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| UNTY > SEC Filings for UNTY > Form 10-Q on 10-Aug-2012 | All Recent SEC Filings |
10-Aug-2012
Quarterly Report
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2011 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, in addition to those items contained in the Company's Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent Quarterly Reports on Form 10-Q, the following: 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 registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Its 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 September 13, 1991. The Bank provides a full range of commercial and retail banking services through 15 branch offices located in Hunterdon, Somerset, Middlesex, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. 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 II is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. Unity (NJ) Statutory Trust III is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On December 19, 2006, the Trust issued $5.0 million of trust preferred securities to investors. These floating rate securities are treated as subordinated debentures on the Company's financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes, subject to certain limitations. The Company does not consolidate the accounts and related activity of any of its business trust subsidiaries.
Earnings Summary
Net income available to common shareholders totaled $575 thousand, or $0.07 per diluted share, for the quarter ended June 30, 2012, compared to $249 thousand, or $0.03 per diluted share for the same period a year ago. For the six months ended June 30, 2012, net income available to common shareholders totaled $1.1 million or $0.14 per diluted share compared to $85 thousand, or $0.01 per diluted share for the same period a year ago.
Net income available to common shareholders for the prior year's periods was adversely impacted by the Company's decision during the second quarter of 2011 to close two of its underperforming branches. As a result of this decision, $215 thousand in residual
lease and fixed asset disposal expenses were realized in the second quarter of 2011. Excluding these expenses, net income available to common shareholders for the three month period ending June 30, 2011, would have been $399 thousand or $0.05 per diluted share. For the six month period, net income available to common shareholders would have been $236 thousand or $0.03 per diluted share.
Highlights for the quarterly and year-to-date periods include:
· Continued reductions in loan loss provisions due to improvement in asset quality.
· Significant increases in residential mortgage originations resulting in increases in gains on sale of mortgage loans.
· Significant commercial loan growth.
· Planned reduction in SBA loans outstanding from our National Program.
· Continued growth in noninterest-bearing demand deposits to 17.4 percent of total deposits.
· Continued reduction in higher costing time deposits. Time deposits now represent 22 percent of total deposits.
· Further improvement in our equity to assets ratio.
The Company's quarterly and six month performance ratios may be found in the table below.
For the three months ended June 30, For the six months ended June 30,
2012 2011 2012 2011
Net income per common share -
Basic (1) $ 0.08 $ 0.03 $ 0.15 $ 0.01
Net income per common share -
Diluted (1) $ 0.07 $ 0.03 $ 0.14 0.01
Return on average assets 0.49 % 0.32 % 0.47 % 0.21 %
Return on average equity (2) 4.25 % 1.95 % 4.03 % 0.34 %
Efficiency ratio 73.72 % 69.74 % 72.76 % 70.64 %
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(1) Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by
weighted average shares outstanding.
(2) Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by
average shareholders' equity (excluding preferred stock).
Net Interest Income
The primary source of income for the Company is net interest income, the difference between the interest earned on earning assets such as investments and loans, and the interest paid on deposits and borrowings. Factors that impact the Company's net interest income include the interest rate environment, the volume and mix of interest-earning assets and interest-bearing liabilities, and the competitive nature of the Company's marketplace.
Our net interest income continues to be impacted by the sustained low interest rate environment, which the Federal Open Market Committee ("FOMC") forecasts will continue through 2014, due to continued weak economic conditions. This rate environment has resulted in a tighter net interest margin as our earning assets continue to re-price at lower rates. Partially offsetting these declines are lower funding costs; however the reduction in yield on earning assets is anticipated to exceed the benefits of further declines in the cost of funds.
During the three months ended June 30, 2012, tax-equivalent interest income decreased $1.4 million or 13.8 percent to $8.8 million when compared to the same period in the prior year. This decrease was driven by the lower average yield on earning assets and a shift in the mix of earning assets as average loans decreased:
× Of the $1.4 million decrease in interest income on a tax-equivalent basis, $1.3 million was attributed to reduced yields on average interest-earning assets and $138 thousand was attributable to the decrease in volume of average interest-earning assets.
× The average volume of interest-earning assets decreased $22 million to $755.1 million for the second quarter of 2012 compared to $777.1 million for the same period in 2011. This was due primarily to a $15.1 million decrease in average loans and a $9.7 million decrease in Federal funds sold and interest-bearing deposits, partially offset by a $2.9 million increase in average investment securities.
× The yield on interest-earning assets decreased 58 basis points to 4.70 percent for the three months ended June 30, 2012 when compared to the same period in 2011, due to continued re-pricing in a lower overall interest rate environment. Yields on most earning assets, particularly those with variable rates, fell due to these lower market rates.
Total interest expense was $1.9 million for the three months ended June 30, 2012, a decrease of $810 thousand or 29.7 percent compared to the same period in 2011. This decrease was driven by the lower overall interest rate environment combined with the shift in deposit mix away from higher priced products and a decrease in the average volume of interest-bearing liabilities:
× Of the $810 thousand decrease in interest expense, $618 thousand was attributed to a decrease in the rates paid on interest-bearing liabilities and $192 thousand was due to the decrease in the volume of average interest-bearing liabilities.
× Interest-bearing liabilities averaged $610.4 million for the second quarter of 2012, a decrease of $39.4 million or 6.1 percent, compared to the prior year's quarter. The decrease in interest-bearing liabilities was a result of a decrease in average time deposits and average savings deposits, partially offset by an increase in interest-bearing demand deposits.
× The average cost of interest-bearing liabilities decreased 42 basis points to 1.25 percent, primarily due to the repricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 42 basis points to 0.85 percent for the first quarter of 2012 and the cost of borrowed funds and subordinated debentures decreased 60 basis points to 3.57 percent.
× The lower cost of funding was also attributed to a shift in the mix of deposits from higher cost time deposits to lower cost products as part of management's strategy to restructure the deposit portfolio.
During the quarter ended June 30, 2012, tax-equivalent net interest income amounted to $6.9 million, a decrease of $609 thousand or 8.1 percent when compared to the same period in 2011. Net interest margin decreased 20 basis points to 3.68 percent for the quarter ended June 30, 2012, compared to 3.88 percent for the same period in 2011. The net interest spread was 3.45 percent for the second quarter of 2012, a 16 basis point decrease from 3.61 for the same period in 2011.
During the six months ended June 30, 2012, tax-equivalent interest income was $18.0 million, a decrease of $2.6 million or 12.6 percent when compared to the same period in 2011.
× Of the $2.6 million decrease in interest income on a tax-equivalent basis, $2.1 million was attributed to reduced yields on average interest-earning assets and $524 thousand was attributable to the decrease in volume of average interest-earning assets.
× The average volume of interest-earning assets decreased $11.3 million to $766.2 million for the six months ended June 30, 2012, compared to $777.6 million for the same period in 2011. This was due primarily to a $21.5 million decrease in average loans, partially offset by a $10.9 million increase in federal funds sold and interest-bearing deposits.
× The yield on interest-earning assets decreased 60 basis points to 4.71 percent for the six months ended June 30, 2012 when compared to the same period in 2011, due to continued re-pricing in a lower overall interest rate environment. Yields on most earning assets, particularly those with variable rates, fell due to these lower market rates.
Total interest expense was $4.2 million for the six months ended June 30, 2012, a decrease of $1.3 million or 24.2 percent compared to the same period in 2011. This decrease was driven by the lower overall interest rate environment combined with the shift in deposit mix away from higher priced products and a decrease in the average volume of interest-bearing liabilities:
× Of the $1.3 million decrease in interest expense, $1.0 million was due to a decrease in the rates paid on interest-bearing liabilities and $300 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.
× Interest-bearing liabilities averaged $625.0 million for the six months ended June 30, 2012, a decrease of $29.1 million or 4.4 percent, compared to the same period in 2011. The decrease in interest-bearing liabilities was a result of a decrease in average time deposits and savings deposits, partially offset by an increase in interest-bearing deposits.
× The average cost of interest-bearing liabilities decreased 36 basis points to 1.33 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 34 basis points to 0.94 percent for the six months ended June 30, 2012 and the cost of borrowed funds and subordinated debentures decreased 56 basis points to 3.63 percent.
× The lower cost of funding was also attributed to a shift in the mix of deposits from higher cost time deposits to lower cost savings deposits and interest-bearing demand deposits.
During the six months ended June 30, 2012, tax-equivalent net interest income amounted to $13.8 million, a decrease of $1.3 million or 8.4 percent, compared to the same period in 2011. Net interest margin decreased 28 basis points to 3.62 percent for the six months ended June 30, 2012, compared to 3.90 percent for the same period in 2011. The net interest spread was 3.38 percent for the six months ended June 30, 2011, a 24 basis point decrease from 3.62 percent for the same period in 2011.
The following table reflects the components of net interest income, setting forth for the periods presented herein: (1) average assets, liabilities and shareholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread (which is the average yield on interest-earning assets less the average rate on interest-bearing liabilities), and (5) net interest income/margin on average earning assets. Rates/Yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 34 percent.
Consolidated Average Balance Sheets
(Dollar amounts in thousands, interest amounts and interest rates/yields on a
fully tax-equivalent basis)
For the three months ended June 30,
2012 2011
Average Average
Balance Interest Rate/Yield Balance Interest Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $ 30,832 $ 11 0.14 % $ 40,499 $ 9 0.09 %
Federal Home Loan Bank stock 3,993 44 4.43 4,097 35 3.43
Securities:
Securities available for
sale 103,958 741 2.85 103,750 939 3.62
Securities held to maturity 17,499 170 3.89 14,841 185 4.99
Total securities (A) 121,457 911 3.00 118,591 1,124 3.79
Loans:
SBA loans 69,273 846 4.89 85,678 1,191 5.56
SBA 504 loans 46,804 691 5.94 58,999 834 5.67
Commercial loans 303,409 4,216 5.59 284,503 4,581 6.46
Residential mortgage loans 133,643 1,582 4.74 132,386 1,846 5.58
Consumer loans 45,658 529 4.66 52,316 629 4.82
Total loans (B) 598,787 7,864 5.28 613,882 9,081 5.93
Total interest-earning
assets $ 755,069 $ 8,830 4.70 % $ 777,069 $ 10,249 5.28 %
Noninterest-earning assets:
Cash and due from banks 16,101 16,243
Allowance for loan losses (16,980) (16,050)
Other assets 39,774 39,903
Total noninterest-earning
assets 38,895 40,096
Total assets $ 793,964 $ 817,165
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits $ 110,343 $ 123 0.45 % $ 104,149 $ 143 0.55 % Savings deposits 270,990 287 0.43 286,738 584 0.82 Time deposits 138,554 689 2.00 168,448 1,045 2.49 Total interest-bearing deposits 519,887 1,099 0.85 559,335 1,772 1.27 Borrowed funds and subordinated debentures 90,465 816 3.57 90,465 953 4.17 Total interest-bearing liabilities $ 610,352 $ 1,915 1.25 % $ 649,800 $ 2,725 1.67 % Noninterest-bearing liabilities: Noninterest-bearing demand deposits 106,043 92,090 Other liabilities 3,438 4,760 Total noninterest-bearing liabilities 109,481 96,850 Total shareholders' equity 74,131 70,515 Total liabilities and shareholders' equity $ 793,964 $ 817,165 Net interest spread $ 6,915 3.45 % $ 7,524 3.61 % Tax-equivalent basis adjustment (58) (53) Net interest income $ 6,857 $ 7,471 Net interest margin 3.68 % 3.88 % |
(A) Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent and applicable state rates. (B) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.
Consolidated Average Balance Sheets
(Dollar amounts in thousands, interest amounts and interest rates/yields on a
fully tax-equivalent basis)
For the six months ended June 30,
2012 2011
Average Average
Balance Interest Rate/Yield Balance Interest Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $ 47,746 $ 43 0.18 % $ 36,896 $ 20 0.11 %
Federal Home Loan Bank stock 4,041 95 4.73 4,151 101 4.91
Securities:
Securities available for sale 103,030 1,523 2.96 104,385 1,849 3.54
Securities held to maturity 17,936 349 3.89 17,166 478 5.57
Total securities (A) 120,966 1,872 3.10 121,551 2,327 3.83
Loans:
SBA loans 70,516 1,770 5.02 85,769 2,427 5.66
SBA 504 loans 49,257 1,451 5.92 60,490 1,789 5.96
Commercial loans 293,823 8,397 5.75 283,559 8,887 6.32
Residential mortgage loans 133,234 3,237 4.86 131,570 3,677 5.59
Consumer loans 46,633 1,089 4.70 53,576 1,315 4.95
Total loans (B) 593,463 15,944 5.40 614,964 18,095 5.92
Total interest-earning assets $ 766,216 $ 17,954 4.71 % $ 777,562 $ 20,543 5.31 %
Noninterest-earning assets:
Cash and due from banks 16,025 16,999
Allowance for loan losses (16,884) (15,555)
Other assets 40,030 39,835
Total noninterest-earning
assets 39,171 41,279
Total assets $ 805,387 $ 818,841
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits $ 109,665 $ 259 0.47 % $ 103,851 $ 283 0.55 % Savings deposits 277,125 641 0.47 288,263 1,165 0.81 Time deposits 147,778 1,603 2.18 171,517 2,140 2.52 Total interest-bearing deposits 534,568 2,503 0.94 563,631 3,588 1.28 Borrowed funds and subordinated debentures 90,465 1,662 3.63 90,465 1,904 4.19 Total interest-bearing liabilities $ 625,033 $ 4,165 1.33 % $ 654,096 $ 5,492 1.69 % Noninterest-bearing liabilities: Noninterest-bearing demand deposits 103,269 90,453 Other liabilities 3,344 4,148 Total noninterest-bearing liabilities 106,613 94,601 Total shareholders' equity 73,741 70,144 Total liabilities and shareholders' equity $ 805,387 $ 818,841 Net interest spread $ 13,789 3.38 % $ 15,051 3.62 % Tax-equivalent basis adjustment (126) (105) Net interest income $ 13,663 $ 14,946 Net interest margin 3.62 % 3.90 % |
(A) Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent and applicable state rates. (B) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.
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 tax-equivalent basis, assuming a federal income tax rate of 34 percent.
For the three months ended June 30, 2012 For the six months ended June 30, 2012
versus June 30, 2011 versus June 30, 2011
Increase (decrease) due to change in: Increase (decrease) due to change in:
(In thousands on a
tax-equivalent basis) Volume Rate Net Volume Rate Net
Interest income:
Federal funds sold and
interest-bearing
deposits $ (2) $ 4 $ 2 $ 7 $ 16 $ 23
Federal Home Loan Bank
stock (1) 10 9 (3) (3) (6)
Securities 32 (245) (213) (4) (451) (455)
Loans (167) (1,050) (1,217) (524) (1,627) (2,151)
Total interest income $ (138) $ (1,281) $ (1,419) $ (524) $ (2,065) $ (2,589)
Interest expense:
Demand deposits $ 8 $ (28) $ (20) $ 16 $ (40) $ (24)
Savings deposits (31) (266) (297) (44) (480) (524)
Time deposits (169) (187) (356) (272) (265) (537)
Total interest-bearing
deposits (192) (481) (673) (300) (785) (1,085)
Borrowed funds and
. . .
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