Unity Bancorp, Inc. — Q2 2012 Form 10-Q
Business context and period. Unaudited consolidated results for the quarter and six months ended June 30, 2012. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $6.86m | $7.47m | $13.66m | $14.95m |
| Provision for loan losses | $1.00m | $1.75m | $2.20m | $4.25m |
| Noninterest income | $1.84m | $1.45m | $3.56m | $2.70m |
| Noninterest expense | $6.20m | $6.25m | $12.16m | $12.41m |
| Net income | $0.98m | $0.64m | $1.88m | $0.86m |
| Income available to common shareholders | $0.58m | $0.25m | $1.08m | $0.09m |
| Diluted EPS | $0.07 | $0.03 | $0.14 | $0.01 |
| Net interest margin | 3.68% | 3.88% | 3.62% | 3.90% |
At June 30, 2012, total assets were $785.1m, loans $604.9m, deposits $616.4m, and shareholders’ equity $74.9m. Borrowed funds were $75.0m and subordinated debentures $15.5m. Cash and cash equivalents were $37.8m. For the first half, operating cash flow was $8.4m; investing activities used $25.1m and financing activities used $28.0m, resulting in a $44.7m decrease in cash.
- Profitability and margins: Q2 common income rose to $0.58m from $0.25m; first-half common income was $1.08m versus $0.09m. Net interest margin contracted year over year in both periods, to 3.68% for Q2 and 3.62% year to date.
- Credit and allowance: Allowance for loan losses was $16.3m, or 2.69% of loans. First-half net charge-offs were $2.3m, compared with $2.6m a year earlier. Nonperforming loans were $19.8m (3.28% of loans) and nonperforming assets were $22.2m (2.83% of assets). TDRs totaled $21.4m, including $0.9m on nonaccrual status.
- Liquidity and funding: Deposits declined $27.5m from year-end 2011, partly reflecting planned runoff of brokered and promotional time deposits and a reduction in municipal deposits. Noninterest-bearing demand deposits increased to 17.4% of deposits; time deposits declined to 21.8%. The Bank reported $48.8m of additional FHLB borrowing capacity and $97.9m of available-for-sale securities.
- Capital: At June 30, the Company’s leverage, Tier 1 risk-based and total risk-based capital ratios were 11.08%, 14.22% and 15.49%, respectively. The Bank’s ratios were 9.63%, 12.37% and 15.02%; each exceeded the stated well-capitalized thresholds.
Material changes and management commentary
- Interest income fell as earning-asset yields declined in the low-rate environment; lower funding costs only partly offset the pressure. Management cited the FOMC’s expectation that low rates could persist through 2014 and said asset-yield declines were expected to exceed further funding-cost benefits.
- Commercial loans grew $27.2m from year-end, while total loans increased $12.3m. Management highlighted commercial loan growth and greater residential mortgage originations; mortgage sale gains rose to $0.45m in Q2 and $0.86m for the first half.
- Noninterest income benefited from mortgage-loan and securities gains. First-half securities gains were $0.51m, following sales of approximately $6.1m in book value of securities. These gains are not necessarily recurring.
- Lower loan-loss provisions reflected management’s assessment of improving asset quality. Nonperforming loans declined from $22.8m at year-end and $25.1m a year earlier; however, potential problem loans increased to $7.4m from $5.7m at year-end.
- Q2 2011 results included $0.215m of residual lease and fixed-asset disposal expense from closing two underperforming branches. Unity opened a new branch in Washington Township in March 2012, adding current-period costs. Management’s comparison excluding the 2011 closure costs puts prior-year Q2 common income at $0.40m and first-half common income at $0.24m.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management identifies the sustained low-rate environment, economic weakness, borrower repayment capacity and real-estate collateral values as key risks. A majority of loans are secured by real estate, and credit exposure is concentrated largely in the Bank’s regional markets. Management also notes that future loan-loss provisions may be required if economic conditions or collateral values worsen.
The Company had approximately $69.4m of commitments to advance funds, including $1.3m of standby letters of credit, and stated that it believed liquidity was sufficient to meet them. Management reported no known legal proceedings expected to have a material adverse effect. The Company had no interest-rate swaps outstanding at June 30, 2012. Preferred stock issued under the Treasury Capital Purchase Program carries a 5% annual dividend before its fifth anniversary and 9% thereafter; the Company was preserving capital and had not paid common dividends.
Important facts for investors to verify
- Whether margin pressure and the low-rate environment continue to reduce net interest income.
- Whether nonperforming loans and potential problem loans keep improving, and whether the $16.3m allowance remains adequate relative to portfolio risk and charge-offs.
- How much earnings depend on securities and mortgage-sale gains, and whether mortgage origination volumes are sustainable.
- Whether deposit runoff, particularly municipal and time deposits, affects liquidity despite reported FHLB capacity and securities available for sale.
- The preferred-stock dividend step-up, associated restrictions on common dividends and the effect of preferred dividends and discount accretion on common earnings.