Unity Bancorp, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Unity Bancorp is a New Jersey bank holding company operating Unity Bank, which provides commercial and retail banking through 15 branches in New Jersey and Pennsylvania and a loan production office in New Jersey. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015, and income comparisons are to Q1 2015. Dollars are in millions unless noted.
Key financial metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $4.205; diluted EPS $0.48 | $1.939; diluted EPS $0.23 in Q1 2015 |
| Net interest income | $8.987 | $8.020 in Q1 2015 |
| Net interest margin | 3.48% | 3.64% in Q1 2015 |
| Total assets | $1,120.955 | $1,084.866 at December 31, 2015 |
| Total loans | $886.990 | $888.958 at December 31, 2015 |
| Total deposits | $926.819 | $894.493 at December 31, 2015 |
| Cash and cash equivalents | $126.473 | $88.157 at December 31, 2015 |
| Borrowed funds and subordinated debentures | $105.310 | $107.465 at December 31, 2015 |
| Shareholders’ equity | $82.276 | $78.470 at December 31, 2015 |
- Reported return on average assets was 1.54%, return on average equity 21.05%, and efficiency ratio 50.16%. Excluding the debt-repurchase gain, management reported core net income of $2.7 million, diluted EPS of $0.31, return on average assets of 1.00%, return on average equity of 13.67%, and efficiency ratio of 60.05%.
- Net cash provided by operating activities was $3.905 million; investing activities provided $2.291 million; financing activities provided $32.120 million. Cash increased $38.316 million during the quarter.
- The allowance for loan losses was $12.634 million, or 1.42% of loans. Q1 net charge-offs were $325,000, compared with $570,000 in Q1 2015.
- Unity Bank’s regulatory capital ratios were 7.34% leverage, 9.70% CET1, 9.70% Tier 1 risk-based, and 11.98% total risk-based. The Bank reported that it was “well-capitalized.”
Material changes versus comparable periods
- Net income more than doubled year over year, but included a $2.264 million pretax gain from repurchasing subordinated debt. The company repurchased $5.0 million face value of debentures at $0.5475 per dollar; the gain was nonrecurring.
- Net interest income rose 12.1% year over year, principally as average loans increased 14.6%. Net interest margin fell 16 basis points, which management attributed in part to a higher Federal funds and interest-bearing deposit balance; average earning-asset yield also declined.
- Total assets rose 3.3% from year-end, driven mainly by a $38.3 million increase in cash. Deposits increased $32.3 million; total loans declined $2.0 million.
- Nonperforming loans were $6.887 million, down from $9.141 million at March 31, 2015. Nonperforming assets were $8.304 million versus $11.116 million a year earlier. Troubled debt restructurings declined to $1.1 million from $3.3 million at year-end 2015.
- Noninterest expense increased modestly to $6.607 million from $6.502 million. Mortgage-loan sale gains increased to $715,000 from $344,000, while SBA loan-sale gains decreased to $308,000 from $363,000.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance is provided. Management cited loan growth, improved credit quality, higher noninterest income, and expense control as drivers of improved core results. It also noted the ongoing low-rate environment and expected gradual Federal Reserve rate increases.
- Credit and concentration risk remain important: approximately 96% of loans were secured by real estate, and the majority of borrowers were in the Bank’s operating markets. Management cautioned that local real-estate values and economic conditions could affect collateral and losses.
- Outstanding loan commitments were approximately $161.7 million, including $73.0 million due to expire within one year; standby letters of credit totaled $2.7 million. The company said it believed it had adequate liquidity to honor commitments. Government deposits totaled $105.9 million, including $99.0 million at 12 municipalities with balances above $1.5 million each.
- Available additional FHLB borrowing capacity was $62.0 million. A $10.0 million FHLB advance was modified to a 4.75-year term, callable quarterly after one year, at 2.10%. The debt repurchase reduced subordinated debt but also reduced Tier 1 capital eligibility.
- The company reported a $520,000 fair-value liability on interest-rate swaps, with the period’s hedge-related loss recorded in other comprehensive income. Its 200-basis-point economic-value-of-equity sensitivity was within Board limits.
- Management said pending ordinary-course legal matters were not expected to materially affect financial position or results. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Separate recurring operating performance from the $2.264 million pretax debt-repurchase gain and confirm the calculation of management’s core earnings and adjusted ratios.
- Reconcile cash-flow figures: the cash-flow statement reports operating cash flow of $3.905 million and financing cash flow of $32.120 million, while the MD&A describes operating cash flow of $6.2 million and financing cash flow of $29.9 million. The filing text does not clearly reconcile these differences.
- Check reported credit-quality comparisons: management’s highlights describe nonperforming loans as down 26.3%, while the tabulated balances of $9.141 million in March 2015 and $6.887 million in March 2016 imply a different percentage change.
- Monitor net interest margin, deposit pricing and mix, commercial and real-estate credit performance, municipal deposit concentration, and the funding and liquidity impact of outstanding commitments.
- Assess the effect of the subordinated-debt repurchase on regulatory capital and review the $520,000 swap liability and related interest-rate exposures.