Unity Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results include Unity Bank. Unless otherwise noted, dollar amounts are in millions; the filing presents most financial statements in thousands.
Business context and key financial metrics
Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania. It provides commercial and retail banking, including SBA, commercial real estate, residential mortgage, and consumer lending.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $7.0 | $7.4 | $20.7 | $22.3 |
| Provision for loan losses | $1.0 | $1.4 | $3.2 | $5.7 |
| Noninterest income | $1.8 | $1.7 | $5.3 | $4.4 |
| Noninterest expense | $6.0 | $6.1 | $18.2 | $18.5 |
| Net income | $1.2 | $1.1 | $3.1 | $2.0 |
| Income available to common shareholders | $0.8 | $0.7 | $1.9 | $0.8 |
| Diluted earnings per common share | $0.10 | $0.09 | $0.24 | $0.10 |
- Profitability and margins: Q3 return on average assets was 0.60% and return on average common equity was 5.74%; nine-month figures were 0.51% and 4.61%. Q3 net interest margin was 3.72%, down from 3.85% a year earlier but up from 3.56% in Q1 and 3.68% in Q2 2012. Nine-month margin was 3.65%, versus 3.88%.
- Balance sheet at September 30: Total assets were $802.7; loans $596.9; allowance for loan losses $15.3; and shareholders’ equity $76.4. Total deposits were $633.1. Borrowed funds were $75.0 and subordinated debentures $15.5.
- Cash flow and liquidity: Cash and cash equivalents ended at $72.6, down $10.0 from year-end 2011. For the first nine months, operating activities provided $9.7, investing activities used $8.3, and financing activities used $11.5. The company reported $60.7 of additional FHLB borrowing capacity and stated that it believed it could meet commitments.
- Capital: At September 30, the company reported an 11.20% leverage ratio, 14.52% Tier 1 risk-based ratio, and 15.78% total risk-based ratio. Unity Bank’s respective ratios were 9.76%, 12.66%, and 15.31%; the filing states the Bank remained well-capitalized.
Material changes versus comparable periods
- Nine-month net income available to common shareholders increased to $1.9 from $0.8; diluted EPS rose to $0.24 from $0.10. Q3 common income rose to $0.8 from $0.7.
- Interest income fell as asset yields repriced lower; lower funding costs only partly offset the decline. Nine-month tax-equivalent interest income decreased 12.0%, while interest expense fell 25.7%.
- Loan-loss provision declined year over year, but nine-month net charge-offs increased to $4.3 from $3.6. The allowance fell to 2.56% of loans from 2.76% at year-end 2011.
- Noninterest income increased, principally due to higher residential mortgage loan sale gains. Mortgage loan sales were $71.6 year to date versus $29.0 a year earlier. SBA loan sale gains declined.
- Total loans rose $4.3 from year-end, with commercial loans up $23.5; SBA 504 and consumer loans declined. Deposits fell $10.8, largely from a $31.9 reduction in time deposits, partly offset by growth in savings and noninterest-bearing demand accounts. Time deposits declined to 20.1% of deposits from 24.8% at year-end.
- Nonperforming assets fell to $18.8 from $25.8 at year-end 2011; nonperforming loans were $17.3 versus $22.8. Other real estate owned declined to $1.5 from $3.0.
Outlook, commentary, risks, and unusual items
- Management described sustained low interest rates as pressuring asset yields and stated the FOMC forecast rates would remain low at least through mid-2015. It warned that further reductions in funding costs may not offset continued asset-yield declines. No specific earnings or financial guidance was provided.
- Management attributed improving nonperforming assets and lower collection and OREO costs to improved credit quality. However, potential problem loans increased to $7.7 from $5.7 at year-end, and net charge-offs were higher year over year.
- The filing added a hurricane-related risk: damage from the late-October 2012 storm could impair borrowers’ ability to repay and increase classified assets. This event occurred after the September 30 reporting date.
- Branch changes included opening a Washington Township branch in March 2012, announcing a Somerset branch, and announcing closure of the William Penn Highway branch; Q3 included about $32,000 of related residual lease and asset-disposal expenses.
- The company held $20.6 of Treasury preferred stock under the Capital Purchase Program. Preferred dividends were 5% annually; program restrictions limit common dividends and suspend share repurchases. The company said it was preserving capital and might resume dividends when earnings and credit quality improve.
- There were no derivatives outstanding at September 30; the remaining $5.0 interest-rate swap expired in Q1 2012. Management reported no known litigation expected to have a material adverse effect and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether credit improvement continues, especially given higher year-to-date net charge-offs and the $7.7 of potential problem loans.
- Current loan concentrations and collateral exposure: commercial real estate represented a substantial portion of lending, and management cited local real estate values and economic conditions as credit risks.
- The sustainability of earnings as asset yields and net interest margin remain under pressure, and the contribution of mortgage loan sale gains to noninterest income.
- The composition, stability, and pricing of deposits, including municipal and other government deposits, and the availability of secured borrowing capacity.
- The financial impact of hurricane-related borrower damage, branch expansion and closure costs, and restrictions associated with Treasury preferred stock.
- Allowance adequacy depends on management estimates and economic conditions; the filing notes future provisions could be necessary. The filing’s interim results are unaudited and are not necessarily indicative of full-year results.