Unity Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014 unless noted. Figures are unaudited and in U.S. dollars; financial statement amounts below are generally in millions.
Business context
Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania and a loan production office in New Jersey. The Bank offers commercial and retail banking, including commercial, residential mortgage, consumer and SBA lending.
Financial results and condition
- Earnings: Net income was $1.939 million, up 50% from $1.293 million in Q1 2014. Diluted EPS was $0.23 versus $0.17. Pretax income was $2.959 million; income tax expense was $1.020 million.
- Revenue and margins: Interest income was $9.884 million versus $9.023 million; net interest income was $8.020 million, up 10.1%. Noninterest income was $1.641 million versus $1.526 million. Net interest margin was 3.64%, compared with 3.57%; net interest spread was 3.44%, up 6 basis points.
- Expenses and returns: Noninterest expense increased to $6.502 million from $6.258 million. The efficiency ratio improved to 67.30% from 71.91%. Return on average assets was 0.82% versus 0.59%, and return on average equity was 11.08% versus 9.06%.
- Loans and credit: Total loans rose 3.0% from year-end to $784.6 million, led by residential mortgages (+$14.5 million) and commercial loans (+$8.8 million). The allowance for loan losses was $12.2 million, or 1.55% of loans, versus $12.6 million and 1.65% at year-end. Q1 provision was $0.2 million versus $0.6 million; net charge-offs were $0.57 million versus $0.934 million in Q1 2014.
- Asset quality: Nonperforming loans declined to $9.1 million from $11.4 million at year-end and $12.0 million a year earlier. Nonperforming assets were $11.1 million, or 1.07% of assets. OREO increased to $2.0 million from $1.2 million at year-end.
- Liquidity and funding: Cash and cash equivalents were $133.8 million, up $4.0 million from year-end. Deposits declined $4.9 million to $789.4 million. Borrowed funds were $155.0 million, up $30.0 million, principally reflecting an $80 million overnight FHLB advance at quarter-end versus $50 million at year-end. Subordinated debentures remained $15.5 million. The Bank reported $14.0 million of additional FHLB borrowing capacity.
- Cash flow: Operating activities provided $0.56 million; investing activities used $21.4 million, primarily reflecting loan growth; financing activities provided $24.9 million, including net new borrowings. Cash and cash equivalents ended the quarter at $133.8 million.
- Capital: At March 31, the Bank’s leverage, common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 8.01%, 10.07%, 10.07% and 12.44%, respectively. The filing states the Bank was well-capitalized under applicable guidelines.
Material changes and notable items
- Average loans grew $98.5 million, or 14.5%, year over year, supporting higher interest income; average securities declined and their yields were lower.
- SBA loan sale gains increased to $0.363 million from $0.083 million. No securities gains were recorded, versus $0.110 million in Q1 2014.
- Compensation expense rose $0.255 million, attributed to added loan origination and support staff. OREO expense fell $0.212 million year over year, partly because of property dispositions after Q1 2014.
- Two properties valued at $1.4 million transferred into OREO during the quarter, resulting in a $0.350 million charge to the loan-loss allowance; one OREO property was sold.
- Shareholders’ equity rose to $72.0 million from $70.1 million at year-end, reflecting quarterly earnings and other items, partly offset by $0.238 million in dividends. The quarterly dividend was $0.03 per share.
Outlook, risks and contingencies
The filing gives no numerical earnings or growth guidance. Management cited strategic priorities of expanding in-market lending and deposit relationships, improving credit quality and growing core earnings. It noted the prolonged low-rate environment and reported that the Federal Reserve had indicated a rate increase could occur as early as June 2015; actual timing and effects were uncertain. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Credit risk is concentrated geographically in the Bank’s markets, and approximately 96% of loans were secured by real estate. A decline in local property values could increase losses.
- Noninterest-bearing municipal and other government deposits can be short-duration and price-sensitive. Government deposits totaled $77.7 million at quarter-end.
- Outstanding borrower commitments were approximately $174.5 million, of which $98.6 million expired within one year; management believed liquidity was sufficient to meet them. Standby letters of credit were $1.5 million.
- Interest-rate changes could affect spreads, asset values and funding costs. Management reported that modeled equity-value impacts under a 200-basis-point shock were within Board limits.
- Management said pending legal proceedings were not expected to materially affect the Company. The filing added that crossing $1.0 billion in assets may trigger additional regulatory reporting and control-attestation requirements if the Bank’s assets exceed the threshold at year-end.
- Management considered the allowance adequate, but stated future provisions could be needed if economic conditions or collateral values change. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth and improved net interest margin continue without weakening underwriting or asset quality.
- Whether the decline in nonperforming loans is sustained, and how elevated Q1 SBA 504 charge-offs and higher OREO affect future credit costs.
- Whether deposit trends and reliance on overnight borrowings remain manageable, including the availability and cost of alternative funding.
- How interest-rate movements affect net interest income, securities values and deposit pricing.
- Whether asset growth triggers added regulatory reporting or control-attestation obligations at year-end, and the resulting compliance costs.