
Commercial loans are generally made in the Company’s market place 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 $182.1 million at June 30, 2003, an increase of $18.3 million, or 11.2 percent, from year-end 2002. The yield on these commercial loans was 7.35 percent for the six months ended June 30, 2003 compared to 7.37 percent for the same period a year ago.
Residential mortgage loans consist of loans secured by residential properties. These loans amounted to $47.2 million at June 30, 2003, a decrease of $9.1 million from year-end 2002. The decrease in residential mortgages was a result of pay-downs in the portfolio. The Company does not originate a material amount of residential mortgage loans held for investment. The yield on residential mortgages was 6.22 percent for the six months ended June 30, 2003 compared to 5.93 percent for the same period a year ago. The increase in rate is attributed to the payoff of lower rate adjustable rate mortgages.
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 $32.4 million at June 30, 2003, an increase of $4.9 million from year-end December 2002. The increase in the consumer loan portfolio was primarily the result of an increase in home equity loans. The yield on consumer loans was 5.13 percent for the six months ended June 30, 2003, compared to 5.95 percent for the same period a year ago.
The decline in yield throughout the loan portfolio reflects the declining interest rate environment.
16
Asset Quality
Inherent in the lending function is the possibility a customer may not perform in accordance with the contractual terms of the loan. A borrower’s inability to pay its obligations according to the contractual terms can create the risk of past due loans and ultimately credit losses, especially on collateral deficient loans.
Non-performing loans consist of loans that are not accruing interest (nonaccrual 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. 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.
Loans past due 90 days and still accruing interest, are not included in non-performing loans. The Company had $759 thousand of loans 90 days past due and still accruing at June 30, 2003, compared to $366 thousand at December 31, 2002. These loans generally consist of loans where customers continue to make the monthly principal and interest payments, however, the loans have matured and are pending renewal.
Credit risk is minimized by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins upon the origination of a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors are analyzed before a loan is submitted for approval. The loan portfolio is then subject to ongoing internal reviews for credit quality.
The following table sets forth information concerning non-accrual loans and non-performing assets at June 30, 2003 and 2002, and December 31, 2002:
Non-performing loans(In thousands)
Dec. 31, 2002
Non-performing loans
2,700
2,882
2,388
319
1,239
98
461
74
193
214
248
Total non-performing loans
3,310
3,557
3,949
OREO
238
153
Total Non-Performing Assets
3,548
3,753
4,102
Past Due 90 days or more and still accruing interest
749
365
1
Total accruing loans 90 days or more past due
759
Non-Performing assets to total assets
0.79
0.87
1.00
Non-Performing assets to loans and OREO
1.09
1.20
1.38
Allowance for loans losses as a percentage of non-performing loans
140.45
115.10
90.23
Allowance for loan losses to total loans
1.43
1.31
Non-performing assets amounted to $3.5 million at June 30, 2003, a decrease of $247 thousand from year-end 2002. Loans past due 90 days or more and still accruing interest at June 30, 2003 amounted to $759 million compared to $366 thousand at December 31, 2002. Loans past due 90 days or more generally consist of loans where customers continue to make the monthly payments, however, the loans have matured and are pending renewal. Included in non-performing assets at June 30, 2003 are $1.4 million of loans guaranteed by the SBA.
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 $2.0 million at June 30, 2003 and $366 thousand at December 31, 2002. The increase in potential problem loans is primarily related to a $1.1 million hotel loan where the borrower is experiencing cash flow problems. Although he loan is well collaterialized it is possible that in future periods the loan could be classified as non-performing.
17
Allowance for Loan Losses
The determination of the adequacy of allowance for loan losses is a critical accounting policy of the Company and 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 loss experience based upon current conditions in the portfolio, 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. 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 $4.6 million, $4.1 million, and $3.6 million at June 30, 2003, December 31, 2002, and June 30, 2002, respectively with resulting allowance to total loan ratios of 1.43 percent, 1.31 percent and 1.20 percent respectively. Net charge offs amounted to $133 thousand for the three months ended June 30, 2003, compared to $592 thousand for the same period a year ago and amounted to $295 thousand for the six months ended June 30, 2003, compared to $1.2 million for the same period a year ago.
The following is a reconciliation summary of the allowance for loan losses for the three and six months ended June 30, 2003 and 2002:
Allowance for Loan Loss Activity
Balance, beginning of period
4,382
3,180
3,165
Provision charged to expense
Charge-offs:
129
22
189
30
574
174
1,118
34
104
Total Charge-offs
167
643
402
1,257
Recoveries:
28
32
29
35
Total recoveries
51
107
80
Total net charge-offs
133
592
295
1,177
Balance, end of period
Selected loan quality ratios:
Net charge offs to average loans
0.80
0.18
0.83
Allowance for loan losses to total loans at period end
Allowance for loan losses to non-performing loans
Deposits, which include non-interest and interest bearing demand deposits and interest-bearing savings and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. For the first six months of 2003 the Company realized continued growth in deposits. This growth was achieved through emphasis on customer service, competitive rate structures and selective marketing. The Company attempts to establish a comprehensive relationship with business borrowers, seeking deposits as well as lending relationships.
Total deposits increased $14.5 million to $397.1 million at June 30, 2003 from $382.6 million at December 31, 2002. The increase in deposits was primarily the result of a $15.0 million increase in demand deposits and $8.2 million increase in interest
18
bearing checking and savings, partially offset by a decline in time deposits. The decline in time deposits is the result of the disintermediation into the Company’s higher yielding checking product “Opportunity Checking.” Included in deposits at June 30, 2003 are $21.7 million of Government deposits, as compared to $27.8 million at December 31, 2002. These deposits are very sensitive to price competition.
Other Debt
Other debt, which includes $10.0 million in advances from the Federal Home Loan Bank (“FHLB”), and $2.7 million of lease obligations, amounted to $12.7 million at June 30, 2003, a decline of $51 thousand from year-end 2002. The 4.92% borrowings from the FHLB mature in 2010 and are callable at any time.
Trust Preferred Securities
On September 2002, Unity (NJ) Statutory Trust I a statutory business trust and wholly-owned subsidiary of Unity Bancorp Inc., issued $9.0 million of floating rate capital trust pass through securities to investors due on September 26, 2032. The capital securities have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital. The Subordinate Debentures are redeemable in whole or part, prior to maturity but after September 26, 2007. The floating interest rate on the Subordinate Debentures is three-month LIBOR plus 3.40% and re-prices quarterly. The rate at June 30, 2003 was 4.40%. The additional capital raised with respect to the issuance of the floating rate capital pass through securities was used to bolster the Company’s capital and for general corporate purposes, including, capital contributions to Unity Bank.
Interest Rate Sensitivity
The principal objectives of the asset and liability management function are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity requirements, and actively manage risk within the Board approved guidelines. The Company seeks to reduce the vulnerability of the operations to changes in interest rates, and actions in this regard are taken under the guidance of the Asset/Liability Management Committee (“ALCO”) of the Board of Directors. The ALCO reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.
The Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models to measure the impact of longer-term asset and liability mismatches beyond two years. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Like the simulation model, results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity, as a percentage of assets with rate shocks of 200 basis points at June 30, 2003, is a decline of 0.93 percent in a rising rate environment and a decrease of 0.56 percent in a falling rate environment. Both variances are within the board-approved guidelines of +/- 3.00 percent. At December 31, 2002 the economic value of equity with rate shocks of 200 basis points was a decline of 1.05 percent in a rising rate environment and a decrease of 1.07 percent in a falling rate environment.
Operating, Investing, and Financing Cash
Cash and cash equivalents amounted to $33.9 million at June 30, 2003, an increase of $3.7 million from December 31, 2002. Net cash provided by operating activities for the six months ended June 30, 2003, amounted to $3.4 million, primarily from proceeds from the sales of loans held for sale, net income from operations partially offset by originations of loans held for sale. Net cash used in investing activities amounted to $14.1 million for the six months ended June 30, 2003, primarily from the funding of and purchases in the loan portfolio. Net cash provided by financing activities, amounted to $14.5 million for the six months ended June 30, 2003, attributable to deposit growth.
Liquidity
The Company’s liquidity is a measure of its ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner.
Parent Company
At June 30, 2003, the Parent Company had $1.3 million in cash compared to $5.8 million at December 31, 2002. The decrease in cash at the parent company was due to the capitalization of Unity Bank. Expenses at the Parent Company are minimal and the management believes that the Parent Company has adequate liquidity to fund its obligations.
Consolidated Bank
Liquidity is a measure of the ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner. The principal sources of funds are deposits, scheduled amortization and repayments of loan principal, sales and maturities of investment securities and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.
At June 30, 2003, $6.0 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. The maximum borrowing line available if additional collateral was pledged as of June 30, 2003 amounted to approximately $59.1 million. An additional source of liquidity is Federal Funds sold, which were $19.0 million at June 30, 2003.
As of June 30, 2003, deposits included $21.7 million of Government deposits, as compared to $27.3 million at December 31, 2002. These deposits are generally short in duration, and are sensitive to price competition. The Company believes the current portfolio of these deposits to be appropriate. Included in the portfolio are $21.0 million of deposits from four municipalities. The withdrawal of these deposits, in whole or in part would not create a liquidity shortfall for the Company.
At June 30, 2003, the Bank had approximately $99.9 million of loan commitments, which will generally either expire or be funded within one year. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded. In addition, approximately $26.6 million of these commitments are for SBA loans, which may be sold into the secondary market.
20
Regulatory 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’s capital amounts and ratios are presented in the following table.
To Be Well CapitalizedUnder Prompt Corrective ActionProvisions
For Capital
Actual
Adequacy Purposes
Amount
Ratio
As of June 30, 2003
Leverage Ratio
37,438
8.61
³
17,391
4.00
21,739
5.00
Tier I risk-based ratio
10.88
13,761
20,642
6.00
Total risk-based ratio
41,738
12.13
27,522
8.00
34,403
10.00
As of December 31, 2002
35,688
8.38
17,038
21,298
11.05
12,919
19,379
39,789
12.32
25,839
32,299
The Bank’s capital amounts and ratios are presented in the following table.
30,012
6.88
17,439
21,324
8.72
13,760
19,989
40,312
11.72
27,520
33,315
29,509
6.96
16,956
21,195
9.16
21,893
19,339
33,541
10.41
25,786
32,232
Shareholders’ Equity
Shareholders’ equity increased $2.1 million, or 7.9 percent, to $29.2 million at June 30, 2003 compared to $27.1 million at December 31, 2002. This increase was the result of the $2.4 million in net income partially offset by $235 thousand decrease in accumulated other comprehensive income. On January 27, 2003 the Company announced a 5% stock dividend payable on March 12, 2003, and, accordingly, all share amounts have been restated to include the effect of the dividend.
Impact of Inflation and Changing Prices
The financial statements and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the operations. Unlike most industrial companies, nearly all the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
During 2003, there have been no significant changes in the Company’s assessment of market risk as reported in Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. (See Interest Rate Sensitivity in Management’s Discussion and Analysis Herein.)
21
ITEM 4. Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2003. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Such evaluation did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On February 20, 2003, the Bank was named as a defendant in a lawsuit initiated by Commerce Bank, N.A. and Commerce Bank/Shore, N.A. in the Superior Court of New Jersey, Essex County alleging that the Bank, as payor of certain checks written against certain deposit accounts held at the Bank, improperly refused to honor approximately $4,000,000 of checks. Commerce Bank, N.A. and Commerce Bank/Shore, N.A. have petitioned the Superior Court of New Jersey, Essex County for compensatory and consequential damages of $4,028,584.44, interest, attorney’s fees and costs of suit. The Bank has reviewed the relevant circumstances and believes that it acted properly and that the outcome of the lawsuit will not have a material impact on the consolidated financial position or results of operations of the Company.
Item 2. Changes in Securities – None
Item 3. Defaults Upon Senior Securities-None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8K
(a)
Exhibits
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)
Reports on Form 8-K
During the quarter ended June 30, 2003, the Company filed the following Reports on Form 8-K.
The Current Report on Form 8-K dated April 21, 2003, under “Item 9. Regulation FD Disclosure” incorporating the April 21, 2003 press release announcing the Company’s earnings for the first quarter of 2003.
The Current Report on Form 8-K dated April 21, 2003 under “Item 9 Regulation FD Disclosure” incorporating the April 21, 2003 message of the Company’s President.
The Current Report on Form 8-K dated June 20, 2003 under “Item 9 Regulation FD Disclosure” incorporating the Company’s June 19, 2003 press release advising that James A. Hughes, Unity Bank’s Chief Financial Officer made a Unity Bank presentation at the June 17, 2003 Northeast Super-Community Bank Conference held in Boston, Massachusetts.
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.
Dated: August 14, 2003
By:
/s/ JAMES A. HUGHES
JAMES A. HUGHES,
Executive Vice President and Chief Financial Officer
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EXHIBIT INDEX
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT NO.
DESCRIPITION
31.1
Certification of Anthony Feraro Required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of.
31.2
Certification of James A. Hughes Required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Anthony Feraro and James A. Hughes Required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
24