Unity Bancorp, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 19 branches in New Jersey and Pennsylvania. This unaudited filing covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. The company provides commercial and retail banking, including SBA, commercial real estate, residential mortgage and consumer lending.
Financial and operating results
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior date |
|---|---|---|
| Net income | $8.5 million | $5.4 million |
| Diluted earnings per share | $0.80 | $0.49 |
| Net interest income | $18.0 million | $15.2 million |
| Net interest margin | 4.09% | 3.92% |
| Provision for loan losses | $0.5 million | $1.5 million |
| Noninterest income / expense | $3.7 million / $9.8 million | $2.5 million / $9.3 million |
| Return on average assets / equity | 1.85% / 19.51% | 1.32% / 13.23% |
| Efficiency ratio | 45.74% | 51.92% |
| Total assets | $2.005 billion | $1.959 billion at Dec. 31, 2020 |
| Total loans / deposits | $1.668 billion / $1.628 billion | $1.628 billion / $1.558 billion at Dec. 31, 2020 |
| Cash and cash equivalents | $239.6 million | $219.3 million at Dec. 31, 2020 |
| Borrowings and subordinated debentures | $180.3 million | $210.3 million at Dec. 31, 2020 |
| Shareholders’ equity | $181.2 million | $173.9 million at Dec. 31, 2020 |
Net cash provided by operating activities was $11.6 million; investing activities used $29.6 million; financing activities provided $38.2 million. Cash increased $20.3 million during the quarter. The Bank’s community bank leverage ratio was 9.85% (company: 10.19%), above the stated 2021 minimum of 8.5%.
Material changes and drivers
- Net income rose 58% year over year. Net interest income increased 18.2%, reflecting PPP and commercial loan growth and lower funding costs; net interest margin improved 17 basis points.
- Interest expense fell 41.1% to $2.6 million, while interest income increased 5.0% to $20.6 million. The average yield on earning assets declined 37 basis points, partly offset by growth in average earning assets.
- Noninterest income increased 46.4%, primarily on mortgage loan sale gains and securities gains. Mortgage loan sales were $101.9 million, producing $1.75 million in gains.
- Noninterest expense increased 5.1%, mainly from mortgage commissions, professional services, deposit insurance and BSA compliance costs. The effective tax rate rose to 25.7% from 22.9%.
- Total loans increased $40.6 million from year-end, including PPP loans that grew to $169.1 million. Deposits rose $70.4 million; borrowings declined $30.0 million.
- Nonperforming loans were $11.8 million, or 0.71% of loans, versus $12.1 million and 0.74% at year-end. Loans past due 90 days or more but still accruing increased to $2.5 million from $0.4 million. The allowance was $23.0 million, or 1.38% of loans, compared with $23.1 million, or 1.42%, at year-end.
Outlook, risks and unusual items
- The filing provides no quantified earnings, revenue or margin guidance. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Management said the lower loan-loss provision reflected an improved credit outlook. COVID-19’s duration and financial effects remain uncertain; adverse effects on borrowers, loan demand, credit quality, liquidity and results could continue. At March 31, $20.2 million of loans, or 1.21% of total loans, remained under payment deferral.
- The Bank is subject to a July 2020 FDIC consent order requiring improvements to its BSA/AML program. The company reported $168,000 in related compliance expense in Q1 and said it could not assure regulators would deem the Bank fully compliant or that additional material costs would not arise.
- Interest-rate and benchmark transition risks remain relevant. The company reported that LIBOR may cease or be replaced after 2021; its subordinated debt and certain borrowings or hedges reference LIBOR. Management’s March 31 sensitivity analysis estimated economic value of equity changes of +4.2% under a 200-basis-point rate rise and −10.7% under a 200-basis-point fall.
- The company repurchased 70,000 shares in Q1 for approximately $1.35 million and had 700,688 shares remaining under its authorized repurchase plan at March 31. It paid a $0.08-per-share quarterly dividend.
- Management stated that pending ordinary-course litigation was not expected to materially affect financial position or results. Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting.
Key facts investors should verify
- PPP loan balances, forgiveness timing and fee recognition; the reported $169.1 million balance includes first- and second-round lending.
- Whether the improved credit outlook persists, including trends in nonperforming and past-due loans, charge-offs, deferrals and allowance adequacy.
- Progress and costs under the FDIC/NJ consent order, including any subsequent regulatory findings or remediation requirements.
- Deposit stability and concentration, particularly municipal deposits, alongside available borrowing capacity and commitments to fund loans.
- Interest-rate exposure, LIBOR transition plans and the effect of changing rates on net interest margin and hedges.
- Whether mortgage-sale gains, securities valuation gains and unusually low provision expense are sustainable; the filing gives no forward guidance.