Unity Bancorp, Inc. — Q3 2019 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The consolidated interim statements are unaudited. Unity Bancorp operates Unity Bank, a New Jersey-based commercial and retail bank with 19 branches in New Jersey and Pennsylvania.
Financial performance and condition
| Metric | Q3 2019 | Comparable period / change |
|---|---|---|
| Net income | $6.0 million | $5.5 million in Q3 2018 |
| Diluted EPS | $0.54 | $0.50 in Q3 2018 |
| Net interest income | $14.4 million | Up 6.2% year over year |
| Net interest margin | 3.90% | 3.92% in Q3 2018 |
| Efficiency ratio | 51.06% | 54.86% in Q3 2018 |
| Return on average assets / equity | 1.53% / 15.57% | 1.50% / 16.64% in Q3 2018 |
For the nine months, net income was $17.5 million, or $1.59 diluted EPS, versus $16.1 million and $1.48 a year earlier. Net interest income was $42.8 million, up 8.2%; net interest margin was 3.97%, compared with 3.95%. The allowance for loan losses provision was $1.6 million in both nine-month periods.
Balance sheet at September 30: Assets were $1.664 billion, up $85.2 million from December 31, 2018. Total loans were $1.368 billion, up $63.9 million; deposits were $1.273 billion, up $65.7 million. Shareholders’ equity was $154.9 million, up $16.4 million. Cash and cash equivalents totaled $166.8 million.
Liquidity and funding: Nine-month operating cash flow was $25.0 million; investing activities used $67.5 million and financing activities provided $63.7 million. Borrowed funds were $210.0 million and subordinated debentures were $10.3 million. The Bank reported $266.3 million of additional FHLB borrowing capacity. Outstanding loan commitments were approximately $278.2 million; management said it believed liquidity was adequate to honor them.
Capital: At September 30, the Bank’s leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 10.11%, 12.53%, 12.53% and 13.78%, respectively. Each exceeded the stated well-capitalized thresholds.
Material changes and notable items
- Loan growth was led by commercial loans, up $29.1 million since year-end; residential mortgages rose $20.9 million and consumer loans $14.9 million.
- Deposit growth included a $63.1 million increase in time deposits, attributed to a new promotional offering.
- Quarterly noninterest income rose to $2.7 million, primarily reflecting a gain on the sale of the Union, New Jersey building. The filing does not separately state the gain amount.
- Q3 noninterest expense declined slightly to $8.7 million and included a $146,000 FDIC assessment credit. Nine-month noninterest expense increased to $26.0 million.
- Net charge-offs for the first nine months increased to $1.1 million from $118,000 in the prior-year period. Nonperforming loans declined to $5.6 million from $6.9 million at year-end, but OREO increased to $1.7 million from $56,000.
- The company authorized a share repurchase plan for up to 525,000 shares, approximately 5% of outstanding shares; no shares were repurchased in the first nine months of 2019.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management stated that New Jersey tax legislation was expected to increase the effective tax rate; the nine-month 2019 rate was 21.6%, versus 19.2% in 2018.
- Management considered the loan-loss allowance adequate, while noting that future provisions may be needed if economic conditions, collateral values or other risk factors change.
- Approximately 94% of the loan portfolio was secured by real estate, exposing credit quality to local property values and economic conditions. Management also identified SBA lending as higher risk than its other loan products.
- The filing identifies uncertainty around the transition from LIBOR, including possible effects on LIBOR-linked assets, liabilities, contracts and systems. The company had $60 million of interest-rate swaps designated as cash-flow hedges.
- Ordinary-course legal matters were not expected by management to materially affect financial position or results. The company reported no material change in market-risk assessment and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of Q3 and year-to-date earnings growth depended on the Union building sale and other nonrecurring items.
- Whether loan growth, deposit pricing and higher interest expense continue to pressure quarterly net interest margin.
- Drivers of the rise in net charge-offs and OREO, and the adequacy of the $16.0 million loan-loss allowance against portfolio growth and real-estate concentration.
- Time-deposit retention and cost, municipal-deposit concentration, and available liquidity if commitments are funded or deposits leave.
- Potential effects of LIBOR transition and the expected impact of New Jersey tax changes on future results.