Unity Bancorp, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012 unless stated otherwise. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania. Amounts below are in millions unless noted.
Key financial metrics
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net income | $1.20; income available to common shareholders $0.80 | Q1 2012: $0.91; common $0.51 |
| EPS | Basic $0.11; diluted $0.10 | Q1 2012: $0.07 basic and diluted |
| Net interest income | $6.69; net interest margin 3.52% | Q1 2012: $6.81; margin 3.56% |
| Provision for loan losses | $0.65 | Q1 2012: $1.20 |
| Noninterest income / expense | $1.83 / $6.13 | Q1 2012: $1.72 / $5.96 |
| Cash flow | Operating +$2.03; investing -$19.34; financing +$3.10; cash declined $14.22 to $79.98 | Q1 2012: operating +$2.40; investing -$12.05; financing -$1.11; cash declined $10.76 |
| Total assets / loans | $827.18 / $596.57 | Dec. 31, 2012: $819.73 / $587.04 |
| Deposits / borrowings and subordinated debentures | $652.12 / $90.47 | Dec. 31, 2012: $648.76 / $90.47 |
| Shareholders’ equity | $78.16 | Dec. 31, 2012: $77.51 |
Material changes and operating performance
- Common-shareholder income rose 56.6% year over year; return on average assets improved to 0.59% from 0.45%, and return on average common equity to 5.65% from 3.81%. The efficiency ratio worsened to 73.91% from 71.80%.
- Net interest income declined 1.9% on a tax-equivalent basis, and net interest margin fell 4 basis points. Lower asset yields reduced interest income by $0.76 million; lower funding costs reduced interest expense by $0.63 million, partly offsetting the decline.
- Commercial loans grew 9.1% year over year, according to management. From year-end, total loans increased $9.5 million, led by commercial and residential mortgage lending. Noninterest-bearing deposits reached a reported record $118.2 million.
- Nonperforming loans fell to $14.9 million from $17.5 million at year-end and $22.2 million a year earlier. Nonperforming assets were $16.0 million, down from $19.3 million at year-end and $23.8 million a year earlier. Potential problem loans increased to $5.3 million from $3.5 million at year-end.
- The allowance for loan losses was $14.35 million, or 2.40% of loans, versus $14.76 million and 2.51% at year-end. Q1 net charge-offs were $1.06 million, compared with $1.21 million a year earlier; allowance coverage of nonperforming loans was 96.25%.
- Commercial real estate represented the largest loan category, and approximately 95% of the loan portfolio was secured by real estate. Management noted that economic weakness and declining real estate values could increase delinquencies and collateral losses.
Liquidity, capital, outlook and risks
- Cash and cash equivalents were $79.98 million. The company had $67.4 million of additional FHLB credit available, and management stated it believed liquidity was sufficient to meet commitments. Borrowings and subordinated debentures were unchanged at $90.47 million.
- Borrower commitments totaled approximately $116.5 million, including $62.6 million expiring within one year; standby letters of credit of $1.6 million were included. Management noted that many commitments may expire unfunded.
- At March 31, the Bank reported an 8.65% leverage ratio, 11.32% Tier 1 risk-based capital ratio and 13.94% total risk-based capital ratio, each above the filing’s stated well-capitalized thresholds.
- Management said the prolonged low-rate environment was pressuring asset yields and expected further declines in funding costs to be insufficient to offset the reduction in earning-asset yields. The filing provides no specific earnings or financial guidance; management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management cited continued reduction of out-of-market SBA lending, growth in local business relationships and lower funding costs as strategic priorities. A contract to purchase three leased branch locations closed April 17, 2013; management estimated future cost savings exceeding $200,000.
- Other notable items: net securities gains were $226,000; available-for-sale securities had $1.6 million of net unrealized gains at quarter-end, down from $2.2 million at year-end. The company recorded a $70,000 OREO valuation adjustment and reported three OREO property sales; management disclosed a net sale loss of $300,000 charged to the allowance.
- Key risks include credit deterioration, real-estate collateral values, sensitivity to interest rates, economic and regulatory changes, and deposit competition. The company had $16.2 million of troubled debt restructurings, including $1.1 million on nonaccrual; no principal forgiveness was reported. Management said pending litigation was not expected to materially affect the company.
Most important facts for investors to verify
- Whether improvement in nonperforming loans and assets continues, and whether potential problem loans or TDRs develop into further losses.
- Whether the $14.35 million allowance remains adequate relative to charge-offs, collateral values and commercial real-estate exposure.
- Whether net interest margin and earnings withstand continued low rates and asset repricing.
- Whether loan and deposit growth is sustainable, and whether liquidity remains adequate if borrower commitments are drawn or deposits leave.
- Whether the branch-property purchase delivers the projected savings and whether the OREO sale-loss disclosure has any further implications.