Unity Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the filing also provides unaudited fourth-quarter results. Unity is a New Jersey bank holding company operating Unity Bank, a community-oriented commercial bank with 19 branches in New Jersey and Pennsylvania.
Financial results and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net income | $23.6 million | $23.7 million |
| Diluted earnings per share | $2.19 | $2.14 |
| Income before taxes | $31.1 million | $30.3 million |
| Net interest income | $64.4 million | $57.6 million |
| Net interest margin | 3.85% | 3.95% |
| Noninterest income | $12.9 million | $9.5 million |
| Noninterest expense | $39.3 million | $34.7 million |
| Provision for loan losses | $7.0 million | $2.1 million |
| Return on average assets / equity | 1.35% / 14.20% | 1.54% / 15.86% |
| Efficiency ratio | 50.80% | 52.00% |
- Fourth quarter: Net income was $7.3 million and diluted EPS was $0.69, compared with $6.1 million and $0.55 in fourth-quarter 2019.
- Balance sheet: Total assets were $1.959 billion, up 14.0%; loans were $1.628 billion, up 14.2%; and deposits were $1.558 billion, up 24.6%.
- Funding and liquidity: Cash and cash equivalents were $219.3 million. FHLB borrowings were $200.0 million and subordinated debentures were $10.3 million. The Bank reported $286.1 million of additional FHLB borrowing capacity. Operating cash flow was $33.7 million; investing activities used $186.8 million and financing activities provided $214.3 million.
- Credit quality: Nonperforming loans rose to $12.1 million from $5.6 million; nonperforming loans were 0.74% of total loans. Potential problem loans increased to $36.7 million from $7.4 million. The allowance for loan losses was $23.1 million, or 1.42% of loans; net charge-offs were $0.3 million.
- Capital: The Bank elected the community bank leverage ratio framework and reported a 9.80% CBLR at year-end; the Company reported 10.09%. Shareholders’ equity was $173.9 million.
Material changes versus the prior comparable period
- Net interest income increased 11.9%, supported by loan growth, PPP lending and lower funding costs. The margin nevertheless declined 10 basis points as asset yields fell following Federal Reserve rate cuts.
- Noninterest income rose primarily because mortgage-loan sale gains increased to $6.3 million from $2.1 million. Mortgage sales volume increased to $290.8 million from $120.2 million.
- Expenses increased 13.1%, including $1.8 million of BSA-related expenses and higher mortgage commissions. The provision for loan losses rose substantially amid pandemic-related uncertainty.
- Deposits grew $307.8 million, notably noninterest-bearing demand deposits, while borrowed funds declined $83.0 million. PPP loans accounted for $118.3 million of year-end loans; the Company originated $143.0 million during 2020.
- Net income was essentially flat, while diluted EPS increased. Return on average assets and return on equity declined.
Outlook, commentary, risks and unusual items
- Management describes the pandemic’s eventual effects as uncertain. Customer payment deferrals, business restrictions and economic weakness could increase delinquencies, problem assets, collateral losses and future loan-loss provisions. At year-end, $32.5 million of loans were in deferral, approximately 2.0% of total loans.
- In July 2020, the Bank consented to an FDIC order, also binding with the New Jersey banking regulator, requiring improvements to its BSA/AML program, controls, testing, staffing and board oversight. The Bank did not admit wrongdoing. Management estimated compliance costs at approximately $1.8 million, with possible additional expense; the order’s duration and lifting are uncertain and it may constrain acquisitions or branch expansion.
- Management said the majority of outstanding PPP loans were expected to be forgiven. The Economic Aid Act extended PPP through March 31, 2021, and the Company planned to participate in the reopened program. The filing provides no earnings or margin guidance.
- Other risks include the concentration of lending in the local New Jersey and eastern Pennsylvania markets, real-estate collateral exposure, interest-rate sensitivity and the transition away from LIBOR. The Company noted that CECL adoption was deferred for eligible smaller reporting companies until fiscal years beginning after December 15, 2022.
- The effective tax rate increased to 24.0% from 22.0%, partly reflecting New Jersey tax changes. The Company repurchased $7.4 million of stock in 2020 and authorized a new repurchase plan for up to 725,000 shares in February 2021.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to attest to internal control effectiveness.
Important facts for investors to verify
- Track whether nonperforming and potential problem loans, deferrals and commercial real-estate exposures worsen as pandemic support and payment relief end.
- Confirm the allowance coverage ratio: the filing’s asset-quality table reports 191.59% of nonperforming loans, while a risk-factor passage states 242.83%; these figures do not reconcile to the reported $23.1 million allowance and $12.1 million of nonperforming loans.
- Monitor actual Consent Order remediation costs, regulatory assessments, compliance progress and any effect on expansion plans.
- Assess the durability of mortgage-sale income, PPP-related income and deposit growth, and the effect of low rates on net interest margin.
- Review liquidity and funding needs, including the substantial near-term maturity of time deposits and FHLB borrowings, and the concentration of municipal deposits.