Unity Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results compared with Q1 2022. Balance-sheet changes are compared with December 31, 2022.
Business context
Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, provides commercial and retail banking through 20 branches in New Jersey and Pennsylvania, as well as online. Lending includes commercial, residential mortgage, SBA, consumer and residential construction loans.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net income | $10.3 million; diluted EPS $0.96 | $9.1 million; diluted EPS $0.85 in Q1 2022 |
| Net interest income | $23.9 million; net interest margin 4.19% | Up 20.1% in income; margin was 4.11% in Q1 2022 |
| Net interest spread | 3.57% | Down 41 basis points year over year |
| Provision for credit losses | $108,000 expense | $178,000 benefit in Q1 2022 |
| Noninterest income / expense | $1.4 million / $11.4 million | Income down 36.7%; expense up 9.8% |
| Returns and efficiency | ROAA 1.72%; ROAE 17.14%; efficiency ratio 44.56% | 1.80%; 17.64%; and 45.86%, respectively, in Q1 2022 |
| Total assets | $2.476 billion | Up $30.9 million from year-end 2022 |
| Loans and allowance | Loans $2.131 billion; allowance $26.2 million (1.23% of loans) | Loans up $24.4 million; allowance was $25.2 million at year-end |
| Deposits | $1.824 billion | Up $36.4 million from year-end; time deposits rose $98.4 million while noninterest-bearing demand and savings fell |
| Borrowings and capital | $374.0 million FHLB borrowings; $10.3 million subordinated debentures. CBLR: company 10.38%, bank 9.96% | Borrowings plus debentures totaled $384.3 million, down from $393.3 million |
| Cash flows | Operating +$13.8 million; investing −$19.9 million; financing +$18.5 million | Cash and cash equivalents ended at $127.1 million, up $12.3 million from year-end |
Material changes and notable items
- Interest income increased 57.9%, reflecting higher asset yields and growth in average earning assets. Interest expense rose substantially as deposit and borrowing costs increased; the average cost of interest-bearing liabilities increased to 2.27% from 0.38%.
- Net income rose 13.0% year over year. Lower gains from SBA and mortgage loan sales drove the decline in noninterest income. Noninterest expense included a one-time $500,000 severance payment following the Chief Administrative Officer’s resignation.
- Nonperforming loans increased to $14.5 million from $9.1 million at year-end 2022; nonperforming assets were $14.7 million. Potential problem loans totaled $19.4 million. The company reported $3.3 million of loans in foreclosure and $176,000 of OREO.
- The company adopted CECL on January 1, 2023, increasing the allowance for credit losses by $847,000 and the unfunded commitment reserve by about $100,000; the retained-earnings impact was $649,000 net of tax. The allowance ended the quarter at $26.2 million.
- Shareholders’ equity was $240.5 million. The company repurchased 337,945 shares for $8.2 million during the quarter and paid $0.12 per share in dividends. After quarter-end, the board approved a new repurchase program for up to 500,000 shares.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management says Q1 results are not necessarily indicative of full-year results.
- Management cited inflation, recessionary pressures, higher interest rates and deposit competition. Recent bank failures heightened sector liquidity concerns. The company reported $334.8 million of uninsured or uncollateralized deposits, 18.4% of total deposits, and noted that withdrawals could increase reliance on more costly secondary funding or constrain lending and investment.
- At March 31, the company reported $127.1 million in cash and cash equivalents and $253.6 million of additional FHLB borrowing capacity. It stated that current liquidity sources were sufficient, while cautioning that future liquidity needs are not guaranteed to be met.
- A 200-basis-point rate increase was modeled to reduce estimated 12-month net interest income by 5.55% and economic value of equity by 12.94%. Management said the EVE sensitivity remained within board limits.
- Available-for-sale securities had $5.6 million of gross unrealized losses and held-to-maturity securities had $6.1 million; management attributed the declines primarily to interest-rate movements and reported no credit impairment. Legal proceedings were described as ordinary-course matters not expected to materially affect results.
- After quarter-end, shareholders approved a 2023 equity compensation plan authorizing up to 500,000 shares or equivalents.
Important facts for investors to verify
- Reconcile the MD&A liquidity narrative, which says cash decreased $12.3 million, with the balance sheet and cash-flow statement, which show cash increased by $12.3 million to $127.1 million.
- Track deposit mix, uninsured deposits and funding costs, especially as time-deposit balances and interest expense have risen.
- Monitor the increase in nonperforming loans and potential problem loans, and assess the adequacy of the allowance as CECL estimates evolve.
- Review interest-rate sensitivity and unrealized securities losses alongside liquidity and borrowing capacity.
- Confirm the effect of share repurchases, dividends and the newly authorized repurchase and equity compensation plans on capital and per-share results.