Unity Bancorp, Inc. — Q2 2021 Form 10-Q
Business and 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 quarter and six months ended June 30, 2021; income comparisons are year over year, and balance-sheet comparisons are against December 31, 2020. Amounts below are in millions unless otherwise stated.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $18.45 | $15.53 | $36.47 | $30.77 |
| Provision for loan losses | $0 | $2.50 | $0.50 | $4.00 |
| Noninterest income | $2.90 | $2.81 | $6.62 | $5.36 |
| Noninterest expense | $10.46 | $9.18 | $20.26 | $18.50 |
| Net income | $8.42 | $5.17 | $16.91 | $10.54 |
| Diluted earnings per share | $0.80 | $0.47 | $1.60 | $0.96 |
| Net interest margin | 4.03% | 3.73% | 4.06% | 3.82% |
| Return on average assets | 1.77% | 1.19% | 1.81% | 1.25% |
| Return on average equity | 18.29% | 12.59% | 18.88% | 12.91% |
Financial position, cash flow and asset quality
- At June 30, total assets were $1,973.3 million, net loans $1,631.2 million, deposits $1,594.3 million, and shareholders’ equity $188.8 million. Since year-end, assets increased $14.4 million, loans $26.2 million, deposits $36.4 million, and equity $14.8 million.
- Cash and cash equivalents were $221.9 million, up $2.5 million since year-end. For the first half, operating activities provided $19.7 million; investing activities used $14.7 million; and financing activities used $2.5 million.
- Borrowed funds were $165.0 million and subordinated debentures $10.3 million, down a combined $35.0 million since year-end. The Bank reported $351.3 million of additional FHLB borrowing capacity. Its community bank leverage ratio was 9.95%; the company ratio was 10.31%.
- Total loans grew 1.6% from year-end, led by commercial lending, PPP and residential construction loans; residential mortgage loans declined. PPP loans on the balance sheet totaled $132.4 million. The Company reported $111.7 million of PPP loan forgiveness as a source of liquidity in the first half.
- Nonperforming loans were $9.7 million, or 0.59% of total loans, compared with $12.1 million, or 0.74%, at year-end. Potential problem loans totaled $39.3 million. Loans in deferral were $5.7 million, or 0.35% of total loans, at quarter-end.
- The allowance for loan losses was $22.8 million, 1.38% of total loans, versus $23.1 million, or 1.42%, at year-end. First-half net charge-offs were $804,000, compared with $161,000 a year earlier. The reserve for unfunded commitments was $346,000.
Changes and management commentary
- Q2 net income rose to $8.4 million from $5.2 million. Management attributed stronger net interest income to PPP and commercial loan growth and lower funding costs; the quarter’s net interest income increased 18.8% year over year.
- Interest expense fell 40.6% in Q2, and the average cost of interest-bearing liabilities declined to 0.73% from 1.28%. The average yield on interest-earning assets fell to 4.52% from 4.63%, while higher average earning-asset balances more than offset the yield decline.
- No loan-loss provision was recorded in Q2, versus $2.5 million in Q2 2020. Management cited improved economic conditions and reopening, while noting the allowance reflects portfolio and economic risk assessments.
- Q2 noninterest income increased 3.0%; higher SBA loan-sale gains were partly offset by lower mortgage-sale gains. Noninterest expense rose 14.0%, including a one-time $291,000 deferred-compensation adjustment and higher staffing and advertising costs. The efficiency ratio improved to 49.06% from 50.27%.
- Management provided no specific earnings or financial guidance in the supplied filing text. It cautioned that interim results are not necessarily indicative of full-year results.
Outlook, risks and contingencies
- Management said the duration and financial effects of COVID-19 remain uncertain. Renewed restrictions, weaker customer repayment capacity, changing demand, or further economic disruption could adversely affect credit quality, liquidity and results.
- The Bank remains subject to a July 2020 FDIC and New Jersey banking regulator consent order requiring improvements to its BSA/AML program. It has engaged a consultant; management stated it believes it is complying but cannot assure regulators will agree or that further compliance costs will not be material.
- Management identified interest-rate and market conditions as risks. At June 30, a 200-basis-point rate shock modeled economic value of equity up 4.2% in a rising-rate scenario and down 9.7% in a falling-rate scenario, within Board limits. The filing also describes uncertainty from the transition away from LIBOR, including for subordinated debentures and hedging arrangements.
- About 86% of the loan portfolio was secured by real estate. The Company had $345.9 million of outstanding loan commitments; management stated it believes liquidity is sufficient to meet commitments. Municipal deposits were $154.0 million and are described as short-duration and price-sensitive.
- The Company authorized repurchases of up to 750,000 shares; 110,000 shares were repurchased in the first half at an average $20.14, leaving 660,000 shares available under the plan. The timing and amount of future repurchases depend on capital needs, loan performance, market price and economic conditions.
- Management said ordinary-course litigation is not expected to materially affect financial position or results. The filing reports effective disclosure controls and no significant change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PPP forgiveness proceeds and associated fee recognition continue at a pace that supports earnings as PPP balances run off.
- Whether nonperforming and potential problem loans, charge-offs, and the allowance remain manageable, particularly in commercial and real-estate-backed exposures.
- Progress toward satisfying the BSA/AML consent order, and the level and classification of related remediation expenses.
- Whether deposit growth and funding costs remain favorable as time deposits decline and municipal deposits remain price-sensitive.
- Whether expense growth, including compensation and deferred-compensation items, moderates while margins and loan demand hold up.