Business context and reporting period
Unity Bancorp, Inc., a New Jersey bank holding company operating Unity Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The Bank provides commercial and retail banking through 15 branches in New Jersey and Pennsylvania.
Financial performance and condition
Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts are in millions.
- Second-quarter earnings: Net income was $1.53 million, up 13% from $1.35 million a year earlier. Diluted EPS was $0.20 versus $0.11; common earnings were $1.53 million versus $0.88 million, as preferred dividends and discount accretion no longer reduced common earnings.
- First-half earnings: Net income was $2.82 million, up 11% year over year; diluted EPS was $0.37 versus $0.21. Return on average assets was 0.64% and return on average common equity was 9.70%, compared with 0.63% and 5.88%, respectively, in 2013.
- Net interest income and margins: Second-quarter net interest income rose 7% to $7.31 million; net interest margin declined to 3.49% from 3.66%. First-half net interest income rose 8% to $14.59 million; margin was 3.53% versus 3.59%. The efficiency ratio improved to 70.81% for the quarter and 71.36% for the first half.
- Other income and expenses: Second-quarter noninterest income was $1.64 million, little changed; first-half income declined 9% to $3.17 million, principally reflecting fewer residential mortgage loan sales. Noninterest expense increased 1% to $6.14 million for the quarter and 2% to $12.40 million for the first half. First-half provision for loan losses increased to $1.15 million from $0.95 million.
- Balance sheet and lending: Total assets were $932.4 million at June 30, up 1.2% from year-end 2013. Loans grew 4.4% to $708.9 million, led by residential mortgages, commercial and consumer lending; SBA loans held for investment declined. Deposits fell 1.4% to $728.1 million. Shareholders’ equity rose to $60.5 million from $57.2 million.
- Credit quality: Nonperforming loans fell to $11.9 million (1.68% of loans) from $15.3 million (2.25%) at year-end; nonperforming assets were $13.0 million. However, OREO rose to $1.1 million from $0.6 million, and potential problem loans totaled $6.2 million. The allowance was $12.9 million, or 1.81% of loans, versus $13.1 million, or 1.94%, at year-end. First-half net charge-offs were $1.43 million, slightly above the $1.40 million in the prior-year period.
- Cash flow and liquidity: First-half operating cash flow was $3.61 million; investing activities used $14.84 million and financing activities provided $7.16 million. Cash and cash equivalents ended at $95.3 million, down $4.1 million from year-end. The Bank reported $47.2 million of additional FHLB borrowing capacity.
- Borrowings and capital: Borrowed funds were $125.0 million, up from $107.0 million at year-end; subordinated debentures were $15.5 million, making total borrowings and subordinated debt $140.5 million. At June 30, the Company’s leverage, Tier 1 risk-based and total risk-based capital ratios were 8.24%, 10.86% and 12.12%; the Bank’s were 7.22%, 9.51% and 12.02%. The Bank exceeded the stated “well-capitalized” thresholds.
Material changes, outlook and risks
- Management attributed earnings growth to loan growth, improved credit quality and core earnings, while noting that loan and asset yields remained under pressure. It warned that low rates could continue to compress margins, as asset yields may decline more than funding costs.
- Management reported loan growth across product lines other than SBA 7(a), and 6.5% growth in noninterest-bearing demand deposits since year-end. Total deposits nevertheless declined, partly due to reductions in municipal deposits.
- The Company commenced a common-stock rights offering around June 30, 2014. Each eligible shareholder received one right per share, with each right allowing purchase of 0.10 shares at $8.30 per share. If fully subscribed, estimated net proceeds were approximately $6.2 million for general corporate purposes, including growth. The filing does not provide a full-year earnings or margin forecast.
- Key exposures include real estate collateral (approximately 95% of loans), interest-rate and funding conditions, municipal-deposit competition, credit losses and OREO disposition. Commitments to advance funds were approximately $132.0 million; management stated it believed liquidity was sufficient to honor them. Litigation was not expected by management to have a material effect. Disclosure controls were reported effective, with no significant change in internal control over financial reporting.
Important facts for investors to verify
- Rights-offering subscription results and actual net capital raised, along with the resulting share count and dilution.
- Whether loan growth, deposit trends and the higher level of borrowings are sustainable and how funding costs affect net interest margin.
- Credit trends beneath the lower headline nonperforming-loan ratio, including SBA nonaccruals, charge-offs, potential problem loans and OREO costs.
- Allowance adequacy relative to portfolio growth, loan mix and future economic or collateral-value changes.
- Effects of low interest rates, municipal deposit runoff and upcoming Basel III capital requirements on earnings, liquidity and capital distributions.