Unity Bancorp, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2018, compared with Q1 2017 unless otherwise noted. Unity Bancorp operates Unity Bank, a New Jersey-based commercial and retail bank with 18 branches in New Jersey and Pennsylvania.
Key financial results
| Metric | Q1 2018 | Comparison |
|---|---|---|
| Net income | $5.2 million | Up from $3.2 million |
| Diluted EPS | $0.48 | Up from $0.30 |
| Net interest income | $12.9 million | Up 23.9% |
| Net interest margin | 3.99% | Up from 3.70% |
| Provision for loan losses | $0.5 million | Up from $0.25 million |
| Noninterest income / expense | $2.3 million / $8.2 million | Income up 3.7%; expense up 10.1% |
| Efficiency ratio | 54.00% | Improved from 59.08% |
| Return on average assets / equity | 1.53% / 17.69% | Up from 1.07% / 12.02% |
| Net cash from operating activities | $7.6 million | Up from $6.8 million |
Balance sheet and liquidity at March 31, 2018: Assets were $1.440 billion, down 1.1% from year-end 2017. Total loans were $1.195 billion, up 2.1%; deposits were $1.118 billion, up $74.4 million (7.1%). Cash and cash equivalents were $116.3 million, down $34.0 million since year-end. Borrowings and subordinated debentures totaled $191.3 million, down $94.0 million; shareholders’ equity was $123.1 million, up $5.0 million.
Q1 cash flows were $7.6 million provided by operations, $21.6 million used in investing and $20.0 million used in financing, producing a $34.0 million decrease in cash. The Bank reported $223.0 million of additional FHLB borrowing capacity. Regulatory capital ratios at the Bank included a 9.12% leverage ratio, 11.60% CET1 and 12.81% total risk-based capital, above applicable well-capitalized thresholds.
Material changes and drivers
- Higher average loan balances and yields drove interest income growth: average loans increased $194.8 million year over year, while total interest-earning asset yield rose to 4.85% from 4.48%. Rising deposit costs partly offset these gains; average cost of interest-bearing liabilities increased to 1.12% from 1.02%.
- The effective tax rate fell to 19.1% from 34.9%, primarily reflecting the Tax Cuts and Jobs Act’s reduction of the federal corporate rate from 35% to 21%.
- Noninterest expense increased $754,000, chiefly from compensation and benefits, as the company expanded its branch, lending and support networks. Lower loan collection and OREO expense partly offset the increase.
- Asset quality showed mixed movement: nonperforming loans rose to $4.3 million from $3.0 million at year-end, but were below $7.8 million a year earlier. The increase from year-end included newly nonaccrual commercial and SBA loans. Potential problem loans were $4.7 million, up from $4.0 million.
- The allowance for loan losses was $14.2 million, or 1.19% of loans, versus $13.6 million and 1.16% at year-end. Q1 recorded $140,000 in net recoveries, compared with $148,000 in net charge-offs in Q1 2017.
- Available-for-sale securities fell to $50.2 million; their net unrealized loss widened to approximately $1.3 million from $476,000 at year-end, primarily reflecting interest-rate and spread movements. Management said it did not consider the securities temporarily impaired.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management attributed stronger earnings to loan growth, higher asset yields and lower taxes, while noting deposit-cost pressure and higher growth-related operating expenses. Results for the quarter are not necessarily indicative of full-year results.
- Credit and collateral risk: approximately 94% of loans were secured by real estate; deterioration in local economic conditions or property values could increase losses. Management noted the allowance estimate depends on assumptions and may require future additions.
- Funding and liquidity: $87.5 million of deposits were government deposits, generally short-duration and price-sensitive; $80.1 million was held by 13 municipalities with balances above $1.5 million. The company reported sufficient liquidity and FHLB capacity.
- Borrowing timing: a $91.0 million FHLB overnight advance outstanding March 30 at 2.00% was repaid April 2, 2018. The quarter-end borrowing balance therefore included this temporary advance.
- Interest-rate exposure: management reported the estimated economic value of equity would decline 0.75% of assets under a 200-basis-point rate increase and rise 0.10% under a comparable decrease, within Board limits. Cash-flow swaps hedge $60 million of variable-rate debt.
- Commitments to advance were approximately $286.2 million, including $4.4 million of standby letters of credit; management said it believed liquidity was adequate to honor commitments. Pending ordinary-course legal proceedings were not expected to have a material adverse effect.
- Accounting items: adoption of ASU 2016-01 put equity-security unrealized losses through earnings ($15,000 in Q1); early adoption of ASU 2018-02 reclassified $66,000 from accumulated other comprehensive income to retained earnings. The company was evaluating lease-accounting adoption; it cited $1.7 million of minimum noncancelable net operating lease payments.
Most important facts for investors to verify
- Whether loan growth and the 3.99% net interest margin can be sustained as deposit and funding costs rise.
- Developments in nonperforming and potential problem loans, especially the recently downgraded commercial and SBA credits, and the adequacy of the allowance.
- Deposit mix, pricing and stability—including municipal and other government deposits—and actual liquidity after the temporary FHLB advance was repaid.
- Real-estate collateral concentrations and the sensitivity of securities values, earnings and capital to further interest-rate changes.
- Whether expansion-related expenses continue to grow and how future results compare with the quarter’s lower tax rate.