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This is a key season for regional bank earnings. Concerns over higher for longer interest rates, consumer credit debt, delinquencies, 7% plus mortgage rates, and a brewing issue with commercial real estate exposure have combined to generate a lot of anxiety. Of course, not all banks cater to the same type of clientele, but our coverage of the regional bank earnings Q1 season starts with Unity Bancorp, Inc. (NASDAQ:UNTY).
For those unfamiliar, this bank is headquartered in Clinton, New Jersey. Like many other regionals, it provides financial services to retail, corporate, and small business customers. Its customers are throughout New Jersey and the Lehigh Valley area of Pennsylvania.
As we all know, the landscape for regional banks changed dramatically in the last year and a half. The competition to attract customer deposits has led to the cost of funds rising, weighing on margins for 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 just-reported earnings indicate that this was another strong quarter.
In the quarter, Unity Bancorp’s operational results were mixed, but rather strong overall. Thanks to some continued loan growth, Unity saw revenues continue to improve once again. Higher rates are having a benefit on the yields on loans, but higher rates on deposits are weighing. The bank’s net interest margin has been pressured for over a year now.
Unity Bancorp’s margins earnings
Performance was led once again led by loan growth, albeit minimal, and deposits were also up. The bank reported net income of $9.6 million, or $0.93 per share, which was down from last year’s $10.3 million or $0.96. This was down from $0.03 from the sequential fourth quarter. However, this was a $0.03 beat against estimates.
For now, with higher rates, net interest margin is declining. However, loan quality and moderate levels of loan loss provisions have not weighed. While there are higher rates on loans issued relative to what is paid to deposit holders, depositors are getting much higher rates. Banks have had to compete for the deposits. Net interest margin was 4.09%, down 10 basis points from 4.19% a year ago, but was up 3 basis points from the sequential fourth quarter.
Loans and deposits in Q1
One of the reasons the bank has done well is that it focuses on traditional banking, rather than heavy commercial lending. Despite the pressures, the bank has performed well. Loans grew slightly, 0.1%, or $2.4 million from the sequential quarter. The bank is also taking in more capital to lend, alleviating fears of a run on deposits. Deposits rose 1.9%, or $37.1 million, from the sequential quarter. As we have over the last year, we will continue to watch closely trends in loans and deposits for all regional banks this reporting season.
Asset quality improves from Q4
Because of all that has happened in a year, we like looking more at quarter-over-quarter changes rather than changes from a year ago. So there was growth in Unity Bancorp, Inc. loans and deposits, but this quarter we saw loan quality mostly improve from the sequential Q4. As of March 31, 2024, nonperforming assets were $16.9 million gross. As of December 31, 2022, nonperforming assets were $19.2 million gross. This is a nice improvement of 13.6% in nonperforming assets quarter-over-quarter. Further, the ratio of nonperforming loans to total loans improved to 0.78, from 0.88 in Q4 2023, but is up from 0.69 a year ago. Nonperforming assets to total assets improved to 0.66 from 0.74 in Q4 as well.
In addition to quality metrics, we also examine certain return metrics, which are critical. The return on average assets was 1.58%, about flat from Q4 2023. The return on average equity was 14.49%, down from 15.12% sequentially. Finally, the efficiency ratio is a stellar 47.57% but did worsen from 43.06% last quarter.
Final thoughts
This is a tough operating climate for this small regional bank and the many banks in the space we follow. Overall, this Unity Bancorp, Inc. report starts us off on the right foot for the regional bank reporting season. That said, we believe the performance of regional banks will be extremely mixed in this first quarter. Margins we think are largely stabilizing, since the Fed has held rates firm for many months. We also want to point out that Unity Bancorp, Inc. pays a growing dividend, and it recently raised the payout another 8%. The valuation is relatively fair, but perhaps a touch stretched given the growth profile even after the pullback. For now, we continue to rate Unity Bancorp, Inc. shares as a hold.
