Unity Bancorp, Inc. — Q1 2020 Form 10-Q
Business and period: Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, provides commercial and retail banking through 19 branches in New Jersey and Pennsylvania. This unaudited filing covers the three months ended March 31, 2020; income and cash-flow comparisons are against Q1 2019, while balance-sheet comparisons are against December 31, 2019.
Financial performance and condition
| Metric | Q1 2020 / Mar. 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $5.4 million; diluted EPS $0.49 | $5.7 million; diluted EPS $0.52 in Q1 2019 |
| Net interest income | $15.2 million | $14.2 million in Q1 2019 |
| Net interest margin | 3.92% | 4.06% in Q1 2019 |
| Provision for loan losses | $1.5 million | $0.5 million in Q1 2019 |
| Noninterest income / expense | $2.5 million / $9.3 million | $2.0 million / $8.5 million in Q1 2019 |
| Cash and cash equivalents | $179.0 million | $158.0 million at Dec. 31, 2019 |
| Total assets | $1.74 billion | $1.72 billion at Dec. 31, 2019 |
| Total loans / allowance | $1.44 billion / $17.4 million | $1.43 billion / $16.4 million at Dec. 31, 2019 |
| Total deposits | $1.38 billion | $1.25 billion at Dec. 31, 2019 |
| Borrowed funds and subordinated debentures | $179.3 million | $293.3 million at Dec. 31, 2019 |
| Shareholders’ equity | $164.3 million | $160.7 million at Dec. 31, 2019 |
Q1 operating cash flow was $11.5 million; investing activities used $3.9 million and financing activities provided $13.4 million. The Bank’s community bank leverage ratio was 10.16%; the Company’s was 10.56%.
Changes and key developments
- Net income declined about 6% year over year, while diluted EPS fell from $0.52 to $0.49. Net interest income increased 7.2%, primarily reflecting loan growth, but margin contracted 14 basis points.
- Noninterest income rose 25.8%, mainly on higher mortgage-loan sale gains. Noninterest expense increased 10.0%, with higher compensation, severance, consulting, and loan collection/OREO costs.
- Deposits grew $128.5 million from year-end; borrowings fell $114.0 million, mainly from lower overnight FHLB advances. Loans grew $14.1 million, with commercial and consumer growth partly offset by lower residential mortgage and SBA balances.
- Nonperforming loans rose to $9.7 million from $5.6 million at year-end; nonperforming assets were $11.2 million. The allowance was 1.21% of total loans, versus 1.15% at year-end. Net charge-offs were $519,000, compared with $304,000 in Q1 2019.
Outlook, risks, and unusual items
- COVID-19: Management said local markets were significantly affected and did not expect results for at least Q1 and Q2 2020 to follow historical performance. Branch lobbies were closed, most non-branch staff were working remotely, and the Bank offered payment deferrals and fee waivers. Management expected elevated loan-loss provisions until businesses reopened and deferral periods ended; lower fee income and increased nonperforming assets were also possible.
- PPP: After quarter-end, the Bank opted to participate in the Paycheck Protection Program and reported 450 approved applications with estimated funding of $90 million. These were not reported as Q1 funded loans.
- Rates: Federal Reserve rate cuts were expected to contribute to modest net interest margin contraction in 2020. The Company had $100 million notional of cash-flow interest-rate swaps; their fair value was a $1.17 million liability at March 31, with a $1.00 million after-tax quarterly loss recorded in other comprehensive income.
- Regulatory matter: In February 2020, the FDIC sought Unity Bank’s agreement to a proposed consent order focused on BSA/AML compliance. The Bank had not yet entered the order, but had begun remediation. Management estimated remediation and look-back costs at approximately $1.5 million; an order could also constrain growth or certain business activity.
- Other noted risks include the regional economic impact of COVID-19, real-estate concentration (about 94% of loans secured by real estate), borrower repayment and collateral risks, and sensitivity of some government deposits to competition. Management suspended share repurchases during the pandemic. No material pending legal proceeding was identified.
Most important facts for investors to verify
- Whether pandemic-related borrower stress, deferrals, and subsequent delinquencies require further provisions or materially worsen credit quality.
- Actual PPP loan funding, forgiveness, servicing economics, and associated operational or credit exposure.
- Final terms and timing of any FDIC/NJDOBI consent order, remediation spending, and any growth restrictions.
- Whether deposit growth is durable and how liquidity, borrowing needs, and net interest margin evolve after rate cuts.
- Reconciliation of reported net security losses: the filing reports a $170,000 net loss in income, including equity-security valuation losses partly offset by realized securities gains.