Unity Bancorp, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Unity 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. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $8.62 | $7.63 | $25.01 | $22.23 |
| Provision for loan losses | $0.20 | $0.55 | $0.40 | $1.70 |
| Noninterest income | $2.28 | $1.85 | $5.81 | $5.02 |
| Noninterest expense | $6.85 | $6.24 | $20.00 | $18.64 |
| Net income | $2.55 | $1.89 | $6.92 | $4.71 |
| Diluted earnings per share | $0.30 | $0.24 | $0.81 | $0.61 |
| Net interest margin | 3.60% | 3.56% | 3.65% | 3.54% |
| Efficiency ratio | 62.88% | 65.80% | 64.97% | 69.40% |
- Quarterly net income rose 35%; nine-month net income rose about 47%. Management attributed improved results principally to loan growth, better credit quality and core earnings growth.
- Net interest income grew 13.0% in Q3 and 12.5% year to date. Loan growth lifted interest income, while lower yields on parts of the loan and securities portfolios partly offset the volume benefit. The filing reports tax-equivalent net interest income growth of 12.9% for Q3 and 12.3% year to date.
- At September 30, assets were $1,052.7, up 4.4% from year-end 2014; loans were $855.6, up 12.3%; deposits were $866.2, up $71.9; and shareholders’ equity was $76.1, up $5.9. Loan growth was broad-based: commercial +$41.0, residential mortgages +$34.6, consumer +$15.2 and SBA +$8.1; SBA 504 loans declined $5.1.
- Cash and cash equivalents were $88.9, down $41.0 from year-end. Nine-month cash flows were operating cash use of $0.4, investing cash use of $76.7 and financing cash inflow of $36.1. Investing cash use largely reflected loan growth.
- Borrowed funds were $90.0, down from $125.0 at year-end; subordinated debentures remained $15.5. Total borrowed funds plus subordinated debentures were $105.5, versus $140.5.
- The allowance for loan losses was $12.4, or 1.45% of loans, versus $12.6 and 1.65% at year-end. Net charge-offs for the first nine months were $0.53, compared with $1.92 in 2014.
- The Bank reported capital ratios of 8.03% leverage, 10.13% CET1, 10.13% Tier 1 risk-based and 12.44% total risk-based at September 30; it remained “well-capitalized” under applicable guidelines.
Material changes, outlook and risks
- Credit indicators were mixed: nonperforming loans fell to $10.7 from $11.4 at year-end, and were 1.26% of loans versus 1.49%. However, OREO increased to $1.8 from $1.2; the Bank took title to four properties valued at $2.2 during the first nine months, with a $0.35 charge to the allowance. Nonperforming assets were $12.5.
- Noninterest income benefited from mortgage loan-sale gains, which were $0.93 in Q3 and $1.96 year to date, versus $0.26 and $0.82. The prior-year comparison included a BOLI death benefit; BOLI income was lower by $0.31 year to date. Compensation and benefits expense rose $1.2 year to date, reflecting additional lending staff, mortgage commissions and a CEO supplemental retirement plan.
- No specific earnings or growth guidance is provided. Management described continued loan and deposit relationship expansion and improving credit quality as strategic priorities. It also noted that a sustained low-rate environment affects results; the filing does not provide a clear quantified earnings forecast.
- Interest-rate risk modeling showed economic value of equity, as a percentage of assets, declining 0.99% under a 200-basis-point rate increase and 0.88% under a 200-basis-point decrease, both within Board limits. Management cautioned that actual outcomes may differ with economic, market, regulatory and interest-rate conditions.
- Credit risk is concentrated geographically in the Bank’s markets, and about 96% of loans were secured by real estate. Commercial real estate is the largest loan category. Government deposits were $114.5, including $97.7 from eleven municipalities with balances above $1.5; management said their withdrawal would not create a liquidity shortfall, but noted their short duration and price sensitivity.
- Outstanding borrower commitments were approximately $147.7, including $1.5 of standby letters of credit; $63.3 of commitments expire within one year. The filing states management believes liquidity is sufficient to honor commitments.
- Subsequent to quarter-end, Unity agreed to reprice two $10.0 million FHLB advances from 4.03% and 4.19% to 2.02% and 2.15%, respectively, with five-year terms and a one-year no-call period (callable quarterly thereafter). Management did not identify pending litigation expected to have a material adverse effect.
- The Bank exceeded $1.0 billion in assets during the period. The filing identifies potential added FDIC reporting, internal-control assessment and audit-attestation requirements as a source of compliance cost and regulatory scrutiny. Management reported disclosure controls were effective and no significant change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth can continue without weakening underwriting or asset quality, particularly in commercial real estate and residential mortgage lending.
- Trends in nonperforming loans, OREO, charge-offs and reserve coverage; the allowance ratio declined as the portfolio expanded.
- How sustainable mortgage-sale gains and other noninterest income are, given their contribution to earnings growth and the prior-year BOLI death benefit.
- Deposit mix, pricing and retention—especially time deposits and municipal balances—and the effect of funding costs on net interest margin.
- Liquidity and capital capacity to support growth, fund commitments and meet new regulatory requirements; confirm the terms and realized savings from the post-quarter FHLB repricing.