Unity Bancorp, Inc. (UNTY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the 2021 Annual Meeting of the Shareholders of Unity Bancorp. [Operator Instructions] As a reminder, today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Dallas, Chairman of Unity Bancorp. Thank you. You may begin.

Thank you and good morning, everyone. My name is David Dallas, and I'm honored to be the Chairman of the Board of Directors of Unity Bancorp. On behalf of the Board of Directors, management and staff, I would like to welcome all those listening to our 2021 annual meeting of the shareholders of Unity Bancorp. As you all are aware, due to the ongoing health impact of the coronavirus and to support the health and well-being of our stakeholders, we are conducting the shareholder meeting in virtual meeting format. For those listening, we would like to thank you for your continued support as shareholders of our company. Despite the financial impact of the COVID-19 pandemic, earnings remained strong in 2020. Unity reported earnings of $23.6 million. Another accomplishment was that Unity Bank has been recognized by the American Banker Magazine as the 15th highest performing publicly traded community bank in the nation for banks less than $2 billion in assets. And Unity was the top-ranked New Jersey community bank on this respected industry list, which Unity has been on for 5 consecutive years. In addition, Unity Bank was named one of the best places to work in New Jersey for the fourth year in a row by New Jersey Biz Magazine. Mr. Hughes will further elaborate on more of Unity's accomplishments, the year's highlights and Unity's strategic goals and future growth of the organization in this morning's meeting -- later in this morning's meeting. I would now like to call the meeting to order and proceed according to today's agenda. The first item on the agenda is the recap of the proposals voted for. As you may know, this year, our shareholders of record have been asked to cast their votes on the 4 proposals. First, for the election of Unity's 3 nominees for director; second, to ratify the selection of RSM US LLP as the company's independent external auditors for the year ending December 31, 2021; third, an advisory vote for the executive compensation plan; and lastly, an advisory vote for how often the company will conduct an advisory vote on executive compensation. The next item on the agenda is the appointment of judges and the inspector of election and the announcement of a quorum present. Today's judges of election are Ms. Laureen Cook, Unity Bank's Vice President and Chief Accounting Officer; and Ms. Linda McDermott, Unity Bank's Corporate Secretary. Would you both please acknowledge your presence by stating your names?

Laureen Cook.

Linda McDermott.

Thank you. Today's inspector of election is Ms. Marlene Grandeson-Mills, a representative from the company's stock transfer agent Computershare. Ms. Mills, would you please acknowledge your presence by stating your name?

Marlene Grandeson-Mills, present.

Thank you. Ms. Mills, may I please have the current tally of the total votes received and a percentage of the total outstanding shares that this tally represents.

Mr. Chairman, based on the total votes received of 9,542,093 representing 91.73% of the total outstanding shares, a quorum is determined to exist for the continuation of today's meeting. Thank you.

Thank you. Next on the agenda will be the opening of the polls for vote for the 4 proposals. I hereby open the polls for further voting. If you have not yet voted or wish to change your vote, you may do so now by clicking on the link provided online. Any shareholder who has already voted and does not want to change their vote need not take any further action. [Voting]

[Operator Instructions] Also within the virtual meeting portal, you will see a 2020 annual report and 2021 proxy report. Within our proxy report, you will find a full list of our directors and executive management team. With us today representing the shareholders of the company are director, Dr. Mark Brody; and director, Allen Tucker. Gentlemen, please say hello.

Good morning.

Hello.

At this time, I would like to entertain a motion to close the polls for the voting on the 2021 Annual Shareholders' Meeting of Unity Bancorp. May I have a motion, please?

So moved.

Second?

Second.

Thank you. The next item morning agenda is the company's report to the shareholders. I would now like to turn the meeting over to our President and Chief Executive Officer, James Hughes.

Thank you, David. Good morning, everyone. Again, thank you for attending today's meeting. I think we can all say that we're glad that 2020 is behind us. It was a challenging year helping our customers with the deferrals, the PPP program. All things being equal, despite the pandemic, it was a record year for Unity Bank. You can see on the first slide, our net income was $23.6 million, slightly down from the prior year, but that includes a $5 million additional provision for loan losses. If it wasn't for the additional provision, our earnings would have been up another $3.7 million. On an EPS level, we did have a record earnings of 2.9 -- $2.19, a high watermark. The impact of the provision there was additional $0.35. Loan growth was significant in 2020. We had a 14% increase, 9% increase in commercial loans, 7% increase in consumer and we had about $120 million of PPP loans, and we'll get into a more detailed slide in loans coming up. Total deposits increased close to 25%, 64% increase in noninterest-bearing and 28% increase in interest-bearing. A lot of this increase is due to the funding of the PPP program. It probably won't stay, but we are enjoying the growth of deposits nonetheless. On the next slide, you see our total loans by year, again, $1.6 billion. Again, another high watermark. You can see the growth of 10% and the commercial loans growing from $765 million to $840 million. Residential loans was completely flat, although we had a record year of residential loan volume. We did about $450 million, 2/3 of which are sold into the secondary market, 1/3 of which is going back into our portfolio. Due to the drop in interest rates, a lot of our nonperforming residential loan customers were able to find alternative financing elsewhere, so that's the reason that the portfolio is flat. We had some growth in consumer lending. SBA lending is flat. But in terms of absolute volume, SBA lending has almost doubled from the prior year. And you could see the new category of PPP, $118 million. I think we did about $140 million on round 1 and we'll do about $100 million in round 2. The next slide shows total deposits, $1.5 billion, up from $1.2 billion. Noninterest bearing of $460 million represents 30% of our total deposit base, which is up from 22%. We had significant increase in time deposits as well, and this is intentional as we try to lock in some longer-term brokerage CDs, 5- and 4-year CDs with the low -- take advantage of the low rate requirement. The next page just shows a summary income statement. Again, our earnings per share was $2.19 versus $2.14. Our return on average assets and average equity at 1.35%, 14.20%, again, impacted by the additional loan loss provision. All those ratios have returned back to more normalized levels, which we report when I get into the last slide on the first quarter results. Our margin went down slightly. So turn to the next page. When the adjusted interest rates for the pandemic dropping prime quickly down to [ 3.25% ], it takes a while for us to reprice our deposits. So although it shows a decline in our margin to 3.85%, it has now rebounded north of 4%, and we're optimistic that we'll be able to maintain stability in our margin at or around that level. In absolute dollars, net interest income has grown to $64 million, up from $57 million the prior year. On noninterest income, up significantly from the prior year from $9.5 million to close to $13 million. Branch fee income and service fee income were down, and that was directly tied to the pandemic as many businesses [ re-bank check ] cash as they were shut down for several months. We've been waiving a lot of late fees on loans. And so we're hopeful that those categories will return back to more normal levels. SBA gains, you can see, have increased significantly from the prior year. We're hopeful that trend will continue. Again, getting back to the mortgage business, we did about $450 million of mortgages, of which about $300 million were sold for gains of $6.3 million. That's the gross gain. Noninterest expenses, again, we've done a good job in controlling our expenses. Our expense ratio has come down from 2.44% to 2.24% over the last 5 years. Although it's an increase in actual dollars, you'll see on the next slide, most of the increase in noninterest expense is due to increase in comp and benefits. And the lion's share of that category is commissions that were paid to the loan officers who are -- get paid solely on commissions. So I'd say 3/4 of that increase is tied to mortgage commissions. We also have a separate line item in our noninterest expense called BSA expenses. For those of you who are not aware, we are under a BSA consent order. We believe that we're significantly through -- at least 75% through the consent order. We expect BSA expenses to be significantly lower in 2021. All other categories and noninterest expenses are virtually consistent with prior periods. The next slide just shows the profitability over the last 5 years. Our dividend for 2020 was $0.32, a very low dividend payout ratio. We'd like to grow our capital. We took advantage of the stock price being low in 2020, and we purchased about 550,000 shares. Our capital does remain extremely strong. Excluding PPP, our community bank leverage ratio is close to 11% when the regulatory requirement is 8.5% and our average equity-to-asset ratio, excluding PPP, is north of 10%. The last slide shows our first quarter results, which I would recall, I would say, fully normalized because we are getting the revenue of PCP, and so that is helping. But you can see the income for the first quarter, again, another record quarter, $8.5 million, $0.80 per diluted share. Return on average assets at $1.85. Return on average equity, close to 20%. Our efficiency ratio dropped below 50% to 46%, and our net interest margin was slightly over 4%. So it was a great year, 2020 -- 2021, and I'm very optimistic we're going to have another record year. I think we have a lot of tailwinds. This rate environment is helpful for our platform because we're such a strong loan generator. The mortgage division continues to be extremely strong. The SBA portfolio is benefiting from the 90% guarantee, the waiving of the fee. So we've seen a significant increase in SBA volume. So -- and I think we're getting close to the end of the BSA remediation. So I think 2021 should be an excellent year for Unity Bank. So once again, I want to thank everybody for attending. And do we have any questions?

There's no questions.

Okay. So with no questions, I will hand it back to the Chairman, Dallas.

Thank you, Jim. And now I'd like to proceed with the remainder of today's meeting by requesting the report of the inspector of election. Ms. Mills, may I please have the final tally on the votes voting for the 4 proposals presented at today's meeting?

Mr. Chairman, for the proposal of election of directors, Dr. Mark S. Brody received 7,802,765 or 95.78%; Raj Patel, 7,980,165 or 97.96%; and Donald E. Souders, Jr., 7,179,113 or 88.13%.

Thank you. Go ahead. I'm sorry.

For proposal #2, to ratify the selection of auditors for year ending December 31, 2021, voted for, 9,473,664 or 99.28%; against, 9,558 or 0.10%. For proposal #3 to approve on an advisory basis the executive compensation plan, voted for, 6,427,488 or 78.9%; against, 1,490,610 or 18.30%. And the final proposal #4, the frequency of the compensation, 1 to 3 years, for year 1, 3,791,358 or 46.54%; and for year 3, 4,028,071 or 2.40%. Let me repeat that. Let me clarify that. For year number 3, 4,028,071 or 49.45%.

Thank you. Finally, on behalf of the directors, management and staff, thank you again for listening to today's meeting, and I look forward to addressing you all next year. There being no further business to come before today's annual meeting, I would entertain a motion to adjourn.

Motioned.

Motioned by Mr. Tucker. Second by?

Second.

Dr. Brody. The 2021 Annual Meeting of the Shareholders of Unity Bancorp is adjourned. Thank you all.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.