Unity Bancorp, Inc. — Q1 2014 Form 10-Q
Business context and period. Unaudited consolidated results for the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are with December 31, 2013. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 15 branches in New Jersey and Pennsylvania.
Key financial metrics
Amounts below are in millions except per-share data and ratios.
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.293 | $1.200 in Q1 2013 |
| Income available to common shareholders | $1.293 | $0.796 in Q1 2013, after preferred dividends and discount accretion |
| Diluted EPS | $0.17 | $0.10 in Q1 2013 |
| Net interest income | $7.287 | $6.689 in Q1 2013 |
| Net interest margin | 3.57% | 3.52% in Q1 2013 |
| Provision for loan losses | $0.600 | $0.650 in Q1 2013 |
| Noninterest income / expense | $1.526 / $6.258 | $1.825 / $6.126 in Q1 2013 |
| Efficiency ratio; return on average assets; return on average common equity | 71.91%; 0.59%; 9.06% | 73.91%; 0.59%; 5.65% in Q1 2013 |
| Total assets | $961.2 | $921.1 at December 31, 2013 |
| Total loans; allowance for loan losses | $684.0; $12.8 | $678.7; $13.1 at December 31, 2013 |
| Total deposits | $767.6 | $738.7 at December 31, 2013 |
| Borrowed funds and subordinated debentures | $130.5 | $122.5 at December 31, 2013 |
| Cash and cash equivalents | $128.2 | $99.4 at December 31, 2013 |
Material changes and operating performance
- Net income increased 7.8% year over year, while income available to common shareholders rose 62.4%, principally because the company had redeemed all Treasury preferred stock in 2013 and paid no preferred dividends in Q1 2014. Diluted EPS increased from $0.10 to $0.17.
- Net interest income rose 8.9%, reflecting loan growth; net interest margin expanded five basis points. Average loans increased $84.5 million year over year, while the average loan yield fell 24 basis points to 4.85%. Management said the low-rate environment continued to pressure asset yields.
- Noninterest income declined $0.299 million, mainly due to lower SBA and residential mortgage loan-sale gains and reduced security gains. Noninterest expense increased $0.132 million, including a $0.120 million rise in OREO expenses.
- Quarter-end loans grew 0.8% from year-end: commercial loans increased $5.6 million and SBA 504 loans increased $2.0 million. Deposits rose 3.9%; noninterest-bearing demand deposits increased $36.0 million, partly offset by a $13.4 million decline in savings deposits.
- Operating cash flow was $2.1 million; investing activities used $10.2 million and financing activities provided $36.8 million. Cash increased $28.8 million. Financing inflows included $28.9 million of net deposit growth and $40.0 million of new borrowings, partly offset by $32.0 million of repayments.
Credit quality, capital, liquidity and risks
- Nonperforming loans were $12.0 million, or 1.76% of loans, down from $15.3 million and 2.25% at year-end. Nonperforming assets were $14.5 million, or 1.51% of assets. OREO rose to $2.5 million from $0.6 million, after four properties totaling $2.4 million transferred to OREO; three properties were sold at a combined net loss of $0.128 million.
- Net charge-offs were $0.934 million versus $1.063 million in Q1 2013. The allowance was 1.87% of total loans and 106.32% of nonperforming loans. Management considered the allowance adequate, but noted future provisions may be required as conditions change. Potential problem loans increased to $9.3 million from $5.7 million at year-end.
- Approximately 96% of loans were secured by real estate, exposing the portfolio to local property values and economic conditions. The filing also identifies borrower performance, collateral values, interest rates, competition, regulation and general economic conditions as risks.
- Reported company capital ratios at March 31 were 8.19% leverage, 10.77% Tier 1 risk-based and 12.03% total risk-based. The Bank’s ratios were 7.14%, 9.39% and 11.91%, respectively; the Bank exceeded the stated well-capitalized thresholds.
- Liquidity included $58.2 million of additional FHLB credit availability as reported in the borrowings discussion; the liquidity section separately states $46.7 million in additional borrowing potential based on pledged collateral. The filing says additional collateral could increase capacity. Outstanding loan commitments were $120.2 million.
- A $30.0 million short-term customer deposit arrived on March 31, of which $25.0 million was withdrawn on April 4. Government deposits were $70.4 million at quarter-end and are described as short-duration and price-sensitive.
- Interest-rate sensitivity modeling showed economic value of equity relative to assets declining 0.88% under a 200-basis-point rate rise and increasing 0.29% under a 200-basis-point decline, within the company’s stated limits.
Outlook, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management described strategic priorities as growing in-market loans and deposits, improving credit quality and growing core earnings. It cautioned that low rates may keep asset yields under pressure and that interim results are not necessarily indicative of full-year performance.
- On April 15, 2014, the company filed an S-1 for a common-stock rights offering intended to provide capital for earning-asset growth; it expected completion in late Q2 or early Q3 2014. The filing provides no offering amount in the supplied text.
- Management reported no pending legal matter expected to materially affect the company. Standby letters of credit were $1.4 million. The company was evaluating a new accounting standard on foreclosed residential real estate; its impact was not yet determined.
- The company reported no significant changes in market-risk assessment, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Rights-offering terms, proceeds, completion and resulting share dilution.
- Whether the temporary $30.0 million deposit outflow and other deposit movements affected subsequent liquidity or funding costs.
- Reconciliation of the filing’s two stated additional FHLB borrowing-capacity figures ($58.2 million and $46.7 million).
- Progression of potential problem loans, OREO, charge-offs and allowance adequacy, particularly given real-estate collateral concentration.
- Sustainability of net interest margin and earnings as loans and deposits reprice in a persistently low-rate environment.