Unity Bancorp, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. The consolidated financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context
Unity Bancorp is a New Jersey bank holding company operating Unity Bank, which provides commercial and retail banking through 20 branches in New Jersey and Pennsylvania, as well as online. Its lending includes commercial, residential mortgage, SBA, consumer and residential construction loans.
Financial performance and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.45 million; diluted EPS $0.88 | Q2 2021: $8.42 million; diluted EPS $0.80 |
| Net interest income | $21.76 million | Q2 2021: $18.45 million |
| Net interest margin | 4.39% | Q2 2021: 4.03% |
| Noninterest income | $2.75 million | Q2 2021: $2.90 million |
| Noninterest expense | $10.71 million | Q2 2021: $10.46 million |
| Total assets | $2.12 billion | December 31, 2021: $2.03 billion |
| Total loans | $1.80 billion | December 31, 2021: $1.65 billion |
| Total deposits | $1.70 billion | December 31, 2021: $1.76 billion |
| Cash and cash equivalents | $109.0 million | December 31, 2021: $244.8 million |
| Borrowed funds and subordinated debentures | $175.3 million | December 31, 2021: $50.3 million |
| Shareholders’ equity | $220.8 million | December 31, 2021: $205.7 million |
For the six months ended June 30, 2022, net income was $18.56 million versus $16.91 million in 2021; diluted EPS was $1.74 versus $1.60. Net interest income was $41.66 million versus $36.47 million. The six-month net interest margin was 4.25%, compared with 4.06%.
For the first six months, operating activities provided $11.8 million of cash, investing activities used $210.3 million, and financing activities provided $62.7 million. Cash and cash equivalents decreased $135.8 million. The large investing outflow primarily reflected loan growth and securities purchases. The allowance for loan losses was $22.9 million, or 1.27% of loans, at June 30.
Material changes and drivers
- Q2 net income rose about 12% year over year. Management attributed stronger net interest income mainly to loan growth and higher yields on earning assets; lower interest expense also contributed. Q2 return on average assets was 1.83%, return on average equity 17.32%, and the efficiency ratio 42.84%.
- Total loans increased $152.1 million, or 9.2%, from year-end, led by commercial loans (+$94.6 million) and residential mortgages (+$72.3 million). PPP loans declined $32.2 million as balances were forgiven or repaid.
- Deposits declined $60.9 million from year-end, including lower time, savings and noninterest-bearing demand balances. The company funded growth in part with higher FHLB borrowings, including $100 million in overnight advances and $25 million in short-term borrowings.
- Shareholders’ equity increased $15.1 million, principally from earnings, partly offset by $2.9 million of after-tax other comprehensive loss and $2.1 million of dividends. The AFS securities portfolio had a $4.5 million net unrealized loss at June 30, compared with a small unrealized gain at year-end; management attributed securities losses mainly to higher rates and wider spreads, and reported no other-than-temporary impairment.
- Nonperforming loans were $7.7 million, down from $9.7 million at year-end; nonperforming loans were 0.43% of total loans. Potential problem loans totaled $16.2 million. Loans in foreclosure increased to $2.1 million from $106,000 at year-end.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings, revenue or margin guidance. Management cautions that first-half results are not necessarily indicative of full-year results.
- Interest-rate and market risk are significant: management noted that changing rates affect asset yields, funding costs and securities values. The company’s modeled economic value of equity declined 6.0% under a 200-basis-point rising-rate shock at June 30, within its stated board limits. Some borrowings and a subordinated debenture reference LIBOR; the filing describes uncertainty around LIBOR replacement and related contract effects.
- About 94% of the loan portfolio was secured by real estate, exposing collateral values and credit performance to local property-market conditions. COVID-19 effects remained uncertain, particularly for industries such as retail, accommodations, and restaurants.
- Unity Bank remained subject to a July 2020 FDIC and New Jersey consent order requiring improvement of its BSA/AML program. Management said it believed the Bank was complying, but could not assure regulators would agree or that further compliance costs would not be material.
- Other income included a nonrecurring $1.2 million gain from termination of a swap derivative. Q2 noninterest income also included $498,000 of net securities losses, mainly from fair-value declines in equity securities. Mortgage-loan sale gains declined amid slower refinancing and home-purchase activity.
- Unfunded lending commitments were approximately $485.8 million, including $187.2 million expiring within one year; management said it believed liquidity was sufficient to honor commitments, many of which may expire unfunded. New Jersey municipal deposits were $250.6 million and described as short-duration and price-sensitive.
- The Bank reported a 10.66% community bank leverage ratio at June 30, 2022. Management reported no legal proceedings expected to have a material adverse effect; the filing notes ordinary-course litigation and contingencies.
Most important facts for investors to verify
- Confirm the reported increase in borrowings, deposit outflows, liquidity sources and the composition and stability of municipal deposits.
- Assess loan growth and credit quality, including the $16.2 million of potential problem loans, foreclosure balances, real-estate collateral concentration, allowance adequacy and upcoming CECL adoption.
- Review the duration and rate sensitivity of securities, the unrealized portfolio losses, and the impact of rate changes on net interest margin and funding costs.
- Track progress and costs under the FDIC/New Jersey BSA/AML consent order, as well as LIBOR transition exposure.
- Verify apparent date inconsistencies in the supplied filing text: it identifies the quarter ended June 30, 2022, but also states that controls were evaluated as of March 31, 2022 and gives a May 10, 2022 signature date.