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

Good morning, and welcome to the Annual Meeting of Shareholders of Unity Bancorp, 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. James Davies, Senior Vice President and Controller of Unity Bancorp, Inc. Mr. Davies, the floor is yours.

Good morning, all, and welcome to the Annual Shareholders Meeting of Unity Bancorp. I'm joined today by our Board of Directors, our President and CEO, Jim Hughes; and our CFO, George Boyan. Before we begin, Unity would like to encourage all participants to refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and factors that could cause actual results to differ from those statements. With that, I'll turn the call over to our CFO, George Boyan.

Good morning, ladies and gentlemen, and welcome to the Annual Shareholders Meeting of Unity Bancorp, Inc. My name is George Boyan, and I am CFO of the company. On behalf of the Board of Directors, management and Unity's talented staff, I welcome you to the 2025 Annual Meeting of Shareholders. At Unity Bank, we are dedicated to forging enduring connections with our customers, offering customized banking solutions that truly resonate with our communities. Our commitment is to deliver exceptional service, adaptability and responsiveness to meet the diverse needs of individuals and businesses regardless of their size. Turning to our 2024 financial performance. I am thrilled to report another record-breaking year. Unity Bancorp achieved an impressive $41.5 million in net income with a full year return on average assets of 1.68% and a full year return on average equity of 14.99%. Speaking on behalf of the Board of Directors and management, we are very optimistic about the company's outlook heading into 2025. Mr. Hughes will further elaborate on Unity's accomplishments, the year's highlights, our strategic goals and the future growth of the organization later in this morning's meeting. But I would now like to proceed according to today's agenda. The first item on the agenda is the recap of the proposals voted on. This year, our shareholders of record have been asked to cast their vote on the following proposals: number one, the election of Unity's 3 nominees for director; number two, ratification of Wolf & Company, P.C. as the company's independent external auditors for the year ending December 31, 2025. If you have not voted or wish to change your vote, you may do so by clicking on the Vote tab. Any shareholder who has already voted and does not wish to change their vote need not take any further action. 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. James Davies, Unity Bank's Senior Vice President and Controller; and Ms. Linda McDermott, Unity Bank's Corporate Secretary. Would you both please state your name?

James Davies.

Linda McDermott.

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

Based on the total votes received of 6,820,086, representing 67.81% of the total outstanding shares, a quorum is determined to exist for the continuation of today's meeting.

Thank you, Ms. Mills. I would now like to encourage any shareholders present to submit questions online by clicking on the Q&A tab. We encourage our shareholders to ask questions, and we will address as many questions as possible towards the end of this meeting. If your question is not answered, please feel free to reach out through our Investor Relations link on the Unity Bank website. Within the virtual meeting portal, you should see a link to view our 2024 annual report and 2025 proxy report. Within our proxy report, you will find a full listing of our directors and executive management team. The next item on the agenda is the company's report to our shareholders. I would now like to turn the meeting over to our President and Chief Executive Officer, James Hughes. Mr. Hughes?

Thank you, George. Good morning, everyone. Again, my name is Jim Hughes, CEO of Unity Bank. I had the honor and privilege to report the results for 2024 and talk about some initiatives for '25 and beyond. And so just overall, the last couple of years has been a challenge for the banking industry with the Fed raising rates to record highs, and we have an inverted yield curve, and Unity Bank has been able to fare much better than most. We actually had a record year of earnings in '24, reporting $41.5 million, net income per share of $4.06 and stellar operating ratios, return on average assets, 1.68%, return on average equity, 14.99%. And the thing that we're most proud of is our net interest margin of 4.16% where the average margin for banks is, I think, slightly under 3%. This is our primary driver of our revenue and our expense control, keeping our noninterest expense to average assets under 2%. So on the next slide, we're reporting how are we doing so far in '25, and we're off to a very strong start despite the fact that the first quarter is generally the weaker of all of our quarters. It was another record quarter, $11.6 million versus $11.5 million in the preceding quarter. And our operating ratios are very, very strong. Return on average assets, 1.83% versus last year, we had 1.68% on average. So you can see the momentum building. Return on average equity of 15.5% and our margin is an all-time high of 4.46%. So we're very pleased with the start for 2025, and I look forward to continuing to report our results throughout the rest of the year. So what's going on with our organization. We have 21 locations on the next slide, 2 in Pennsylvania and 19 in New Jersey. And we have a little tag there, O&L let you know which ones are owned and leased. We prefer to own our branches rather than leasing. And our 3 most recent branches in Fort Lee, Parsippany and Lakewood are doing very, very well. And in '25, our initiative is to start looking for another branch or 2. And so we're going to get back to the business of expanding one branch at a time. So our core business on the next slide, gathering deposits and making loans. And so at the end of '22, we had a little bit of a challenge as did a lot of banks with the loan-to-deposit ratios growing as money was exiting the banking industry. And so we ended '22 with a loan-to-deposit ratio close to 120%. And so in '23, we stopped doing investment property lending focused on our core business of owner-occupied lending. And then in early '24, we were back in compliance with our loan-to-deposit policy of 110%. We're currently at 108% right now. And loan growth has been surprisingly strong, and we've been able to get the fair rate of return on our loans. So let me just briefly go down the list of our categories of our loans. SBA is declining somewhat by design, first and foremost, with interest rates being as high as they are. There's just not a lot of SBA loan demand. However, on the commercial side, we had 10% growth, extremely strong growth. Again, we're lending in our footprint. Our focus is on owner-occupied businesses on Main Street, and we're sprinkling some investment property lending. Residential mortgages, again, there's still a struggle with not enough inventory out in the market. And so our volume is down to around $25 million a month of which about 75% of it is going into our portfolio and 25% is being sold. And so even though the portfolio is flat, I think we put in, on average, probably 7 to 10 loans into the residential portfolio each month. We have 7 to 10 that pay off. And so the positive is we have lower-yielding loans paying off and it's being replaced with higher-yielding paper. So that's helped contributing to our growth in our margin. Consumer is holding its own with 5% growth. And the residential construction portfolio, which is probably our most profitable division, it looks like it really declined in '23 to '24, but that's not really the story. The story was there was a backlog created by COVID, the supply chain issues, can't get town inspectors come out and do inspections. And so a lot of our projects were stale in '23, and we're able to flush all those out in '24. And I would say that the $90 million that we have at 12/31 is all current production, again, predominantly owner-occupied in spec 50-50. And then below 9% core deposit growth. We continue to be very successful in growing our core deposits. Credit quality, again, is first and foremost. Our allowance to total loans is slightly above our peer average, about [ 118% ] . Nonaccrual loans, just within our peer group of about 65 basis points, and that fluctuates, obviously, month-to-month, quarter-to-quarter. It's predominantly residential loans. People get divorced, people lose their job, tenants not paying whatever. There's always a story. But you can see the net charge-offs are relatively low, 9 basis points, 7 basis points, 9 basis points for the first quarter. So I don't see any dark clouds ahead of us for '25 with regard to credit quality. The next page is really just kind of the summary income statement, and we'll get into each of the line items. But the first line item, net interest income, our primary source of revenue continues to grow, a combination of now growth in the margin and growth in outstanding. So let's turn to the next slide. And you could see -- let's talk about the bottom slide first, the cost of funds. And for years, banks -- when prime was stuck at 3.25% for 10 years, banks were lulled into thinking that cost of funding was going to be low forever. The Fed raises rates 525 basis points. And before you know, we're doing CD promotions at 4.5% and 5%. And so the positive thing is when you look at the top line item is our yield on our earning assets, you can see that we were able to aggressively reprice our loan portfolio up as high as 6.57% from our low of 4.58%. So that enabled us to keep our margin in the 4% range. And as I reported earlier, 4.46% in the first quarter of this year, our high watermark. And so I'm very optimistic that, that's going to continue, meaning we're going to continue to have a high margin for the rest of '25. One of the items that we discussed in our strategic plan was we recognized that our fee income was below our peers. And so we really looked at our fee schedules and we repriced our branch fee schedules and our loan fee schedules, and you could see the positive impact it had on our '24 results. Again, the gain on sale of SBA is down, again, due to where rates are. I do see that returning sometime in the future. Gain on sale of mortgage loans, again, it's not where it could be. optimistic that when rates come down and there's going to be more availability of product in the market that we'll be able to grow our gain on sale of mortgage loans. The next page, just talking about expenses. Overall, again, our expense ratio is strong at around 2%. We'd like to get a little bit lower, obviously, but 3.8% increase year-over-year is not bad. Comp and benefits, '23 was slightly inflated. We had some temp help for BSA. It was probably around $600,000 in '23. We had some severance costs. So '23 is really kind of inflated. Obviously, we have a higher headcount, and we would expect to see higher compensation levels going forward. On the benefit line item, the reason it's up 28%. We did a larger CER accrual in '24. And we're self-employed -- or not self-employed, self-insured for our medical benefits. And so we had some large claims in '24. Hopefully, that doesn't repeat itself. But overall, we were very, very happy with our expense control. Book value growth. So this is really what it gets down, the rubber meets the road, how do we build shareholder value by growing book value. So this bottom line shows a consistent book value growth. If you annualize our first quarter results, then we'll make $4.50 a year. We're paying out $0.50 approximately in dividends for the year. And so we'll grow book value in theory by $4 a share a year. So you put $1 in book value, maybe you get $1.10 back in return to the shareholders. And you can see the top line is our stock price. And we really had great stock appreciation in the fourth quarter. I think it was over 40%. So we're certainly happy with the results of not only the performance, but the result of how our stock is perceived. So again, I'm very, very bullish on our outlook for the remainder of the year. We have a great business model, making loans to small businesses on Main Street. Not only do we have an experienced and proven management team, it's all about our employees. We've got exceptional employees that focus on sales and service and really make the clients welcome. High level of ownership around the board here certainly helps. We are focused on achieving shareholder value, best-in-class financial performance. We're probably in the top 5% of all financial institutions nationwide. So we're very pleased with that and strong capital management practices. We believe in a low dividend payout ratio, save our powder for stock buying opportunities when they become available, building our capital for potential mergers if we can find something that we like. And that's really it, very, very optimistic about the future. And now I'll hand it back to George.

Thank you, Jim. The next item on today's agenda is to provide answers to any questions that may have been submitted during today's meeting. At this time, we're not seeing any, but I'll wait another few moments to see if there are any additional questions that come through the queue.

No questions.

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

The voting tally for the proposals are as follows: Proposal #1, election of directors. Dr. Mary E. Gross, 4,910,369 voted for. 873,798 withheld and 1,035,929 were nonvoted. James A. Hughes, 5,735,559 voted for, 48,598 were withheld and 1,035,929 nonvoted. Aaron Tucker, 5,421,167 voted for, 362,990 were withheld and 1,035,929 were nonvoted. For proposal #2, the ratification of Wolf & Co P.C. as the company's independent external auditors for the year ending December 31, 2025, those voted for 6,776,976; against 41,030 and those voted -- those abstained, 2,080. Thank you.

Thank you, Ms. Mills. In closing, I'd like to thank everyone in attendance and for their participation in today's meeting and for your continued support of Unity Bank and Unity Bancorp, Inc. We look forward to all of you joining us again next year. There being no further business to come before today's annual meeting, I'd like to entertain a motion to adjourn. With us today, representing shareholders of the company are Vice Chairman, Aaron Tucker; and Director, Robert Dallas. May I please have a motion?

Motion.

Second.

The 2025 Annual Meeting of Shareholders of Unity Bancorp is adjourned. Thank you all.

This concludes the meeting. You may now disconnect.