Unity Bancorp, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, operates 15 branches in New Jersey and Pennsylvania.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $9.34 million | $8.37 million | $18.33 million | $16.39 million |
| Provision for loan losses | $0.40 million | — | $0.60 million | $0.20 million |
| Noninterest income | $2.23 million | $1.89 million | $6.51 million | $3.53 million |
| Noninterest expense | $6.73 million | $6.65 million | $13.34 million | $13.15 million |
| Net income | $2.82 million | $2.43 million | $7.03 million | $4.37 million |
| Diluted earnings per share | $0.33 | $0.28 | $0.82 | $0.51 |
| Net interest margin | 3.61% | 3.70% | 3.55% | 3.67% |
Q2 net income increased about 16% year over year; six-month net income rose about 61%, boosted by a one-time gain on repurchased subordinated debt. Excluding that $2.264 million pretax gain, six-month net income was approximately $5.6 million, or $0.65 per diluted share, versus $4.4 million, or $0.51, a year earlier. The filing reports Q2 return on average assets/equity of 1.03%/13.59% and a 58.53% efficiency ratio; six-month figures were 1.28%/17.25% and 54.06%, respectively.
Financial condition, cash flow and capital
- At June 30, 2016, assets were $1.128 billion, up 4.0% from year-end 2015. Loans totaled $915.0 million, up 2.9%; deposits were $912.2 million, up 2.0%; and shareholders’ equity was $85.0 million.
- Cash and cash equivalents were $96.1 million, up $7.9 million from year-end. For the six months, operating activities provided $6.6 million, investing activities used $35.0 million, and financing activities provided $36.3 million.
- Borrowed funds and subordinated debentures totaled $124.3 million, up from $107.5 million at year-end. The allowance for loan losses was $12.8 million, or 1.39% of loans; six-month net charge-offs were $0.60 million.
- Unity Bank reported regulatory capital ratios of 7.62% leverage, 9.71% CET1 and Tier 1 risk-based, and 11.63% total risk-based capital. The Bank stated it was well-capitalized under applicable guidelines.
Changes, management commentary and risks
- Management attributed higher net interest income primarily to loan growth. That growth was partly offset by margin compression: Q2 net interest margin declined 9 basis points year over year, while deposit costs rose amid savings promotions and growth in longer-term deposits.
- Credit indicators improved year over year: nonperforming loans were $6.5 million, down 26% from June 2015; nonperforming assets were $8.2 million. However, six-month net charge-offs increased to $0.60 million from $0.35 million. The filing reported $0.49 million of residential loans 90 days past due but still accruing.
- Commercial, residential mortgage and consumer lending make up a substantial portfolio, and approximately 96% of loans were secured by real estate. Management identifies local economic conditions, real-estate collateral values, borrower performance and interest-rate changes as risks. Government deposits are short-duration and price-sensitive; commitments to lend were approximately $183.2 million.
- The Company repurchased subordinated debentures in February 2016, recognizing a $2.264 million pretax gain and reducing outstanding subordinated debt. The transaction also reduced Tier 1 capital eligibility. The filing gives the repurchase amount as $5.2 million in the note and $5.0 million in MD&A.
- The Company used $40 million of interest-rate swaps to hedge variable-rate debt; the six-month unrealized loss was $0.858 million and was recorded in other comprehensive income. Management said modeled rate-shock effects were within Board limits.
- No specific earnings or operating guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results and identified economic, regulatory, market and interest-rate conditions as factors that could cause actual outcomes to differ from forward-looking statements. Management reported effective disclosure controls and no material change in internal control over financial reporting. Pending legal matters were not expected by management to have a material adverse effect.
Key facts for investors to verify
- Underlying earnings growth after excluding the debt-repurchase gain, and whether loan growth can offset continued net interest margin pressure.
- Credit performance, particularly rising net charge-offs, real-estate collateral values, and the adequacy of the allowance and unfunded-commitment reserve.
- Funding mix and liquidity exposure, including reliance on borrowings, municipal and other price-sensitive deposits, and the $183.2 million in loan commitments.
- The differing $5.0 million and $5.2 million disclosures for the subordinated-debt repurchase, and the resulting effects on capital and earnings.