CLINTON, N.J., Jan. 24, 2018 (GLOBE NEWSWIRE) -- Unity Bancorp, Inc. (NASDAQ:UNTY), parent company of Unity Bank, reported net income of $2.5 million or $0.23 per diluted share for the three months ended December 31, 2017, compared to net income of $3.2 million, or $0.32 per diluted share, for the three months ended December 31, 2016. Return on average assets and average common equity for the quarter were 0.74% and 8.54%, respectively, compared to 1.07% and 13.47% for the same period a year ago.
For the year ended December 31, 2017, net income was $12.9 million or $1.20 per diluted share, compared to net income of $13.2 million or $1.38 per diluted share for the prior year. Return on average assets and average common equity for the year ended December 31, 2017 was 1.02% and 11.47%, respectively compared to 1.17% and 15.37% for the prior year.
Net income presented above includes the impact of the “Tax Cuts and Jobs Act” which was signed into law on December 22, 2017, as well as a gain on the repurchase of subordinated debentures in 2016. The “Tax Cuts and Jobs Act,” which lowered the corporate tax rate from 35% to 21%, will provide a significant tax benefit in 2018 and beyond. However, net income for 2017 was adversely impacted. Under ASC 740, Income Taxes, Unity was required to adjust its deferred income tax balances as of the enactment date to reflect a rate of 21%. This adjustment resulted in a $1.7 million increase in income tax expense. In February 2016, the Company repurchased $5.0 million of its outstanding subordinated “capital qualifying” debentures at a price of $0.5475 per dollar, thus reducing its outstanding subordinated debt to $10.3 million. The repurchase resulted in a nonrecurring pre-tax gain of approximately $2.26 million.
Core net income, which excludes the impact of the nonrecurring items discussed above, was $4.2 million or $0.39 per diluted share for the quarter ended December 31, 2017, an increase of 34.0% over $3.2 million or $0.32 per diluted share a year ago. Core return on average assets and average common equity for the quarter ended December 31, 2017 were 1.25% and 14.46%, respectively, compared to 1.07% and 13.47% for the same period a year ago.
Core net income was $14.6 million or $1.36 per diluted share for 2017, an increase of 24.7% over $11.7 million or $1.23 per diluted share a year ago. Core return on average assets and average common equity for the year ended December 31, 2017 were 1.15% and 13.02%, respectively, compared to 1.04% and 13.65% for the same period a year ago.
The core earnings presented above exclude the impact of nonrecurring items such as the 2017 adjustment to deferred tax assets due to the changes in corporate tax rates and the 2016 gain on the sale of subordinated debt. Management believes excluding these items from net income and reporting it in a format which is not in compliance with generally accepted accounting principles (“non-GAAP”) is beneficial to the reader and provides better comparability of the Company’s performance over both periods.
Fourth quarter highlights included:
- Opened our new Ramsey, NJ branch and relocated the Phillipsburg, NJ branch. The new Bethlehem, PA branch is expected to open near the end of March.
- Loans grew 20.3% from year-end, reflecting a 26.3% increase in residential mortgage loans, 20.0% increase in consumer loans and 19.2% increase in commercial loans.
- Deposits increased 10.3%, reflecting an 18.6% increase in noninterest-bearing demand deposits, 13.3% increase in interest-bearing deposits and a 9.1% increase in savings deposits.
- Net interest income increased 24.3% to $12.5 million compared to the prior year’s quarter due to earning asset growth and improved margins.
- Net interest margin increased to 3.91% this quarter compared to 3.60% in the prior year’s quarter due to strong loan growth and the benefit of a rising rate environment.
- Credit quality continues to improve. Nonperforming loans fell to $3.0 million.
- The Company provided all non-executive employees with a bonus of $750 each in response to the federal tax reform legislation at a cost of approximately $150 thousand.
- Unity Bank received the prestigious “5-Star Rating” from Bauer Financial indicating excellence among financial institutions in capital adequacy, profitability and asset quality.
“We are all extremely proud of our performance in 2017,” stated James A. Hughes, President and CEO. “Due to our record loan growth and our expanding margin, our performance in 2017 significantly exceeded our forecasts. We expanded our geographic footprint with the opening of the Ramsey, NJ branch this quarter and will be opening our Bethlehem, PA branch this spring. I am confident that we can continue to expand our franchise while we grow our profitability. Our performance is a testament to the competency of our team of exceptional employees. As such, the Board felt it was appropriate to share some of the future tax benefit with the employees for a job well done.”
Net Interest Income
Net interest income, our primary driver of earnings, increased $2.4 million to $12.5 million for the quarter ended December 31, 2017 compared to the prior year’s quarter. In addition, the net interest margin expanded 31 basis points to 3.91%, compared to 3.60% for the prior year’s quarter. For the year ended December 31, 2017, net interest income increased $7.6 million to $45.9 million, and the net interest margin expanded 25 basis points to 3.83%. Each period benefited from strong loan growth, the rising interest rate environment and a stable cost of funds.
The yield on earning assets increased 31 basis points to 4.71% for the quarter ended December 31, 2017 compared to 4.40% for the prior year’s quarter. This increase was the result of strong commercial, residential mortgage and consumer loan growth over the prior year’s period and the benefit of a rising rate environment. Quarterly average commercial loans increased $85.5 million, average residential mortgage loans increased $55.6 million and consumer loans increased $18.8 million compared to the fourth quarter of 2016.
The cost of interest-bearing liabilities increased 2 basis points to 1.05% for the quarter ended December 31, 2017. While the cost of deposits increased 5 basis points to 0.88%, the cost of borrowed funds and subordinated debentures decreased 35 basis points compared to the prior year due to the modification of borrowings with the Federal Home Loan Bank (“FHLB”) and the addition of new borrowings at lower rates over the past year. The increase in the cost of deposits was primarily driven by the growth in savings deposits. The cost of interest-bearing liabilities may rise in the future due to competition for deposits and the rising rate environment.
Provision for Loan Losses
The provision for loan losses increased during the quarter and annual periods ended December 31, 2017 despite reduced net charge-offs, due to the growth in the loan portfolio. The provision for loan losses was $500 thousand and $200 thousand for each of the quarters ended December 31, 2017 and December 31, 2016, respectively. The provision for loan losses increased $430 thousand to $1.7 million for the year ended December 31, 2017 compared to the prior year period. Quarterly net charge-offs declined $249 thousand to $57 thousand from $306 thousand in the prior year’s quarter. Annual net charge-offs declined $727 thousand over the prior year period to $673 thousand for the twelve months ended December 31, 2017.
Noninterest income decreased $336 thousand to $2.0 million for the three months ended December 31, 2017 and declined $526 thousand to $8.3 million for the year ended December 31, 2017, compared to the same period last year due to a lower volume of sales of both mortgage and SBA loans, and lower gains on the sale of securities, partially offset by increased service and loan fee income.
Quarterly gains on the sale of mortgage loans declined $359 thousand and yearly gains declined $1.1 million compared to the prior year periods due to lower sales volumes in each period. During 2017, management elected to hold more of the residential loans it originates in portfolio for long term investment rather than sell the loans. In the twelve months ended December 31, 2017, $221.6 million in mortgage loans were originated with $82.1 million being sold for a net gain of $1.5 million. By comparison, $192.2 million in mortgage loans were originated in 2016, of which $108.1 million were sold for a gain of $2.6 million. Mortgage loan sale volume totaled $15.9 million for the three months ended December 31, 2017 compared to $31.5 million in sales in the prior year’s period.
Gains on the sale of SBA loans decreased due to a lower volume of loan sales this quarter compared with the prior year’s quarter. SBA loan sales totaled $3.7 million with net gains on sale of $268 thousand for the quarter ended December 31, 2017, compared to $6.4 million in sales and a net gain of $515 thousand in the prior year’s quarter. Gains on the sale of $19.4 million in SBA loans were $1.6 million for the full year 2017 compared to $2.1 million on $24.7 million in sales in the prior year.
Service and loan fee income increased $404 thousand and $1.1 million in the quarterly and annual periods, respectively due to increased loan application, interest rate swap, servicing and payoff fees.
Net security gains decreased $245 thousand and $362 thousand in the quarterly and annual periods, respectively.
Noninterest expense increased $326 thousand, or 4.5%, to $7.6 million for the quarter and increased $2.4 million, or 8.7%, to $30.0 million for the year ended December 31, 2017 compared to the prior year periods. These increases are attributed to costs of expanding our retail branch and lending networks which resulted in higher compensation and furniture and equipment expenses.
Notable items for the periods include:
- Compensation and benefits expense increased $633 thousand to $4.5 million for the three months ended December 31, 2017 and increased $2.2 million to $17.1 million for the year ended December 31, 2017. Compensation and benefit expenses have risen in each of these periods due to the addition of two new retail branches, and additional lending and operational staff. Our full-time-equivalent employees increased significantly to 199 in the 4th quarter from 166 in the 3rd quarter 2017 as we filled vacant positions. In addition, a bonus of approximately $150 thousand or $750 per non-executive employee will be paid in 2018 in response to the federal tax reform legislation.
- Furniture and equipment expense increased $89 thousand and $379 thousand for the quarter and annual periods, respectively due to continued investment in technology in the form of equipment, network maintenance and software.
- Loan collection and OREO expenses decreased $417 thousand and $191 thousand in the quarterly and annual periods as we continue to work through these credits, reduce our OREO inventory and the related expenses to maintain these properties
- Deposit insurance expense declined for the quarter and annual periods.
- Advertising expense increased $74 thousand for the quarter and $84 thousand for the annual periods due to supporting new markets and a larger branch network.
Income Tax Expense
On December 22, 2017, the “Tax Cuts and Jobs Act” was signed which lowered the corporate tax rate from 35% to 21%. Under ASC 740, Income Taxes, Unity was required to adjust its deferred income tax balances as of the enactment date, December 22nd, to reflect the lower tax rate of 21%. This adjustment resulted in a $1.7 million increase in income tax expense and an effective tax rate of 61.0% for the quarter and 42.5% for the year. Excluding this, our income tax expense was $2.2 million with an effective tax rate of 33.9% and $7.8 million with an effective tax rate of 34.8% for the quarter and year ended December 31, 2017. We expect that our net income will benefit from the lower tax rate in the future.
At December 31, 2017, total assets were $1.5 billion, an increase of $265.6 million from year-end 2016:
- Total loans increased $197.3 million or 20.3%, from year-end 2016 to $1.2 billion at December 31, 2017. Commercial, residential mortgage, consumer and SBA loan portfolios increased $97.8 million, $76.1 million, $18.3 million and $9.5 million, respectively. Our pipeline in all categories remains strong and loan growth is expected to continue in future quarters.
- Total deposits increased $97.4 million or 10.3%, to $1.0 billion at December 31, 2017. Noninterest-bearing demand deposits, savings deposits and interest-bearing demand deposits have increased $40.2 million, $33.1 million and $19.3 million, respectively.
- Borrowed funds increased $154.0 million to $285.3 million at December 31, 2017 due to increased overnight borrowings. These short-term, low cost borrowings were used to fund loan growth.
- Shareholders’ equity was $118.1 million at December 31, 2017, an increase of $11.8 million from year-end 2016, due to retained net income.
- Book value per common share was $11.13 as of December 31, 2017 compared to $10.14 at December 31, 2016.
- At December 31, 2017, the leverage, common equity Tier I, Tier I and Total Risk Based Capital ratios were 9.37%, 10.81%, 11.75% and 12.87% respectively, all in excess of the ratios required to be deemed “well-capitalized”.
- Nonperforming assets totaled $3.4 million at December 31, 2017, or 0.29% of total loans and OREO, compared to $8.3 million or 0.85% of total loans and OREO at year-end 2016.
- The allowance for loan losses totaled $13.6 million at December 31, 2017, or 1.16% of total loans compared to $12.6 million and 1.29% at December 31, 2016.
- Net charge-offs were $57 thousand for the three months ended December 31, 2017, compared to $306 thousand for the same period a year ago. Annual net charge-offs were $673 thousand compared to $1.4 million for the prior year’s period.
Unity Bancorp, Inc. is a financial service organization headquartered in Clinton, New Jersey, with approximately $1.5 billion in assets and $1.0 billion in deposits. Unity Bank provides financial services to retail, corporate and small business customers through its 18 retail service centers located in Bergen, Hunterdon, Middlesex, Somerset, Union and Warren Counties in New Jersey and Northampton County in Pennsylvania. For additional information about Unity, visit our website at www.unitybank.com , or call 800- 618-BANK.
This news release contains certain forward-looking statements, either expressed or implied, which are provided to assist the reader in understanding anticipated future financial performance. These statements may be identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. These statements involve certain risks, uncertainties, estimates and assumptions made by management, which are subject to factors beyond the company’s control and could impede its ability to achieve these goals. These factors include those items included in our Annual Report on Form 10-K under the heading “Item IA-Risk Factors” as well as general economic conditions, trends in interest rates, the ability of our borrowers to repay their loans, our ability to manage and reduce the level of our nonperforming assets, and results of regulatory exams, among other factors.