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

Hello, and welcome to the Annual Meeting of Shareholders of Unity Bank Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Mr. David Dallas, Chairman of the Board of Directors of Unity Bancorp. Mr. Dallas, the floor is yours.

Thank you. Good morning, ladies and gentlemen. 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'd like to welcome all those listening to the 2023 Annual Meeting of the Shareholders of Unity Bank. At Unity Bank, our mission is to cultivate lasting relationships with our customers by providing personalized banking services that resonate within the communities we serve. Our goal is to offer the same level of attention, flexibility and responsiveness to individuals and businesses of all sizes. Due to our commitment to exceptional customer service and high-quality loan and deposit products, we have expanded our branch operations to Lakewood and Fort Lee, New Jersey. We also plan on opening our first Morris County, New Jersey branch in Lake Hiawatha, later this summer. Our diverse team of bankers will focus on providing credit and treasury solutions to all members of the communities we serve. Recently, the banking industry experienced the largest bank failure since the great financial crisis. These failures largely resulting from the challenging interest rate environment, have highlighted the importance of managing risk for banks of all sizes. We remain vigilant in our risk management practices and have positioned our balance sheet to mitigate these risks and ensure the safety and soundness of our institution. In addition, Unity Bank is committed to our mission of supporting our local communities. As a community bank, we understand the importance of providing access to financial services for individuals and small businesses who might not have access to capital. When you bank with Unity Bank, your deposits are used to support and develop your community, whether it's helping a small business get started or helping a family buy their first home. Our focus is on building strong relationships with our customers and providing the resources they need to grow. Thus, our tagline grow with us. 2022 was another record year for the bank posting its highest annual profit of $38.5 million with a return on average assets of 1.80%. Unity Bank is also selected as a top 25 bank in Bank Director Magazine, a national ranking of the best publicly traded banks. This will further elaborate on more of Unity's accomplishments, the year's highlights, Unity's strategic growth and the future growth of the organization later in this morning's meeting. I would now like to proceed according to today's agenda. The first item on the agenda is to recap where the proposals voted for. As you may know, this year, our shareholders of record have been asked to cast their votes on the following proposals: number one, for the election of Unity's 4 nominees for director; and secondly, for the adoption of the company's 2023 equity compensation plan. If you have not voted or you wish to change your vote, you may do so by clicking on the Vote tab. Any shareholder who has already voted and does not want to change their vote, need not take any further action. [Voting]

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 Mr. George Boyan, Unity Bancorp's Executive Vice President and Chief Financial Officer; and Ms. Linda McDermott, Unity Bank's Corporate Secretary. Would you both please take your names, Linda?

Linda McDermott.

George Boyan.

Thank you. Today's inspector of election is Ms. Marlene Grandeson-Mills, a representative from the company's stock transfer agent, Computershare. Ms. Mills, may I please have the current tally of the total votes received as a percentage of the total outstanding shares that this tally represents.

Mr. Chairman, based on the total votes received of 8,115,224 representing 76.74% of the total outstanding shares, a quorum is determined to exist for the continuation of today's meeting.

Thank you, Ms. Mills. And now I'd like to encourage any shareholder present to submit questions online by clicking on the Q&A tab. [Operator Instructions] If any question is not answered, please feel free to reach out through our Investor Relations link on the Unity Bank website. Also within the virtual meeting portal, you should see a link to view our 2022 annual report and 2023 proxy report. Within the proxy report, you will find a full list of our directors and executive management team. Next item on the agenda is the company's report to our shareholders. I would like to now turn the meeting over to our President and Chief Executive Officer, James Hughes. Jim?

Thank you, David. Welcome, and good morning. It's my honor and privilege to present the operating results for 2022. Before we do that, let's just spend a couple of seconds on our first quarter results. We released our earnings a week ago last Monday and as the slide shows, $10.3 million of earnings, which is a high water mark for Unity Bank. Our performance is still a top quartile of our peer group. Our operating ratios continue to be very, very strong. The only dark side of the earnings release was the decline in the net interest margin. As Mr. Dallas alluded to, the interest rate is very, very challenging for all banks as the cost of funding, the cost of deposits is outpacing the ability to reprice the cost of -- or the interest-bearing assets. So that should continue as long as the yield curve stays inverted, but I'm very confident that we will continue to outperform our peers. Looking on the following chart, you can see the 5-year earnings growth of the bank over 5 years, approximately 75% growth in absolute dollars and on a per share basis. This slide looks a little inconsistent. In 2020, we had the pandemic, and we took a very large provision, about $7 million. And then '21 numbers were inflated with PPP revenue. So excluding those 2 items, you'd have probably a more traditional bar chart, but again, very strong earnings, and we expect to continue to have earnings growth in the future. Deposits are more important than ever. We were fortunate enough to have a couple of branches in the pipeline. We opened up our 19th branch in Ocean County, doing extremely well, about $35 million in deposits already. We opened up in Fort Lee with about $25 million in deposits in the last 2 to 3 months of opening, and we look forward to opening our first branch in Morris County, in Parsippany, Lake Hiawatha, which has an Asian-Indian population. So we'll do extremely well there. That should open at or around July 1. The next slide really shows the story of 2022 for the bank. On the left side, you can see tremendous, tremendous loan growth, almost 28% growth. And so overall, the growth was really comprised of 2 factors: one, loan originations being very, very strong and the slowdown of the loan prepayment. Look at the residential division, they did about $400 million in '21. It did about the same number in '22. The product mix was substantially different, a lot less salable product, a lot more portfolio lending in '22. That accounts for the increase from $400 million to $600 million in outstanding. But really what -- we really changed there was the speed of prepayments slow down to a call. We used our prepayments about $10 million a month or more. Now it's down to about $3 million a month. So that's really the primary read in the portfolio grew so strongly. Residential construction, again, up 36%. It wasn't that we outpaced the prior year. Our origination volume was consistent with '21. Really what's caused that increase was really the slowdown of finishing jobs due to the pandemic, the supply chain issues. So instead of remaining [indiscernible] in 18 months, it's now taken 30 months. So that should correct itself in '23. So we should probably see actually the decline in residential construction lending. Commercial loan was absolutely due to loan volume. We did about $500 million in commercial loans in '22. Normally, we were pacing around $300 million to $350 million in prior year. So it was a very, very strong year for total loan growth. The negative side, is as you look at the right side of the slide, total deposits were relatively flat. When rates increase, money moves out of the banking system. And so and -- we're not immune to that. So we brought in a lot of new relationships in '22 despite all of our efforts, deposits were flat, which is put in our loan-to-deposit ratio as many banks have under pressure or current loan-to-deposit ratios around 117%, our policy is 110%. So we're doing all the things possible to get it back into compliance, opening up more branches to grow deposits, improving our sales efforts on deposits. We're no longer doing investment property lending on the commercial side. So I'm very confident by the end of the year, our deposit ratio should be back in line. So the next 2 slides show, again, just the composition of our total loans and our total loan growth over 5 years. And you can see the growth from [ 409 to 605 ] in resi and then $932,000 to $1.2 million in commercial. So on the deposit side, again, a different rate environment. People are very, very aware of the fact that you can get to 4% to 5% on free money, and so money has fallen out of noninterest-bearing [ 5 29 to 4 94 ], still relatively strong relative to our peer group and we're funding a lot of the growth with high cost, unfortunately, deposits and CDs. So that accounts for the growth from [ 2 92 to 4 25 ]. The next page is our income summary. Again, '22 was a record year for us, up 6.5% in earnings, again, '21 had a lot of PPP revenue. '22, what I would describe as more core like earnings. And there's a slide for each of the categories here, which we can go over in detail. But the point here, again, a great year on our performance ratio is 1.80%, return on average assets, 17% and return on average equity. The decline there was is really solely due to the growth in equity. And the real highlight was net interest margin at 4.41, on the highest margins in the state. Going to the next slide, you could see net interest income in absolute dollars in $53 million in 2018 to $90 million with a margin up at a high point of [ 4 40 ]. Again, the margin is expected to decline in '23 due to the rate environment. Net interest income may also come under pressure as the cost of deposits continues to increase. Noninterest income down 33% from the prior year, which is driving that service and loan fee income as rates go up, repayment slow down. And so you get less prepayment reference. So that accounts for the decline in service and loan fee income. We're going to go back to the business of selling our SBA production. So we started that in '22 and that should continue in '23. The decline in [indiscernible] mortgage sales has nothing to do with really the decline in mortgage volume has to do with the products that we are getting purchase money mortgages are down due to a higher rate environment. And so we had fewer salable product in '22. Security losses. We do have a small investment portfolio of bank equities. The majority of this loss has not to do with the bank equities but really investments in bank preferred stock for high yielding dividends. So that's mark-to-market each quarter. And other income was unusually high in 2022. We unwound a swap that was in the money for about $1.2 million, I think, in June of last year. The next slide shows noninterest expense. Good quality control overall despite all the inflationary pressures, we were able to control our costs at $42 million, up 4.4% from the prior year. The largest increase was comp and benefits, certainly salary and inflation there is a component, but we also have a higher headcount to increasing staffing in back office and in the new branches. All the other areas are basically down from prior periods with the exception of occupancy, again, due to the new locations. The next slide shows book value and share price. Our goal is to continue to build the book value and our -- our target on average we're growing book value of about $3 per share per year. In the good old days, banks used to trade at $150 a book. And then in 2020 the pandemic happened, and that brought that down. So there's always a little story with each of these declinations and then back up the $150 change like $130, $135 of book and now first quarter with what's going on in the market, the concern about bank liquidity, which is really not to remain to community banks but for the larger regional banks. But all banks are under stress with the inverted yield curve, and that's the reality of that it's going to be a tough market for all financial institutions. We are continuing to make record earnings, which is a positive. And so if you go to the next slide and the story here is we want to keep our dividend payout ratio while we have been increasing our dividend each year by $0.01. Whether that continues or not is yet to be determined by the Board, but the story here is the building of book value. And so why is that important? It provides us the opportunity to repurchase our shares when we have opportunities. So I look at what's going on today. Yes, it hurts the banking industry, what banks stops in my opinion, are completely undervalued. And so for the first quarter, we bought 338,000 shares of stock to make -- to take advantage of it. And we could not have that flexibility if we had a high dividend payout ratio. So we like to build capital, and we like to be opportunistic with buying back our stock when situations like this arise. And just the last slide, again, just showing that we want to be a sustainable organization at all times. And so our community bank leverage ratio, our capital ratios are very, very strong, as depicted by the last slide. So with that, I'd be happy to take any questions if anybody has any. No questions? No questions. Okay. Back to you, David.

Thank you, Jim. We'd now like to proceed with the remainder of today's meeting by closing the polls and requesting the report of the Inspector of Election. Ms. Mills, may I please have the final tally on the voting for the 2 proposals presented at this meeting.

Proposal 1 for the election of directors the current vote total are as follows: Wayne Courtright, votes in favor are 7,822,016 votes, votes withheld 293,208; David D. Dallas, votes in favor are 7,799,507, votes withheld 315,760; Robert H. Dallas, II, votes in favor, 7,159,255, votes withheld 955,968; Peter E. Maricondo, votes in favor 6,578,670, votes withheld 1,536,554. Proposal 2 for the adoption of the company's 2023 equity compensation plan, votes in favor, 7,682,899, votes against 267,300, votes abstain 165,024. Thank you.

Thank you, Ms. Mills. In closing, I'd like to thank all in attendance for participating in today's meeting and your continued support of Unity Bank. I look forward to all of you joining us next year. There being no further business to come before today's annual meeting, I would like to entertain a motion to adjourn motion by Mr. Hughes, second by Raj Patel, Director, all in favor, aye. Thank you. The 2023 Annual Meeting of the Shareholders of Unity Bank is adjourned. Thank you all again. Good day.

This concludes the meeting. You may now disconnect.