Unity Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results for Unity Bancorp and Unity Bank, a New Jersey community bank operating 19 branches in New Jersey and Pennsylvania. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $5.76 million, or $0.54 per diluted share, versus $5.96 million, or $0.54, a year earlier. Return on average assets was 1.28% (1.53% prior year); return on average equity was 13.76% (15.57%).
- Nine-month earnings: Net income was $16.30 million, or $1.50 per diluted share, versus $17.53 million, or $1.59, for the first nine months of 2019.
- Net interest: Q3 net interest income rose 13.4% to $16.33 million; net interest margin declined to 3.78% from 3.90%. Nine-month net interest income rose 10.0% to $47.10 million, while margin fell to 3.81% from 3.97%. Lower funding costs and loan growth supported income; lower market rates reduced asset yields.
- Credit provision and asset quality: Provision for loan losses was $2.0 million in Q3 and $6.0 million year to date, compared with $0.75 million and $1.6 million, respectively, in 2019. The allowance was $22.24 million, or 1.38% of loans, versus $16.40 million and 1.15% at year-end 2019. Nonperforming loans increased to $8.99 million from $5.65 million; nonperforming assets were $9.70 million, or 0.50% of assets.
- Other income and expenses: Q3 noninterest income increased 23.1% to $3.34 million, largely on mortgage-loan sale gains. Noninterest expense rose 15.0% to $10.04 million, including $0.63 million of BSA/AML compliance expense. Q3 effective tax rate was 24.5%, compared with 22.0%.
- Balance sheet and liquidity: Total assets were $1.93 billion, up 12.3% from December 31, 2019. Loans were $1.61 billion, including $138.9 million of PPP loans. Deposits grew $243.3 million to $1.49 billion; noninterest-bearing demand deposits increased $133.1 million. Cash and cash equivalents rose $43.4 million to $201.4 million.
- Debt and capital: Borrowed funds and subordinated debentures totaled $250.3 million, down $43.0 million from year-end, primarily from reduced overnight FHLB advances. The Bank’s community bank leverage ratio was 9.62% and the Company’s was 9.95%; the stated 2020 minimum was 8.00%.
- Cash flows, nine months: Operating activities provided $32.8 million; investing activities used $182.4 million, principally reflecting PPP loan originations and loan growth; financing activities provided $192.9 million, mainly from deposit growth. Cash increased $43.4 million.
Material changes and notable items
- PPP lending added $138.9 million of loans by quarter-end. The Company reported 1,224 approved applications with estimated funding of $143.0 million and $5.5 million in gross origination fees, to be recognized over the loans’ lives or upon forgiveness.
- COVID-19-related payment deferrals totaled $60.6 million, or 3.76% of loans, at September 30. Commercial deferrals included exposure to shopping centers, hotels, restaurants, and transport services. The company said it could not predict whether borrowers would resume payments after deferral periods.
- Mortgage loan sales increased substantially: $85.8 million in Q3 and $191.7 million year to date, generating gains of $1.7 million and $4.3 million, respectively. The filing cites these sales as a liquidity-management tool.
- The Company repurchased 373,000 shares for $5.1 million during the first nine months, at an average price of $13.72; 152,097 shares remained authorized for repurchase at September 30. Quarterly dividends were $0.08 per share.
- The Bank agreed to an FDIC consent order, also acknowledged by New Jersey regulators, requiring improvements to its BSA/AML program. Management estimated compliance costs at approximately $1.8 million, with potential for additional costs. The order may constrain acquisitions or branch expansion while in effect.
Outlook, risks, and contingencies
The filing provides no numerical earnings or operating guidance. Management said 2020 results were not expected to track historical performance because of COVID-19, and that elevated loan-loss provisions could continue while restrictions and economic disruption persist. Key risks include borrower repayment and collateral deterioration, local economic weakness, pressure on net interest margins from low rates, deposit outflows, and costs or operational effects associated with the consent order. Management considered the allowance adequate but noted future additions may be necessary. Ordinary-course litigation was not expected by management to materially affect financial position or results.
Important facts for investors to verify
- Whether COVID-19 deferral borrowers resume payments, and how nonperforming loans, criticized credits, charge-offs, and the allowance develop.
- PPP forgiveness timing and the recognition of the $5.5 million of gross origination fees.
- Actual and remaining costs to satisfy the BSA/AML consent order, progress against its requirements, and any resulting restrictions or further regulatory action.
- Sustainability of mortgage-sale gains and deposit growth, and the effect of low rates on net interest margin and funding costs.
- Liquidity and capital implications of loan commitments of approximately $269.3 million, municipal deposit concentrations, and future share repurchases or dividends.