Unity Bancorp Rises on Strong Earnings, But Credit Concerns Emerge
The New Jersey bank beat profit and revenue estimates, but a 53% jump in nonperforming loans has captured investor attention.
Unity Bancorp, Inc. (NASDAQ: UNTY) reported strong fourth-quarter financial results that surpassed analyst expectations, driven by robust revenue growth and expanding margins. However, the impressive headline numbers were accompanied by a significant increase in nonperforming assets, creating a mixed picture for investors monitoring the health of the regional banking sector.
The Clinton, New Jersey-based lender announced quarterly net income of $15.5 million, or $1.52 per diluted share. On a core basis, earnings per share reached $1.41, beating consensus estimates of $1.29 by 9.3%. Revenue also exceeded forecasts by 12.4%, a result of a healthy net interest margin that expanded to 4.60%.
Despite the strong profitability, the bank’s stock performance reflected underlying investor caution. The focus for many was a sharp 52.6% quarter-over-quarter increase in nonaccrual loans, which grew to $31.3 million. The rise in troubled assets required an increased provision for credit losses, a metric closely watched in the current economic climate.
According to a company announcement, the surge in nonaccrual loans was primarily due to a single $15.5 million owner-occupied commercial mortgage being moved to nonaccrual status. Unity's management moved to reassure investors, stating that the loan is well-secured and that the bank “anticipates no material loss from this credit.”
For the full fiscal year, Unity reported a record net income of $58.0 million, capping a year of solid operational performance. The bank, with approximately $530 million in market capitalization, has a strong base of support, with insiders holding over 28% of the company’s shares.
Analysts have maintained a positive outlook on the bank, with a consensus 'Strong Buy' rating and an average price target of $60, suggesting confidence in the bank's long-term strategy and its ability to manage the current credit issues. The stock trades at a modest valuation of approximately 10 times trailing earnings, with a dividend yield of just over 1%.
Unity's situation highlights the tightrope regional banks are walking. While higher interest rates have bolstered net interest margins, they have also increased pressure on borrowers, making investors and regulators highly sensitive to any signs of deteriorating credit quality. As stated on its investor relations page, Unity has a long history of serving communities in New Jersey and Pennsylvania, and its high level of insider ownership signals a management team with significant skin in the game.
Investors will be closely watching Unity's handling of the nonperforming loan and its provision levels in the upcoming quarters. The bank's ability to resolve this credit issue without material losses, as projected, will be critical to restoring full confidence and validating its strong underlying profitability.