Unity Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Unaudited consolidated results. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 20 branches in New Jersey and Pennsylvania.
Financial performance and condition
- Earnings: Net income was $9.1 million, up 7.2% from $8.5 million in Q1 2021. Diluted EPS was $0.85 versus $0.80; basic EPS was $0.87 versus $0.81. Pretax income was $11.9 million, compared with $11.4 million.
- Interest income and margins: Net interest income rose 10.5% to $19.9 million. Net interest margin was 4.11%, versus 4.09%; net interest spread was 3.98%, versus 3.82%. Interest expense fell 52.5% to $1.2 million, more than offsetting modest growth in interest income.
- Noninterest items and expenses: Noninterest income declined to $2.2 million from $3.7 million, mainly due to lower mortgage-sale gains and $557,000 of net security losses, versus $310,000 of gains a year earlier. Noninterest expense rose 6.2% to $10.4 million, primarily on higher compensation. The efficiency ratio was 45.86%, versus 45.74%.
- Returns and taxes: Return on average assets was 1.80% (1.85% in Q1 2021); return on average equity was 17.64% (19.51%). The effective tax rate declined to 23.5% from 25.7%.
- Balance sheet: Assets totaled $2.068 billion, up 1.7% from year-end. Total loans were $1.701 billion, up 3.1%, driven mainly by commercial, residential mortgage, and residential construction lending. Deposits were $1.771 billion, up $12.3 million. Cash and cash equivalents were $187.7 million, down $57.1 million. Securities totaled $116.3 million, up $36.9 million.
- Credit quality: The allowance for loan losses was $22.2 million, or 1.30% of loans, versus 1.35% at year-end. The company recorded a $178,000 provision credit, compared with a $500,000 provision expense in Q1 2021. Nonperforming loans were $9.3 million, or 0.55% of loans; potential problem loans totaled $19.1 million. The company reported $1.9 million of performing troubled debt restructurings.
- Cash flow and liquidity: Operating activities provided $7.6 million; investing activities used $76.4 million, principally for securities purchases and loan growth; financing activities provided $11.7 million, including deposit growth. Cash and cash equivalents decreased $57.1 million during the quarter.
- Debt and capital: Borrowed funds were $40.0 million and subordinated debentures were $10.3 million, both unchanged from year-end. The company reported Community Bank Leverage Ratios of 10.87% for the holding company and 10.35% for the Bank, up from 10.51% and 10.00%, respectively.
Material changes versus comparable periods
- Profit and net interest income increased year over year, supported by loan growth and lower funding costs; margin improved slightly.
- Noninterest income fell substantially as mortgage-sale volumes declined and equity-security marks shifted to losses. Mortgage loan sales were $27.0 million, compared with $101.9 million in Q1 2021; SBA loan sales were $6.8 million, compared with $2.2 million.
- Loan growth and securities purchases increased earning assets, while PPP balances declined by $17.8 million from year-end to $28.6 million as loans were forgiven or repaid.
- Nonperforming loans declined from $9.7 million at year-end, although $488,000 of loans were 90 days past due and still accruing at quarter-end.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management attributed the lower loan-loss provision to an improved credit-quality outlook, but cautioned that future results depend on economic conditions and borrower performance.
- Management said the effects of COVID-19 remained uncertain and could affect customers, loan demand, credit quality, liquidity, and results. At quarter-end, $1.86 million of commercial loans remained in deferral.
- The Bank remains subject to a July 2020 FDIC and New Jersey banking regulator Consent Order requiring improvements to its Bank Secrecy Act/anti-money-laundering program. The company said it believes it is complying, but cannot assure regulators will agree or that compliance will not require material additional expense.
- Interest-rate, securities valuation, real-estate collateral, and funding risks remain relevant. A majority of loans are secured by real estate; municipal deposits are described as short-duration and price-sensitive. The company had $438.7 million of outstanding loan commitments and $383.3 million of additional FHLB borrowing capacity.
- The company identified LIBOR transition uncertainty as a risk to certain loans and liabilities, including subordinated debentures. It reported no pending legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Progress and any regulatory findings or added costs related to the Consent Order.
- Trends in nonperforming and potential problem loans, delinquencies, TDRs, and allowance adequacy as loan balances grow.
- Whether net interest income and margins remain resilient as market rates and deposit costs change.
- The impact of securities valuation changes, including the $557,000 quarterly security loss and unrealized losses in debt securities.
- Deposit stability and liquidity relative to commitments, municipal deposit concentrations, and continued PPP runoff.