Unity Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three and nine months ended September 30, 2018; balance-sheet changes are compared with December 31, 2017. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 19 branches in New Jersey and Pennsylvania. It provides commercial and retail banking, lending, and deposit services.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $13.6m | $11.8m | $39.6m | $33.4m |
| Provision for loan losses | $0.5m | $0.5m | $1.55m | $1.15m |
| Noninterest income | $2.5m | $2.0m | $7.1m | $6.2m |
| Noninterest expense | $8.8m | $7.6m | $25.2m | $22.4m |
| Net income | $5.49m | $3.76m | $16.12m | $10.39m |
| Diluted earnings per share | $0.50 | $0.35 | $1.48 | $0.97 |
- Q3 net income rose about 46% year over year; nine-month net income rose about 55%. Q3 return on average assets was 1.50% and return on average equity was 16.64%, versus 1.17% and 13.00%, respectively, a year earlier.
- Net interest margin was 3.92% for Q3, up from 3.88%; for the nine-month period it was 3.95%, up from 3.79%. Q3 efficiency ratio was 54.86%, unchanged year over year; the nine-month ratio improved to 53.90% from 56.72%.
- At September 30, total assets were $1.553bn, up 6.7% from year-end. Total loans were $1.283bn, up $112.6m (9.6%); deposits were $1.219bn, up $176.3m (16.9%). Shareholders’ equity was $133.1m, versus $118.1m.
- Cash and cash equivalents were $144.6m, down $5.7m from year-end. For the nine months, operating activities provided $28.9m; investing activities used $114.3m; financing activities provided $79.8m.
- Borrowed funds were $180.0m and subordinated debentures were $10.3m, compared with $275.0m and $10.3m, respectively, at year-end. The company reported $190.3m in combined borrowings and subordinated debentures.
- Regulatory capital ratios at September 30 included a 9.35% Bank leverage ratio, 11.52% CET1 ratio, and 12.77% total risk-based capital ratio. Each exceeded the stated minimum for the Bank to be considered well capitalized.
Material changes and asset quality
- Loan growth was led by commercial loans, up $68.2m, and residential mortgages, up $48.5m, from year-end. Total deposits rose substantially, including a $133.6m increase in time deposits; management attributed this partly to retail and broker-generated deposits.
- Q3 interest income benefited from loan growth and higher asset yields, while interest expense rose 52.5% year over year as deposit balances and rates increased. The average cost of interest-bearing deposits rose to 1.33% in Q3 from 0.87%.
- Nonperforming loans increased to $6.2m, or 0.48% of total loans, from $3.0m, or 0.26%, at year-end. Nonperforming assets were $6.3m. Management cited new nonaccrual commercial and SBA credits and higher residential nonperforming loans. The allowance for loan losses was $15.0m, or 1.17% of total loans; nine-month net charge-offs were $118,000.
- About 94% of loans were secured by real estate. Management notes that local property values and economic conditions can affect collateral and loss exposure. Potential problem loans totaled $2.4m, down from $4.0m at year-end.
Outlook, commentary, risks, and unusual items
- The filing gives no earnings or revenue guidance. Management estimated an effective tax rate of 25%–27% for 2019, reflecting New Jersey tax legislation; the 2018 Q3 effective rate was 18.6%, compared with 34.9% a year earlier, largely due to the federal corporate tax rate reduction and, in Q3, stock-option exercises.
- Q3 noninterest expense included an $850,000 charge from a change to the CEO’s supplemental retirement benefit calculation. The filing estimates future payments under the benefit at $4.2m. A $317,000 legal settlement related to an OREO property partly offset expenses. BOLI income included a $291,000 death benefit.
- Management said two additional branches and increased headcount drove higher compensation, occupancy, and equipment costs. Mortgage-loan sales gains increased, while management said it chose to retain more non-conforming residential mortgages for long-term investment.
- Management reported $289.4m of outstanding loan commitments, including $5.6m of standby letters of credit, and said it believed liquidity was sufficient to honor them. Government deposits totaled $147.0m and were described as short-duration and price-sensitive. The filing cites additional FHLB borrowing capacity, but gives two different figures—$234.7m and $275.4m—under separate descriptions.
- Key risks include credit deterioration, real-estate collateral values, changing interest rates and deposit competition, and regulatory or economic changes. Management reported no pending legal matters expected to materially affect the company and no significant change in market-risk assessment. Disclosure controls were judged effective.
Important facts for investors to verify
- Whether recent loan growth and deposit growth—particularly time, broker-generated, and municipal deposits—remain sustainable and appropriately priced.
- Developments in nonperforming loans, criticized commercial and SBA credits, residential foreclosures, and allowance adequacy as the loan portfolio expands.
- The impact of higher deposit costs and future interest-rate changes on net interest margin, liquidity, and the value of securities; available-for-sale securities had a $1.7m net unrealized loss at quarter-end.
- The 2019 tax-rate outlook, including the effect of New Jersey’s surtax and combined-reporting rules.
- The continuing cost and vesting terms of the amended CEO retirement benefit, and the nature and recurrence of the OREO settlement and BOLI death benefit.
- The FHLB borrowing-capacity figures: management’s discussion reports both $234.7m and $275.4m, so the applicable available capacity should be reconciled.