Unity Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results for the New Jersey-based bank holding company and Unity Bank. Unless noted, amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $19.7 | $16.3 | $56.2 | $47.1 |
| Provision for loan losses | $0 | $2.0 | $0.5 | $6.0 |
| Noninterest income | $2.8 | $3.3 | $9.4 | $8.7 |
| Noninterest expense | $9.9 | $10.0 | $30.1 | $28.5 |
| Net income | $9.5 | $5.8 | $26.4 | $16.3 |
| Diluted EPS | $0.90 | $0.54 | $2.50 | $1.50 |
| Net interest margin | 4.27% | 3.78% | 4.13% | 3.81% |
Q3 return on average assets was 1.96% versus 1.28%; return on average equity was 19.57% versus 13.76%. The efficiency ratio improved to 44.15% from 50.80%. Management attributed stronger net interest income to commercial, residential construction and SBA lending growth, PPP forgiveness fees, and lower funding costs. Lower loan-loss provision reflected an improved economic environment. Quarterly noninterest income fell mainly because mortgage-sale gains were lower and no SBA loans held for sale were sold.
Financial position, liquidity and capital
- At September 30, total assets were $1.991 billion, up 1.6% from December 31, 2020. Total loans were $1.665 billion, up $37.1 million; commercial loans rose $84.2 million and residential construction loans rose $21.8 million, while residential mortgages fell $46.8 million and PPP loans fell $36.4 million.
- Deposits grew $148.2 million to $1.706 billion, led by savings and demand deposits; time deposits declined $119.1 million. Cash and cash equivalents were $216.4 million, down $2.9 million from year-end.
- Borrowings plus subordinated debentures declined $140.0 million to $70.3 million, including $60.0 million of FHLB borrowings and $10.3 million of subordinated debentures. The company reported $401.6 million of additional FHLB borrowing capacity.
- Nine-month cash flows were $20.2 million provided by operations, $24.9 million used in investing, and $1.8 million provided by financing, resulting in a $2.9 million decrease in cash and cash equivalents.
- Shareholders’ equity was $196.3 million, up $22.4 million from year-end. The community bank leverage ratio was 10.70% for the company and 10.23% for the Bank; the stated 2021 minimum was 8.5%.
Asset quality, risks and management commentary
- Nonperforming loans were $8.8 million, or 0.53% of loans, versus $12.1 million at year-end 2020 and $9.0 million at September 2020. Loans 90 days past due but still accruing rose to $2.3 million from $0.4 million at year-end. Potential problem loans totaled $32.1 million.
- The allowance for loan losses was $22.5 million, or 1.35% of loans, compared with 1.42% at year-end. Nine-month net charge-offs increased to $1.1 million from $0.2 million in 2020. Management stated the allowance was adequate, while noting future provisions may be needed as conditions change.
- COVID-19 remains a material uncertainty. At quarter-end, $17.6 million of commercial loans were in deferral, equal to 1.06% of total loans. Management warned that economic effects could impair customers’ ability to repay and adversely affect credit quality, liquidity and results.
- The Bank remains subject to a July 2020 FDIC and New Jersey consent order requiring improvements to its BSA/AML program. It hired a consultant and said it believes it is complying, but gave no assurance regulators would agree or that compliance would not entail material additional expense. Q3 BSA expense declined year over year.
- The filing identifies LIBOR replacement uncertainty, interest-rate risk, real-estate collateral exposure, and competition-sensitive municipal deposits as risks. A 200-basis-point rate shock showed economic value of equity increasing 5.6% in a rising-rate scenario and declining 11.9% in a falling-rate scenario, within board limits.
- No specific earnings or financial guidance was provided. Management noted results for the nine-month period are not necessarily indicative of full-year results. The filing reported no legal proceedings expected to materially affect the company and no significant change in market-risk assessment.
Most important facts for investors to verify
- Whether loan growth and the higher net interest margin can be sustained as PPP balances and fees run off and interest rates change.
- Whether elevated net charge-offs, past-due accruing loans, and potential problem loans lead to higher provisions or nonperforming assets.
- Whether COVID-related borrower stress or commercial real-estate exposure worsens, including the performance of loans previously granted deferrals.
- Progress and costs associated with satisfying the BSA/AML consent order.
- Deposit stability, including the concentration and short duration of municipal deposits, and the Bank’s ability to meet $358.1 million in outstanding loan commitments.