Unity Bancorp, Inc. — 2019 Form 10-K
Business context and reporting period. Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, provides commercial and consumer banking through 19 branches in New Jersey and Pennsylvania. This filing covers the fiscal year ended December 31, 2019; the fourth-quarter results are unaudited.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net income | $23.7 million | $21.9 million |
| Diluted earnings per share | $2.14 | $2.01 |
| Income before taxes | $30.3 million | $27.3 million |
| Net interest income | $57.6 million | $53.7 million |
| Net interest margin | 3.95% | 3.97% |
| Noninterest income | $9.5 million | $9.0 million |
| Noninterest expense | $34.7 million | $33.4 million |
| Net cash from operating activities | $33.2 million | $38.6 million |
- Growth and balance sheet: Total assets rose 8.9% to $1.719 billion. Loans increased 9.3% to $1.426 billion, led by commercial, residential mortgage and consumer lending. Deposits increased 3.5% to $1.250 billion.
- Credit quality: The allowance for loan losses was $16.4 million, or 1.15% of loans, versus $15.5 million, or 1.19%, in 2018. Net charge-offs rose to $1.2 million from $118,000. Nonperforming loans declined to $5.6 million (0.40% of loans) from $6.9 million (0.53%); OREO increased to $1.7 million from $56,000. Potential problem loans rose to $7.4 million from $4.5 million.
- Liquidity and funding: Cash and cash equivalents were $158.0 million, up $12.5 million. Borrowed funds and subordinated debentures totaled $293.3 million, up $73.0 million; this included $193.0 million of overnight FHLB advances at year-end, repaid January 2, 2020. The Bank reported $219.7 million of additional FHLB borrowing capacity. Unfunded lending commitments were $272.8 million.
- Capital: Shareholders’ equity rose to $160.7 million from $138.5 million. The Bank’s leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 10.15%, 11.81%, 11.81% and 12.58%, respectively; the Bank was classified as well-capitalized.
- Fourth quarter: Net income was $6.12 million, or $0.55 diluted EPS, compared with $5.80 million, or $0.53, in fourth-quarter 2018.
Material changes versus 2018
- Net income increased 7.9%; pretax income increased 11.0%. Loan growth drove higher interest income, while net interest margin slipped two basis points as rate cuts and deposit-cost pressures affected spreads.
- Total interest expense rose 33.6% to $18.1 million, mainly from higher rates and time-deposit growth. Average cost of interest-bearing liabilities increased to 1.64% from 1.32%.
- Noninterest expense increased $1.3 million, primarily from compensation, mortgage commissions and technology investment. The efficiency ratio improved to 52.00% from 53.07%.
- Net charge-offs increased materially, although nonperforming loans declined. OREO and potential problem loans increased and merit monitoring.
- Borrowings increased as deposit growth lagged loan growth. Time deposits rose $47.2 million; noninterest-bearing demand deposits rose $9.6 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management cites loan growth as the primary driver of higher net interest income, while noting margin sensitivity to interest rates and funding costs.
- In management’s rate simulations, a 200-basis-point increase was estimated to raise 12-month net interest income by about $522,000 (0.9%); a 200-basis-point decline was estimated to reduce it by about $1.8 million (2.9%). These are scenario estimates, not guidance.
- Key risks include concentration in the New Jersey/eastern Pennsylvania economy; real-estate collateral exposure (about 94% of loans); borrower defaults and allowance-estimation uncertainty; interest-rate and liquidity risk; competition; regulatory and compliance costs; cybersecurity/vendor disruption; and the transition away from LIBOR. Management also noted possible competition for municipal deposits from a proposed New Jersey state-owned bank.
- Unusual items included a $766,000 gain, primarily from selling the Union, New Jersey branch building; a transfer of $14.2 million of held-to-maturity securities to available-for-sale; and a $321,000 market-value gain on equity securities. New Jersey tax changes contributed to the effective tax rate rising to 22.0% from 19.7%.
- The company reported no known legal proceedings expected to have a material adverse effect and no material subsequent events through issuance. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. The CFO resigned in January 2020, and an interim principal accounting and financial officer was appointed.
Important facts for investors to verify
- Whether increased net charge-offs, rising OREO and potential problem loans indicate broader credit deterioration, particularly in real-estate-backed lending.
- How the bank will fund continued loan growth and manage reliance on short-term FHLB advances, time deposits and municipal deposits.
- Whether deposit repricing and future rate changes pressure net interest margin and earnings relative to management’s modeled scenarios.
- The effect of the expected credit-loss accounting standard (CECL) adoption; the company said it was evaluating the impact.
- Whether the branch-property gain and equity-security valuation gains are repeatable; they contributed to 2019 noninterest income.
- Capital, liquidity and dividend capacity alongside the authorized 525,000-share repurchase plan; no shares were repurchased in 2019.