Unity Bancorp, Inc. — Q3 2023 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Unity Bancorp operates Unity Bank, a New Jersey-based commercial and retail bank serving parts of New Jersey and Pennsylvania.
Financial performance and condition
- Q3 earnings: Net income was $9.95 million, essentially flat versus $9.94 million a year earlier. Diluted EPS rose to $0.97 from $0.93. Return on average assets was 1.61% (1.85% prior year); return on average equity was 15.84% (17.39%).
- First nine months: Net income was $29.94 million versus $28.50 million; diluted EPS was $2.88 versus $2.67.
- Net interest income and margin: Q3 net interest income declined 0.9% to $23.53 million; net interest margin fell to 3.96% from 4.61%. For nine months, net interest income increased 8.5% to $70.96 million, while margin decreased to 4.06% from 4.37%.
- Drivers and expenses: Q3 interest income rose 41.1% year over year, but interest expense increased 441.3%, reflecting higher deposit and borrowing costs. Q3 noninterest income rose 84.1% to $2.04 million, including higher BOLI income from realized gains on two claims. Noninterest expense increased 19.2% to $12.0 million, with higher compensation, deposit insurance and professional services costs.
- Credit costs: Q3 provision for credit losses was $0.53 million, down from $1.52 million; nine-month provision was $1.42 million versus $2.53 million. The allowance was $25.9 million, or 1.19% of loans, compared with 1.20% at year-end 2022. Nine-month net charge-offs were $1.5 million.
- Balance-sheet growth: Total assets increased 4.8% from year-end 2022 to $2.56 billion. Loans rose 3.2% to $2.17 billion, led by commercial and residential mortgage lending; residential construction and consumer balances declined.
- Deposits and liquidity: Deposits increased $97.4 million year to date to $1.88 billion. Growth in time deposits was partly offset by declines in noninterest-bearing demand and savings deposits. Cash and cash equivalents were $161.4 million, up $46.7 million from year-end. The company reported $302.4 million of additional FHLB borrowing capacity.
- Debt and capital: Borrowed funds and subordinated debentures totaled $398.9 million. Shareholders’ equity was $252.4 million. The Bank’s community bank leverage ratio was 10.35%; the Company’s was 10.76%.
- Cash flow, nine months: The cash flow statement reports $22.0 million provided by operating activities, $61.6 million used in investing activities and $86.3 million provided by financing activities. Ending cash and cash equivalents were $161.4 million.
Material changes and notable items
- Funding costs rose faster than asset yields in Q3, compressing net interest margin despite higher interest income.
- Nonperforming loans increased to $18.1 million from $9.1 million at December 31, 2022; loans in foreclosure increased to $12.5 million from $2.1 million. Potential problem loans totaled $18.5 million. The filing also reports $251,000 of other real estate owned.
- Uninsured or uncollateralized deposits were $326.1 million, or 17.3% of total deposits. Government deposits are described as short-duration and sensitive to price competition.
- The securities portfolio continued to carry significant interest-rate-related unrealized losses: AFS securities had a $6.5 million net unrealized loss, and HTM securities had a fair value of $27.2 million versus $36.0 million carrying value. Management attributed losses primarily to interest-rate movements and reported no credit impairment.
- The company repurchased $14.3 million of treasury stock during the first nine months and authorized a new plan for up to 500,000 shares. A quarterly dividend of $0.12 per share was recorded.
- CECL adoption on January 1, 2023 increased the allowance by approximately $0.8 million and the unfunded-commitment reserve by $0.1 million; the retained-earnings impact was $0.6 million after tax. Management reported no significant regulatory-capital impact.
Outlook, risks and contingencies
- The filing provides no quantified earnings or financial guidance. Management cautions that nine-month results are not necessarily indicative of full-year results.
- Management cites inflation, recessionary pressures, higher rates and competition for deposits as risks. Unexpected deposit outflows could increase reliance on secondary funding, raise funding costs, constrain loan growth or require asset sales; management considers current liquidity sources adequate but gives no assurance they will meet future demands.
- A 200-basis-point rate increase was estimated to reduce economic value of equity by 15.2%, within the Board’s stated ±20% guideline; estimated 12-month net interest income declined 5.4% in that scenario.
- New Jersey did not extend the 2.5% Corporation Business Tax surcharge beyond December 31, 2023; the change is reflected in the Q3 tax provision. Proposed federal regulations could adversely affect tax benefits from the company’s captive insurance subsidiary, which management estimates currently saves $0.3–$0.4 million in federal tax annually.
- Management said pending legal proceedings are not expected to materially affect the company. The filing adds risks relating to confidence in banks, deposit outflows, funding access, regulatory changes and possible higher FDIC assessments following recent bank failures.
Important facts for investors to verify
- Track deposit mix, pricing and concentration, including uninsured or uncollateralized and municipal deposits, alongside available borrowing capacity.
- Monitor the increase in nonperforming loans, loans in foreclosure, potential problem loans and charge-offs, particularly in real-estate-related portfolios.
- Assess whether deposit and borrowing costs continue to outpace asset yields and pressure net interest margin.
- Review the duration and unrealized losses in AFS and HTM securities, and the potential effect of asset sales or rate changes on capital and liquidity.
- Reconcile cash-flow figures: the cash flow statement reports operating cash flow of $22.0 million and investing outflow of $61.6 million, while the MD&A text cites $21.1 million and $60.7 million, respectively.
- Follow the outcome of proposed captive-insurance tax regulations and the effect of New Jersey tax changes on the effective tax rate.