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This is a key season for regional bank results. Concerns about rising long-term interest rates, consumer credit debt, delinquencies, mortgage rates above 7% and a looming problem with commercial real estate exposure have combined to generate a lot of anxiety. Of Of course, not all banks cater to the same type of customer, but our coverage of the regional banks’ first quarter earnings season begins with Unity Bancorp, Inc. (NASDAQ:UNTY).
For those who don’t know, this bank is headquartered in Clinton, New Jersey. Like many other regional companies, it provides financial services to individuals, businesses and small businesses. Its customers are located throughout New Jersey and the Lehigh Valley region of Pennsylvania.
As we all know, the regional banking landscape has changed dramatically over the past year and a half. Competition to attract customer deposits has led to rising costs rising funds, weighing on the margins of many banks. Banks are also tightening their lending standards. Currently, Unity is in good shape and has handled the current climate quite well. And the the winnings just declared indicate that it was another solid quarter.
During the quarter, Unity Bancorp’s operating results were mixed, but overall quite strong. With continued loan growth, Unity saw its revenue continue to improve once again. Higher rates have a beneficial effect on loan yields, but higher rates on deposits weigh on them. The bank’s net interest margin has been under pressure for more than a year.
Unity Bancorp Profit Margins
Performance was once again driven by loan growth, albeit minimal, and deposits also increased. The bank reported net income of $9.6 million, or $0.93 per share, down from $10.3 million, or $0.96, a year ago. This is down from $0.03 from the sequential fourth quarter. However, this is $0.03 above estimates.
For now, with the rise in rates, the net interest margin is decreasing. However, loan quality and moderate levels of loan loss provisions were not a drag. Even though the interest rates on loans provided are higher than what is paid to deposit holders, depositors benefit from much higher rates. Banks had to compete for deposits. Net interest margin was 4.09%, down 10 basis points from 4.19% a year ago, but up 3 basis points from the sequential fourth quarter .
Loans and deposits in the 1st quarter
One reason the bank has performed well is because it focuses on traditional banking operations rather than massive commercial lending. Despite the pressures, the bank recorded good results. Loans increased slightly, by 0.1%, or $2.4 million from the sequential quarter. The bank is also absorbing more capital to lend, easing fears of a run on deposits. Deposits increased 1.9%, or $37.1 million, from the sequential quarter. As we have done over the past year, we will continue to closely monitor loan and deposit trends at all regional banks during this reporting period.
Asset quality improves from the fourth quarter
Because of everything that has happened over the course of a year, we prefer to look at quarter-over-quarter changes rather than changes that occurred a year ago. So there was growth in loans and deposits from Unity Bancorp, Inc., but this quarter we saw loan quality primarily improve compared to the sequential fourth quarter. As of March 31, 2024, non-performing assets amounted to $16.9 million gross. As of December 31, 2022, non-performing assets amounted to $19.2 million gross. This is a nice 13.6% improvement in non-performing assets quarter over quarter. Additionally, the ratio of non-performing loans to total loans improved to 0.78, from 0.88 in the fourth quarter of 2023, but up from 0.69 a year ago. Non-performing assets to total assets also improved to 0.66 from 0.74 in the fourth quarter.
In addition to quality measures, we also look at certain performance measures, which are essential. Return on average assets was 1.58%, roughly flat compared to Q4 2023. Return on average equity was 14.49%, down from 15.12% sequentially. Finally, the efficiency ratio is 47.57%, but it has deteriorated from 43.06% last quarter.
Final Thoughts
This is a challenging operating climate for this small regional bank and for the many industry banks we follow. Overall, this report from Unity Bancorp, Inc. starts us off on the right foot for the regional bank reporting season. That said, we believe that the performance of regional banks will be extremely mixed during this first quarter. We believe that margins are largely stabilizing, since the Fed has kept rates firm for many months. We’d also like to point out that Unity Bancorp, Inc. pays a growing dividend and recently increased the payout by an additional 8%. The valuation is relatively fair, but perhaps a little exaggerated given the growth profile, even after the downturn. For now, we continue to view shares of Unity Bancorp, Inc. as a Hold.
