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UNTY > SEC Filings for UNTY > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for UNITY BANCORP INC /NJ/

Form 10-Q for UNITY BANCORP INC /NJ/


9-Aug-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 $882 thousand, or $0.11 per diluted share for the quarter ended June 30, 2013, a 53.4 percent increase compared to $575 thousand, or $0.07 per diluted share for the same period a year ago. For the six months ended June 30, 2013, net income available to common shareholders totaled $1.7 million or $0.21 per diluted share, compared to $1.1 million or $0.14 per diluted share for the same period a year ago. Return on average assets and average common equity for the quarter were 0.67% and 6.11%, respectively, compared to 0.49% and 4.25% 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.

Second quarter highlights include:

Repurchased $10.3 million of preferred stock issued in connection with Unity's participation in the Treasury's Capital Purchase Program ("CPP") during the quarter with the remaining $10.3 million repurchased July 3, 2013.

Paid our first cash dividend to shareholders since prior to entering into the CPP program in December 2008.

Total loans increased 6.0 percent from year-end 2012, driven by strong loan demand.

Noninterest-bearing deposits reached a record high $128.0 million, an 11.9 percent increase from year-end, and now represent 20.4 percent of total deposits.

Continued asset quality improvement as evidenced by: a 36.4 percent decrease in nonperforming assets from a year ago and a 68.2 percent decrease in net charge-offs.

Net interest margin continued to remain strong versus prior periods.

Increased gains on the sales of mortgage loans resulting from record residential mortgage loan originations.

Total noninterest expense continued to be stable compared to the prior year period.

Remained well-capitalized in excess of regulatory requirements after the CPP repurchase and dividend payment.

Launched the Unity Bank Facebook page on June 10, 2013.

Closed on the purchase of three of our previously leased branch locations which will result in future cost savings.

Opened a residential mortgage loan production office in Elmwood Park, New Jersey.


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,
                                      2013                2012              2013                   2012
Net income per common share
- Basic (1)                    $            0.12        $    0.08      $          0.22      $            0.15
Net income per common share
- Diluted (1)                  $            0.11        $    0.07      $          0.21                   0.14
Return on average assets                    0.67  %          0.49  %              0.63  %                0.47  %
Return on average equity (2)                6.11  %          4.25  %              5.88  %                4.03  %
Efficiency ratio                           72.72  %         73.72  %             73.31  %               72.76  %

(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 June 30, 2013, tax-equivalent net interest income amounted to $6.9 million, a decrease of $52 thousand or 0.8 percent when compared to the same period in 2012. Net interest margin decreased 2 basis points to 3.66 percent for the quarter ended June 30, 2013, compared to 3.68 percent for the same period in 2012. The net interest spread was 3.45 percent for both the second quarter of 2013 and 2012.

During the three months ended June 30, 2013, tax-equivalent interest income was $8.5 million, a decrease of $368 thousand or 4.2 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 $368 thousand decrease in interest income on a tax-equivalent basis, $453 thousand was attributed to reduced yields on average interest-earning assets, partially offset by an $85 thousand increase in interest income due to the increased volume of average loans.

The yield on interest-earning assets decreased 19 basis points to 4.51 percent for the three months ended June 30, 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 decreased $3.0 million to $752.1 million for the second quarter of 2013 compared to $755.1 million for the same period in 2012. This was due primarily to a $5.5 million decrease in Federal funds sold and interest-bearing deposits and a $5.3 million decrease in average investment securities, partially offset by a $7.9 million increase in average loans.

Total interest expense was $1.6 million for the three months ended June 30, 2013, a decrease of $316 thousand or 16.5 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 $316 thousand decrease in interest expense, $267 thousand was due to a decrease in the rates paid on interest-bearing liabilities and $49 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased 19 basis points to 1.06 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 23 basis points to 0.62 percent for the second quarter of 2013 and the cost of borrowed funds and subordinated debentures decreased 8 basis points to 3.49 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 $602.4 million for the second quarter of 2013, a decrease of $7.9 million or 1.3 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 savings deposits, partially offset by an increase in average interest-bearing demand deposits.


During the six months ended June 30, 2013, tax-equivalent net interest income amounted to $13.6 million, a decrease of $180 thousand or 1.3 percent when compared to the same period in 2012. Net interest margin decreased 3 basis points to 3.59 percent for the six months ended June 30, 2013, compared to 3.62 percent for the same period in 2012. The net interest spread was 3.37 percent for the six months ended June 30, 2013, a 1 basis point decrease compared to the same period in 2012.

During the six months ended June 30, 2013, tax-equivalent interest income was $16.8 million, a decrease of $1.1 million or 6.2 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 $1.1 million decrease in interest income on a tax-equivalent basis, $1.3 million was attributed to reduced yields on average interest-earning assets, partially offset by a $132 thousand increase in interest income due to the increased volume of average loans.

The yield on interest-earning assets decreased 29 basis points to 4.42 percent for the six months ended June 30, 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 decreased $1.1 million to $765.2 million for the six months ended June 30, 2013, compared to $766.2 million for the same period in 2012. This was due primarily to a $3.9 million decrease in Federal funds sold and interest-bearing deposits and a $3.6 million decrease in average investment securities, partially offset by a $6.6 million increase in average loans.

Total interest expense was $3.2 million for the six months ended June 30, 2013, a decrease of $942 thousand or 22.6 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 $942 thousand decrease in interest expense, $737 thousand was due to a decrease in the rates paid on interest-bearing liabilities and $205 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased 28 basis points to 1.05 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 32 basis points to 0.62 percent for the six months ended June 30, 2013, and the cost of borrowed funds and subordinated debentures decreased 12 basis points to 3.51 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 $614.8 million for the six months ended June 30, 2013, a decrease of $10.2 million or 1.6 percent, compared to the same period in the prior year. The decrease in interest-bearing liabilities was a result of a decrease in average time deposits, partially offset by an increase in average interest-bearing demand deposits and savings 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
                                      June 30, 2013                            June 30, 2012
                            Average                                  Average
                            Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning
assets:
Federal funds sold and
interest-bearing
deposits                   $  25,312     $     7           0.11  %  $  30,832     $    11           0.14  %
Federal Home Loan Bank
stock                          4,007          35           3.50         3,993          44           4.43
Securities:
Taxable                       95,675         620           2.59       105,903         733           2.77
Tax-exempt                    20,440         186           3.64        15,554         178           4.58
Total securities (A)         116,115         806           2.77       121,457         911           3.00
Loans:
SBA loans                     63,007         778           4.94        69,273         846           4.89
SBA 504 loans                 39,408         441           4.49        46,804         691           5.94
Commercial loans             315,128       4,250           5.41       303,409       4,216           5.59
Residential mortgage
loans                        143,835       1,649           4.59       133,643       1,582           4.74
Consumer loans                45,295         496           4.39        45,658         529           4.66
Total loans (B)              606,673       7,614           5.03       598,787       7,864           5.28
Total interest-earning
assets                     $ 752,107     $ 8,462           4.51  %  $ 755,069     $ 8,830           4.70  %

Noninterest-earning
assets:
Cash and due from banks       22,866                                   16,101
Allowance for loan
losses                       (14,747)                                 (16,980)
Other assets                  41,435                                   39,774
Total
noninterest-earning
assets                        49,554                                   38,895
Total assets               $ 801,661                                $ 793,964

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                   $ 116,414     $    90           0.31  %  $ 110,343     $   123           0.45  %
Savings deposits             270,097         164           0.24       270,990         287           0.43
Time deposits                124,285         537           1.73       138,554         689           2.00
Total interest-bearing
deposits                     510,796         791           0.62       519,887       1,099           0.85
Borrowed funds and
subordinated debentures       91,653         808           3.49        90,465         816           3.57
Total interest-bearing
liabilities                $ 602,449     $ 1,599           1.06  %  $ 610,352     $ 1,915           1.25  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits              122,635                                  106,043
Other liabilities              3,554                                    3,438
Total
noninterest-bearing
liabilities                  126,189                                  109,481
Total shareholders'
equity                        73,023                                   74,131
Total liabilities and
shareholders' equity       $ 801,661                                $ 793,964

Net interest spread                      $ 6,863           3.45  %                $ 6,915           3.45  %
Tax-equivalent basis
adjustment                                   (61)                                     (58)
Net interest income                      $ 6,802                                  $ 6,857
Net interest margin                                        3.66  %                                  3.68  %

(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, 2013                            June 30, 2012
                              Average                                  Average
                              Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits    $  43,818    $     22           0.10  %  $  47,746    $     43           0.18  %
Federal Home Loan Bank
stock                            3,998          78           3.93         4,041          95           4.73
Securities:
Taxable                         97,856       1,267           2.59       104,263       1,483           2.84
Tax-exempt                      19,463         363           3.73        16,703         389           4.66
Total securities (A)           117,319       1,630           2.78       120,966       1,872           3.10
Loans:
SBA loans                       64,190       1,555           4.84        70,516       1,770           5.02
SBA 504 loans                   40,266       1,092           5.47        49,257       1,451           5.92
Commercial loans               309,990       8,251           5.37       293,823       8,397           5.75
Residential mortgage
loans                          139,882       3,199           4.57       133,234       3,237           4.86
Consumer loans                  45,700       1,005           4.43        46,633       1,089           4.70
Total loans (B)                600,028      15,102           5.06       593,463      15,944           5.40
Total interest-earning
assets                       $ 765,163    $ 16,832           4.42  %  $ 766,216    $ 17,954           4.71  %

Noninterest-earning
assets:
Cash and due from banks         21,310                                   16,025
Allowance for loan losses      (14,872)                                 (16,884)
Other assets                    39,680                                   40,030
Total noninterest-earning
assets                          46,118                                   39,171
Total assets                 $ 811,281                                $ 805,387

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $ 117,535    $    191           0.33  %  $ 109,665    $    259           0.47  %
Savings deposits               282,738         340           0.24       277,125         641           0.47
Time deposits                  123,495       1,083           1.77       147,778       1,603           2.18
Total interest-bearing
deposits                       523,768       1,614           0.62       534,568       2,503           0.94
Borrowed funds and
subordinated debentures         91,063       1,609           3.51        90,465       1,662           3.63
Total interest-bearing
liabilities                  $ 614,831    $  3,223           1.05  %  $ 625,033    $  4,165           1.33  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits                117,844                                  103,269
Other liabilities                3,398                                    3,344
Total noninterest-bearing
liabilities                    121,242                                  106,613
Total shareholders'
equity                          75,208                                   73,741
Total liabilities and
shareholders' equity         $ 811,281                                $ 805,387

Net interest spread                       $ 13,609           3.37  %               $ 13,789           3.38  %
Tax-equivalent basis
adjustment                                    (118)                                    (126)
Net interest income                       $ 13,491                                 $ 13,663
Net interest margin                                          3.59  %                                  3.62  %

(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, 2013 versus      For the six months ended June 30, 2013
                                          June 30, 2012                                versus June 30, 2012
                              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)         $     (2)         $     (4)     $     (4)       $    (17)       $    (21)
Federal Home Loan Bank
stock                               -               (9)               (9)           (1)            (16)            (17)
Securities                       (18)              (87)             (105)          (30)           (212)           (242)
Loans                            105              (355)             (250)          167          (1,009)           (842)
Total interest income       $     85          $   (453)         $   (368)     $    132        $ (1,254)       $ (1,122)
Interest expense:
Demand deposits             $      7          $    (40)         $    (33)     $     16        $    (84)       $    (68)
Savings deposits                  (1)             (122)             (123)           13            (314)           (301)
Time deposits                    (66)              (86)             (152)         (243)           (277)           (520)
Total interest-bearing
deposits                         (60)             (248)             (308)         (214)           (675)           (889)
Borrowed funds and
subordinated
debentures                        11               (19)               (8)            9             (62)            (53)
Total interest expense           (49)             (267)             (316)         (205)           (737)           (942)
Net interest income -
fully tax-equivalent        $    134          $   (186)         $    (52)     $    337        $   (517)       $   (180)
Decrease (increase) in
tax-equivalent
. . .
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