Unity Bancorp(UNTY) - 2020 Q3 - Quarterly Report

PART I CONSOLIDATED FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) The unaudited consolidated financial statements present Unity Bancorp's financial position, operations, and cash flows, reflecting COVID-19 impacts, PPP loan growth, and a net income decrease from higher loan loss provisions Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,930,836 | $1,718,942 | | Cash and cash equivalents | $201,395 | $158,016 | | Net loans | $1,591,054 | $1,409,163 | | - SBA PPP loans | $138,895 | $0 | | Total securities | $50,387 | $66,564 | | Total Liabilities | $1,761,602 | $1,558,233 | | Total deposits | $1,493,440 | $1,250,114 | | Borrowed funds | $240,000 | $283,000 | | Total Shareholders' Equity | $169,234 | $160,709 | - Total assets grew by 12.3% to $1.93 billion at September 30, 2020, from $1.72 billion at year-end 2019, primarily driven by a $181.9 million increase in net loans, which includes $138.9 million in SBA PPP loans[10][260] - Total deposits increased by 19.5% to $1.49 billion, largely due to a significant rise in noninterest-bearing demand deposits, which grew from $279.8 million to $412.9 million[10] Consolidated Statements of Income Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $16,327 | $14,404 | $47,099 | $42,829 | | Provision for Loan Losses | $2,000 | $750 | $6,000 | $1,600 | | Noninterest Income | $3,336 | $2,710 | $8,692 | $7,143 | | Noninterest Expense | $10,037 | $8,729 | $28,540 | $25,997 | | Net Income | $5,760 | $5,959 | $16,299 | $17,533 | | Diluted EPS | $0.54 | $0.54 | $1.50 | $1.59 | - For the nine months ended September 30, 2020, the provision for loan losses increased significantly to $6.0 million from $1.6 million in the prior-year period, reflecting increased risk due to the COVID-19 pandemic[12][248] - Net interest income for Q3 2020 rose to $16.3 million from $14.4 million in Q3 2019, driven by loan growth, including $1.0 million in interest income from SBA PPP loans[12] - Noninterest income for Q3 2020 was boosted by a $1.7 million gain on the sale of mortgage loans, a substantial increase from the $545 thousand gain in Q3 2019[12] Consolidated Statements of Comprehensive Income - For the nine months ended September 30, 2020, the company reported a total other comprehensive loss of $1.4 million, net of tax, compared to other comprehensive income of $89 thousand in the same period of 2019[17] - The comprehensive loss in 2020 was primarily driven by unrealized losses on cash flow hedges amounting to $1.1 million and unrealized losses on securities available for sale of $383 thousand[17] Consolidated Statements of Changes in Shareholders' Equity - Shareholders' equity increased from $160.7 million at December 31, 2019, to $169.2 million at September 30, 2020[19] - Key changes in shareholders' equity during the first nine months of 2020 included net income of $16.3 million, offset by the acquisition of treasury stock for $5.1 million and payment of common stock dividends totaling $2.5 million[19][24] Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $32,813 | $25,028 | | Net cash used in investing activities | ($182,354) | ($67,475) | | Net cash provided by financing activities | $192,920 | $63,692 | | Increase in cash and cash equivalents | $43,379 | $21,245 | - Investing activities in 2020 were dominated by the origination of $142.8 million in SBA PPP Loans and a net increase in other loans of $57.3 million[24] - Financing activities were a significant source of cash, driven by a $243.3 million net increase in deposits, which more than offset the net repayment of borrowings and the purchase of treasury stock[24] Notes to the Consolidated Financial Statements - The company adopted the Community Bank Leverage Ratio (CBLR) framework effective January 1, 2020. As of September 30, 2020, the Bank's CBLR was 9.62% and the Company's was 9.95%, both exceeding the 8.00% requirement[197][192] - The company has not yet adopted ASU 2016-13 regarding credit losses (CECL), with the effective date deferred for smaller reporting companies to fiscal years beginning after December 15, 2022[156][157] - The company has interest rate swaps with a notional amount of $100.0 million as of September 30, 2020, designated as cash flow hedges against variable rate debt[175] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's impact, including PPP loans, higher loan loss provisions, and BSA/AML consent order expenses, with total assets growing and net income flat - Net income was $5.8 million for Q3 2020, compared to $6.0 million for Q3 2019. Diluted EPS was flat at $0.54 for both periods[222] - The company is addressing a Consent Order from the FDIC issued in July 2020 to strengthen its Bank Secrecy Act (BSA)/anti-money laundering (AML) program, which resulted in $626 thousand of BSA expenses in Q3 2020[221][252] - As of September 30, 2020, the company had approved 1,224 PPP loan applications totaling $143.0 million, earning gross origination fees of $5.5 million[215] Loan Deferrals as of September 30, 2020 (in thousands) | Loan Type | Total Portfolio Balance | Unpaid Principal on Deferral | % Deferrals to Total Loans | | :--- | :--- | :--- | :--- | | Commercial loans | $799,573 | $36,387 | 4.55% | | Residential mortgage loans | $473,420 | $24,255 | 5.12% | | Total | $1,613,291 | $60,643 | 3.76% | Net Interest Income - For Q3 2020, tax-equivalent net interest income increased 13.3% to $16.3 million compared to Q3 2019. This was driven by a $250.2 million increase in average earning assets, primarily from PPP and commercial loans[230][238] - Net interest margin (NIM) decreased by 12 basis points to 3.78% in Q3 2020 from 3.90% in Q3 2019, primarily due to lower yields on assets following interest rate cuts by the Federal Reserve[224][230] - The average cost of total interest-bearing liabilities decreased significantly by 53 basis points to 1.15% in Q3 2020, helping to mitigate the decline in asset yields[238] Provision for Loan Losses - The provision for loan losses was $2.0 million for Q3 2020, a significant increase from $750 thousand in Q3 2019[248] - For the first nine months of 2020, the provision totaled $6.0 million, compared to $1.6 million for the same period in 2019. The increase is attributed to the heightened risk of loan defaults resulting from the COVID-19 pandemic[248] Noninterest Income - Noninterest income increased 23.1% to $3.3 million in Q3 2020, primarily driven by a substantial increase in gains on the sale of mortgage loans, which rose to $1.7 million from $545 thousand in Q3 2019[231][250][251] - Gain on sale of SBA loans was $534 thousand in Q3 2020, compared to zero in the prior year's quarter when the company elected not to sell SBA loans[251] Noninterest Expense - Noninterest expense increased 15.0% to $10.0 million in Q3 2020 from $8.7 million in Q3 2019[231][252] - The increase was primarily driven by $626 thousand in BSA expenses related to the FDIC consent order and a $408 thousand increase in compensation and benefits, mainly from higher mortgage commissions[252][253] Financial Condition - Total assets increased by $211.9 million (12.3%) to $1.9 billion at September 30, 2020, compared to year-end 2019, largely due to the funding of $138.9 million in SBA PPP loans[260] - Total loans increased by $187.7 million (13.2%) to $1.6 billion, while the securities portfolio decreased by $16.2 million to $50.4 million[260][272] - Total deposits grew by $243.3 million, with noninterest-bearing demand deposits increasing by $133.1 million[261] - Nonperforming loans increased to $9.0 million (0.56% of total loans) at September 30, 2020, up from $5.6 million (0.40% of total loans) at year-end 2019[297] - The allowance for loan losses increased to $22.2 million, representing 1.38% of total loans, up from 1.15% at year-end 2019, reflecting the increased provision due to COVID-19[305] Quantitative and Qualitative Disclosures about Market Risk The company reported no significant changes in its assessment of market risk during the nine months ended September 30, 2020, from what was disclosed in its 2019 Annual Report on Form 10-K - There have been no significant changes in the Company's assessment of market risk during the first nine months of 2020 compared to the disclosures in the 2019 Form 10-K[341] Controls and Procedures Management, including the CEO and Interim CFO, evaluated the company's disclosure controls and procedures as of September 30, 2020, and concluded they were effective - The CEO and Interim CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[345] - No significant changes in internal control over financial reporting occurred during the third quarter of 2020[345] PART II OTHER INFORMATION Legal Proceedings The company is subject to ordinary course legal proceedings but is not aware of any that would have a material adverse effect on its business, financial condition, or results of operations - The Company is not aware of any pending legal proceedings that would materially affect its financial position or results of operations[342] Risk Factors The company highlights significant new risks arising from the COVID-19 pandemic and a regulatory Consent Order, impacting operations, loan quality, and financial condition - A significant new risk factor is the COVID-19 pandemic, which could materially adversely affect the company's operations, customer businesses, loan portfolio quality, and overall financial condition due to economic disruptions[343][348][350] - The company is subject to a Consent Order from the FDIC and NJDOBI related to deficiencies in its BSA/AML program. Compliance is expected to cost approximately $1.8 million and may involve operational restrictions[354][356] - Potential impacts from the pandemic include decreased demand for products, increased loan delinquencies, higher allowance for loan losses, and reduced net interest margin[352] Unregistered Sales of Equity Securities and Use of Proceeds The company has a share repurchase plan authorized on July 16, 2019, for up to 525,000 shares, with 161,554 shares repurchased in Q3 2020 Share Repurchases in Q3 2020 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2020 | 50,000 | $13.56 | | August 2020 | 111,554 | $13.07 | | September 2020 | - | - | - During the nine months ended September 30, 2020, a total of 373,000 shares were repurchased at an average price of $13.72. As of the end of the quarter, 152,000 shares were still available for repurchase under the current plan[339] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and Interim CFO, and documents related to a change in control agreement and the FDIC Consent Order - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1) and documents related to the FDIC Consent Order (10.2, 10.3), which were incorporated by reference from prior Form 8-K filings[361][363]