Unity Bancorp, Inc. — 2018 Form 10-K
Business context and reporting period. Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, provides commercial and retail banking across 19 branches in New Jersey and Pennsylvania. The filing covers the fiscal year ended December 31, 2018; quarterly figures are unaudited.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $53.7 million | $45.9 million |
| Net interest margin | 3.97% | 3.83% |
| Noninterest income | $9.0 million | $8.3 million |
| Noninterest expense | $33.4 million | $30.0 million |
| Provision for loan losses | $2.1 million | $1.7 million |
| Income before taxes | $27.3 million | $22.4 million |
| Net income | $21.9 million | $12.9 million |
| Diluted earnings per share | $2.01 | $1.20 |
| Return on average assets / equity | 1.53% / 17.10% | 1.02% / 11.47% |
| Total assets at year-end | $1.579 billion | $1.455 billion |
| Total loans at year-end | $1.305 billion | $1.171 billion |
| Total deposits at year-end | $1.208 billion | $1.043 billion |
| Borrowed funds and subordinated debentures | $220.3 million | $285.3 million |
| Cash and cash equivalents | $145.5 million | $150.3 million |
Operating cash flow was $38.6 million, investing cash flow was negative $140.7 million, and financing cash flow was positive $97.3 million. The company paid $2.8 million in common dividends. The efficiency ratio improved to 53.07% from 55.57%.
Material changes versus 2017
- Net income rose about 70%, while pretax income increased 21.7%. The 2018 effective tax rate fell to 19.7% from 42.5%; 2017 included a $1.7 million deferred-tax remeasurement charge following the federal Tax Act.
- Net interest income grew 17.2%, reflecting loan growth and a higher net interest margin. Average interest-bearing liability costs also rose, to 1.32% from 1.04%.
- Total loans increased 11.4%, led by residential mortgage growth of 19.4%, commercial growth of 10.4%, and consumer growth of 12.8%. Deposits rose 15.8%, especially time deposits.
- Borrowed funds declined by $65.0 million. Year-end shareholders’ equity increased to $138.5 million from $118.1 million.
- Nonperforming loans increased to $6.9 million from $3.0 million (0.53% of loans versus 0.26%). The allowance was $15.5 million, or 1.19% of loans, compared with $13.6 million, or 1.16%.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or growth guidance. Management attributed results to lending and deposit growth, a rising-rate environment, branch expansion, and the lower federal corporate tax rate.
- Expansion into two additional branches and higher staffing increased compensation, occupancy, and equipment costs. Compensation included a $1.1 million expense from a change to the CEO’s supplemental retirement plan; the plan’s estimated future payments total $5.5 million.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would reduce 12-month net interest income by about $720,000 (1.3%); a 200-basis-point decline would reduce it by about $1.9 million (3.4%).
- Credit and concentration risks include the real-estate-secured nature of approximately 94% of loans, local economic exposure, SBA program and guarantee risks, and potential deterioration in collateral values. SBA lending is also vulnerable to federal government shutdowns.
- Liquidity factors include competition for deposits and $121.9 million of government and municipal deposits, which are generally short-duration and price-sensitive. The company reported $289.9 million in commitments to extend credit and stated it believed liquidity was adequate to meet commitments.
- New Jersey tax legislation imposed a temporary corporate surtax and introduced combined reporting beginning in 2019; management said the overall tax impact was not yet fully evaluable and could increase tax expense. The company expected adoption of the new lease standard to add about $3.0 million in right-of-use assets and lease liabilities.
- Available-for-sale securities had a $1.0 million net unrealized loss at year-end. Management attributed losses primarily to interest-rate and spread changes and reported no other-than-temporary impairment. Adoption of the equity-security accounting standard led to a $195,000 unrealized loss recognized in income.
- Management reported no known legal proceedings expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth can continue without further deterioration in nonperforming loans, delinquencies, or potential problem credits.
- The composition and cost of deposit growth, including time deposits and municipal deposits, and the company’s reliance on short-term FHLB funding.
- How future interest-rate changes affect net interest margin, deposit costs, and the value of the securities portfolio.
- The realized tax impact of New Jersey’s surtax and combined-reporting rules, and the sustainability of the 2018 effective tax rate.
- The ongoing expense and funding implications of branch expansion and the supplemental retirement plan.
- Reconcile reporting inconsistencies: MD&A describes year-end assets as $1.6 billion and gives a $123.7 million increase, while the balance sheet reports $1.579 billion, up $123.7 million from $1.455 billion; reported loan-growth amounts also vary slightly across sections.