Unity Bancorp, Inc. — 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017. Unity Bancorp is a New Jersey bank holding company whose principal subsidiary, Unity Bank, provides community-oriented commercial and consumer banking through 18 branches in New Jersey and Pennsylvania. The company reported 189 full-time and 19 part-time employees at year-end.
Financial performance and condition
- Net income: $12.893 million for 2017, compared with $13.209 million in 2016. The company’s non-GAAP figures, excluding specified unusual items, were $14.626 million and $11.726 million, respectively.
- Earnings per share: GAAP basic and diluted EPS were $1.22 and $1.20 in 2017, versus $1.40 and $1.38 in 2016. Adjusted non-GAAP diluted EPS was $1.36 versus $1.23.
- Returns: GAAP return on average assets was 1.02% and return on average equity was 11.47% in 2017; adjusted non-GAAP figures were 1.15% and 13.02%. The corresponding 2016 non-GAAP figures were 1.04% and 13.65%.
- Taxes: GAAP income tax expense was $9.540 million and the effective tax rate was 42.50% in 2017. Excluding the tax-law adjustment, the company reported $7.807 million of tax expense and a 34.80% effective rate.
- Loans and reserves: The allowance for loan losses was $13.6 million, equal to 1.16% of total loans and 452.77% of nonperforming loans. Approximately 96% of loans had real estate as a primary or secondary collateral component.
- Assets and investments: Average assets were approximately $1.3 billion in 2017, versus $1.1 billion in 2016. Year-end available-for-sale and held-to-maturity securities were approximately $53.5 million and $16.3 million, respectively.
- Liquidity and funding: The company held approximately $99.6 million in governmental and municipal deposits at year-end. The filing identifies deposit growth and retention, loan and securities cash flows, operations, and other funding sources as sources of liquidity.
- Cash flow, revenue, margins and debt: The supplied filing text does not provide clear values for revenue, net interest margin, cash flow, year-end liquidity ratios, or total debt. The complete financial statements and detailed management discussion are incorporated by reference to the 2017 shareholder annual report. The company also disclosed $10.3 million of preferred securities issued by its statutory trust; the amount of other debt outstanding is not clear in the supplied text.
Material changes versus the prior comparable period
- GAAP net income declined by $0.316 million from 2016; GAAP diluted EPS fell from $1.38 to $1.20. Adjusted non-GAAP net income and diluted EPS increased year over year.
- Comparability is affected by unusual items: 2017 includes a $1.733 million tax expense adjustment associated with the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate from 35% to 21%. 2016 included a $2.3 million pretax gain from repurchasing $5.2 million of subordinated debentures.
- Average assets and average equity increased year over year, to approximately $1.3 billion and $113.0 million, respectively, from $1.1 billion and $85.9 million.
Outlook, risks and contingencies
- The filing gives no specific earnings, growth, margin, or capital guidance. Management states that the ultimate impact of regulatory changes is uncertain.
- Key exposures include the local New Jersey and eastern Pennsylvania economies, real estate values and loan concentration, borrower repayment, and sensitivity of earnings and asset values to interest-rate movements.
- Other identified risks include competition for deposits and loans, reliance on municipal deposits, cybersecurity and vendor disruptions, regulatory and compliance costs, and the effects of the 2017 tax-law changes on borrowers and residential real estate.
- A proposed New Jersey state-owned bank was described as an early-stage proposal, with no legislation introduced at the time; if implemented, it could affect the company’s governmental and municipal deposits.
- The company reported no legal proceedings it believed would have a material adverse effect and no unresolved SEC staff comments. Management concluded disclosure controls were effective; the filing states there were no significant changes in internal controls during the period.
Important facts for investors to verify
- Review the incorporated annual report for full income statements, balance sheets, cash-flow statements, net interest margin, deposit and borrowing composition, and regulatory capital ratios.
- Reconcile GAAP and adjusted results, including the tax-law adjustment in 2017 and subordinated-debenture repurchase gain in 2016.
- Assess loan quality, nonperforming assets, charge-offs, and reserve adequacy, particularly given the real-estate collateral exposure.
- Evaluate funding concentration and liquidity, including municipal deposits and the status of the proposed state-owned bank.
- Check regulatory capital and debt details, including the terms and treatment of the trust preferred securities.