Unity Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 19 branches in New Jersey and Pennsylvania.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $15.5m | $14.2m | $30.8m | $28.4m |
| Provision for loan losses | $2.5m | $0.35m | $4.0m | $0.85m |
| Noninterest income | $2.8m | $2.4m | $5.4m | $4.4m |
| Noninterest expense | $9.2m | $8.8m | $18.5m | $17.3m |
| Net income | $5.2m | $5.8m | $10.5m | $11.6m |
| Diluted earnings per share | $0.47 | $0.53 | $0.96 | $1.05 |
| Net interest margin | 3.73% | 3.96% | 3.82% | 4.01% |
Q2 return on average assets was 1.19% and return on average equity was 12.59%, versus 1.54% and 16.01%, respectively, a year earlier. The efficiency ratio improved to 50.27% from 53.20%.
Financial condition, cash flow and liquidity
- At June 30, 2020, total assets were $1.90bn, up 10.6% from December 31, 2019. Total loans were $1.59bn, including $136.0m of PPP loans; deposits were $1.48bn.
- Cash and cash equivalents were $186.7m, up $28.7m from year-end. Six-month operating cash flow was $19.4m; investing activities used $159.7m, principally reflecting PPP loan originations; financing activities provided $168.9m, mainly from deposit growth.
- Borrowed funds were $223.0m and subordinated debentures were $10.3m, down $60.0m in total from year-end due to lower overnight FHLB advances. The company reported $240.5m of additional FHLB borrowing capacity.
- Shareholders’ equity was $166.6m. The Bank’s community bank leverage ratio was 9.64%; the Company’s was 10.01%, compared with an 8% minimum under the temporary 2020 framework.
- The allowance for loan losses was $20.2m, or 1.27% of total loans, versus $16.4m and 1.15% at year-end. Six-month net charge-offs were $0.16m.
Changes versus comparable periods
- Q2 net income fell 11.4% year over year; first-half net income fell 8.9%. Higher loan-loss provisions more than offset growth in net interest income and noninterest income.
- Net interest income rose 9.3% in Q2 and 8.2% year to date, supported by loan growth, PPP lending and lower funding costs. Net interest margin declined as market rate cuts reduced asset yields.
- Mortgage loan sale gains increased: $1.6m in Q2 versus $0.6m, and $2.6m for the first half versus $1.0m. Fee income declined, in part because of lower customer activity and waived fees.
- Nonperforming loans rose to $9.5m, or 0.59% of loans, from $5.6m, or 0.40%, at year-end. Nonperforming assets were $10.2m, compared with $7.4m.
- PPP lending and deposits drove substantial balance-sheet growth. Deposits increased $233.3m from year-end, while loans increased $166.9m.
Outlook, risks and unusual items
- COVID-19: Management stated 2020 results are not expected to track historical performance. It warned provisions may remain elevated while businesses face restrictions and noted uncertainty about borrowers’ ability to resume payments after deferrals.
- Loan accommodations: At June 30, $354.6m of loans were reported as deferred or in forbearance, equal to 22.27% of total loans. This included 35.0% of commercial loans, 14.5% of residential mortgages and 6.3% of consumer loans. An additional $21.8m of requested mortgage forbearances were current and excluded from the table.
- Credit concentration: Deferred balances included $75.9m in selected pandemic-affected industries, including hotels, restaurants, commercial strip malls, and amusement and recreation. Approximately 85% of the loan portfolio was secured by real estate.
- Regulatory consent order: In July 2020, after the quarter-end, Unity Bank agreed to an FDIC consent order, also acknowledged by the New Jersey regulator, requiring improvements to its BSA/AML program. The company estimated compliance costs of approximately $1.8m, with potential for additional costs; Q2 included $488,000 of BSA-related expense.
- Other items: The company repurchased 211,000 shares for $3.0m during the first half and paid $1.7m in dividends. It reported a $1.5m fair-value liability on interest-rate swaps at June 30, versus a $0.2m asset at year-end.
- No specific earnings or margin guidance was provided. Management noted risks from the pandemic, economic conditions, interest-rate changes, credit quality, and costs or constraints related to the consent order. Management said disclosure controls were effective and reported no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related deferrals and forbearances convert into delinquencies, nonperforming loans or losses as relief periods expire.
- Whether the $20.2m loan-loss allowance adequately reflects portfolio risks, especially commercial real estate and pandemic-affected industries.
- Actual total costs and progress in satisfying the BSA/AML consent order, and any effects on operations, expansion or regulatory status.
- The sustainability of PPP-related balances and fees, mortgage origination and sale gains, and deposit growth as temporary pandemic-related activity changes.
- Future net interest margin, funding costs, liquidity and capital ratios under changing rate and economic conditions.