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UNTY > SEC Filings for UNTY > Form 10-Q on 8-Nov-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/


8-Nov-2013

Quarterly Report


ITEM 2Management'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. The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios and other real estate owned ("OREO") properties.

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 $1.2 million, or $0.15 per diluted share for the quarter ended September 30, 2013, a 48.1 percent increase compared to $799 thousand, or $0.10 per diluted share for the same period a year ago. For the nine months ended September 30, 2013, net income available to common shareholders totaled $2.9 million or $0.36 per diluted share, compared to $1.9 million or $0.24 per diluted share for the same period a year ago. Return on average assets and average common equity for the quarter were 0.62% and 8.25%, respectively, compared to 0.60% and 5.74% for the same period a year ago. The continued improvement in our operating results is the product of our strategic initiatives, which include expansion of our in-market loan and deposit relationships, improving credit quality, controlling noninterest expenses, and further reduction in our cost of funds.

Third quarter highlights include:

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

Repurchased the warrants issued in connection with the CPP for $2.7 million.

Realized record growth in commercial loans with a 15.6 percent increase since year-end 2012.

Closed $37.5 million in residential mortgage loans for the third quarter and $122.9 million year-to-date.

Expanded the Small Business Administration ("SBA") lending division with the addition of two new loan officers.

Continued to reduce noninterest expense compared to the prior year and prior quarter periods.

Although nonperforming loans increased, we reduced the number of delinquent loan accounts compared to the prior quarter and year-end periods.

Rang the closing bell at NASDAQ on August 22, 2013 commemorating Unity Bancorp's 15th anniversary of listing on the exchange.


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,
                                   2013              2012           2013               2012
Net income per common share
- Basic (1)                    $       0.16        $    0.11      $     0.38      $        0.25
Net income per common share
- Diluted (1)                  $       0.15        $    0.10      $     0.36               0.24
Return on average assets               0.62  %          0.60  %         0.63  %            0.51  %
Return on average equity (2)           8.25  %          5.74  %         6.67  %            4.61  %
Efficiency ratio                      69.93  %         68.22  %        72.17  %           71.20  %

(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 demand, 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 September 30, 2013, tax-equivalent net interest income amounted to $6.9 million, a decrease of $156 thousand or 2.2 percent when compared to the same period in 2012. Net interest margin decreased 19 basis points to 3.53 percent for the quarter ended September 30, 2013, compared to 3.72 percent for the same period in 2012. The net interest spread was 3.37 percent for the third quarter of 2013, a 14 basis point decrease compared to the same period in 2012.

During the three months ended September 30, 2013, tax-equivalent interest income was $8.5 million, a decrease of $397 thousand or 4.4 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 $397 thousand decrease in interest income on a tax-equivalent basis, $898 thousand was attributed to reduced yields on average interest-earning assets, partially offset by a $501 thousand increase in interest income due to the increased volume of average loans.

The yield on interest-earning assets decreased 34 basis points to 4.36 percent for the three months ended September 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 increased $22.0 million to $778.7 million for the third quarter of 2013 compared to $756.7 million for the same period in 2012. This was due primarily to a $41.8 million increase in average loans, partially off by a $14.3 million decrease in Federal funds sold and interest-bearing deposits and a $5.5 million decrease in average investment securities.

Total interest expense was $1.6 million for the three months ended September 30, 2013, a decrease of $241 thousand or 13.1 percent compared to the same period in 2012. This decrease was driven by the continued lower overall interest rate environment, but partially offset by an increase in the average volume of interest-bearing liabilities:

Of the $241 thousand decrease in interest expense, $339 thousand was due to a decrease in the rates paid on interest-bearing liabilities, partially offset by a $98 thousand increase due to an increase in the volume of average interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased 20 basis points to 0.99 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 21 basis points to 0.57 percent for the third quarter of 2013 and the cost of borrowed funds and subordinated debentures decreased 7 basis points to 3.49 percent.

Interest-bearing liabilities averaged $635.1 million for the third quarter of 2013, an increase of $23.2 million or 3.8 percent, compared to the prior year's quarter. The increase in interest-bearing liabilities was a result of an increase in average time deposits and interest-bearing demand deposits, partially offset by a decrease in average savings deposits.


During the nine months ended September 30, 2013, tax-equivalent net interest income amounted to $20.5 million, a decrease of $335 thousand or 1.6 percent when compared to the same period in 2012. Net interest margin decreased 8 basis points to 3.57 percent for the nine months ended September 30, 2013, compared to 3.65 percent for the same period in 2012. The net interest spread was 3.37 percent for the nine months ended September 30, 2013, a 4 basis point decrease compared to the same period in 2012.

During the nine months ended September 30, 2013, tax-equivalent interest income was $25.4 million, a decrease of $1.5 million or 5.6 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 $1.5 million decrease in interest income on a tax-equivalent basis, $2.2 million was attributed to reduced yields on average interest-earning assets, partially offset by a $649 thousand increase in interest income due to the increased volume of average loans.

The yield on interest-earning assets decreased 30 basis points to 4.40 percent for the nine months ended September 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 increased $6.7 million to $769.7 million for the nine months ended September 30, 2013, compared to $763.0 million for the same period in 2012. This was due primarily to an $18.4 million increase in average loans, partially offset by a $7.4 million decrease in Federal funds sold and interest-bearing deposits and a $4.3 million decrease in average investment securities.

Total interest expense was $4.8 million for the nine months ended September 30, 2013, a decrease of $1.2 million or 19.7 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 $1.2 million decrease in interest expense, $1.1 million was due to a decrease in the rates paid on interest-bearing liabilities and $88 thousand was attributed to the decrease in the volume of average interest-bearing liabilities.

The average cost of interest-bearing liabilities decreased 26 basis points to 1.03 percent, primarily due to the re-pricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 28 basis points to 0.61 percent for the nine months ended September 30, 2013, and the cost of borrowed funds and subordinated debentures decreased 11 basis points to 3.50 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 $621.7 million for the nine months ended September 30, 2013, an increase of $1.1 million or 0.2 percent, compared to the same period in the prior year. The increase in interest-bearing liabilities was a result of an increase in average interest-bearing demand deposits and savings deposits, partially offset by a decrease in average time 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
                                    September 30, 2013                       September 30, 2012
                            Average                                  Average
                            Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning
assets:
Federal funds sold and
interest-bearing
deposits                   $  25,841     $     9           0.14  %  $  40,183     $    13           0.13  %
Federal Home Loan Bank
stock                          4,022          40           3.95         3,989          50           4.99
Securities:
Taxable                       87,694         591           2.70        97,389         694           2.85
Tax-exempt                    18,474         162           3.51        14,271         161           4.51
Total securities (A)         106,168         753           2.84       111,660         855           3.06
Loans:
SBA loans                     59,755         586           3.92        66,484         881           5.30
SBA 504 loans                 37,971         411           4.29        44,583         647           5.77
Commercial loans             335,404       4,387           5.19       307,090       4,313           5.59
Residential mortgage
loans                        163,805       1,861           4.54       136,568       1,631           4.78
Consumer loans                45,709         480           4.17        46,116         534           4.61
Total loans (B)              642,644       7,725           4.78       600,841       8,006           5.31
Total interest-earning
assets                     $ 778,675     $ 8,527           4.36  %  $ 756,673     $ 8,924           4.70  %

Noninterest-earning
assets:
Cash and due from banks       24,367                                   16,211
Allowance for loan
losses                       (14,310)                                 (16,508)
Other assets                  44,184                                   40,138
Total
noninterest-earning
assets                        54,241                                   39,841
Total assets               $ 832,916                                $ 796,514

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                   $ 115,085     $    90           0.31  %  $ 103,029     $   108           0.42  %
Savings deposits             277,501         183           0.26       287,054         293           0.41
Time deposits                150,533         510           1.34       131,356         619           1.87
Total interest-bearing
deposits                     543,119         783           0.57       521,439       1,020           0.78
Borrowed funds and
subordinated debentures       92,025         820           3.49        90,465         824           3.56
Total interest-bearing
liabilities                $ 635,144     $ 1,603           0.99  %  $ 611,904     $ 1,844           1.19  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits              137,711                                  105,876
Other liabilities              2,918                                    3,469
Total
noninterest-bearing
liabilities                  140,629                                  109,345
Total shareholders'
equity                        57,143                                   75,265
Total liabilities and
shareholders' equity       $ 832,916                                $ 796,514

Net interest spread                      $ 6,924           3.37  %                $ 7,080           3.51  %
Tax-equivalent basis
adjustment                                   (53)                                     (53)
Net interest income                      $ 6,871                                  $ 7,027
Net interest margin                                        3.53  %                                  3.72  %

(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, 2013                       September 30, 2012
                              Average                                  Average
                              Balance     Interest     Rate/Yield      Balance     Interest     Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold and
interest-bearing deposits    $  37,760    $     31           0.11  %  $  45,206    $     56           0.17  %
Federal Home Loan Bank
stock                            4,006         118           3.94         4,023         144           4.78
Securities:
Taxable                         94,431       1,858           2.62       101,955       2,177           2.85
Tax-exempt                      19,130         525           3.66        15,886         550           4.62
Total securities (A)           113,561       2,383           2.80       117,841       2,727           3.08
Loans:
SBA loans                       62,695       2,141           4.55        69,162       2,652           5.11
SBA 504 loans                   39,493       1,503           5.09        47,687       2,098           5.88
Commercial loans               318,554      12,638           5.30       298,279      12,707           5.69
Residential mortgage
loans                          147,944       5,060           4.56       134,353       4,869           4.83
Consumer loans                  45,703       1,485           4.34        46,459       1,624           4.67
Total loans (B)                614,389      22,827           4.96       595,940      23,950           5.36
Total interest-earning
assets                       $ 769,716    $ 25,359           4.40  %  $ 763,010    $ 26,877           4.70  %

Noninterest-earning
assets:
Cash and due from banks         22,340                                   16,088
Allowance for loan losses      (14,682)                                 (16,758)
Other assets                    41,198                                   40,068
Total noninterest-earning
assets                          48,856                                   39,398
Total assets                 $ 818,572                                $ 802,408

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $ 116,709    $    281           0.32  %  $ 107,437    $    368           0.46  %
Savings deposits               280,973         524           0.25       280,459         933           0.44
Time deposits                  132,607       1,593           1.61       142,263       2,222           2.09
Total interest-bearing
deposits                       530,289       2,398           0.61       530,159       3,523           0.89
Borrowed funds and
subordinated debentures         91,387       2,428           3.50        90,465       2,486           3.61
Total interest-bearing
liabilities                  $ 621,676    $  4,826           1.03  %  $ 620,624    $  6,009           1.29  %

Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits                124,539                                  104,145
Other liabilities                3,237                                    3,386
Total noninterest-bearing
liabilities                    127,776                                  107,531
Total shareholders'
equity                          69,120                                   74,253
Total liabilities and
shareholders' equity         $ 818,572                                $ 802,408

Net interest spread                       $ 20,533           3.37  %               $ 20,868           3.41  %
Tax-equivalent basis
adjustment                                    (171)                                    (179)
Net interest income                       $ 20,362                                 $ 20,689
Net interest margin                                          3.57  %                                  3.65  %

(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, 2013       For the nine months ended September 30,
                                    versus September 30, 2012                     2013 versus September 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                    $     (5)         $      1          $     (4)     $     (8)       $    (17)       $    (25)
Federal Home Loan Bank
stock                               -              (10)              (10)           (1)            (25)            (26)
Securities                       (26)              (76)             (102)          (51)           (293)           (344)
Loans                            532              (813)             (281)          709          (1,832)         (1,123)
Total interest income       $    501          $   (898)         $   (397)     $    649        $ (2,167)       $ (1,518)
Interest expense:
Demand deposits             $     12          $    (30)         $    (18)     $     30        $   (117)       $    (87)
Savings deposits                  (9)             (101)             (110)            2            (411)           (409)
Time deposits                     82              (191)             (109)         (143)           (486)           (629)
Total interest-bearing
deposits                          85              (322)             (237)         (111)         (1,014)         (1,125)
Borrowed funds and
subordinated
debentures                        13               (17)               (4)           23             (81)            (58)
Total interest expense            98              (339)             (241)          (88)         (1,095)         (1,183)
Net interest income -
fully tax-equivalent        $    403          $   (559)         $   (156)     $    737        $ (1,072)       $   (335)
Decrease in
tax-equivalent
adjustment                                                              -                                            8
Net interest income                                             $   (156)                                     $   (327)

Provision for Loan Losses

The provision for loan losses totaled $600 thousand for the three months ended September 30, 2013, compared to $1.0 million for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the provision for loan losses totaled $1.6 million, compared to $3.2 million for the same period in 2012. Each period's loan loss provision is the result of management's . . .

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