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UNTY > SEC Filings for UNTY > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for UNITY BANCORP INC /NJ/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNITY BANCORP INC /NJ/


10-May-2013

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 2012 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012. 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 $796 thousand, or $0.10 per diluted share for the quarter ended March 31, 2013, a 56.6 percent increase compared to $509 thousand, or $0.07 per diluted share for the same period a year ago. Return on average assets and average common equity for the quarter were 0.59% and 5.65%, respectively, compared to 0.45% and 3.81% for the same period a year ago. The continued improvement in our operating results is the product of our strategic initiatives, which include the continued reduction of our out of market SBA portfolio, expansion of our in-market business relationships and further reduction in our cost of funds.

First quarter highlights include:

A 9.1 percent increase in commercial loans from a year ago.

A 33.1 percent decrease in nonperforming assets from a year ago.

A 45.8 percent decrease in the loan loss provision compared to prior period's quarter.

Noninterest-bearing deposits reached a record high of $118.2 million.

Negotiated the purchase contract for three of our currently leased branch locations, which closed April 17, 2013, that will result in estimated future cost savings in excess of $200 thousand.

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

                                                For the three months ended March 31,
                                                    2013                    2012
Net income per common share - Basic (1)      $             0.11        $           0.07
Net income per common share - Diluted (1)    $             0.10        $           0.07
Return on average assets                                   0.59  %                 0.45  %
Return on average equity (2)                               5.65  %                 3.81  %
Efficiency ratio                                          73.91  %                71.80  %

(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 the Company's operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans to individuals and businesses, investment securities, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank advances and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities ("net interest spread") and the relative amounts of earning assets and interest-bearing liabilities. The Company's net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and general levels of nonperforming assets.

During the quarter ended March 31, 2013, tax-equivalent net interest income amounted to $6.7 million, a decrease of $129 thousand or 1.9 percent when compared to the same period in 2012. Net interest margin decreased 4 basis points to 3.52 percent for the quarter ended March 31, 2013, compared to 3.56 percent for the same period in 2012. The net interest spread was 3.29 percent for the first quarter of 2013, a 1 basis point decrease compared to the same period in 2012.

During the three months ended March 31, 2013, tax-equivalent interest income was $8.4 million, a decrease of $755 thousand or 8.3 percent when compared to the same period in the prior year. This decrease was driven by the lower average yield on earning assets, partially offset by a shift in the mix of earning assets as average loans increased:

Of the $755 thousand decrease in interest income on a tax-equivalent basis, $788 thousand was attributed to reduced yields on average interest-earning assets, partially offset by a $33 thousand increase in interest income due to the increase volume of average interest-earning assets.

The yield on interest-earning assets decreased 38 basis points to 4.33 percent for the three months ended March 31, 2013 when compared to the same period in 2012, 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 the continued low market rates.

The average volume of interest-earning assets increased $1.0 million to $778.4 million for the first quarter of 2013 compared to $777.4 million for the same period in 2012. This was due primarily to a $5.2 million increase in average loans, partially offset by a $2.1 million decrease in Federal funds sold and interest-bearing deposits and a $1.9 million decrease in average investment securities.


Total interest expense was $1.6 million for the three months ended March 31, 2013, a decrease of $626 thousand or 27.8 percent compared to the same period in 2012. This decrease was driven by the continued lower overall interest rate environment, the shift in deposit mix away from higher priced products and a decrease in the average volume of interest-bearing liabilities:

Of the $626 thousand decrease in interest expense, $471 thousand was due to a decrease in the rates paid on interest-bearing liabilities and $155 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased 37 basis points to 1.04 percent, primarily due to the re-pricing of deposits in a lower interest rate environment and the expiration of a high rate interest rate swap agreement in March 2012. The cost of interest-bearing deposits decreased 41 basis points to 0.62 percent for the first quarter of 2013 and the cost of borrowed funds and subordinated debentures decreased 16 basis points to 3.54 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.

Interest-bearing liabilities averaged $627.3 million for the first quarter of 2013, a decrease of $12.4 million or 1.9 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.

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 as long as the unemployment rate remains above 6.5 percent. 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.

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, 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
                                      March 31, 2013                           March 31, 2012
                            Average                                  Average
                            Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning
assets:
Federal funds sold and
interest-bearing
deposits                   $  62,530     $    14           0.09  %  $  64,660     $    32           0.20  %
Federal Home Loan Bank
stock                          3,989          44           4.47         4,088          51           5.02
Securities:
Taxable                      100,062         647           2.59       102,624         752           2.93
Tax-exempt                    18,475         178           3.85        17,851         210           4.71
Total securities (A)         118,537         825           2.79       120,475         962           3.19
Loans:
SBA loans                     65,386         777           4.75        71,760         924           5.15
SBA 504 loans                 41,135         651           6.42        51,710         759           5.90
Commercial loans             304,790       4,001           5.32       284,237       4,183           5.92
Residential mortgage
loans                        135,886       1,550           4.56       132,824       1,655           4.98
Consumer loans                46,111         509           4.48        47,608         560           4.73
Total loans (B)              593,308       7,488           5.09       588,139       8,081           5.52
Total interest-earning
assets                     $ 778,364     $ 8,371           4.33  %  $ 777,362     $ 9,126           4.71  %

Noninterest-earning
assets:
Cash and due from banks       19,737                                   15,949
Allowance for loan
losses                       (14,998)                                 (16,788)
Other assets                  37,905                                   40,287
Total
noninterest-earning
assets                        42,644                                   39,448
Total assets               $ 821,008                                $ 816,810

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                   $ 118,668     $   101           0.35  %  $ 108,988     $   136           0.50  %
Savings deposits             295,520         177           0.24       283,261         354           0.50
Time deposits                122,695         546           1.80       156,999         913           2.34
Total interest-bearing
deposits                     536,883         824           0.62       549,248       1,403           1.03
Borrowed funds and
subordinated debentures       90,465         800           3.54        90,465         847           3.70
Total interest-bearing
liabilities                $ 627,348     $ 1,624           1.04  %  $ 639,713     $ 2,250           1.41  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits              113,000                                  100,496
Other liabilities              3,242                                    3,249
Total
noninterest-bearing
liabilities                  116,242                                  103,745
Total shareholders'
equity                        77,418                                   73,352
Total liabilities and
shareholders' equity       $ 821,008                                $ 816,810

Net interest spread                      $ 6,747           3.29  %                $ 6,876           3.30  %
Tax-equivalent basis
adjustment                                   (58)                                     (68)
Net interest income                      $ 6,689                                  $ 6,808
Net interest margin                                        3.52  %                                  3.56  %

(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 March 31, 2013 versus March
                                                              31, 2012
                                                Increase (decrease) due to change in:
(In thousands on a tax-equivalent
basis)                                    Volume                Rate                  Net
Interest income:
Federal funds sold and
interest-bearing deposits                $        (1)         $       (17)         $       (18)
Federal Home Loan Bank stock                      (1)                  (6)                  (7)
Securities                                       (12)                (125)                (137)
Loans                                             47                 (640)                (593)
Total interest income                    $        33          $      (788)         $      (755)
Interest expense:
Demand deposits                          $        10          $       (45)         $       (35)
Savings deposits                                  14                 (191)                (177)
Time deposits                                   (179)                (188)                (367)
Total interest-bearing deposits                 (155)                (424)                (579)
Borrowed funds and subordinated
debentures                                          -                 (47)                 (47)
Total interest expense                          (155)                (471)                (626)
Net interest income - fully
tax-equivalent                           $       188          $      (317)         $      (129)
Decrease in tax-equivalent
adjustment                                                                                  10
Net interest income                                                                $      (119)

Provision for Loan Losses

The provision for loan losses totaled $650 thousand for the three months ended March 31, 2013, compared to $1.2 million for the three months ended March 31, 2012. 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 of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions "Financial Condition - Asset Quality" and "Financial Condition - Allowance for Loan Losses and Reserve for Unfunded Loan Commitments." The current provision is considered appropriate under management's assessment of the adequacy of the allowance for loan losses.

Noninterest Income



The following table shows the components of noninterest income for the three
months ended March 31, 2013 and 2012:




                                                     For the three months ended March 31,
(In thousands)                                           2013                    2012
Branch fee income                                   $            347        $            386
Service and loan fee income                                      304                     302
Gain on sale of SBA loans held for sale, net                     241                     157
Gain on sale of mortgage loans, net                              477                     411
BOLI income                                                       70                      73
Net security gains                                               226                     224
Other income                                                     160                     162
Total noninterest income                            $          1,825        $          1,715

Our noninterest income consists primarily of branch and loan fee income, gains on the sale of SBA and residential mortgage loans and BOLI income. For the three months ended March 31, 2013, noninterest income amounted to $1.8 million, an increase of $110 thousand from the prior year period. The increase during the three month period was driven by higher gains on the sale of residential mortgage and SBA loans, partially offset by lower levels of branch fee income.


Changes in our noninterest income for the three months ended March 31, 2013 versus 2012 reflect:

Branch fee income, which consists of deposit service charges and overdraft fees, decreased $39 thousand for the quarterly period due to lower overdraft fees.

Service and loan fee income increased $2 thousand when compared to the same period in the prior year.

Gains on SBA loan sales increased $84 thousand for the quarter due to higher premiums on the sale of $2.3 million in loans during the period.

Gains on sales of residential mortgage loans increased $66 thousand on a higher volume of loan sales. For the three month period, $22.6 million in residential mortgage loans were sold compared to $21.2 million in the first quarter of 2012.

The increase in the cash surrender value of BOLI remained relatively flat when compared to the same periods in the prior year, with income of $70 thousand and $73 thousand for the three months ended March 31, 2013 and 2012, respectively.

Net realized gains on the sale of securities amounted to $226 thousand, compared to gains of $224 thousand for the same period in the prior year. For additional information, see Note 7 - Securities.

Other income decreased $2 thousand when compared to the same period in the prior year.

Noninterest Expense



The following table presents a breakdown of noninterest expense for the three
months ended March 31, 2013 and 2012:




                                   For the three months ended March 31,
(In thousands)                         2013                    2012
Compensation and benefits         $          3,176        $          3,182
Occupancy                                      694                     609
Processing and communications                  561                     534
Furniture and equipment                        365                     362
Professional services                          190                     190
Loan collection costs                          177                     180
OREO expenses                                  127                     124
Deposit insurance                              149                     171
Advertising                                    120                     146
Other expenses                                 567                     461
Total noninterest expense         $          6,126        $          5,959

Noninterest expense totaled $6.1 million and $6.0 million for the three months ended March 31, 2013 and 2012, respectively. In March 2012, we opened our Washington Township, New Jersey branch.

Changes in noninterest expense for the three months ended March 31, 2013 versus 2012 reflect:

Compensation and benefits expense, the largest component of noninterest expense, decreased $6 thousand. Benefits expense decreased, however this was partially offset by an increase in employer taxes.

Occupancy expense increased $85 thousand due to higher seasonal snow removal expenses, increased building depreciation expenses related to the Washington branch, and additional rental expense due to the termination of a sublease during 2012.

Processing and communications expenses increased $27 thousand due to expenses related to our check cashing, merchant services and mortgage business.

Furniture and equipment expense increased $3 thousand, primarily due to increased software maintenance, depreciation, and ATM maintenance expenses.

Professional service fees remained flat at $190 thousand when compared to the same period in 2012.

Loan collection costs decreased $3 thousand, due to lower appraisal fees.

OREO expenses remained relatively flat at $127 thousand for the first quarter of 2013, compared to $124 thousand for the first quarter of 2012.

Deposit insurance expense decreased $22 thousand for the quarter ended March 31, 2013 due to a lower assessment basis.

Advertising expense decreased $26 thousand for the quarter ended March 31, 2013 due to a reduction in promotional gift expenses, the expiration of a third party marketing agreement and reduced promotional marketing.

Other expenses increased $106 thousand for the quarter due to higher employee recruiting, increased director fees and an increase to the reserve for unfunded loan commitments.

Income Tax Expense

For the quarter ended March 31, 2013, the Company reported income tax expense of $538 thousand for an effective tax rate of 31.0 percent, compared to an income tax expense of $459 thousand and effective tax rate of 33.7 percent for the prior year's quarter.


Financial Condition at March 31, 2013

Total assets increased $7.5 million or 0.9 percent, to $827.2 million at March 31, 2013, compared to $819.7 million at December 31, 2012. This increase was primarily due to increases of $9.5 million in loans, $8.3 million in securities, and $3.7 million in premises and equipment, partially offset by a $14.2 million decrease in cash and cash equivalents. Total deposits increased $3.4 million, due to increases of $3.7 million in noninterest-bearing demand deposits, $802 thousand in savings deposits, and $536 thousand in interest-bearing demand deposits, partially offset by a decrease of $1.7 million in time deposits. There were no changes to borrowed funds and subordinated debentures. Total shareholders' equity increased $647 thousand over year-end 2012, primarily due to the increase in net income. These fluctuations are discussed in further detail in the paragraphs that follow.

Securities Portfolio

The Company's securities portfolio consists of available for sale ("AFS") and held to maturity ("HTM") investments. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.

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. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. AFS securities consist primarily of obligations of U.S. Government sponsored entities, obligations of state and political subdivisions, mortgage-backed securities, and corporate and other securities.

AFS securities totaled $91.1 million at March 31, 2013, an increase of $1.5 million or 1.7 percent, compared to $89.5 million at December 31, 2012. This net increase was the result of:

$13.1 million in purchases, primarily of municipal and agency securities, partially offset by

$5.7 million in principal payments, maturities and called bonds,

$5.1 million in sales net of realized gains, which consisted of asset-backed securities and corporate bonds,

. . .

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