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This is a critical season for regional banks to make profits. Concerns about rising long-term interest rates, consumer credit debt, delinquencies, mortgage rates above 7%, and brewing concerns about commercial real estate risks have combined to create a lot of anxiety.of Of course, not all banks cater to the same type of customers, but our report on regional banks’ first-quarter earnings begins with Union Banking Corporation (NASDAQ:UNTY).
For those unfamiliar, the bank is headquartered in Clinton, New Jersey. Like many other regions, it provides financial services to retail, corporate and small business customers. Its clients are located throughout New Jersey and the Lehigh Valley area of Pennsylvania.
It’s no secret that the regional banking landscape has changed dramatically over the past year and a half.Competition to attract customer deposits drives up costs The increase in funding has put pressure on the profits of many banks. Banks are also tightening lending standards. Currently, Unity is in good shape and coping well with the current climate.besides Just-announced earnings show It was another strong quarter.
Unity Bancorp’s operating results were mixed during the quarter, but overall performance was strong. Unity’s revenue continues to improve again as loans continue to grow. Higher interest rates are good for loan yields, but higher deposit rates put pressure on them. The bank’s net interest margin has been under pressure for more than a year.
Unity Bancorp’s Profit Margins
Loan growth (albeit marginally) once again drove results, and deposits also grew. The bank reported net income of $9.6 million, or $0.93 a share, down from $10.3 million, or $0.96 a share, last year. This was down from $0.03 in the fourth quarter. However, this was $0.03 higher than expected.
Currently, as interest rates rise, net interest margins are falling. However, loan quality and modest loan loss provisioning levels were not affected. While the interest rates on loans issued are higher relative to the rates paid to deposit holders, savers receive much higher interest rates. Banks had no choice but to fight for deposits. The net interest margin was 4.09%, a decrease of 10 basis points from 4.19% in the same period last year, but an increase of 3 basis points from the fourth quarter of last year.
First quarter loans and deposits
One reason the bank is doing well is that it focuses on traditional banking rather than heavy business lending. Despite the pressure, banks are performing well. Loans increased slightly from the previous quarter by 0.1%, or $2.4 million. The bank is also taking in more capital for lending, easing concerns about a run on deposits. Deposits increased 1.9% from the previous quarter, or $37.1 million. As we did last year, we will continue to closely monitor loan and deposit trends for all regional banks this reporting season.
Asset quality improved from fourth quarter
Because of everything that happens during the year, we prefer to focus on quarter-over-quarter changes rather than changes a year ago. So, Unity Bancorp, Inc.’s loans and deposits grew, but this quarter we saw an improvement in loan quality compared to last quarter. As of March 31, 2024, non-performing assets totaled $16.9 million. As of December 31, 2022, non-performing assets totaled $19.2 million. Non-performing assets improved by 13.6% month-on-month. Additionally, the ratio of nonperforming loans to total loans improved to 0.78 from 0.88 in the fourth quarter of 2023, but was higher than 0.69 a year ago. The ratio of non-performing assets to total assets also improved to 0.66 from 0.74 in the fourth quarter.
In addition to quality metrics, we also examine certain crucial return metrics. Return on average assets was 1.58%, unchanged from the fourth quarter of 2023. Return on average equity was 14.49%, down from 15.12% in the previous quarter. Finally, the efficiency rate was 47.57%, but this was worse than last quarter’s 43.06%.
final thoughts
It’s a tough operating environment for this small regional bank, and for many of the banks we cover. Overall, this Unity Bancorp, Inc. report gets us off to a good start in the regional bank reporting season. Nonetheless, we believe the performance of regional banks will be extremely mixed in the first quarter. We believe that profit margins have been basically stable as the Federal Reserve has kept interest rates unchanged for several months. We’d also like to point out that Unity Bancorp, Inc. pays growing dividends and recently increased its dividend by 8%. Valuations are relatively fair, but may be stretched given growth conditions even after the pullback. We currently maintain a Hold rating on Unity Bancorp, Inc.’s stock.
