Unity Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Unity Bancorp is a New Jersey bank holding company whose subsidiary, Unity Bank, provides commercial and retail banking services in New Jersey and Pennsylvania. Financial statements are unaudited.
Key financial results
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Net interest income | $23.8 million | $23.9 million; down 0.3% year over year |
| Net interest margin | 4.09% | 4.19%; down 10 basis points |
| Provision for credit losses | $0.64 million | $0.11 million |
| Noninterest income | $1.72 million | $1.42 million; up 21.2% |
| Noninterest expense | $12.13 million | $11.43 million; up 6.2% |
| Net income | $9.59 million | $10.29 million |
| Diluted earnings per share | $0.93 | $0.96 |
| Return on average assets / equity | 1.58% / 14.49% | 1.72% / 17.14% |
Interest income increased 13.7% to $37.9 million, but interest expense rose 49.3% to $14.1 million as deposit costs increased faster than asset yields. Average yield on earning assets rose to 6.51%, while the cost of interest-bearing liabilities increased to 3.26%. The efficiency ratio was 47.57%, versus 44.56% a year earlier.
Financial position, liquidity and capital
- Assets and loans: Total assets were $2.568 billion, down $10.4 million from year-end. Gross loans were $2.174 billion, up $2.4 million; commercial loans increased $13.9 million, while residential mortgage and construction balances declined.
- Deposits and borrowings: Deposits totaled $1.961 billion, up $37.1 million. Time deposits rose $74.2 million, partly offset by a $32.7 million decline in brokered deposits and a $24.1 million decline in noninterest-bearing demand deposits. Borrowed funds and subordinated debt were $309.7 million, down from $366.7 million.
- Cash and liquidity: Cash and cash equivalents were $183.0 million, down $11.8 million during the quarter. Management reported approximately $546 million of additional funding capacity and stated cash plus available funding equaled 215.6% of uninsured or uncollateralized deposits. Uninsured or uncollateralized deposits were 17.2% of total deposits.
- Cash flows: Operating activities provided $15.8 million; investing activities used $3.0 million; financing activities used $24.5 million. The financing outflow primarily reflected repayment of short-term borrowings, alongside deposit growth, share repurchases and dividends.
- Credit quality: The allowance for credit losses was $26.1 million, or 1.20% of loans, versus $25.9 million and 1.19% at year-end. Net charge-offs were $0.42 million, compared with net recoveries of $0.05 million in Q1 2023. Nonperforming loans were $17.0 million, down from $19.2 million at year-end but up from $14.5 million a year earlier. Potential problem loans totaled $12.8 million.
- Equity and capital: Shareholders’ equity was $266.8 million, up $5.3 million from year-end. The Bank’s capital ratios included 14.36% total risk-based capital, 13.11% common equity Tier 1 and 11.10% Tier 1 leverage; the filing states the Bank exceeded regulatory capital requirements and was well capitalized.
Material changes and notable items
- Net income and returns declined year over year, reflecting slightly lower net interest income, a materially higher credit-loss provision and higher operating expenses. Higher noninterest income partly offset these pressures.
- The company repurchased 149,997 shares during the quarter at a weighted-average price of $27.14; 263,750 shares remained authorized for repurchase. It paid $0.13 per share in dividends.
- Accumulated other comprehensive loss was $2.9 million. Debt securities had net unrealized losses of approximately $4.5 million in available-for-sale securities and $7.0 million in held-to-maturity securities; the filing attributes these primarily to interest-rate movements.
- Q1 included $54,000 of net securities gains, compared with $322,000 of net securities losses in Q1 2023. The company also reported increased gains on mortgage-loan sales.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management said current liquidity sources were adequate as of quarter-end, but cautioned that unexpected deposit withdrawals could increase reliance on secondary funding, raise funding costs and reduce income; in a stress scenario the company might need to slow loan growth or investments or liquidate assets. Management also cited inflation, recessionary pressures, elevated interest rates and competition for deposits as risks. Approximately 96% of loans were secured by real estate, exposing credit performance to collateral values and local property conditions. Government deposits totaled $373.2 million, including $344.4 million from 20 municipalities with balances exceeding $5 million. In a +300-basis-point rate scenario, estimated 12-month net interest income declined 8.76% and economic value of equity declined 20.77%; both were within Board-approved tolerances. Management considered the allowance adequate, while noting future provisions may be needed as conditions or credit quality change. Pending litigation was not expected by management to have a material effect. The quarter’s results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether deposit pricing and mix—particularly time deposits, brokered deposits and municipal funding—continue to pressure net interest margin and liquidity.
- Trends in nonperforming and potential problem loans, charge-offs, real-estate collateral values, and the adequacy of the allowance for credit losses.
- The durability of loan growth, noninterest income and expense levels, and whether earnings and returns stabilize after the year-over-year decline.
- Available liquidity under stressed deposit-withdrawal scenarios and the company’s dependence on FHLB and other secondary funding sources.
- Interest-rate sensitivity and unrealized securities losses, including the effect of changing rates on earnings, capital and liquidity.
- Capital allocation through share repurchases and dividends relative to credit needs, capital requirements and future operating conditions.