Unity Bancorp, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unity Bancorp is a New Jersey bank holding company operating Unity Bank, with 18 branches in New Jersey and Pennsylvania and a loan production office. This unaudited filing covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $9.9 million, up from $9.5 million in Q3 2021; diluted EPS was $0.93 versus $0.90. Return on average assets was 1.85% and return on average equity was 17.39%, compared with 1.96% and 19.57%, respectively, a year earlier.
- Interest income and margins: Q3 interest income was $26.2 million versus $21.3 million; net interest income rose 20.4% to $23.7 million. Net interest margin increased to 4.61% from 4.27%, and net interest spread to 4.37% from 4.09%. Management attributed the improvement primarily to loan growth, higher market rates and higher average securities balances.
- Credit costs and operating expenses: Q3 provision for loan losses was $1.5 million, versus none in Q3 2021. Noninterest expense rose 2.1% to $10.1 million, primarily reflecting compensation costs. Noninterest income fell to $1.1 million from $2.8 million, including a $0.6 million net securities loss and lower mortgage-sale gains.
- Nine-month results: Net income increased to $28.5 million from $26.4 million; diluted EPS was $2.67 versus $2.50. Net interest income was $65.4 million, up 16.4%; net interest margin was 4.37% versus 4.13%. Provision for loan losses increased to $2.5 million from $0.5 million. Noninterest income declined to $6.1 million from $9.4 million, partly reflecting lower mortgage-sale gains and $1.6 million in net securities losses.
- Balance sheet and funding: Total assets were $2.34 billion, up 15.0% from year-end 2021. Gross loans grew $293.0 million (17.8%) to $1.94 billion, led by commercial and residential mortgage growth. Deposits rose $37.7 million to $1.80 billion. Borrowed funds and subordinated debentures increased to $290.3 million from $50.3 million, including $240 million in overnight FHLB advances. Cash and cash equivalents were $163.4 million, down $81.4 million.
- Cash flow and liquidity: For the first nine months, operating activities used $1.7 million, investing activities used $355.3 million—principally to fund loan growth and securities purchases—and financing activities provided $275.6 million. The company reported $267.1 million of additional FHLB borrowing capacity. It had $494.5 million in outstanding loan commitments, including $159.5 million expiring within one year, and stated it believed it had sufficient liquidity to honor them.
- Capital and credit quality: Shareholders’ equity was $230.2 million, up from $205.7 million at year-end 2021. The Bank’s community bank leverage ratio was 10.78% (10.85% for the parent company). Nonperforming loans were $8.0 million, or 0.41% of total loans, versus $9.7 million and 0.59% at year-end. Potential problem loans totaled $18.1 million. The allowance for loan losses was $23.9 million, or 1.23% of total loans, compared with $22.3 million and 1.35% at year-end.
Material changes and notable items
- Loan growth and rising asset yields boosted net interest income, while the cost of interest-bearing liabilities also increased in Q3. The average cost of total interest-bearing liabilities was 0.72%, versus 0.51% a year earlier.
- Interest-rate-driven unrealized losses reduced accumulated other comprehensive income: the nine-month after-tax OCI loss was $3.1 million, and accumulated other comprehensive loss stood at $2.8 million at September 30. AFS securities had $5.2 million of gross unrealized losses; HTM securities had $5.2 million of unrealized losses. Management attributed securities losses primarily to market interest-rate movements.
- About 99% of the loan portfolio was secured by real estate, compared with 92% at year-end 2021, increasing exposure to collateral values and local real-estate conditions.
- Municipal deposits totaled $281.5 million and were described as short in duration and sensitive to price competition. Fifteen municipalities had balances exceeding $5 million; the company stated their withdrawal would not create a liquidity shortfall.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said the provision reflected loan growth and its assessment of economic conditions; results for the nine-month period are not necessarily indicative of full-year results.
- Management cited inflation, recessionary pressures, higher interest rates and continuing uncertainty around COVID-19 impacts as risks. Interest-rate changes may affect margins, deposit costs, securities values and loan performance. The company also noted uncertainty around the transition from LIBOR; its subordinated debentures reset quarterly based on three-month LIBOR.
- Unity 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 cause additional material expense.
- Management did not expect pending ordinary-course litigation to materially affect the company. Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and improved net interest margin persist as funding costs rise, and how deposit competition affects liquidity.
- Developments in credit quality, including the $18.1 million of potential problem loans, real-estate collateral exposure, and the adequacy of the allowance and unfunded-commitment reserve.
- Changes in securities valuations and accumulated other comprehensive loss if interest rates or market conditions shift.
- FHLB borrowing usage, municipal-deposit concentration, and the company’s capacity to fund loan commitments.
- Regulatory progress and any costs or consequences associated with the BSA/AML consent order.