Unity Bancorp, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three and six months ended June 30, 2018. Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, operates 19 branches in New Jersey and Pennsylvania. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Net interest income | $13.1 million | $11.2 million | +17.9% |
| Provision for loan losses | $550,000 | $400,000 | +$150,000 |
| Noninterest income | $2.3 million | $2.0 million | +14.4% |
| Noninterest expense | $8.2 million | $7.4 million | +9.9% |
| Net income | $5.4 million | $3.4 million | +56.7% |
| Diluted EPS | $0.49 | $0.32 | +$0.17 |
| Net interest margin | 3.95% | 3.79% | +16 basis points |
| Efficiency ratio | 52.80% | 56.41% | Improved |
- For the six months, net income was $10.6 million versus $6.6 million; diluted EPS was $0.98 versus $0.62. Return on average assets was 1.53% and return on average equity was 17.41%, compared with 1.09% and 12.25%, respectively, in the first half of 2017.
- First-half net interest income was $26.0 million, up 20.8%; net interest margin was 3.97% versus 3.75%. Higher loan balances and yields more than offset rising deposit costs.
- Q2 interest expense rose 38.6% year over year, primarily from higher deposit rates and time-deposit volumes. Average cost of interest-bearing liabilities increased to 1.27% from 1.03%.
- The effective tax rate was 20.0% for Q2 and 19.6% for the first half, versus 35.6% and 35.3% a year earlier. The reduction primarily reflects the federal corporate tax rate decrease under the Tax Cuts and Jobs Act.
Balance sheet, funding and credit
- At June 30, total assets were $1.514 billion, up 4.0% from year-end 2017. Total loans were $1.247 billion, up 6.5%; commercial loans rose $44.6 million, residential mortgages $33.2 million and consumer loans $8.6 million. Deposits increased $103.3 million to $1.146 billion, including a $111.4 million increase in time deposits.
- Cash and cash equivalents were $139.3 million, down $11.0 million from year-end. Shareholders’ equity was $128.1 million, up $10.0 million.
- Borrowed funds and subordinated debentures totaled $230.3 million, down $55.0 million from year-end. The company reported $220.0 million of FHLB borrowings and $10.3 million of subordinated debentures. A $140 million overnight FHLB advance outstanding on June 30 was repaid July 2.
- First-half cash flow: operating activities provided $21.4 million; investing activities used $79.7 million, mainly for loan growth; financing activities provided $47.3 million, reflecting deposit growth and borrowing activity. Cash decreased $11.0 million over the period.
- The allowance for loan losses was $14.6 million, or 1.17% of total loans, compared with 1.16% at year-end 2017. The first half included $28,000 of net recoveries, versus $429,000 of net charge-offs in the prior-year period.
- Nonperforming loans increased to $5.2 million from $3.0 million at year-end; nonperforming assets were $5.3 million, or 0.35% of assets. Management attributed the increase in impaired loans mainly to downgrades of three commercial loans totaling $2.0 million and two SBA loans totaling $579,000. One performing TDR totaled $767,000.
- Regulatory capital ratios remained above the stated well-capitalized thresholds: the Bank’s leverage ratio was 9.26%, CET1 was 11.46%, Tier 1 risk-based capital was 11.46%, and total risk-based capital was 12.71%.
Material changes, outlook and risks
- Management attributed earnings growth chiefly to loan growth and improved earning-asset yields. Net interest income benefited from the rising-rate environment, while deposit costs also increased.
- Noninterest expense growth reflects two additional branches, higher headcount, branch occupancy, equipment and technology investment. The company also cited higher deposit-insurance and advertising costs.
- Management expects New Jersey tax expense to increase significantly in 2019 following legislation signed July 1, 2018, after quarter-end. The law imposes a temporary surtax on qualifying New Jersey income and introduces mandatory combined reporting from 2019; the full impact was not yet clear.
- No quantified earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key exposures include interest-rate changes, competition for deposits, credit and collateral risk, and the geographic concentration of lending in the Bank’s markets. Approximately 94% of loans were secured by real estate. Government deposits are relatively short-term and price-sensitive. The company had $283.5 million in loan commitments, of which $197.5 million expire within one year, and stated it believed liquidity was sufficient to meet commitments.
- Available-for-sale securities had a $1.4 million net unrealized loss at June 30, versus $476,000 at year-end, attributed primarily to interest-rate and spread changes; management did not consider the securities other-than-temporarily impaired. The company also reported no material pending litigation known to management and no significant change in market-risk assessment.
Important facts for investors to verify
- Track whether the rise in nonperforming and impaired commercial/SBA loans continues, and whether the allowance remains adequate as loan growth proceeds.
- Assess deposit pricing, time-deposit growth and funding mix against asset yields and net interest margin as rates change.
- Confirm the eventual effect of New Jersey’s surtax and combined-reporting requirements on the effective tax rate and earnings.
- Reconcile the filing’s two descriptions of additional FHLB borrowing capacity: $189.6 million in one section and $194.3 million in another.
- Monitor the $140 million overnight advance repayment, total borrowings, liquidity needs and the funding of outstanding commitments.