Unity Bancorp, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 19 branches in New Jersey and Pennsylvania. This unaudited filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are against December 31, 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net income was $5.83 million, up 8.1% from $5.40 million in Q2 2018. Diluted EPS was $0.53 versus $0.49. For the first half, net income was $11.57 million versus $10.63 million, and diluted EPS was $1.05 versus $0.98.
- Interest income and margin: Q2 net interest income was $14.21 million, up 8.1%; net interest margin was 3.96% versus 3.95%. First-half net interest income was $28.43 million, up 9.3%, and margin was 4.01% versus 3.97%. Q2 net interest spread declined to 3.55% from 3.64%.
- Other income and costs: Q2 noninterest income rose 4.3% to $2.41 million, while noninterest expense rose 7.8% to $8.79 million. The efficiency ratio increased to 53.20% from 52.80%. First-half noninterest income declined to $4.43 million from $4.60 million; expenses increased to $17.27 million from $16.35 million.
- Returns and credit provision: Q2 return on average assets was 1.54% versus 1.53%; return on average equity was 16.01% versus 17.32%. The Q2 loan-loss provision was $0.35 million versus $0.55 million; first-half provision was $0.85 million versus $1.05 million.
- Balance-sheet growth: Assets were $1.63 billion, up 3.0% from year-end. Total loans were $1.345 billion, up $40.2 million; deposits were $1.264 billion, up $56.7 million. Shareholders’ equity rose to $149.4 million from $138.5 million.
- Credit quality: Nonperforming loans were $4.42 million, down from $6.87 million at year-end; nonperforming assets were $5.34 million, or 0.33% of assets. The allowance for loan losses was $15.97 million, 1.19% of loans, compared with $15.49 million and 1.19% at year-end. First-half net charge-offs were $0.37 million, versus net recoveries of $0.03 million in 2018.
- Liquidity, funding and capital: Cash and cash equivalents were $154.8 million. Borrowings and subordinated debentures totaled $200.3 million, down $20.0 million since year-end. The Bank reported $297.3 million of additional FHLB borrowing capacity. At June 30, the Bank’s leverage, CET1, Tier 1 risk-based and total risk-based capital ratios were 9.95%, 12.31%, 12.31% and 13.56%, respectively; each exceeded the stated well-capitalized threshold.
- Cash flows: First-half operating activities provided $15.7 million, investing activities used $41.9 million and financing activities provided $35.5 million. Cash and cash equivalents increased $9.3 million from year-end.
Material changes and management commentary
- Management attributed higher interest income primarily to loan growth and improved earning-asset yields. Rising deposit rates and a larger time-deposit balance drove much of the increase in interest expense, partly offsetting the benefit to net interest income.
- Loan growth was concentrated in commercial, residential mortgage and consumer lending; SBA balances declined. Approximately 94% of loans were secured by real estate, creating exposure to collateral values and local property-market conditions.
- Q2 noninterest income benefited from mortgage-loan gains, loan payoff fees and equity-security appreciation; lower SBA loan-sale volume and premiums reduced SBA sale gains. Higher compensation, mortgage commissions, SERP costs, technology investment and consulting contributed to expense growth.
- New Jersey tax legislation increased the effective tax rate: 22.0% in Q2 versus 20.0%, and 21.5% for the first half versus 19.6%. Management anticipated a higher effective rate from the state changes.
- On July 16, 2019, after quarter-end, the Company authorized a share repurchase of up to 525,000 shares, approximately 5% of outstanding common stock. No shares were repurchased in the first half.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Risks cited include economic and market changes, interest-rate movements affecting spreads and income, and uncertainty around the transition from LIBOR to a replacement benchmark such as SOFR. LIBOR-linked assets, liabilities, contracts and systems may be affected.
- Funding considerations include price-sensitive government deposits and $270.3 million of outstanding loan commitments, of which $120.0 million expire within one year. Management stated it believes liquidity is sufficient to meet commitments; many commitments may expire unfunded.
- Management considered the allowance adequate, but noted future provisions may be needed as economic conditions, collateral values or loan performance change. OREO increased to $0.92 million from $0.06 million at year-end after two properties were transferred to OREO.
- The Company reported no pending legal proceedings expected by management to materially affect its financial position or results. Adoption of the expected-credit-loss standard (ASU 2016-13) was still being evaluated. The filing also records adoption of lease accounting in 2019, including approximately $3.0 million of lease assets and liabilities at June 30.
Important facts for investors to verify
- Whether loan growth and asset yields can continue to offset higher deposit funding costs, and how net interest margin responds to changing rates.
- Trends in delinquencies, nonperforming loans, SBA charge-offs, OREO and allowance adequacy as the portfolio grows.
- The composition, pricing and stability of deposits, including municipal and time deposits, and use of FHLB borrowings and available capacity.
- The realized cost and timing of the 525,000-share repurchase authorization, including its effect on capital and liquidity.
- The eventual impact of CECL adoption, New Jersey tax changes and LIBOR transition on earnings, capital and reported financial measures.