Unity Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2017, compared with Q1 2016; balance-sheet comparisons are with December 31, 2016. Unity is a New Jersey bank holding company whose Unity Bank operates 17 branches in New Jersey and Pennsylvania and offers commercial and retail banking services.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.226 billion | $1.190 billion at Dec. 31, 2016 |
| Total loans | $1.001 billion | $973.4 million at Dec. 31, 2016 |
| Total deposits | $980.7 million | $945.7 million at Dec. 31, 2016 |
| Cash and cash equivalents | $103.2 million | $105.9 million at Dec. 31, 2016 |
| Borrowed funds and subordinated debentures | $130.3 million | $131.3 million at Dec. 31, 2016 |
| Net interest income | $10.39 million | $8.99 million in Q1 2016 |
| Net interest margin | 3.70% | 3.48% in Q1 2016 |
| Net income / diluted EPS | $3.19 million / $0.30 | $4.21 million / $0.44 in Q1 2016 |
| Operating cash flow | $6.81 million | $3.91 million in Q1 2016 |
Interest income was $12.59 million, up 12.6% year over year; interest expense was $2.20 million, up $15,000. The loan-loss provision was $250,000 versus $200,000. Noninterest income was $2.20 million versus $4.28 million, while noninterest expense rose to $7.44 million from $6.61 million. The effective tax rate was 34.9% in both periods.
Reported Q1 2016 earnings included a $2.3 million pretax gain on a subordinated-debt repurchase. Excluding that gain, management reported Q1 2016 net income of $2.7 million, diluted EPS of $0.29, return on average assets of 1.00%, and return on average equity of 13.68%. On that adjusted comparison, Q1 2017 net income and diluted EPS improved; the efficiency ratio was 59.08% versus 60.56%. Reported return on average assets and equity were 1.07% and 12.02%, respectively, versus 1.54% and 21.05% unadjusted in Q1 2016.
Operating activities provided $6.8 million; investing activities used $43.1 million, principally for loan growth and securities purchases; financing activities provided $33.6 million, mainly from deposit growth and borrowings. Cash declined $2.7 million during the quarter. Shareholders’ equity was $109.3 million. At March 31, the company’s and bank’s total risk-based capital ratios were 13.78% and 13.40%; the bank met the stated 10.00% well-capitalized threshold.
Material changes and management commentary
- Loans grew 2.8% from year-end, led by residential mortgages (+$16.5 million), commercial loans (+$10.2 million), and consumer loans (+$4.5 million). Deposits rose 3.7%, including $26.3 million of savings growth, which management attributed in part to promotions.
- Management attributed higher net interest income to loan growth and a higher interest-rate environment. Average interest-earning assets increased $100.7 million year over year; net interest margin expanded 22 basis points.
- Compensation and benefits increased $546,000, partly from two new retail branches and additional lending and support staff. Loan collection and OREO expense increased $269,000, including a $253,000 loss on an OREO sale.
- Nonperforming loans were $7.8 million, or 0.78% of loans, versus $7.2 million at year-end; nonperforming assets were $8.9 million, or 0.73% of assets. Potential problem loans increased to $4.2 million from $1.1 million at year-end. Management reported no TDRs at quarter-end.
- The allowance for loan losses was $12.7 million, or 1.27% of loans, compared with 1.29% at year-end; Q1 net charge-offs were $148,000. Management considered the allowance adequate but noted future additions could be required as conditions change.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results. Forward-looking results may be affected by economic, market, legislative, regulatory and interest-rate conditions, including changes affecting the company’s interest-rate spread and income.
Credit risks include concentration in the bank’s regional markets and real-estate collateral: approximately 95% of loans were secured by real estate. Management also identifies SBA lending as higher risk than other loan products. Unfunded lending commitments were approximately $219.8 million, including $130.3 million expiring within one year; management stated it believed liquidity was sufficient to honor them. The bank reported $241.8 million of additional FHLB borrowing capacity. Government deposits were $82.2 million and described as short-duration and price-sensitive.
A 200-basis-point rate shock was estimated to reduce economic value of equity as a percentage of assets by 0.46% in a rising-rate scenario and 0.73% in a falling-rate scenario, within board limits. Management reported no material expected effect from adopting the revenue-recognition standard; it was evaluating several other accounting standards, including the expected-credit-loss standard. Management stated pending ordinary-course legal matters were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether loan growth and deposit promotions continue to support margin and funding costs, and how deposit competition affects the cost of funds.
- Trends in nonperforming and potential problem loans, collateral values, charge-offs, and allowance adequacy, particularly in commercial and real-estate lending.
- Whether the OREO loss and higher collection costs recur, and whether expense growth from branch expansion and staffing is matched by revenue growth.
- The sustainability of earnings improvement compared with Q1 2016 after excluding its one-time debt-repurchase gain.
- Liquidity and capital resilience if lending commitments are funded or short-duration municipal and other deposits are withdrawn.