Unity Bancorp, Inc. — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; quarterly figures below identify the fourth quarter where relevant. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, a community commercial bank with 19 branches in New Jersey and Pennsylvania.
Financial performance and condition
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Net interest income | $77.0 million | $64.4 million | Up 19.6%; net interest margin rose to 4.16% from 3.85% |
| Net income | $36.1 million | $23.6 million | Up 52.7% |
| Diluted earnings per share | $3.43 | $2.19 | Up from $2.19 |
| Noninterest income | $12.1 million | $12.9 million | Down $0.9 million, mainly lower mortgage and SBA loan sale gains |
| Noninterest expense | $40.8 million | $39.3 million | Up $1.5 million, including higher compensation and a one-time deferred compensation adjustment |
| Provision for loan losses | $0.2 million | $7.0 million | Substantially lower than the pandemic-driven 2020 provision |
| Total assets | $2.034 billion | $1.959 billion | Up 3.8% |
| Total loans | $1.649 billion | $1.628 billion | Up 1.3%; commercial and construction growth was partly offset by PPP paydowns and lower residential mortgages |
| Total deposits | $1.759 billion | $1.558 billion | Up $200.9 million, or 12.9% |
| Cash and cash equivalents | $244.8 million | $219.3 million | Up $25.5 million |
| Borrowings and subordinated debentures | $50.3 million | $210.3 million | Down $160.0 million, primarily through repayment of FHLB advances |
| Shareholders’ equity | $205.7 million | $173.9 million | Up $31.8 million |
Return on average assets was 1.87%, return on average equity was 19.16%, and the non-GAAP efficiency ratio was 46.09%, all improved from 2020. The effective tax rate rose to 25.0% from 24.0%.
Cash flow: Operating activities provided $23.5 million; investing activities used $31.4 million; financing activities provided $33.5 million. PPP loan forgiveness provided $196.1 million of liquidity during 2021. The filing states the Company believes liquidity is sufficient to meet commitments. Available additional FHLB borrowing capacity was $374.1 million at year-end.
Fourth quarter: Net income was $9.7 million, or $0.93 per diluted share, compared with $7.3 million, or $0.69 per diluted share, in the fourth quarter of 2020.
Material changes versus 2020
- Profitability improved as net interest income increased and the loan-loss provision fell sharply. Management attributed higher net interest income to commercial and residential construction loan growth, PPP forgiveness fees, and lower funding costs.
- The net interest spread increased to 3.95% from 3.48%. Average interest-bearing liability cost declined to 0.63% from 1.23%.
- Commercial loans rose $91.9 million and residential construction loans rose $33.4 million. Residential mortgage loans declined $58.2 million, while PPP loans declined $71.8 million as loans were forgiven or repaid.
- Noninterest income declined mainly because mortgage loan sales were lower and the Bank chose not to sell SBA loans held for sale in the latter half of 2021. Service and loan fee income increased.
- Deposits grew, particularly savings balances, while time deposits declined $147.2 million. FHLB borrowings fell from $200.0 million to $40.0 million.
- Nonperforming loans decreased to $9.7 million from $12.1 million; nonperforming loans were 0.59% of total loans. The allowance for loan losses was $22.3 million, or 1.35% of loans, versus $23.1 million, or 1.42%, a year earlier. Net charge-offs increased to $984,000 from $290,000.
Outlook, risks, contingencies and unusual items
- No numerical earnings guidance is provided. Management describes significant uncertainty around the continuing effects of COVID-19 and its impact on borrowers, local economic conditions, collateral values, loan demand and credit losses.
- Regulatory Consent Order: Unity Bank remains subject to a 2020 FDIC order, also binding with the New Jersey banking regulator, requiring improvements to its BSA/AML program, controls, testing, training and board oversight. The Bank consented without admitting wrongdoing. The order remained in effect at year-end; management could not assure when or whether it would be lifted. The Company reported $2.5 million of cumulative remediation costs and warned that further costs or constraints on branch expansion and acquisitions may result.
- Credit and concentration risks: Approximately 92% of loans were secured by real estate, primarily in the Bank’s New Jersey and eastern Pennsylvania markets. Management cited regional economic conditions, property values, borrower repayment capacity and SBA guarantee compliance as risks. Potential problem loans declined to $16.6 million from $36.7 million.
- Interest-rate sensitivity: Modeling indicated a 200-basis-point immediate rate increase would raise net interest income by approximately 4.6% in year one; a corresponding decline would reduce it by approximately 2.6%. The filing also discusses LIBOR transition risk for contracts and the subordinated debentures.
- PPP and accounting: At year-end, $46.5 million of PPP loans remained outstanding, including $44.6 million originated under the Economic Aid Act. The Company expected most remaining CARES Act PPP loans to be forgiven. CECL adoption was scheduled for fiscal years beginning after December 15, 2022; management expected the model could change allowance levels and increase volatility.
- Capital and distributions: The Bank’s community bank leverage ratio was 10.00% and the Company’s was 10.51%, above the applicable 2021 minimum of 8.5%. The Company repurchased 199,000 shares for approximately $4.2 million and paid $3.6 million in common dividends during 2021.
- The auditor gave an unqualified opinion on the financial statements and identified the allowance’s qualitative factors as a critical audit matter because of the judgment and estimation involved. The auditor was not engaged to audit internal control effectiveness; management reported its controls were effective.
Important facts for investors to verify
- Whether the regulators consider the Bank’s Consent Order remediation satisfactory, when the order may be lifted, and the likely remaining compliance costs or business restrictions.
- Whether loan quality and the allowance remain adequate as pandemic-related accommodations unwind, particularly given higher net charge-offs and the portfolio’s real-estate concentration.
- How much of 2021 earnings came from PPP fees and forgiveness activity, and whether core net interest income can be sustained as rates and funding costs change.
- Whether deposit growth is durable, including the concentration and rate sensitivity of municipal deposits, and whether liquidity remains sufficient against $399.8 million of borrower commitments.
- The expected effect of CECL adoption and the LIBOR transition on reserves, earnings, capital and the subordinated debt.