Unity Bancorp, Inc. — Q3 2014 Form 10-Q
Business context and period. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania. This unaudited filing covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $7.63 | $6.87 | $22.23 | $20.36 |
| Provision for loan losses | $0.55 | $0.60 | $1.70 | $1.55 |
| Noninterest income | $1.85 | $1.65 | $5.02 | $5.13 |
| Noninterest expense | $6.24 | $5.94 | $18.64 | $18.13 |
| Net income | $1.89 | $1.30 | $4.71 | $3.85 |
| Diluted earnings per common share | $0.24 | $0.15 | $0.61 | $0.36 |
| Net interest margin | 3.56% | 3.53% | 3.54% | 3.57% |
Q3 net income available to common shareholders increased 59.4% year over year; nine-month net income available to common shareholders rose 64.6%. The efficiency ratio improved to 65.80% from 69.93% for the quarter and to 69.40% from 72.17% year to date. Q3 return on average assets and common equity were 0.82% and 11.89%, respectively.
Financial position, liquidity and credit
- Growth: Total assets were $969.6 million, up 5.3% since year-end 2013. Total loans reached $744.4 million, up 9.7%, led by residential mortgages (+$29.4 million), commercial loans (+$28.0 million) and consumer loans (+$9.0 million).
- Funding and debt: Deposits were $781.9 million, up $43.2 million. Borrowed funds were $100.0 million and subordinated debentures $15.5 million, for combined borrowings of $115.5 million. Borrowed funds declined $7.0 million from year-end. The Bank reported $47.0 million of additional FHLB borrowing capacity.
- Cash and cash flow: Cash and cash equivalents were $101.6 million, up $2.2 million from year-end. For the first nine months, operating activities provided $5.2 million, investing activities used $44.9 million and financing activities provided $41.9 million.
- Capital: Shareholders’ equity was $68.4 million, up $11.2 million. At September 30, the Bank’s leverage, Tier 1 risk-based and total risk-based capital ratios were 8.01%, 10.36% and 12.81%, respectively; each exceeded the stated well-capitalized thresholds.
- Credit quality: Nonperforming loans were $11.2 million, or 1.51% of loans, versus $16.7 million, or 2.52%, a year earlier. The allowance for loan losses was $12.9 million, equal to 1.74% of loans and 115.22% of nonperforming loans. Nine-month net charge-offs were $1.9 million versus $2.8 million in 2013.
- Other credit indicators: OREO increased to $1.7 million from $0.6 million at year-end; the Bank took title to 12 properties totaling $4.3 million and sold nine properties, recording $0.31 million in net losses on sales. TDRs totaled $7.7 million, including $3.5 million on nonaccrual, up from $0.47 million of nonaccrual TDRs at year-end. About 95% of loans were secured by real estate.
- Commitments: Outstanding borrower commitments were approximately $150.9 million, including $58.6 million expiring within one year. Management stated it believes liquidity is sufficient to honor commitments; many may expire unfunded.
Material changes and management commentary
- Q3 net interest income grew 11.1% year over year, primarily from loan growth. Q3 net interest margin increased 3 basis points; the nine-month margin declined 3 basis points.
- Management said the prolonged low-rate environment continues to pressure asset yields and expects further declines in earning-asset yields may exceed any benefit from lower funding costs. The filing cites the Federal Open Market Committee’s then-current expectation that the federal funds rate would remain near 0.25% through late 2015.
- Noninterest income was higher in Q3, notably due to a $305,000 tax-exempt BOLI death benefit. Excluding it, the reported effective tax rate would have been 33.8% for Q3 and 33.3% year to date. Year-to-date noninterest income was slightly lower, reflecting reduced mortgage-loan sale gains and lower service and loan fees.
- Noninterest expenses increased 5.2% in Q3 and 2.8% year to date, with higher compensation, processing and communications, and advertising costs among the contributors.
- The company completed an oversubscribed rights offering in August, issuing 760,713 shares at $8.30 per share. Gross proceeds were approximately $6.3 million; $6.2 million was recorded from the offering, with excess subscriptions returned. Proceeds are intended for general corporate purposes, including growth and strategic opportunities.
- Management reported no material expected impact from the forthcoming Basel III requirements based on current capital levels and composition. No specific earnings or financial guidance was provided.
- Management considered the loan-loss allowance adequate but cautioned that future provisions may be necessary as economic conditions and collateral values change. Other identified risks include interest-rate changes, local economic and real-estate conditions, deposit competition, and the concentration of real-estate-secured lending. The company reported no known legal proceedings expected to have a material adverse effect and stated disclosure controls were effective.
Most important facts for investors to verify
- Whether loan growth can continue without weakening underwriting or increasing delinquencies, nonperforming assets, charge-offs or required loan-loss provisions.
- The trajectory of nonaccrual TDRs and OREO, including recoveries and realized losses on property sales.
- Whether deposit growth is sustainable and how sensitive municipal and other rate-sensitive deposits are to competition and repricing.
- The effect of low rates, and eventual rate changes, on net interest margin, funding costs and the value of the securities portfolio.
- How the rights-offering capital is deployed and whether growth produces improved recurring earnings, given the quarter’s BOLI death benefit and securities gains in year-to-date results.
- The Bank’s capacity to fund the substantial outstanding commitments and maintain capital ratios as Basel III requirements take effect.