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UNTY > SEC Filings for UNTY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for UNITY BANCORP INC /NJ/

Form 10-Q for UNITY BANCORP INC /NJ/


9-Nov-2012

Quarterly Report


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 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 $799 thousand, or $0.10 per diluted share for the quarter ended September 30, 2012, compared to $700 thousand, or $0.09 per diluted share for the same period a year ago. For the nine months ended September 30, 2012, net income available to common shareholders totaled $1.9 million, or $0.24 per diluted share compared to $786 thousand, or $0.10 per diluted share for the same period a year ago.

Our results for the current and prior year periods reflect the impact of branch restructuring related expenses. In March 2012, we opened a new branch in Washington Township, New Jersey. In the third quarter of 2012, we announced that we would be closing our William Penn Highway, Pennsylvania branch and recognized approximately $32 thousand in residual lease and fixed asset disposal expenses. Also in the third quarter of 2012, we announced we would be opening another new branch in Somerset, New Jersey and have subsequently begun to incur lease and other operating expenses. In 2011, we closed two underperforming branches, resulting in $215 thousand in residual lease obligation and fixed asset disposals.

Additional highlights for the quarterly and year-to-date periods include:

Nonperforming assets improved for the third consecutive quarter with a decline of $3.4 million to $18.8 million from $22.2 million at June 30, 2012 and a decline of $6.6 million from $25.8 million at December 31, 2011.

Improved credit quality resulted in lower loan loss provisions as well as reduced loan collection expense and costs to maintain other real estate owned ("OREO").

Significant increases in residential mortgage originations resulted in increased gains on sale of mortgage loans.

Net interest margin expanded to 3.72 percent for the quarter, from 3.56 percent and 3.68 percent for the first and second quarters of 2012, respectively.

Continued deposit product mix improvement. Growth in core demand deposit and savings deposits, while higher costing time deposits declined. Time deposits now represent only 20.1 percent of total deposits.

Further improvement in our capital ratios as we remain "well-capitalized".

The Company's quarterly and nine month performance ratios may be found in the table below.

                                For the three months ended       For the nine months ended
                                       September 30,                   September 30,
                                   2012             2011           2012             2011
Net income per common share
- Basic (1)                    $      0.11        $    0.09      $    0.25      $      0.11
Net income per common share
- Diluted (1)                  $      0.10        $    0.09      $    0.24             0.10
Return on average assets              0.60  %          0.54  %        0.51  %          0.32  %
Return on average equity (2)          5.74  %          5.27  %        4.61  %          2.04  %
Efficiency ratio                     68.22  %         69.80  %       71.20  %         70.36  %

(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") of the Federal Reserve Board forecasts will continue at least through mid-2015, 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 from already low levels.

During the three months ended September 30, 2012, tax-equivalent interest income decreased $1.1 million or 10.8 percent to $8.9 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 $1.1 million decrease in interest income on a tax-equivalent basis, $992 thousand was attributed to reduced yields on average interest-earning assets and $89 thousand was attributable to the decrease in volume of average interest-earning assets.

The average volume of interest-earning assets decreased $7.4 million to $756.7 million for the third quarter of 2012 compared to $764.0 million for the same period in 2011. This was due primarily to a $10.7 million decrease in average loans and a $1.6 million decrease in Federal funds sold and interest-bearing deposits, partially offset by a $5.0 million increase in average investment securities.

The yield on interest-earning assets decreased 51 basis points to 4.70 percent for the three months ended September 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 $1.8 million for the three months ended September 30, 2012, a decrease of $755 thousand or 29.0 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 $755 thousand decrease in interest expense, $597 thousand was attributed to a decrease in the rates paid on interest-bearing liabilities and $158 thousand was due to the decrease in the volume of average interest-bearing liabilities.

Interest-bearing liabilities averaged $611.9 million for the third quarter of 2012, a decrease of $22.8 million or 3.6 percent, compared to the prior year's quarter. The decrease in interest-bearing liabilities was a result of a decrease in average time deposits, partially offset by an increase in average savings deposits and interest-bearing demand deposits.

The average cost of interest-bearing liabilities decreased 42 basis points to 1.19 percent, primarily due to the repricing of deposits in a lower interest rate environment. The cost of borrowed funds and subordinated debentures decreased 54 basis points to 3.56 percent for the third quarter of 2012 and the cost of interest-bearing deposits decreased 42 basis points to 0.78 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 September 30, 2012, tax-equivalent net interest income amounted to $7.1 million, a decrease of $326 thousand or 4.4 percent when compared to the same period in 2011. Net interest margin decreased 13 basis points to 3.72 percent for the quarter ended September 30, 2012, compared to 3.85 percent for the same period in 2011. The net interest spread was 3.51 percent for the third quarter of 2012, a 9 basis point decrease from 3.60 percent for the same period in 2011.

During the nine months ended September 30, 2012, tax-equivalent interest income was $26.9 million, a decrease of $3.7 million or 12.0 percent when compared to the same period in 2011.

Of the $3.7 million decrease in interest income on a tax-equivalent basis, $3.1 million was attributed to reduced yields on average interest-earning assets and $601 thousand was attributable to the decrease in volume of average interest-earning assets.

The average volume of interest-earning assets decreased $10.0 million to $763.0 million for the nine months ended September 30, 2012, compared to $773.0 million for the same period in 2011. This was due primarily to a $17.9 million decrease in average loans, partially offset by a $6.7 million increase in Federal funds sold and interest-bearing deposits and a $1.3 million increase in average investment securities.

The yield on interest-earning assets decreased 58 basis points to 4.70 percent for the nine months ended September 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 $6.0 million for the nine months ended September 30, 2012, a decrease of $2.1 million or 25.7 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 $2.1 million decrease in interest expense, $1.6 million was due to a decrease in the rates paid on interest-bearing liabilities and $465 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.

Interest-bearing liabilities averaged $620.6 million for the nine months ended September 30, 2012, a decrease of $26.9 million or 4.2 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 average savings deposits, partially offset by an increase in interest-bearing deposits.

The average cost of interest-bearing liabilities decreased 37 basis points to 1.29 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of borrowed funds and subordinated debentures decreased 55 basis points to 3.61 percent for the nine months ended September 30, 2012 and the cost of interest-bearing deposits decreased 37 basis points to 0.89 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 nine months ended September 30, 2012, tax-equivalent net interest income amounted to $20.9 million, a decrease of $1.6 million or 7.1 percent, compared to the same period in 2011. Net interest margin decreased 23 basis points to 3.65 percent for the nine months ended September 30, 2012, compared to 3.88 percent for the same period in 2011. The net interest spread was 3.41 percent for the nine months ended September 30, 2012, a 21 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 September 30,
                                           2012                                     2011
                            Average                                  Average
                            Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning
assets:
Federal funds sold and
interest-bearing
deposits                   $  40,183     $    13           0.13  %  $  41,735    $      6           0.06  %
Federal Home Loan Bank
stock                          3,989          50           4.99         4,088          46           4.46
Securities:
Securities available
for sale                      95,193         703           2.95        93,603         852           3.64
Securities held to
maturity                      16,467         152           3.69        13,043         162           4.97
Total securities (A)         111,660         855           3.06       106,646       1,014           3.80
Loans:
SBA loans                     66,484         881           5.30        82,764       1,243           6.01
SBA 504 loans                 44,583         647           5.77        55,814         838           5.96
Commercial loans             307,090       4,313           5.59       286,634       4,417           6.11
Residential mortgage
loans                        136,568       1,631           4.78       135,519       1,825           5.39
Consumer loans                46,116         534           4.61        50,838         616           4.81
Total loans (B)              600,841       8,006           5.31       611,569       8,939           5.82
Total interest-earning
assets                     $ 756,673     $ 8,924           4.70  %  $ 764,038    $ 10,005           5.21  %

Noninterest-earning
assets:
Cash and due from banks       16,211                                   15,453
Allowance for loan
losses                       (16,508)                                 (16,812)
Other assets                  40,138                                   41,739
Total
noninterest-earning
assets                        39,841                                   40,380
Total assets               $ 796,514                                $ 804,418

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                   $ 103,029     $   108           0.42  %  $  98,942    $    137           0.55  %
Savings deposits             287,054         293           0.41       281,591         536           0.76
Time deposits                131,356         619           1.87       163,676         979           2.37
Total interest-bearing
deposits                     521,439       1,020           0.78       544,209       1,652           1.20
Borrowed funds and
subordinated debentures       90,465         824           3.56        90,465         947           4.10
Total interest-bearing
liabilities                $ 611,904     $ 1,844           1.19  %  $ 634,674    $  2,599           1.62  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits              105,876                                   94,811
Other liabilities              3,469                                    2,922
Total
noninterest-bearing
liabilities                  109,345                                   97,733
Total shareholders'
equity                        75,265                                   72,011
Total liabilities and
shareholders' equity       $ 796,514                                $ 804,418

Net interest spread                      $ 7,080           3.51  %               $  7,406           3.59  %
Tax-equivalent basis
adjustment                                   (53)                                     (53)
Net interest income                      $ 7,027                                 $  7,353
Net interest margin                                        3.72  %                                  3.85  %

(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 nine months ended September 30,
                                             2012                                     2011
                              Average                                  Average
                              Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits    $  45,206    $     56           0.17  %  $  38,526    $     26           0.09  %
Federal Home Loan Bank
stock                            4,023         144           4.78         4,130         147           4.76
Securities:
Securities available for
sale                           100,398       2,225           2.95       100,752       2,701           3.57
Securities held to
maturity                        17,443         502           3.84        15,776         640           5.41
Total securities (A)           117,841       2,727           3.08       116,528       3,341           3.82
Loans:
SBA loans                       69,162       2,652           5.11        84,757       3,671           5.77
SBA 504 loans                   47,687       2,098           5.88        58,914       2,626           5.96
Commercial loans               298,279      12,707           5.69       284,595      13,304           6.25
Residential mortgage
loans                          134,353       4,869           4.83       132,901       5,502           5.52
Consumer loans                  46,459       1,624           4.67        52,653       1,931           4.90
Total loans (B)                595,940      23,950           5.36       613,820      27,034           5.88
Total interest-earning
assets                       $ 763,010    $ 26,877           4.70  %  $ 773,004    $ 30,548           5.28  %

Noninterest-earning
assets:
Cash and due from banks         16,088                                   16,478
Allowance for loan losses      (16,758)                                 (15,978)
Other assets                    40,068                                   40,477
Total noninterest-earning
assets                          39,398                                   40,977
Total assets                 $ 802,408                                $ 813,981

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $ 107,437    $    368           0.46  %  $ 102,197    $    420           0.55  %
Savings deposits               280,459         933           0.44       286,014       1,701           0.80
Time deposits                  142,263       2,222           2.09       168,874       3,119           2.47
Total interest-bearing
deposits                       530,159       3,523           0.89       557,085       5,240           1.26
Borrowed funds and
subordinated debentures         90,465       2,486           3.61        90,465       2,851           4.16
Total interest-bearing
liabilities                  $ 620,624    $  6,009           1.29  %  $ 647,550    $  8,091           1.66  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits                104,145                                   91,922
Other liabilities                3,386                                    3,736
Total noninterest-bearing
liabilities                    107,531                                   95,658
Total shareholders'
equity                          74,253                                   70,773
Total liabilities and
shareholders' equity         $ 802,408                                $ 813,981

Net interest spread                       $ 20,868           3.41  %               $ 22,457           3.62  %
Tax-equivalent basis
adjustment                                    (179)                                    (158)
Net interest income                       $ 20,689                                 $ 22,299
Net interest margin                                          3.65  %                                  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.


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 September 30, 2012       For the nine months ended September 30,
                                    versus September 30, 2011                     2012 versus September 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                    $       -         $      7          $      7      $      5        $     25        $     30
Federal Home Loan Bank
stock                             (1)                5                 4            (4)              1              (3)
Securities                        51              (210)             (159)           54            (668)           (614)
Loans                           (139)             (794)             (933)         (656)         (2,428)         (3,084)
Total interest income       $    (89)         $   (992)         $ (1,081)     $   (601)       $ (3,070)       $ (3,671)
Interest expense:
Demand deposits             $      6          $    (35)         $    (29)     $     21        $    (73)       $    (52)
Savings deposits                  10              (253)             (243)          (32)           (736)           (768)
Time deposits                   (174)             (186)             (360)         (454)           (443)           (897)
Total interest-bearing
deposits                        (158)             (474)             (632)         (465)         (1,252)         (1,717)
Borrowed funds and
subordinated
debentures                          -             (123)             (123)             -           (365)           (365)
Total interest expense          (158)             (597)             (755)         (465)         (1,617)         (2,082)
Net interest income -
fully tax-equivalent        $     69          $   (395)         $   (326)     $   (136)       $ (1,453)       $ (1,589)
Increase in
tax-equivalent
adjustment                                                              -                                          (21)
Net interest income                                             $   (326)                                     $ (1,610)

Provision for Loan Losses

The provision for loan losses totaled $1.0 million for the three months ended September 30, 2012, compared to $1.4 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the provision for loan losses totaled $3.2 million, compared to $5.7 million for the same period in 2011. Each period's loan loss provision is the result of management's analysis of the loan portfolio and reflects changes in the size and composition . . .

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