Unity Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unity Bancorp is a New Jersey bank holding company; its subsidiary, Unity Bank, operates 15 branches in New Jersey and Pennsylvania. Unaudited consolidated statements are prepared under U.S. GAAP. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 / June 30, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income | $6.802; tax-equivalent NII $6.9 | $6.857 in Q2 2012; tax-equivalent NII $6.915 |
| Net interest margin | 3.66% | 3.68% in Q2 2012 |
| Net income | $1.347; $0.11 diluted EPS available to common shareholders | $0.976; $0.07 diluted EPS in Q2 2012 |
| Six-month earnings | Net income $2.546; $0.21 diluted EPS to common shareholders | Net income $1.881; $0.14 diluted EPS for first half 2012 |
| Loans / deposits | $622.3 / $628.4 at June 30 | Loans $587.0 / deposits $648.8 at Dec. 31, 2012 |
| Cash and cash equivalents | $56.3 at June 30 | $94.2 at Dec. 31, 2012 |
| Borrowings and subordinated debentures | $125.5 at June 30 | $90.5 at Dec. 31, 2012 |
| Total assets / shareholders’ equity | $824.6 / $68.3 at June 30 | $819.7 / $77.5 at Dec. 31, 2012 |
- Q2 operating revenue, calculated as net interest income plus noninterest income, was $8.460; pretax income was $2.086 and income tax expense was $0.739. Noninterest income was $1.658 and noninterest expense was $6.074.
- For the first six months, operating cash flow was $4.323, investing cash flow was negative $45.915, and financing cash flow was $3.710. Cash and cash equivalents declined by $37.882.
- The Q2 efficiency ratio was 72.72% versus 73.72% a year earlier. Q2 return on average assets was 0.67% and return on average common equity was 6.11%.
- At June 30, the allowance for loan losses was $14.309, or 2.30% of loans; net charge-offs were $0.336 for Q2 and $1.399 for the six months. The Bank’s regulatory capital ratios were 9.03% leverage, 11.79% Tier 1 risk-based, and 14.45% total risk-based.
Material changes versus comparable periods
- Q2 net income rose 38% year over year, while income available to common shareholders rose 53.4%. The filing attributes improved results in part to lower loan-loss provisions: $0.300 in Q2 versus $1.000 in Q2 2012; first-half provision was $0.950 versus $2.200.
- Tax-equivalent Q2 net interest income decreased 0.8% and margin narrowed 2 basis points. Lower asset yields reduced interest income, partly offset by lower funding costs. First-half tax-equivalent NII declined 1.3%, with margin down 3 basis points.
- Noninterest income declined $0.183 in Q2, largely reflecting lower securities and SBA loan sale gains; higher residential mortgage loan sale gains partly offset the decline. Q2 noninterest expense fell $0.130, including lower occupancy and OREO costs; loan collection costs increased.
- Loans increased 6.0% from year-end, led by commercial loans and residential mortgages. Deposits fell $20.4, including a $28.4 decrease in savings deposits, partly offset by $13.6 growth in noninterest-bearing deposits. Noninterest-bearing deposits reached $128.0, or 20.4% of deposits.
- Nonperforming assets declined to $14.1 from $19.3 at year-end 2012 and $22.2 at June 30, 2012. Nonperforming loans were $13.4, or 2.15% of loans, versus $17.5 at year-end; OREO was $0.752. Potential problem loans increased to $5.8 from $3.5 at year-end.
- Shareholders’ equity fell $9.2 from year-end, primarily because the Company redeemed $10.3 of Treasury preferred stock and recorded lower unrealized gains on securities. Other comprehensive loss was $1.106 for the first half.
Outlook, commentary, risks and unusual items
- Management cited loan demand, expansion of in-market business relationships, a lower cost of funds, improving asset quality, and mortgage originations as strategic drivers. The filing provides no quantified earnings or revenue guidance.
- Management said the sustained low-rate environment was pressuring earning-asset yields and expected further reductions in asset yields to exceed potential additional funding-cost savings. The filing identifies economic, regulatory, market and interest-rate changes as risks to results.
- The Company purchased three previously leased branch locations for $4.3 in April; management expected approximately $0.2 in annual expense savings. It opened a mortgage production office in Elmwood Park, New Jersey.
- The Company repurchased half of its Treasury Capital Purchase Program preferred stock for $10.3 on May 15. It received approval to redeem the remainder after quarter-end and paid $10.4 on July 3, 2013. It also paid its first common dividend since entering the program: $0.01 per share. Management reported capital remained above regulatory requirements.
- Liquidity included $130.7 of outstanding loan commitments, of which $76.5 expired within one year; management said it had sufficient liquidity to honor them. The Bank had $25.1 of additional FHLB borrowing capacity at quarter-end. A $35.0 overnight FHLB advance contributed to the increase in borrowings.
- Credit risk remains sensitive to economic conditions and real-estate collateral values; approximately 95% of loans were secured by real estate. The Company reported $12.3 of troubled debt restructurings, including $1.7 in nonaccrual status. Management considered the allowance adequate but noted future additions could be required. Pending legal matters were not expected to materially affect the Company.
Important facts for investors to verify
- Whether earnings improvement persists if lower loan-loss provisions and realized gains on asset sales contribute less to results.
- Trends in nonperforming and potential problem loans, TDR performance, charge-offs, collateral values, and allowance adequacy.
- Deposit stability and funding costs, including municipal deposits, overnight FHLB borrowing, available borrowing capacity, and commitment funding needs.
- Post-quarter capital and dividend effects of the July 3 redemption of the remaining Treasury preferred stock; the filing’s June 30 capital ratios predate that payment.
- Mortgage origination and sale volumes, securities valuations and unrealized losses, and the effect of interest-rate changes on net interest margin.