Unity Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results include Unity Bank. Unity Bancorp is a New Jersey bank holding company operating 16 branches in New Jersey and Pennsylvania. Dollar amounts below are in millions unless noted.
Financial results and condition
- Q3 earnings: Net income was $3.02 million, up 18% from $2.55 million a year earlier. Diluted earnings per share were $0.32 versus $0.27.
- Nine-month earnings: Net income was $10.05 million versus $6.92 million; diluted EPS was $1.06 versus $0.74. Results included a $2.26 million pretax gain from repurchasing subordinated debt. Excluding that gain, management reported net income of $8.6 million and diluted EPS of $0.91.
- Interest income and margins: Q3 net interest income rose 14.5% to $9.87 million, and net interest margin improved to 3.63% from 3.60%. For the nine months, net interest income rose 12.6% to $28.20 million, while margin declined to 3.58% from 3.65%. Loan growth drove higher interest income; deposit costs increased.
- Noninterest items and expenses: Q3 noninterest income was $2.17 million, down from $2.28 million; nine-month income was $8.69 million, including the debt-repurchase gain. Noninterest expense increased to $6.99 million for Q3 and $20.33 million year to date. The Q3 efficiency ratio improved to 58.11% from 62.88%; the nine-month ratio was 55.39% versus 64.97%.
- Balance sheet growth: Total assets were $1.153 billion, up 6.3% from year-end 2015. Loans totaled $949.8 million, up 6.8%; deposits totaled $933.3 million, up 4.3%. Shareholders’ equity was $88.2 million versus $78.5 million.
- Credit quality: Nonperforming assets were $8.23 million, down 34.2% from September 2015; nonperforming loans were $6.53 million versus $10.74 million. The allowance for loan losses was $12.69 million, or 1.34% of loans, compared with 1.45% a year earlier. Nine-month net charge-offs increased to $1.09 million from $0.53 million.
- Cash flow and liquidity: Cash and cash equivalents were $84.67 million, down $3.49 million from year-end. Nine-month operating cash flow was $5.30 million, investing outflow $66.84 million, and financing inflow $58.05 million. The Bank reported $182.3 million of additional FHLB borrowing capacity and $183.4 million in loan commitments.
- Debt and capital: Borrowings and subordinated debentures totaled $125.3 million, up from $107.5 million at year-end. The company repurchased $5.2 million of subordinated debentures, reducing outstanding debentures to $10.3 million. Unity Bank was reported well-capitalized: total risk-based capital ratio 11.30%, Tier 1 ratio 10.48%, and leverage ratio 8.28%.
Material changes versus comparable periods
- Q3 net income, net interest income, and diluted EPS increased year over year; Q3 margin also improved modestly. For the first nine months, earnings growth included the one-time debt-repurchase gain, while net interest margin declined.
- Loans grew across commercial, residential mortgage, and consumer categories; SBA 504 loans decreased. Savings and noninterest-bearing deposits grew, while time deposits declined.
- Credit metrics improved versus September 2015, though year-to-date net charge-offs and loan-loss provision increased. Provision was $1.02 million for the nine months, compared with $0.40 million in 2015.
Outlook, commentary, and risks
- The filing provides no specific earnings or financial guidance. Management cited sustained low interest rates and anticipated gradual Federal Reserve rate increases; it noted that interest-rate changes can affect spreads and operating income.
- Management considered the allowance adequate but said future provisions may be required as economic conditions, collateral values, or portfolio risks change. Approximately 96% of loans were secured by real estate, creating exposure to declines in property values. SBA lending was identified as higher risk than other loan products.
- Government deposits were $81.0 million and described as short-duration and price-sensitive. The company stated that withdrawal of municipal deposits would not create a liquidity shortfall and that it had liquidity to meet commitments.
- At September 30, 2016, the company had $183.4 million in commitments to advance funds, including $2.8 million in standby letters of credit. Management noted that many commitments may expire unfunded.
- The filing reported no known legal proceedings expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the $2.26 million debt-repurchase gain, and how loan-sale gains affect recurring noninterest income.
- Whether loan growth can continue without further deterioration in charge-offs, delinquencies, or required loan-loss provisions.
- Deposit pricing and retention trends, particularly for promotional savings accounts and municipal deposits, and the cost and maturity profile of FHLB borrowings and swaps.
- The funding and expected drawdown of the $183.4 million commitment balance, alongside available liquidity and collateral capacity.
- Potential effects of real-estate concentration, changing interest rates, and implementation of the accounting standards the company was still evaluating.