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Unity Bancorp 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

 

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 March 31, 2005

 

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 jurisdiction

 

(I.R.S. employer

of incorporation or organization)

 

identification no.)

 

 

 

64 Old Highway 22, Clinton, NJ

 

08809

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (908) 730-7630

 

Indicate by check mark whether the 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 May 11, 2005: common stock, no par value:  5,822,458 shares outstanding

 

 



 

 

 

 

 

PART I

-

CONSOLIDATED FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1

-

Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2005, and December 31, 2004

 

 

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2005 and 2004

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2005 and 2004

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004

 

 

 

 

 

 

 

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

 

 

 

 

 

ITEM 1

 

Legal Proceedings

 

ITEM 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

ITEM 3

 

Defaults upon Senior Securities

 

ITEM 4

 

Submission of Matters to a Vote of Security Holders

 

ITEM 5

 

Other Information

 

ITEM 6

 

Exhibits

 

 

 

 

 

SIGNATURES

 

 

 

 

 

Exhibit Index

 

 

 

2



 

Part 1.-Consolidated Financial Information

 

Item 1.-Consolidated Financial Statements

 

Unity Bancorp, Inc

Consolidated Balance Sheets

 

 

 

(unaudited)

 

 

 

(unaudited)

 

(in thousands)

 

03/31/05

 

12/31/04

 

03/31/04

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

11,286

 

$

12,439

 

$

9,950

 

Federal funds sold and interest bearing deposits

 

17,603

 

10,967

 

35,306

 

Securities:

 

 

 

 

 

 

 

Available for sale

 

74,571

 

78,014

 

75,159

 

Held to maturity (market value of $23,616, $23,786 and $12,760, respectively)

 

23,593

 

23,579

 

12,392

 

Total securities

 

98,164

 

101,593

 

87,551

 

Loans:

 

 

 

 

 

 

 

SBA held for sale

 

8,172

 

7,574

 

7,637

 

SBA held to maturity

 

54,567

 

55,576

 

48,740

 

Commercial

 

214,730

 

207,771

 

188,707

 

Residential mortgage

 

59,769

 

60,240

 

48,862

 

Consumer

 

43,934

 

42,419

 

37,561

 

Total loans

 

381,172

 

373,580

 

331,507

 

Less: Allowance for loan losses

 

5,942

 

5,856

 

5,466

 

Net loans

 

375,230

 

367,724

 

326,041

 

Premises and equipment, net

 

9,191

 

7,439

 

6,764

 

Accrued interest receivable

 

2,600

 

2,493

 

2,340

 

Loan servicing asset

 

2,065

 

2,018

 

1,320

 

Bank owned life insurance

 

5,047

 

5,000

 

 

Other assets

 

4,656

 

5,744

 

3,989

 

Total assets

 

$

525,842

 

$

515,417

 

$

473,261

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing demand deposits

 

$

77,800

 

$

83,839

 

$

86,781

 

Interest bearing checking

 

154,074

 

164,426

 

190,247

 

Savings deposits

 

112,847

 

79,557

 

37,748

 

Time deposits, under $100,000

 

72,435

 

73,399

 

64,813

 

Time deposits, $100,000 and over

 

30,634

 

32,677

 

29,741

 

Total deposits

 

447,790

 

433,898

 

409,330

 

Borrowed funds

 

30,000

 

35,000

 

20,000

 

Subordinated debentures

 

9,279

 

9,279

 

9,279

 

Accrued interest payable

 

165

 

176

 

178

 

Accrued expense and other liabilities

 

2,202

 

1,196

 

2,004

 

Total liabilities

 

$

489,436

 

$

479,549

 

$

440,791

 

Commitments and contingencies

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, no par value, 12,500 shares authorized

 

34,101

 

34,025

 

32,237

 

Retained earnings

 

3,403

 

2,327

 

229

 

Accumulated other comprehensive (loss) income

 

(1,098

)

(484

)

4

 

Total Shareholders’ Equity

 

$

36,406

 

$

35,868

 

32,470

 

Total Liabilities and Shareholders’ Equity

 

$

525,842

 

$

515,417

 

$

473,261

 

 

 

 

 

 

 

 

 

Issued common shares

 

5,817

 

5,778

 

5,747

 

Outstanding common shares

 

5,817

 

5,778

 

5,747

 

 

See Accompanying Notes to the Consolidated Financial Statements

 

3



 

Unity Bancorp

Consolidated Statements of Income

(unaudited)

 

 

 

For the three months ended
March 31,

 

(in thousands, except per share amounts)

 

2005

 

2004

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest on deposits

 

$

62

 

$

32

 

Securities:

 

 

 

 

 

Available for sale

 

796

 

757

 

Held to maturity

 

274

 

177

 

Total securities

 

1,070

 

934

 

Loans:

 

 

 

 

 

SBA loans

 

1,359

 

1,019

 

Commercial loans

 

3,638

 

3,096

 

Residential mortgage loans

 

802

 

703

 

Consumer loans

 

592

 

442

 

Total loan interest income

 

6,391

 

5,260

 

Total interest income

 

7,523

 

6,226

 

Interest expense:

 

 

 

 

 

Interest bearing demand deposits

 

611

 

630

 

Savings deposits

 

460

 

107

 

Time deposits

 

763

 

618

 

Borrowed funds and subordinated debentures

 

424

 

253

 

Total interest expense

 

2,258

 

1,608

 

Net interest income

 

5,265

 

4,618

 

Provision for loan losses

 

300

 

250

 

Net interest income after provision for loan losses

 

4,965

 

4,368

 

Non-interest Income:

 

 

 

 

 

Service charges on deposit accounts

 

430

 

406

 

Service and loan fee income

 

536

 

471

 

Gain on sales of SBA loans, net

 

460

 

738

 

Net security gains

 

53

 

53

 

Bank owned life insurance

 

47

 

 

Other income

 

265

 

213

 

Total non-interest income

 

1,791

 

1,881

 

Non-interest expense:

 

 

 

 

 

Compensation and benefits

 

2,397

 

2,239

 

Occupancy

 

593

 

529

 

Processing and communications

 

466

 

474

 

Furniture and equipment

 

329

 

263

 

Professional fees

 

109

 

231

 

Loan servicing costs

 

177

 

180

 

Advertising

 

185

 

144

 

Deposit insurance

 

15

 

15

 

Other expenses

 

377

 

328

 

Total non-interest expense

 

4,648

 

4,403

 

Net income before provision for income taxes

 

2,108

 

1,846

 

Provision for income taxes

 

798

 

652

 

Net income

 

$

1,310

 

$

1,194

 

 

 

 

 

 

 

Net income per common share - Basic

 

$

0.23

 

$

0.21

 

Net income per common share - Diluted

 

0.21

 

0.20

 

Weighted average shares outstanding – Basic

 

5,789

 

5,735

 

Weighted average shares outstanding – Diluted

 

6,116

 

6,035

 

 

See Accompanying Notes to the Consolidated Financial Statements

 

4



 

Unity Bancorp, Inc

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2005 and 2004

(unaudited)

 

(In thousands)

 

Outstanding
Shares

 

Common
Stock

 

Retained
Earnings
(Deficit)

 

Accumulated
Other

Comprehensive
Income (loss)

 

Total
Shareholders’
Equity

 

Balance, December 31, 2003

 

5,686

 

$

31,989

 

$

(746

)

$

(481

)

$

30,762

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

1,194

 

 

1,194

 

Unrealized holding gains on securities arising during the period, net of tax of $370

 

 

 

 

 

 

 

517

 

 

 

Less: reclassification adjustment for gains included in net income, net of tax of $21

 

 

 

 

 

 

 

32

 

 

 

Net unrealized holding gain on securities arising during the period, net of tax $349

 

 

 

 

 

485

 

485

 

Total comprehensive income

 

 

 

 

 

 

1,679

 

Cash dividend on common stock $.04 per share

 

 

 

 

(219

)

 

(219

)

Stock options exercised

 

61

 

248

 

 

 

248

 

Balance, March 31, 2004

 

5,747

 

$

32,237

 

$

229

 

$

4

 

$

32,470

 

 

(In thousands)

 

Outstanding
Shares

 

Common
Stock

 

Retained
Earnings

 

Accumulated
Other

Comprehensive
Loss

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

5,778

 

$

34,025

 

$

2,327

 

$

(484

)

$

35,868

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

1,310

 

 

1,310

 

Unrealized holding gains on securities arising during the period, net of tax benefit of $356

 

 

 

 

 

 

 

(582

)

 

 

Less: reclassification adjustment for gains included in net income, net of tax of $21

 

 

 

 

 

 

 

32

 

 

 

Net unrealized holding gain on securities arising during the period, net of tax benefit of $377

 

 

 

 

 

(614

)

(614

)

Total comprehensive income

 

 

 

 

 

 

696

 

Cash dividend declared on common stock $.04 per share

 

 

 

 

(234

)

 

(234

)

Stock options exercised

 

39

 

76

 

 

 

76

 

Balance, March 31, 2005

 

5,817

 

$

34,101

 

$

3,403

 

$

(1,098

)

$

36,406

 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

5



 

Unity Bancorp, Inc

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

For the three months ended
March 31,

 

(In thousands)

 

2005

 

2004

 

Operating activities:

 

 

 

 

 

Net income

 

$

1,310

 

$

1,194

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Provision for loan losses

 

300

 

250

 

Depreciation and amortization

 

354

 

305

 

Net gain on sale of securities

 

(53

)

(53

)

Gain on sale of SBA loans held for sale

 

(460

)

(738

)

Origination of SBA loans held for sale

 

(6,104

)

(1,256

)

Proceeds from the sale of SBA loans

 

5,966

 

8,371

 

Net change in other assets and liabilities

 

890

 

16

 

Net cash provided by operating activities

 

2,203

 

8,089

 

Investing activities:

 

 

 

 

 

Purchases of securities held to maturity

 

(2,195

)

 

Purchases of securities available for sale

 

(298

)

(7,325

)

Maturities and principal payments on securities held to maturity

 

2,167

 

667

 

Maturities and principal payments on securities available for sale

 

2,627

 

5,618

 

Proceeds from sale of securities available for sale

 

148

 

6,652

 

Proceeds from the sale of other real estate owned

 

345

 

 

Net (increase) decrease in loans

 

(7,497

)

1,683

 

Purchases of premises and equipment

 

(754

)

(978

)

Net cash (used in) provided by investing activities

 

(5,457

)

6,317

 

Financing activities:

 

 

 

 

 

Net increase (decrease) in deposits

 

13,892

 

(5,652

)

Net (decrease) increase in borrowings

 

(5,000

)

10,000

 

Proceeds from the issuance of common stock

 

76

 

248

 

Dividends paid

 

(231

)

(161

)

Net cash provided by financing activities

 

8,737

 

4,435

 

Increase in cash and cash equivalents

 

5,483

 

18,841

 

Cash and cash equivalents at beginning of year

 

23,406

 

26,415

 

Cash and cash equivalents at end of period

 

$

28,889

 

$

45,256

 

Supplemental disclosures:

 

 

 

 

 

Cash:

 

 

 

 

 

Interest paid

 

$

2,269

 

$

1,615

 

Income taxes paid

 

 

930

 

Non-Cash investing activities:

 

 

 

 

 

Transfer of loan to Other Real Estate Owned

 

198

 

59

 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

6



 

Unity Bancorp, Inc

Notes to the Consolidated Financial Statements (Unaudited)

March 31, 2005

 

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”), and reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of interim results.  Unity Investment Services, Inc. a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.  All significant inter-company 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 accounting principles generally accepted in the United States of America 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 relate to the determination of the allowance for loan losses.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market. The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”).  The results of operations for the three months ended March 31, 2005 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, 2004, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

Stock Based Compensation

 

The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. No stock-based 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 table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” as amended, to stock based compensation.

 

Proforma

 

 

 

Three months ended March 31,

 

(In thousands, except per share data)

 

2005

 

2004

 

Net income to common shareholders as reported:

 

 

 

 

 

As reported

 

$

1,310

 

$

1,194

 

Pro forma

 

1,294

 

1,148

 

Income per share:

 

 

 

 

 

Basic as reported

 

$

0.23

 

$

0.21

 

Basic Pro forma

 

0.22

 

0.20

 

Diluted as reported

 

0.21

 

0.20

 

Diluted Pro forma

 

0.21

 

0.19

 

 

7



 

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.  On March 12, 2004, the aforesaid Court granted Commerce Bank, N.A. partial summary judgment in the amount of $1,800,000 of its aforesaid claim.  Although the Bank has reviewed the relevant circumstances and believes it acted properly, on March 28, 2005, the Bank agreed to settle the lawsuit with Commerce Bank and the other party to the litigation.  The settlement will be paid primarily out of a deposit account the Bank has been holding to satisfy any liability, and as such, the settlement will not have an impact on the financial conditions or results of operations of the Company.

 

During the third quarter of 2004, the Company entered into a settlement agreement with its former Chairman Robert J. Van Volkenburgh thereby settling the pending litigation initiated by Mr. Van Volkenburgh.  Effective immediately upon the execution of the agreement, the parties exchanged general releases and dismissed the litigation with prejudice.  The Company’s payment of the settlement amount called for by the settlement agreement requires the approval of the Federal Deposit Insurance Corporation (“FDIC”) under applicable regulations.  If the FDIC approves the settlement agreement, the Company will pay $275 thousand, net of insurance proceeds. The charge for such settlement agreement, recognized in the third quarter of 2004, reduced net income by approximately $165 thousand after tax or $0.03 per diluted share.

 

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 the results of the operation of the Company.

 

NOTE 3. Earnings per share

 

The following is a reconciliation of the calculation of basic and diluted 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, were issued during the reporting period utilizing the Treasury stock method.

 

 

 

Three months ended March 31,

 

(In thousands, except per share data)

 

2005

 

2004

 

Net income to common shareholders

 

$

1,310

 

$

1,194

 

Basic weighted-average common shares outstanding

 

5,789

 

5,735

 

Plus: Common stock equivalents

 

327

 

300

 

Diluted weighted - average common shares outstanding

 

6,116

 

6,035

 

Net income per common share:

 

 

 

 

 

Basic

 

$

0.23

 

$

0.21

 

Diluted

 

0.21

 

0.20

 

Return on average assets

 

1.03

%

1.04

%

Return on average common equity

 

14.63

%

15.32

%

Efficiency ratio*

 

66.37

%

68.31

%

 


* Non-interest expense divided by net interest income plus non-interest income less securities gains

 

8



 

NOTE 4. Recent accounting pronouncements

 

On April 14, 2005 the Securities and Exchange Commission amended the compliance dates for the Financial Accounting Standard Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement No. 123R).  The Commissions new rule allows companies to implement Statement No. 123R at the beginning of the next fiscal year, instead of the next reporting period, that begins after June 15, 2005, or December 15, 2005 for small business issuers.  The Commissions new rule does not change the accounting required by Statement No. 123R; it changes only the dates for compliance with the standard.  The Company has evaluated the impact of implementation of Statement No. 123R and does not believe that it will be material.

 

NOTE 5.  Subsequent Events

 

On April 8, 2005, the Company sold the $1.0 million asset-backed security, which the Company had classified as an impaired asset.  The security was sold for $600 thousand and $24 thousand of the charged off impairment was recovered. Through March 31, 2005, the Company continued to receive payments on this bond; however, the bond was rated Caa1 by Moody’s and if the default rates on the underlying collateral continued to deteriorate the future market value could be impaired.  As of March 31, 2005, the Company had recognized an impairment of $426 thousand on the security.

 

9



 

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 2004 consolidated audited financial statements and notes thereto.  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

 

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 13 branch offices located in Hunterdon, Somerset, Middlesex, and Union counties in New Jersey.  These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration and other commercial credits. Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.

 

Unity (NJ) Statutory Trust I is a statutory Business Trust and wholly-owned subsidiary of Unity Bancorp, Inc.  On September 26, 2002, the trust issued $9.0 million of capital securities to investors.  These floating rate securities are treated as subordinated debentures on the financial statements.  However, they qualify as Tier I Capital for regulatory capital compliance purposes.  In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust I.

 

Earnings Summary

 

Net income for the three months ended March 31, 2005 was $1.3 million, an increase of $116 thousand or 9.7 percent, compared to net income of $1.2 million for the same period in 2004. This was the result of increased net interest income offset in part by a higher provision for loan losses, reduced non-interest income and higher operating expenses.

 

Quarterly performance highlights include:

      Earnings per basic common share increased to $0.23 for the first quarter of 2005 compared to $0.21 for the same period in 2004.

      Earnings per diluted common share increased to $0.21 for the first quarter of 2005 compared to $0.20 for the same period a year ago.

      Return on average assets remained stable at 1.03 percent and 1.04 percent for the quarters ended March 31, 2005 and 2004, respectively.

      Return on average common equity equaled 14.63 percent and 15.32 percent for the quarters ended March 31, 2005 and 2004, respectively.

      The efficiency ratio improved to 66.37 percent for the first quarter of 2005 compared to 68.31 percent for the same period a year ago.

 

Over the past twelve months, the Federal Reserve has raised short-term interest rates seven times for a total of 175 basis points.  During this period the Federal Funds rate has increased from 1.0 percent to 2.75 percent while the Prime-lending rate increased from 4.0 percent to 5.75 percent.  Rising rates positively impact a Bank’s performance when variable rate earning assets such as Prime based commercial loans re-price at a higher rate; however, a higher interest rate environment also puts pressure on a Bank’s cost of funds as its deposit and borrowing costs rise.

 

The higher average interest rate environment during the first quarter of 2005 was advantageous as seen in the growth of net interest income and the improvement in the net interest margin.  Net interest income, our largest component of operating income, increased $647 thousand or 14 percent to $5.3 million for the three months ended March 31, 2005 compared to the same period in 2004.  This increase was the result of a $53.2 million increase in average earning assets combined with a stable net interest margin

 

10



 

and spread.  Net interest margin (net interest income as a percentage of average interest earning assets) increased 5 basis points to 4.30 percent for the current quarter compared to 4.25 percent for the same period a year ago.  Over the same period, net interest spread, the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities, increased 4 basis points to 3.92 percent from 3.88 percent a year ago.

 

Non-interest income decreased $90 thousand or 4.8 percent to $1.79 million for the three months ended March 31, 2005 compared to $1.88 million for the three months ended March 31, 2004.  This decline was due primarily to lower levels of gains on the sale of SBA loans, partially offset by increased service and loan fee income, service charges on deposits and income on bank owned life insurance.

 

Non-interest expense was $4.65 million for the three months ended March 31, 2005, an increase of $245 thousand or 5.6 percent compared to $4.40 million for the same period a year ago. The increase was due primarily to increases in compensation and benefits, occupancy expense, furniture and equipment and advertising expense.

 

During the first quarter of 2005, the Company recorded income tax expense of $798 thousand compared to $652 thousand for the same period a year ago.  The current 2005 tax provision represents an effective tax rate of approximately 38.0 percent as compared to 35.0 percent for 2004.

 

Net Interest Income

 

Tax-equivalent interest income totaled $7.54 million for the three months ended March 31, 2005, an increase of $1.28 million or 20 percent, compared to $6.25 million a year ago.  Of the $1.28 million increase in interest income, $799 thousand is attributable to an increase in the volume of earning assets, while $483 thousand is attributable to an increase in the yield on earning assets.  The average volume of earning assets increased $53.2 million to $490.5 million at March 31, 2005 compared to $437.3 million at March 31, 2004.  This was due to a $45.1 million increase in average total loans plus a $10 million increase in average total securities, partially offset by a $2.0 million decline in federal funds sold and interest bearing deposits.  The impact of the higher interest rate environment in the first quarter of 2005 is evident in the rates earned on variable rate instruments such as SBA loans, commercial loans and consumer home equity lines of credit, as well as federal funds sold and interest bearing deposits.  Key interest rate increases during the quarter included:

 

      Federal funds sold and interest bearing deposits earned 2.43 percent for the three months ended March 31, 2005, an increase of 138 basis points compared to 1.05 percent for the same period a year ago.

      SBA loans earned 8.37 percent during the quarter, an increase of 181 basis points over the comparable quarter in 2004, due to the quarterly re-pricing of these loans with changes in the Prime rate.

      Consumer loans earned 5.65 percent for the three months ended March 31, 2005, an increase of 79 basis points compared to 4.86 percent for the same period a year ago due to the re-pricing of Prime based home equity products.

      Commercial loans earned 6.95 percent for the quarter, an increase of 28 basis points over the comparable quarter in 2004.

 

The higher interest rate environment also increased interest expense and the cost of funds.  Total interest expense was $2.26 million for the three months ended March 31, 2005, an increase of $650 thousand or 40.4 percent, compared to $1.61 million for the same period a year ago. Of the $650 thousand increase in interest expense, $376 thousand is related to an increase in average interest-bearing liabilities while $274 thousand is due to an increase in the cost of funds.  Over the past twelve months, average interest bearing liabilities increased $54 million as average interest bearing deposits increased $37 million and borrowed funds and subordinated debentures increased $17 million. Total interest-bearing deposits were $360.7 million on average, an increase of $37.0 million or 11.4 percent compared to $323.7 million from the same period a year ago.  The increase in average interest-bearing deposits was as a result of increases in the savings and time deposit categories, partially offset by a decline in interest-bearing checking accounts.  Average borrowed funds increased $17 million to $40.1 million as of March 31, 2005 due to the addition of a $10 million repurchase agreement at 2.78 percent during the first quarter of 2004 and a $10 million FHLB advance at 2.95 percent during the fourth quarter of 2004.  The rate paid on interest bearing liabilities increased 42 basis points to 2.28 percent for the three months ended March 31, 2005 from 1.86 percent in the same period in 2004.  The cost of interest bearing deposits increased 38 basis points to 2.06 percent as the rates paid on all deposit products increased.

 

Tax-equivalent net interest income increased $632 thousand to $5.28 million for the quarter ended March 31, 2005 compared to $4.65 million for the same period a year ago.  Net interest margin widened 5 basis points to 4.30 percent compared to 4.25 percent for the same period a year ago.  The widened net interest margin was primarily the result of a higher volume of loans and securities and a higher interest rate environment.  The net interest spread was 3.92 percent for the three months ended March 31, 2005 compared to 3.88 percent for the same period a year ago.

 

11



 

Unity Bancorp, Inc.

Consolidated Average Balance Sheets with resultant Interest and Rates

(unaudited)

(Tax-equivalent basis, dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

 

 

Balance

 

Interest

 

Rate/
Yield

 

Balance

 

Interest

 

Rate/
Yield

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-bearing deposits with banks

 

$

10,331

 

$

62

 

2.43

%

$

12,287

 

$

32

 

1.05

%

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

76,926

 

809

 

4.21

 

77,256

 

785

 

4.06

 

Held to maturity

 

23,088

 

274

 

4.75

 

12,751

 

177

 

5.55

 

Total securities

 

100,014

 

1,083

 

4.33

 

90,007

 

962

 

4.28

 

Loans, net of unearned discount:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans

 

64,966

 

1,359

 

8.37

 

62,115

 

1,019

 

6.56

 

Commercial

 

212,343

 

3,638

 

6.95

 

186,562

 

3,096

 

6.67

 

Residential Mortgages

 

60,361

 

802

 

5.31

 

49,787

 

703

 

5.65

 

Consumer

 

42,482

 

592

 

5.65

 

36,568

 

442

 

4.86

 

Total loans

 

380,152

 

6,391

 

6.79

 

335,032

 

5,260

 

6.30

 

Total interest-earning assets

 

490,497

 

7,536

 

6.20

 

437,326

 

6,254

 

5.74

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

10,748

 

 

 

 

 

14,125

 

 

 

 

 

Allowance for loan losses

 

(6,047

)

 

 

 

 

(5,510

)

 

 

 

 

Other assets

 

22,742

 

 

 

 

 

14,163

 

 

 

 

 

Total noninterest-earning assets

 

27,443

 

 

 

 

 

22,778

 

 

 

 

 

Total Assets

 

$

517,940

 

 

 

 

 

$

460,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

$

160,991

 

611

 

1.54

 

$

188,999

 

630

 

1.34

 

Savings deposits

 

91,294

 

460

 

2.04

 

38,489

 

107

 

1.12

 

Time deposits

 

108,374

 

763

 

2.86

 

96,213

 

618

 

2.58

 

Total interest-bearing deposits

 

360,659

 

1,834

 

2.06

 

323,701

 

1,355

 

1.68

 

Borrowed funds and subordinated debentures

 

40,139

 

424

 

4.28

 

23,112

 

253

 

4.40

 

Total interest-bearing liabilities

 

400,798

 

2,258

 

2.28

 

346,813

 

1,608

 

1.86

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

78,852

 

 

 

 

 

79,834

 

 

 

 

 

Other liabilities

 

1,976

 

 

 

 

 

2,118

 

 

 

 

 

Total noninterest-bearing liabilities

 

80,828

 

 

 

 

 

81,952

 

 

 

 

 

Shareholders’ equity

 

36,314

 

 

 

 

 

31,339

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

517,940

 

 

 

 

 

$

460,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

5,278

 

3.92

%

 

 

4,646

 

3.88

%

Tax-equivalent basis adjustment

 

 

 

(13

)

 

 

 

 

(28

)

 

 

Net interest income

 

 

 

$

5,265

 

 

 

 

 

$

4,618

 

 

 

Net interest margin

 

 

 

 

 

4.30

%

 

 

 

 

4.25

%

 

12



 

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

 

 

 

Three months ended March 31, 2005
versus March 31, 2004

 

 

 

Due to change in:

 

 

 

 

 

Volume

 

Rate

 

Total

 

Interest Income

 

 

 

 

 

 

 

Commercial

 

$

416

 

$

126

 

$

542

 

SBA

 

49

 

291

 

340

 

Residential mortgage

 

143

 

(44

)

99

 

Consumer

 

75

 

75

 

150

 

Total Loans

 

683

 

448

 

1,131

 

 

 

 

 

 

 

 

 

Available for sale securities

 

(3

)

27

 

24

 

Held to maturity securities

 

125

 

(28

)

97

 

Federal funds sold and interest bearing deposits

 

(6

)

36

 

30

 

Total interest earning assets

 

$

799

 

$

483

 

$

1,282

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

Interest bearing checking

 

$

(102

)

$

83

 

$

(19

)

Savings deposits

 

222

 

131

 

353

 

Time deposits

 

78

 

67

 

145

 

Total Interest Bearing Deposits

 

198

 

281

 

479

 

Borrowings

 

178

 

(7

)

171

 

Total interest-bearing liabilities

 

376

 

274

 

650

 

Tax equivalent net interest income

 

$

423

 

$

209

 

$

632

 

Tax equivalent adjustment

 

 

 

 

 

15

 

Increase in net interest income

 

 

 

 

 

$

647

 

 

Provision for Loan Losses

 

The provision for loan losses was $300 thousand for the three months ended March 31, 2005, an increase of $50 thousand, compared to $250 thousand for the same period a year ago. The increase from a year ago was primarily attributable to the $45.1 million increase in average loans during the period.  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.

 

Non-Interest Income

 

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 $1.79 million for the three months ended March 31, 2005, a decrease of $90 thousand compared with 2004.  The components of non-interest income are as follows:

 

 

 

Three months ended March, 31

 

(In thousands)

 

2005

 

2004

 

Percent
Change

 

Deposit service charges

 

$

430

 

$

406

 

5.9

%

Loan and servicing fees

 

536

 

471

 

13.8

 

Net gains on SBA loan sales

 

460

 

738

 

(37.7

)

Net security gains

 

53

 

53

 

 

Bank owned life insurance

 

47

 

 

NM

 

Other income

 

265

 

213

 

24.4

 

Total non-interest income

 

$

1,791

 

$

1,881

 

(4.8

)%

 


NM = Not meaningful

 

13



 

Deposit service charges increased $24 thousand, or 5.9 percent, for the three months ended March 31, 2005, compared to the same period a year ago as a result of the implementation of an overdraft privilege program and a larger deposit base.

 

Loan and servicing fees increased $65 thousand, or 13.8 percent, for the three months ended March 31, 2005, compared to the same period a year ago due to the volume of new loans being originated and an increase in prepayment penalties on commercial loans.

 

Net gains on SBA loan sales declined $278 thousand or 37.7 percent for the quarter, compared to the same period a year ago, as a result of lower sales volume.  SBA loan sales, all without recourse, totaled $5.5 million for the three months ended March 31, 2005, compared to $7.6 million for the three months ended March 31, 2004.

 

Net security gains were flat at $53 thousand for the three months ended March 31, 2005 and 2004.

 

During the fourth quarter of 2004, the Company invested $5 million in bank owned life insurance (BOLI).  BOLI income from this investment totaled $47 thousand for the three months ended March 31, 2005.

 

Other non-interest income increased $52 thousand to $265 thousand for the quarter ended March 31, 2005 compared to the quarter ended March 31, 2004.  The increase was due primarily to increased gains on the sale of residential mortgage loans.

 

Non-Interest Expense
 

Total non-interest expense increased $245 thousand or 5.6 percent to $4.6 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004.  The components of non-interest expense are as follows:

 

 

 

Three months ended March 31,

 

(In thousands)

 

2005

 

2004

 

Percent
Change

 

Compensation and benefits

 

$

2,397

 

$

2,239

 

7.1

%

Occupancy

 

593

 

529

 

12.1

 

Processing and communications

 

466

 

474

 

(1.7

)

Furniture and equipment

 

329

 

263

 

25.1

 

Professional services

 

109

 

231

 

(52.8

)

Loan servicing costs

 

177

 

180

 

(1.7

)

Advertising

 

185

 

144

 

28.5

 

Deposit insurance

 

15

 

15

 

 

Other expenses

 

377

 

328

 

14.9

 

Total non-interest expense

 

$

4,648

 

$

4,403

 

5.6

%

 

Compensation and benefits expense, the largest component of non-interest expense, increased $158 thousand, or 7.1 percent, for the three months ended March 31, 2005 compared to the same period a year ago. The increase in compensation and benefits was a result of merit increases, an increase in the number of employees and higher benefits costs. Total full time equivalent employees amounted to 169 at March 31, 2005, compared to 166 at March 31, 2004.

 

Occupancy expense increased $64 thousand or 12.1 percent, for the three months ended March 31, 2005, compared to the same period a year ago. The increase for the three months ended March 31, 2005 was due to higher rental, property tax and snow removal expenses.

 

Processing and communications expense decreased $8 thousand, or 1.7 percent, for the three months ended March 31, 2005, compared to the same period a year ago. The decrease was primarily the result of lower data processing line costs and postage expenses offset, in part, by increased telephone expense.

 

Furniture and equipment expense increased $66 thousand, or 25.1 percent, for the three months ended March 31, 2005, compared to the same period a year ago. The increase in furniture and equipment was primarily related to increased software maintenance costs for systems upgrades.

 

Professional fees decreased $122 thousand, or 52.8 percent, for the three months ended March 31, 2005, compared to the same period a year ago.  The decrease was due to lower levels of legal fees in 2005 compared to 2004.

 

14



 

Loan servicing expense decreased slightly to $177 thousand for the three months ended March 31, 2005, compared to the same period a year ago.

 

Advertising expense increased $41 thousand or 28.5 percent for the three months ended March 31, 2005 compared to the same period a year ago.  This increase was due to increased marketing expenses related to new business generation.

 

Deposit insurance remained flat for the three months ended March 31, 2005 and 2004.

 

Other expense increased $49 thousand, or 14.9 percent, for the three months ended March 31, 2005, compared to the same period a year ago.  This increase was due primarily to higher insurance expenses.

 

Income Tax Expense

 

For the first quarter of 2005, the provision for income taxes was $798 thousand compared to $652 thousand for the same period a year ago. The current 2005 tax provision represents an effective tax rate of approximately 38 percent as compared 35 percent for the prior year. During the first quarter of 2004, the Company realized a portion of a prior period State tax valuation allowance.  Management anticipates an effective rate of approximately 38 percent for the remainder of 2005.

 

Financial Condition at March 31, 2005

 

Total assets at March 31, 2005 were $525.8 million compared to $473.3 million a year ago and $515.4 million from year-end 2004. Compared to year-end 2004, total assets increased due primarily to the investment of liquidity from savings deposit growth into loans and federal funds sold and interest bearing deposits.

 

Securities

 

The Company’s investment securities portfolio is maintained for asset-liability management purposes, as an additional source of liquidity, and as an additional source of earnings.  The securities portfolio consists of available for sale “AFS” and held to maturity “HTM” investments.  AFS securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. HTM securities, 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 AFS or HTM at the time of purchase. The portfolio is comprised of U.S. Treasury securities, obligations of the U.S. Government and government sponsored agencies, collateralized mortgage obligations and corporate and equity securities. Approximately 84 percent of the total investment portfolio has a fixed rate of interest.

 

AFS securities totaled $74.6 million at March 31, 2005, a decrease of $3.4 million from year-end 2004. This decrease was the result of the following transactions during the quarter:

      $298 thousand in securities were purchased,

      $95 thousand in sales,

      $2.6 million in principal payments were received, and

      The market value of the portfolio depreciated $991 thousand.

 

Included in AFS securities at March 31, 2005 was a $1.0 million asset-backed security, which the Company had classified as an impaired asset.  Through March 31, 2005, the Company continued to receive payments on this bond; however, the bond was rated Caa1 by Moody’s and if the default rates on the underlying collateral continued to deteriorate the future market value could be impaired.  As of March 31, 2005, the Company had recognized an impairment of $426 thousand on the security.  Subsequent to the end of the quarter, the Company sold this asset-backed security for $600 thousand and recovered $24 thousand of the previously charged off impairment.  The yield on the AFS securities portfolio was 4.21 percent for the three months ended March 31, 2005, compared to 4.06 percent a year ago.  The weighted average life of the AFS portfolio was 4.59 years and the effective duration of the portfolio was 3.78 years at March 31, 2005 compared to 4.72 years and 4.48 years at December 31, 2004.

 

HTM securities totaled $23.6 million at March 31, 2005 and December 31, 2004. During the first three months of 2005, $2.2 million in maturities and principal payments were received on the portfolio.  In addition, there was a $2.2 million bond purchased during the quarter.  The yield on HTM securities was 4.75 percent for the three months ended March 31, 2005 compared to 5.55 percent for the same period a year ago. As of March 31, 2005 and December 31, 2004, the market value of HTM securities was $23.6 million and $23.8 million, respectively.  The weighted average life of the HTM portfolio was 2.99 years and the effective duration of the portfolio was 2.30 years at March 31, 2005 compared to 2.85 years and 2.66 years at December 31, 2004.

 

15



 

In the normal course of business, the Company accepts government deposits that require investment securities to be held as collateral.  As of March 31, 2005, $16.6 million of securities were required to be pledged for governmental deposits.

 

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.

 

Total loans increased $7.6 million or 2.0 percent to $381.2 million at March 31, 2005, from year-end 2004.  The concentration of the loan portfolio remained virtually unchanged from year-end with a 56 percent commercial, 16 percent SBA, 16 percent residential mortgage and 12 percent consumer concentration.

 

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 $214.7 million at March 31, 2005 and increased $7.0 million compared to $207.8 million at year-end 2004. The yield on these commercial loans was 6.95 percent for the three months ended March 31, 2005 compared to 6.67 percent for the same period a year ago.

 

SBA loans provide guarantees of up to 85 percent of the principal from the SBA. SBA loans are generally sold in the secondary market with the non-guaranteed portion held in the portfolio as a loan held for investment. SBA loans held for investment amounted to $54.6 million at March 31, 2005, a decrease of $1.0 million from year-end 2004. SBA loans held for sale, carried at the lower of aggregate cost or market, amounted to $8.2 million at March 31, 2005, an increase of $598 thousand from year-end 2004. The SBA held for sale portfolio increased due to lower levels of SBA loans being sold during the quarter. The yield on SBA loans which are generally floating and tied to prime was 8.37 percent for the three months ended March 31, 2005 compared to 6.56 percent for the same period a year ago.

 

Residential mortgage loans consist of loans secured by residential properties. These loans amounted to $59.8 million at March 31, 2005, a decrease of $471 thousand from year-end 2004. 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 5.31 percent for the three months ended March 31, 2005 compared to 5.65 percent for the same period a year ago. The decrease in rate is attributed to the refinancing and prepayment of higher 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 $43.9 million at March 31, 2005, an increase of $1.5 million from year-end 2004. The increase in the consumer loan portfolio was primarily the result of an increase in home equity loans. The yield on consumer loans was 5.65 percent for the three months ended March 31, 2005, compared to 4.86 percent for the same period a year ago.

 

The increase in yields throughout the loan portfolio reflect the higher interest rate environment at March 31, 2005 compared to March 31, 2004 due to the Federal Reserve raising interest rates 175 basis points since June 2004.

 

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.

 

16



 

Credit risk is minimized by loan diversification and adhering to credit administration policies and procedures.  Due diligence on loans begins upon the origination of a loan with a borrower.  Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors are analyzed before a loan is submitted for approval.  The loan portfolio is then subject to ongoing internal reviews for credit quality.  In addition, an outside firm is used to conduct independent credit reviews.

 

The following table sets forth information concerning non-accrual loans and non-performing assets at each of the periods indicated:

 

(In thousands)

 

Mar. 31, 2005

 

Dec. 31, 2004

 

Mar. 31, 2004

 

 

 

 

 

 

 

 

 

Non-performing loans

 

 

 

 

 

 

 

SBA

 

$

2,156

 

$

2,013

 

$

2,474

 

Commercial

 

426

 

1,534

 

1,387

 

Residential mortgage

 

223

 

288

 

687

 

Consumer

 

115

 

256

 

175

 

Total non-performing loans

 

2,920

 

4,091

 

4,723

 

OREO

 

198

 

345

 

338

 

Total Non-Performing Assets

 

$

3,118

 

$

4,436

 

$

5,061

 

 

 

 

 

 

 

 

 

Past Due 90 days or more and still accruing interest

 

 

 

 

 

 

 

SBA

 

290

 

 

 

Commercial

 

 

 

 

Residential mortgage

 

 

 

 

Consumer

 

23

 

 

 

Total accruing loans 90 days or more past due

 

313

 

 

 

 

 

 

 

 

 

 

 

Non-Performing assets to total assets

 

0.59

%

1.10

%

1.07

%

Non-Performing assets to loans and OREO

 

0.82

%

1.19

%

1.53

%

Allowance for loans losses as a percentage of non-performing loans

 

203.49

%

143.14

%

115.73

%

Allowance for loan losses to total loans

 

1.56

%

1.57

%

1.65

%

 

Non-performing assets amounted to $3.1 million at March 31, 2005, a decrease of $1.3 million from year-end 2004.  There were $313 thousand in loans past due 90 days or more and still accruing interest at March 31, 2005 compared to $0 at December 31, 2004. 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 March 31, 2005 are approximately $558 thousand 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.  There were $1.8 million in potential problem loans at March 31, 2005 and $1.4 million in potential problem loans at December 31, 2004.

 

17



 

Allowance for Loan Losses

 

The allowance for loan losses totaled $5.9 million, $5.9 million, and $5.5 million at March 31, 2005, December 31, 2004, and March 31, 2004, respectively with resulting allowance to total loan ratios of 1.56 percent, 1.57 percent and 1.65 percent respectively. Net charge offs amounted to $214 thousand for the three months ended March 31, 2005, compared to $136 thousand for the three months ended March 31, 2004.

 

The following is a reconciliation summary of the allowance for loan losses for the three months ended March 31, 2005 and 2004:

 

 

 

Three months ended March 31,

 

(In thousands)

 

2005

 

2004

 

Balance, beginning of period

 

$

5,856

 

$

5,352

 

Provision charged to expense

 

300

 

250

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

SBA

 

107

 

98

 

Commercial

 

165

 

181

 

Residential mortgage

 

24

 

 

Consumer

 

8

 

3

 

Total Charge-offs

 

304

 

282

 

Recoveries:

 

 

 

 

 

SBA

 

44

 

17

 

Commercial

 

45

 

125

 

Residential mortgage

 

 

 

Consumer

 

1

 

4

 

Total recoveries

 

90

 

146

 

Total net charge-offs

 

214

 

136

 

Balance, end of period

 

$

5,942

 

$

5,466

 

Selected loan quality ratios:

 

 

 

 

 

Net charge offs to average loans (annualized)

 

0.23

%

0.16

%

Allowance for loan losses to total loans at period end

 

1.56

%

1.65

%

Allowance for loan losses to non-performing loans

 

203.49

%

115.73

%

 

Deposits

 

Deposits, which include non-interest and interest bearing demand deposits and interest-bearing savings and time deposits, are the primary source of the Company’s funds.  The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. For the first three months of 2005 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 $13.9 million to $447.8 million at March 31, 2005 from $433.9 million at December 31, 2004. The increase in deposits was primarily the result of a $33.3 million increase in savings deposits, partially offset by a $10.4 million decrease in interest bearing demand deposits, a $6.0 million decrease in non-interest bearing demand deposits and a $3.0 million decrease in time deposits. The growth in savings deposits was directly related to the Company’s direct mail promotion of its Opportunity Savings product. The decline in interest bearing and non-interest bearing demand accounts and time deposits was due to the transfer of balances into the higher cost Opportunity Savings product.

 

Included in deposits at March 31, 2005 are $39.7 million of Government deposits, as compared to $38.6 million at December 31, 2004.  These deposits are generally short in duration and sensitive to price competition.  The Company believes the current portfolio of these deposits is appropriate.

 

18



 

Borrowed Funds and Subordinated Debentures

 

Borrowed funds and subordinated debentures totaled $39.3 million at March 31, 2005, a decrease of $5 million from December 31, 2004.  This decrease was due to the maturity of a short-term, $5 million repurchase agreement with a rate of 2.50 percent on January 13, 2005.

 

As of March 31, 2005, the Company was a party to the following borrowed funds and subordinated debenture transactions:

 

      A $10 million repurchase agreement with a term of 5 years, expiring on March 11, 2009 and a rate of 2.78 percent.  The borrowing may be called by the investor if the 3 month LIBOR rate is greater than or equal to 7 percent on March 11, 2005 or on any quarterly payment date thereafter.

      A $10 million FHLB repo-advance with a term of 10 years, expiring on December 15, 2014 and a fixed rate of 2.95 percent.  The borrowing is convertible by the FHLB on December 15, 2006 and quarterly thereafter with 4 business days notice into replacement funding for the same or lesser principal amount based on any advance then offered by the FHLB at then current market rates.

      A $10.0 million advance from the Federal Home Loan Bank (“FHLB”).  The 4.92% borrowing from the FHLB matures in 2010 and is callable by the FHLB at any time.

      $9.3 million in subordinated debentures issued on September 26, 2002 with a floating rate of 3 month Libor plus 340 basis points.  The subordinated debentures mature on September 26, 2032, but are redeemable in whole or in part by the issuer prior to maturity, but after September 26, 2007.

 

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 March 31 2005, is a decline of 1.63 percent in a rising rate environment and a decrease of 0.07 percent in a falling rate environment.  Both variances are within the board-approved guidelines of +/- 3.00 percent.  At December 31, 2004 the economic value of equity with rate shocks of 200 basis points was a decline of 1.23 percent in a rising rate environment and a decrease of 0.68 percent in a falling rate environment.

 

Operating, Investing, and Financing Cash

 

Cash and cash equivalents amounted to $28.9 million at March 31, 2005, an increase of $5.5 million from December 31, 2004. Net cash provided by operating activities for the three months ended March 31, 2005, amounted to $2.2 million, primarily from proceeds from the sales of loans held for sale and net income from operations partially offset by originations of loans held for sale. Net cash used in investing activities amounted to $5.5 million for the three months ended March 31, 2005, primarily due to loan originations, security purchases and investments in premises and equipment, partially offset by proceeds from the maturities and sales of securities available for sale.  Net cash provided by financing activities, amounted to $8.7 million for the three months ended March 31, 2005, attributable to increased deposits, partially offset by reduced borrowings and the payment of a dividend.

 

19



 

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 March 31, 2005, the Parent Company had $1.4 million in cash compared to $1.5 million at December 31, 2004. The slight decrease in cash at the parent company was due to the payment of operating expenses and a cash dividend at the Parent Company.  Expenses at the Parent Company are minimal and 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 March 31, 2005, $30.2 million was available for additional borrowings from the FHLB of New York.  Pledging additional collateral in the form of 1-4 family residential mortgages or investment securities can increase the line with the FHLB. The maximum borrowing line available if additional collateral was pledged as of March 31, 2005 amounted to approximately $61.3 million. An additional source of liquidity is Federal Funds sold, which were $17.6 million at March 31, 2005.

 

As of March 31, 2005, deposits included $39.7 million of Government deposits, as compared to $38.6 million at December 31, 2004.  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 $28.9 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 March 31, 2005, the Bank had approximately $141 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 $20.8 million of these commitments are for SBA loans, which may be sold into the secondary market.

 

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.

 

20



 

The Company’s capital amounts and ratios are presented in the following table.

 

 

 

Actual

 

For Capital
Adequacy Purposes

 

To Be Well Capitalized
Under Prompt Corrective Action
Provisions

 

(In thousands)

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

As of March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Ratio

 

46,489

 

8.96

%

>

 

20,761

 

4.00

%

>

 

25,952

 

5.00

%

Tier I risk-based ratio

 

46,489

 

11.08

%

>

 

16,789

 

4.00

%

>

 

25,183

 

6.00

%

Total risk-based ratio

 

51,744

 

12.33

%

>

 

33,577

 

8.00

%

>

 

41,971

 

10.00

%

As of December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Ratio

 

45,352

 

9.09

%

>

 

19,948

 

4.00

%

>

 

24,935

 

5.00

%

Tier I risk-based ratio

 

45,352

 

11.14

%

>

 

16,291

 

4.00

%

>

 

24,436

 

6.00

%

Total risk-based ratio

 

50,452

 

12.39

%

>

 

32,582

 

8.00

%

>

 

40,727

 

10.00

%

 

The Bank’s capital amounts and ratios are presented in the following table. 

 

 

 

Actual

 

For Capital
Adequacy Purposes

 

To Be Well Capitalized
Under Prompt Corrective Action
Provisions

 

(In thousands)

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

As of March 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Ratio

 

38,779

 

7.49

%

>

 

20,718

 

4.00

%

>

 

25,897

 

5.00

%

Tier I risk-based ratio

 

38,779

 

9.26

%

>