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.

 

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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	%

 

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