UNITY BANCORP INC quarterly report, Q2 FY2023

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Unity Bancorp, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results for Unity Bancorp and Unity Bank. Unless otherwise noted, figures are in U.S. dollars.

Business context and financial performance

Unity Bancorp is a New Jersey bank holding company providing commercial and retail banking services across New Jersey and Pennsylvania. Its lending includes commercial, residential mortgage, SBA, consumer and residential construction loans.

  • Q2 net income: $9.7 million, up 2.6% from $9.5 million in Q2 2022. Diluted EPS was $0.95, versus $0.88.
  • Q2 net interest income: $23.5 million, up 8.1%. Net interest margin declined to 4.04% from 4.39%; management attributed the decrease to funding costs rising faster than asset yields. Net interest spread was 3.32%, down from 4.25%.
  • Q2 credit provision: $0.8 million, versus $1.2 million a year earlier. Noninterest income fell 23.1% to $2.1 million, largely reflecting the prior-year quarter’s one-time realized gain from terminating an interest-rate swap hedge. Noninterest expense rose 9.7% to $11.8 million, primarily due to higher deposit insurance and compensation costs.
  • First-half results: Net income was $20.0 million, up from $18.6 million; diluted EPS was $1.91, versus $1.74. Net interest income was $47.4 million, up from $41.7 million, while net interest margin was 4.11%, down from 4.25%.
  • Returns and efficiency: Q2 return on average assets was 1.60% versus 1.83%; return on average equity was 16.19% versus 17.32%. The efficiency ratio increased to 45.54% from 42.84%.

Financial position, liquidity and capital

  • Assets and lending: Total assets were $2.55 billion at June 30, up 4.4% from year-end 2022. Total loans were $2.17 billion, up $60.8 million; commercial loans grew $68.5 million and residential mortgages $28.3 million, partly offset by lower residential construction lending.
  • Deposits and funding: Deposits totaled $1.85 billion, up $62.0 million from year-end. Time deposits increased $138.2 million, while noninterest-bearing demand deposits declined $55.0 million and savings declined $45.7 million. Borrowed funds and subordinated debentures totaled $433.3 million, including $423.0 million of FHLB borrowings.
  • Liquidity: Cash and cash equivalents were $151.2 million, up $36.4 million from year-end. The Bank reported $194.1 million of additional FHLB borrowing capacity. Uninsured or uncollateralized deposits were $336.0 million, or 18.2% of deposits. Management said existing liquidity sources were adequate, while cautioning that unexpected withdrawals could increase reliance on secondary funding and raise funding costs.
  • Cash flows, first half: Operating activities provided $8.7 million; investing activities used $59.3 million, primarily to fund loans; financing activities provided $87.0 million, including deposit growth and $40.0 million of borrowing proceeds. The company repurchased $13.4 million of treasury stock and paid $2.4 million in dividends.
  • Credit and capital: The allowance for credit losses was $26.0 million, or 1.20% of total loans. The Bank’s community bank leverage ratio was 10.07%, versus 10.34% at year-end. Shareholders’ equity was $244.1 million, up $4.9 million from year-end.

Material changes and notable items

  • Nonperforming loans rose to $16.2 million from $9.1 million at December 31, 2022. Potential problem loans totaled $20.4 million. Loans in foreclosure proceedings were $13.7 million, compared with $2.1 million at year-end; OREO was $0.3 million. No loans were 90 days past due and still accruing at June 30.
  • Available-for-sale securities had a $6.1 million net unrealized loss, compared with $5.8 million at year-end. Held-to-maturity securities had a $6.6 million fair-value shortfall versus amortized cost. Management attributed securities losses primarily to interest-rate movements and reported no recognized credit impairment on these portfolios.
  • The company adopted CECL on January 1, 2023, increasing the loan allowance by about $0.8 million and the unfunded-commitment reserve by about $0.1 million; the after-tax retained-earnings adjustment was $0.6 million. Management said adoption had no significant effect on regulatory capital ratios.
  • The Board authorized a new repurchase program in April 2023. The company repurchased 225,000 shares during Q2 at an average price of $22.82; 507,199 shares remained authorized for repurchase at quarter-end.
  • Interest-rate modeling showed that a parallel 200-basis-point increase would reduce estimated economic value of equity by 14.7% and modeled 12-month net interest income by 5.48%. The filing states the 200-basis-point EVE result was within Board-approved limits.

Outlook, risks and contingencies

The filing provides no specific earnings, growth or margin guidance. Management identifies inflation, recessionary pressure, higher interest rates, deposit competition and the possibility of deposit withdrawals as risks. It notes that bank failures in March 2023 increased uncertainty about sector liquidity and could lead to higher funding costs, regulatory changes, additional FDIC assessments or reduced confidence in banks. The company also faces credit risk from its geographically concentrated lending markets and real-estate collateral exposure; approximately 97% of loans were secured by real estate. Management does not expect pending legal matters or other contingencies to materially affect financial position or results.

Important facts for investors to verify

  • Whether deposit pricing and reliance on time deposits and borrowings continue to pressure net interest margin and funding costs.
  • Whether the increase in nonperforming loans, potential problem loans and foreclosure proceedings leads to higher charge-offs or credit-loss provisions.
  • How uninsured deposits, municipal funding and available contingent borrowing capacity evolve if deposit outflows accelerate.
  • Whether securities valuation losses or interest-rate sensitivity change materially; review the assumptions and outcomes under larger rate shocks.
  • How loan growth, share repurchases and dividends affect capital ratios and liquidity. The filing’s cash-flow and balance-sheet figures are reported for different periods and should be assessed together.