UNITY BANCORP INC /NJ/ - Quarter Report: 2022 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____.

Commission File Number 1-12431

Unity Bancorp, Inc.

(Exact name of registrant as specified in its charter)


New Jersey	22-3282551
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

64 Old Highway 22, Clinton, NJ	08809
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (800) 618-2265

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	UNTY	NASDAQ

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:


Large accelerated filer ◻	Accelerated filer ◻	Nonaccelerated filer ⌧	Smaller reporting company ☒
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act: Yes ☐ No ⌧

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of April 30, 2022 common stock, no par value: 10,494,658 shares outstanding.

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		Page #
PART I	CONSOLIDATED FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at March 31, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the three months ended March 31, 2022 and 2021	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021	5

	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	7

	Notes to the Consolidated Financial Statements	8

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	65

ITEM 4	Controls and Procedures	65

PART II	OTHER INFORMATION	66

ITEM 1	Legal Proceedings	66

ITEM 1A	Risk Factors	66

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	66

ITEM 3	Defaults upon Senior Securities	66

ITEM 4	Mine Safety Disclosures	66

ITEM 5	Other Information	66

ITEM 6	Exhibits	67

	EXHIBIT INDEX	68

	Exhibit 31.1

	Exhibit 31.2

	Exhibit 32.1

	SIGNATURES	69

PART I CONSOLIDATED FINANCIAL INFORMATION

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ITEM 1 Consolidated Financial Statements (Unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)


(In thousands)	March 31, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	26,728	$	26,053
Interest-bearing deposits		160,998		218,765
Cash and cash equivalents		187,726		244,818
Securities:
Debt securities available for sale (amortized cost of $78,910 in 2022 and $56,442 in 2021)		77,878		56,480
Securities held to maturity (fair value of $28,931 in 2022 and $14,229 in 2021)		30,367		14,276
Equity securities with readily determinable fair values (amortized cost of $8,164 in 2022 and 8,163 in 2021)		8,009		8,566
Total securities		116,254		79,322
Loans:
SBA loans held for sale		25,282		27,373
SBA loans held for investment		33,048		36,075
SBA PPP loans		28,618		46,450
Commercial loans		979,911		931,726
Residential mortgage loans		427,165		409,355
Consumer loans		77,702		77,944
Residential construction loans		129,658		120,525
Total loans		1,701,384		1,649,448
Allowance for loan losses		(22,168)		(22,302)
Net loans		1,679,216		1,627,146
Premises and equipment, net		19,593		19,914
Bank owned life insurance ("BOLI")		26,652		26,608
Deferred tax assets		9,928		10,040
Federal Home Loan Bank ("FHLB") stock		3,541		3,550
Accrued interest receivable		9,568		9,586
Goodwill		1,516		1,516
Prepaid expenses and other assets		13,698		11,213
Total assets	$	2,067,692	$	2,033,713
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	541,990	$	529,227
Interest-bearing demand		240,757		244,073
Savings		707,498		694,161
Time, under $100,000		186,260		194,961
Time, $100,000 to $250,000		60,569		62,668
Time, $250,000 and over		34,094		33,791
Total deposits		1,771,168		1,758,881
Borrowed funds		40,000		40,000
Subordinated debentures		10,310		10,310
Accrued interest payable		132		129
Accrued expenses and other liabilities		31,154		18,664
Total liabilities		1,852,764		1,827,984
Shareholders’ equity:
Common stock		94,853		94,003
Retained earnings		131,100		123,037
Treasury stock		(11,633)		(11,633)
Accumulated other comprehensive income		608		322
Total shareholders’ equity		214,928		205,729
Total liabilities and shareholders’ equity	$	2,067,692	$	2,033,713

Shares issued		11,196		11,094
Shares outstanding		10,493		10,391
Treasury shares		703		703

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Unity Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	For the three months ended March 31,
(In thousands, except per share amounts)	2022		2021
INTEREST INCOME
Interest-bearing deposits	$	96	$	24
FHLB stock		33		63
Securities:
Taxable		652		292
Tax-exempt		6		10
Total securities		658		302
Loans:
SBA loans		923		783
SBA PPP loans		777		1,730
Commercial loans		11,497		10,474
Residential mortgage loans		4,390		5,128
Consumer loans		921		857
Residential construction loans		1,824		1,215
Total loans		20,332		20,187
Total interest income		21,119		20,576
INTEREST EXPENSE
Interest-bearing demand deposits		164		309
Savings deposits		345		431
Time deposits		480		1,463
Borrowed funds and subordinated debentures		226		355
Total interest expense		1,215		2,558
Net interest income		19,904		18,018
(Credit) provision for loan losses		(178)		500
Net interest income after provision for loan losses		20,082		17,518
NONINTEREST INCOME
Branch fee income		275		295
Service and loan fee income		584		625
Gain on sale of SBA loans held for sale, net		852		245
Gain on sale of mortgage loans, net		521		1,750
BOLI income		163		129
Net security (losses) gains		(557)		310
Other income		401		372
Total noninterest income		2,239		3,726
NONINTEREST EXPENSE
Compensation and benefits		6,508		6,063
Occupancy		775		706
Processing and communications		752		807
Furniture and equipment		576		649
Professional services		447		380
Deposit insurance		269		214
Director fees		233		208
Advertising		225		268
Other loan expenses		135		143
Loan collection expenses (recoveries)		58		(49)
Other expenses		432		413
Total noninterest expense		10,410		9,802
Income before provision for income taxes		11,911		11,442
Provision for income taxes		2,803		2,946
Net income	$	9,108	$	8,496
Net income per common share - Basic	$	0.87	$	0.81
Net income per common share - Diluted	$	0.85	$	0.80
Weighted average common shares outstanding – Basic		10,446		10,437
Weighted average common shares outstanding – Diluted		10,664		10,565

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended
	March 31, 2022						March 31, 2021
			Income tax
	Before tax		expense		Net of tax		Before tax		Income tax		Net of tax
(In thousands)	amount		(benefit)		amount		amount		expense		amount
Net income	$	11,911		2,803		9,108	$	11,442		2,946		8,496
Other comprehensive (loss) income
Debt securities available for sale:
Unrealized holding (losses) gains on securities arising during the period		(1,627)		(375)		(1,252)		395		89		306
Less: reclassification adjustment for (losses) gains on securities included in net income		(557)		(118)		(439)		310		65		245
Total unrealized (losses) gains on securities available for sale		(1,070)		(257)		(813)		85		24		61
Adjustments related to defined benefit plan:
Amortization of prior service cost		—		—		—		21		6		15
Total adjustments related to defined benefit plan		—		—		—		21		6		15
Net unrealized gains from cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period		1,533		434		1,099		807		228		579
Total unrealized gains on cash flow hedges		1,533		434		1,099		807		228		579
Total other comprehensive income		463		177		286		913		258		655
Total comprehensive income	$	12,374	$	2,980	$	9,394	$	12,355	$	3,204	$	9,151

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2022 and 2021

(Unaudited)

Accumulated

other

Total

Stock

Retained

comprehensive

Treasury

shareholders’

(In thousands)

Shares

Amount

earnings

income

stock

equity

Balance, December 31, 2021

10,391

94,003

123,037

322

(11,633)

205,729

Net income

9,108

Other comprehensive income, net of tax

286

Dividends on common stock ($0.10 per share)

(1,045)

(1,008)

Common stock issued & related tax effects (1)

102

813

Balance, March 31, 2022

10,493

94,853

131,100

608

(11,633)

214,928


						Accumulated
						other					Total
	Stock			Retained		comprehensive		Treasury			shareholders’
(In thousands)	Shares	Amount		earnings		(loss) income		stock		aa	equity
Balance, December 31, 2020	10,456	$	91,873	$	90,669	$	(1,189)	$	(7,442)		$	173,911
Net income	—		—		8,496		—		—			8,496
Other comprehensive income, net of tax	—		—		—		655		—			655
Dividends on common stock ($0.08 per share)	—		30		(834)		—		—			(804)
Common stock issued & related tax effects (1)	36		277		—		—		—			277
Acquisition of treasury stock, at cost	(70)		—		—		—		(1,349)			(1,349)
Balance, March 31, 2021	10,422		92,180		98,331		(534)		(8,791)			181,186

(1)	Includes the issuance of common stock under employee benefit plans, which includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	For the three months ended March 31,
(In thousands)	2022		2021
OPERATING ACTIVITIES:
Net income	$	9,108	$	8,496
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(178)		500
Net amortization of purchase premiums and discounts on securities		11		62
Depreciation and amortization		447		469
PPP deferred fees and costs		(686)		1,937
Deferred income tax benefit		(63)		(191)
Net security gains		—		(43)
Stock compensation expense		394		374
Gain on sale of mortgage loans, net		(521)		(2,001)
Gain on sale of SBA loans held for sale, net		(852)		(245)
Origination of mortgage loans sold		(27,006)		(101,869)
Origination of SBA loans held for sale		(20,108)		(1,312)
Proceeds from sale of mortgage loans, net		27,527		103,870
Proceeds from sale of SBA loans held for sale, net		7,609		2,416
BOLI income		(163)		(129)
Net change in other assets and liabilities		12,114		(685)
Net cash provided by operating activities		7,633		11,649
INVESTING ACTIVITIES
Purchases of securities held to maturity		(18,666)		—
Purchase of equity securities		—		—
Purchases of securities available for sale		(24,245)		—
Purchases of FHLB stock, at cost		—		(16,450)
Maturities and principal payments on securities held to maturity		2,584		6,305
Maturities and principal payments on debt securities available for sale		1,756		7,048
Proceeds from sales of debt securities available for sale		—		—
Proceeds from sales of equity securities		—		—
Proceeds from redemption of FHLB stock		9		17,775
Net decrease (increase) in SBA PPP loans		18,521		(52,492)
Net (increase) decrease in loans		(56,461)		8,364
Proceeds from BOLI		119		107
Proceeds from sale of premises and equipment		—		—
Purchases of premises and equipment		(41)		(224)
Net cash used in investing activities		(76,424)		(29,567)
FINANCING ACTIVITIES
Net increase in deposits		12,288		70,434
Proceeds from new borrowings		—		130,000
Repayments of borrowings		—		(160,000)
Proceeds from exercise of stock options		639		80
Fair market value of shares withheld to cover employee tax liability		(220)		(177)
Dividends on common stock		(1,008)		(803)
Purchase of treasury stock		—		(1,350)
Net cash provided by financing activities		11,699		38,184
(Decrease) increase in cash and cash equivalents		(57,092)		20,266
Cash and cash equivalents, beginning of period		244,818		219,311
Cash and cash equivalents, end of period	$	187,726	$	239,577
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid	$	1,213	$	2,550
Income taxes paid		2,145		3,320
Noncash investing activities:
Establishment of lease liability and right-of-use asset		582		—
Transfer of SBA loans held for sale to held to maturity		—		—
Capitalization of servicing rights	$	131	$	19

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

March 31, 2022

NOTE 1. Significant Accounting Policies

The accompanying Consolidated Financial Statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, Unity Bank (the "Bank" or when consolidated with the Parent Company, the "Company"), and reflect all adjustments and disclosures which are generally routine and recurring in nature, and in the opinion of management, necessary for a fair presentation of interim results. The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings or shareholders’ equity. The financial information has been prepared in accordance with U.S. generally accepted accounting principles and has not been audited. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Amounts requiring the use of significant estimates include the allowance for loan losses, valuation of deferred tax and servicing assets, the carrying value of loans held for sale and other real estate owned, the valuation of securities and the determination of other-than-temporary impairment for securities and fair value disclosures. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. The markets served by the Company were significantly impacted by the COVID-19 pandemic, which started during the first quarter of 2020. The Company continues to assess the financial impact of the COVID-19 pandemic.

The interim unaudited Consolidated Financial Statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”) and consist of normal recurring adjustments necessary for the fair presentation of interim results. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results which may be expected for the entire year. As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc., and its consolidated subsidiary, Unity Bank, depending on the context. Certain information and financial disclosures required by U.S. generally accepted accounting principles have been condensed or omitted from interim reporting pursuant to SEC rules. Interim financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has adversely affected local, national and global economic activity. Actions taken to help mitigate the spread of COVID-19 included restrictions on travel, localized quarantines, and government-mandated closures of certain businesses. The spread of the outbreak caused significant disruptions to the U.S. economy and disrupted banking and other financial activity in the areas in which the Company operates.

On March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The effects of the COVID-19 pandemic may materially and adversely affect the Company’s financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions.

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administration after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the

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United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated debentures, what rate or rates may become accepted alternatives to LIBOR or the effect of any changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

Other-Than-Temporary Impairment

The Company has a process in place to identify securities that could potentially incur credit impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a forecasted period of time that allows for the recovery in value.

Management assesses its intent to sell or whether it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired with no intent to sell and no requirement to sell prior to recovery of its amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. For debt securities where management has the intent to sell, the amount of the impairment is reflected in earnings as realized losses.

The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and

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liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits would be recognized in income tax expense on the income statement.

NOTE 2. Litigation

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. In the best judgment of management, based upon consultation with counsel, the consolidated financial position and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.

NOTE 3. Net Income per Share

Basic net income per common share is calculated as net income divided by the weighted average common shares outstanding during the reporting period.

Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method.

The following is a reconciliation of the calculation of basic and diluted income per share:


	For the three months ended March 31,
(In thousands, except per share amounts)	2022		2021
Net income	$	9,108	$	8,496
Weighted average common shares outstanding - Basic		10,446		10,437
Plus: Potential dilutive common stock equivalents		218		128
Weighted average common shares outstanding - Diluted		10,664		10,565
Net income per common share - Basic	$	0.87	$	0.81
Net income per common share - Diluted		0.85		0.80
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive		—		154

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NOTE 4. Income Taxes

The Company follows FASB ASC Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return. ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes.

On July 1, 2018, New Jersey’s Assembly Bill 4202 was signed into law. The bill, effective January 1, 2018, imposed a temporary surtax on corporations earning New Jersey allocated taxable income in excess of $1 million at a rate of 2.5 percent for tax years beginning on or after January 1, 2018, through December 31, 2019, and at 1.5 percent for tax years beginning on or after January 1, 2020, through December 31, 2021. In addition, New Jersey adopted mandatory unitary combined reporting for its Corporation Business Tax, which became effective for periods on or after January 1, 2019.

On September 29, 2020, New Jersey’s Assembly Bill 4721 was signed into law. The bill, retroactively effective January 1, 2020, extends the 2.5% corporate income surtax until December 31, 2023. If the federal corporate tax rate is increased to a rate of at least 35% of taxable income, the surtax will be suspended.

For the quarter ended March 31, 2022, the Company reported income tax expense of $2.8 million for an effective tax rate of 23.5 percent, compared to an income tax expense of $2.9 million and an effective tax rate of 25.7 percent for the prior year’s quarter. The Company did not recognize or accrue any interest or penalties related to income taxes during the three months ended March 31, 2022 or 2021. The Company did not have an accrual for uncertain tax positions as of March 31, 2022 or December 31, 2021, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2017 and thereafter are subject to future examination by tax authorities.

NOTE 5. Other Comprehensive Income (Loss)

The following tables show the changes in other comprehensive income (loss) for the three months ended March 31, 2022 and 2021, net of tax:

For the three months ended March 31, 2022

Adjustments

Accumulated

Net unrealized

related to

Net unrealized

other

gains (losses) on

defined benefit

gains from cash

comprehensive

(In thousands)

securities

plan

flow hedges

income (loss)

Balance, beginning of period

—

293

322

Other comprehensive (loss) income before reclassifications

(1,252)

—

1,099

(153)

Less amounts reclassified from accumulated other comprehensive loss

(439)

—

(439)

Period change

(813)

—

1,099

286

Balance, end of period

(784)

—

1,392

608

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	For the three months ended March 31, 2021
			Adjustments		Net unrealized		Accumulated
	Net unrealized		related to		(losses) gains		other
	(losses) gains on		defined benefit		from cash flow		comprehensive
(In thousands)	securities		plan		hedges		(loss) gains
Balance, beginning of period	$	(179)	$	(238)	$	(737)	$	(1,154)
Other comprehensive income before reclassifications		306		—		579		885
Less amounts reclassified from accumulated other comprehensive income (loss)		245		(15)		—		230
Period change		61		15		579		655
Balance, end of period	$	(118)	$	(223)	$	(158)	$	(499)

NOTE 6. Fair Value

Fair Value Measurement

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

●

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

●

Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

●

Quoted prices for similar assets or liabilities in active markets.

●

Quoted prices for identical or similar assets or liabilities in inactive markets.

●

Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

●

Generally, this includes U.S. Government and sponsored entity mortgage-backed securities, corporate debt securities and derivative contracts

Level 3 Inputs

●

Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

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●

These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:

Debt Securities Available for Sale

The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of March 31, 2022, the fair value of the Company’s AFS debt securities portfolio was $77.9 million. Approximately 19 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $14.5 million at March 31, 2022. Approximately $10.9 million of the residential mortgage-backed securities are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.

Most of the Company’s AFS debt securities were classified as Level 2 assets at March 31, 2022. The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information. It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities.

Included in the Company’s AFS debt securities are two corporate bonds which are classified as Level 3 assets at March 31, 2022. The valuation of these corporate bonds is determined using broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques. Market inputs used in the other valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government bond yield curves, credit spreads, and trade execution data.

The following table presents a reconciliation of the Level 3 available for sale debt securities measured at fair value on a recurring basis for the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
(In thousands)	2022		2021
Balance at beginning of period	$	5,074	$	4,400
Purchases/additions		—		—
Sales/reductions		—		—
Realized		—		—
Unrealized		(179)		138
Balance at end of period	$	4,895	$	4,538

Equity Securities with Readily Determinable Fair Values

The fair value of equity securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

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As of March 31, 2022, the fair value of the Company’s equity securities portfolio was $8.0 million.

All of the Company’s equity securities were classified as Level 2 assets at March 31, 2022. The valuation of equity securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.

There were no changes in the inputs or methodologies used to determine fair value during the period ended March 31, 2022, as compared to the periods ended December 31, 2021 and March 31, 2021.

Loans Held for Sale

Fair Value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy.

Interest Rate Swap Agreements

The fair value of interest rate swap agreements is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

The Company’s derivative instruments are classified as Level 2 assets, as the readily observable market inputs to these models are validated to external sources, such as industry pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data.

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:

Fair Value Measurements at March 31, 2022 Using

Quoted Prices in

Assets/Liabilities

Active Markets

Significant Other

Significant

Measured at Fair

for Identical

Observable

Unobservable

(In thousands)

Value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Measured on a recurring basis:

Assets:

Debt securities available for sale:

U.S. Government sponsored entities

5,000

—

5,000

—

State and political subdivisions

947

—

947

—

Residential mortgage-backed securities

14,487

—

14,487

—

Corporate and other securities

57,444

—

52,549

4,895

Total debt securities available for sale

77,878

—

72,983

4,895

Equity securities with readily determinable fair values

8,009

—

8,009

—

Total equity securities

8,009

—

8,009

—

Loans held for sale

28,565

—

28,565

—

Total loans held for sale

28,565

—

28,565

—

Interest rate swap agreements

1,942

—

1,942

—

Total swap agreements

1,942

—

1,942

—

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	Fair value Measurements at December 31, 2021 Using
			Quoted Prices in
	Assets/Liabilities		Active Markets		Significant Other		Significant
	Measured at Fair		for Identical		Observable		Unobservable
(In thousands)	Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Measured on a recurring basis:
Assets:
Debt securities available for sale:
U.S. Government sponsored entities	$	—	$	—	$	—	$	—
State and political subdivisions		994		—		994		—
Residential mortgage-backed securities		9,749		—		9,749		—
Corporate and other securities		45,737		—		40,663		5,074
Total debt securities available for sale	$	56,480	$	—	$	51,406	$	5,074

Equity securities with readily determinable fair values		8,566		—		8,566		—
Total equity securities	$	8,566	$	—	$	8,566	$	—

Loans held for sale		31,014		—		31,014		—
Total loans held for sale	$	31,014	$	—	$	31,014	$	—

Interest rate swap agreements		816		—		816		—
Total swap agreements	$	816	$	—	$	816	$	—

Fair Value on a Nonrecurring Basis

The following tables present the assets and liabilities subject to fair value adjustments (impairment) on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):

Fair Value Measurements at March 31, 2022 Using

Quoted Prices

Significant

in Active

Other

Significant

Assets/Liabilities

Markets for

Observable

Unobservable

Net Credit

Measured at Fair

Identical Assets

Inputs

During

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

9,503

—

9,503

Fair Value Measurements at December 31, 2021 Using

Quoted Prices

Significant

in Active

Other

Significant

Net (Credit)

Assets/Liabilities

Markets for

Observable

Unobservable

Provision

Measured at Fair

Identical Assets

Inputs

During

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

8,928

—

8,928

(1,284)

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Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis:

Appraisal Policy

All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice ("USPAP"). Appraisals are certified to the Company and performed by appraisers on the Company’s approved list of appraisers. Evaluations are completed by a person independent of Company management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value.”

Impaired Collateral-Dependent Loans

The fair value of impaired collateral-dependent loans is derived in accordance with FASB ASC Topic 310, “Receivables.” Fair value is determined based on the loan’s observable market price or the fair value of the collateral. Partially charged-off loans are measured for impairment based upon a third party appraisal for collateral-dependent loans. When an updated appraisal is received for a nonperforming loan, the value on the appraisal may be discounted. If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status. The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status. The Company removes loans from nonaccrual status generally when the borrower makes three months of contractual payments and demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. At March 31, 2022, the valuation allowance for impaired loans was $2.9 million compared to $2.8 million at December 31, 2021.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option. These estimated fair values as of March 31, 2022 and December 31, 2021 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

For these short-term instruments, the carrying value is a reasonable estimate of fair value.

Securities

The fair value of securities is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

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SBA Loans Held for Sale

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

Loans

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

FHLB Stock

Federal Home Loan Bank stock is carried at cost. Carrying value approximates fair value based on the redemption provisions of the issues.

Servicing Assets

Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e. carrying value). The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.

Borrowed Funds and Subordinated Debentures

The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.

Standby Letters of Credit

At March 31, 2022, the Bank had standby letters of credit outstanding of $4.3 million. The fair value of these commitments is nominal.

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The table below presents the carrying amount and estimated fair values of the Company’s financial instruments presented as of March 31, 2022 and December 31, 2021:

March 31, 2022

December 31, 2021

Fair value

Carrying

Estimated

Carrying

Estimated

(In thousands)

level

amount

fair value

amount

fair value

Financial assets:

Cash and cash equivalents

Level 1

187,726

244,818

Securities (1)

Level 2

116,254

110,818

79,322

79,275

SBA loans held for sale

Level 2

25,282

28,565

27,373

31,014

Loans, net of allowance for loan losses (2)

Level 2

1,653,934

1,639,657

1,599,773

1,605,248

FHLB stock

Level 2

3,541

3,550

Servicing assets

Level 3

1,034

1,013

Accrued interest receivable

Level 2

9,568

9,586

Financial liabilities:

Deposits

Level 2

1,771,168

1,761,619

1,758,881

1,755,670

Borrowed funds and subordinated debentures

Level 2

50,310

49,393

50,310

50,842

Accrued interest payable

Level 2

132

129

(1)	Includes corporate securities that are considered Level 3 and reported separately in the table under the “Fair Value on a Recurring Basis” heading. These securities had book values of $5.3 million and market values of $4.9 million.

(2)

Includes collateral-dependent impaired loans that are considered Level 3 and reported separately in the tables under the “Fair Value on a Nonrecurring Basis” heading. Collateral-dependent impaired loans, net of specific reserves totaled $9.5million and $8.9 million at March 31, 2022 and December 31, 2021, respectively.

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.

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NOTE 7. Securities

This table provides the major components of debt securities available for sale ("AFS"), held to maturity (“HTM”) and equity securities with readily determinable fair values ("equity securities") at amortized cost and estimated fair value at March 31, 2022 and December 31, 2021:


	March 31, 2022								December 31, 2021
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated
(In thousands)	cost		gains		losses		fair value		cost		gains		losses		fair value
Available for sale:
U.S. Government sponsored entities	$	5,000	$	—	$	—	$	5,000	$	—	$	—	$	—	$	—
State and political subdivisions		958		1		(12)		947		996		6		(8)		994
Residential mortgage-backed securities		14,550		78		(141)		14,487		9,485		277		(13)		9,749
Corporate and other securities		58,402		74		(1,032)		57,444		45,961		164		(388)		45,737
Total debt securities available for sale	$	78,910	$	153	$	(1,185)	$	77,878	$	56,442	$	447	$	(409)	$	56,480
Held to maturity:
U.S. Government sponsored entities	$	21,000	$	—	$	(1,265)	$	19,735	$	10,000	$	—	$	(67)	$	9,933
Residential mortgage-backed securities		9,367		—		(171)		9,196		4,276		28		(8)		4,296
Total securities held to maturity	$	30,367	$	—	$	(1,436)	$	28,931	$	14,276	$	28	$	(75)	$	14,229
Equity securities:
Total equity securities	$	8,164	$	281	$	(436)	$	8,009	$	8,163	$	486	$	(83)	$	8,566

This table provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at March 31, 2022 is distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.


					After one through				After five through								Total carrying
	Within one year				five years				ten years				After ten years				value
(In thousands, except percentages)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale at fair value:
U.S. Government sponsored entities	$	—	—	%	$	—	—	%	$	—	—	%	$	5,000	—	%	$	5,000	—	%
State and political subdivisions	$	200	3.89	%	$	416	2.91	%	$	—	—	%	$	331	2.75	%	$	947	3.06	%
Residential mortgage-backed securities		12	2.26			647	2.51			511	2.48			13,317	3.17			14,487	3.11
Corporate and other securities		—	—			1,957	6.25			15,112	4.73			40,375	2.33			57,444	3.09
Total debt securities available for sale	$	212	3.80	%	$	3,020	4.99	%	$	15,623	4.65	%	$	59,023	2.32	%	$	77,878	2.90	%
Held to maturity at cost:
U.S. Government sponsored entities	$	—	—	%	$	—	—	%	$	—	—	%	$	21,000	2.97	%	$	21,000	2.97	%
Residential mortgage-backed securities		—	—			—	—			—	—			9,367	3.46			9,367	3.46
Total securities held to maturity	$	—	—	%	$	—	—	%	$	—	—	%	$	30,367	3.12	%	$	30,367	3.12	%
Equity Securities at fair value:
Total equity securities	$	—	—	%	$	—	—	%	$	—	—	%	$	8,009	2.35	%	$	8,009	2.35	%

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The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021 are as follows:


	March 31, 2022
		Less than 12 months				12 months and greater				Total
	Total
	number in a	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands, except number in a loss position)	loss position	fair value		loss		fair value		loss		fair value		loss
Available for sale:
State and political subdivisions	2	$	546	$	(12)	$	—	$	—	$	546	$	(12)
Residential mortgage-backed securities	24	$	7,009	$	(141)	$	—	$	—	$	7,009	$	(141)
Corporate and other securities	23		33,339		(473)		8,209		(559)		41,548		(1,032)
Total temporarily impaired securities	49	$	40,894	$	(626)	$	8,209	$	(559)	$	49,103	$	(1,185)
Held to maturity:
U.S. Government sponsored entities	5	$	11,735	$	(1,265)	$	—	$	—	$	11,735	$	(1,265)
Residential mortgage-backed securities	4	$	9,196	$	(171)	$	—	$	—	$	9,196	$	(171)
Total temporarily impaired securities	9	$	20,931	$	(1,436)	$	—	$	—	$	20,931	$	(1,436)


	December 31, 2021
		Less than 12 months				12 months and greater				Total
	Total
	number in a	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands, except number in a loss position)	loss position	fair value		loss		fair value		loss		fair value		loss
Available for sale:
State and political subdivisions	1		370		(8)		—		—		370		(8)
Residential mortgage-backed securities	8		1,821		(13)		—		—		1,821		(13)
Corporate and other securities	15	$	17,281	$	(19)	$	8,394	$	(369)	$	25,675	$	(388)
Total temporarily impaired securities	24	$	19,472	$	(40)	$	8,394	$	(369)	$	27,866	$	(409)
Held to maturity:
U.S. Government sponsored entities	3	$	9,933	$	(67)	$	—	$	—	$	9,933	$	(67)
Residential mortgage-backed securities	1		823		(8)		—		—		823		(8)
Commercial mortgage-backed securities	—		—		—		—		—		—		—
Total temporarily impaired securities	4	$	10,756	$	(75)	$	—	$	—	$	10,756	$	(75)

Unrealized Losses

The unrealized losses in each of the categories presented in the tables above are discussed in the paragraphs that follow:

U.S. government sponsored entities and state and political subdivision securities: The unrealized losses on investments in these types of securities were caused by the increase in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments. Because the Company had the intent and ability to hold these investments, the Company did not consider these investments to be other-than temporarily impaired as of March 31, 2022 or December 31, 2021.

Residential and commercial mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by increases in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The majority of contractual cash flows of these securities are guaranteed by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of March 31, 2022 or December 31, 2021.

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Corporate and other securities: Included in this category are corporate and other debt securities. The unrealized losses on corporate and other debt securities were due to widening credit spreads. The Company evaluated the prospects of the issuers and forecasted a recovery period; and as a result determined it did not consider these investments to be other-than-temporarily impaired as of March 31, 2022 or December 31, 2021. The contractual terms do not allow the securities to be settled at a price less than the par value. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis, which may be at maturity, the Company did not consider these securities to be other-than-temporarily impaired as of March 31, 2022 or December 31, 2021.

Realized Gains and Losses

Gross realized gains and losses on securities for the three months ended March 31, 2022 and 2021 are detailed in the table below:


	For the three months ended March 31,
(In thousands)	2022		2021
Available for sale:
Realized gains	$	—	$	43
Realized losses		—		—
Total debt securities available for sale		—		43
Held to maturity:
Realized gains		—		—
Realized losses		—		—
Total securities held to maturity		—		—
Net gains on sales of securities	$	—	$	43

The net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were no gross realized gains during the three months ended March 31, 2022, compared to $43 thousand of gross realized gains during the same period a year ago. There were no gross realized losses for the three months ended March 31, 2022, or 2021.

During the prior year’s quarter, ended March 31, 2021, the net gain is attributed to:

●

the sale of six corporate bonds with a total book value of $7.0 million and resulting gains of $39 thousand, and

●

the call of one taxable municipal security with a book value of $496 thousand and resulting gain of $4 thousand.

Equity Securities

Included in this category are Community Reinvestment Act ("CRA") investments and the Company’s current other equity holdings of financial institutions. Equity securities are defined to include (a) preferred, common and other ownership interests in entities including partnerships, joint ventures and limited liability companies and (b) rights to acquire or dispose of ownership interests in entities at fixed or determinable prices.

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The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
(In thousands)	2022		2021
Net (losses) gains recognized during the period on equity securities	$	(557)	$	267
Net gains (losses) recognized during the period on equity securities sold during the period		—		—
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date	$	(557)	$	267

Pledged Securities

Securities with a carrying value of $1.0 million and $1.2 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure deposits, secure other borrowings and for other purposes required or permitted by law.

NOTE 8. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of March 31, 2022 and December 31, 2021:


(In thousands)	March 31, 2022		December 31, 2021
SBA loans held for investment	$	33,048	$	36,075
SBA PPP loans		28,618		46,450
Commercial loans
SBA 504 loans		27,534		27,479
Commercial other		120,345		109,903
Commercial real estate		728,652		704,674
Commercial real estate construction		103,380		89,670
Residential mortgage loans		427,165		409,355
Consumer loans
Home equity		63,536		65,380
Consumer other		14,166		12,564
Residential construction loans		129,658		120,525
Total loans held for investment	$	1,676,102	$	1,622,075
SBA loans held for sale		25,282		27,373
Total loans	$	1,701,384	$	1,649,448

Loans held for investment are stated at the unpaid principal balance, net of unearned discounts and deferred loan origination fees and costs. In accordance with the level yield method, loan origination fees, net of direct loan origination costs, are deferred and recognized over the estimated life of the related loans as an adjustment to the loan yield. Interest is credited to operations primarily based upon the principal balance outstanding.

Loans are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet. Loans qualify for charge-off when, after thorough analysis, all possible sources of repayment are insufficient. These include: 1) potential future cash flows, 2) value of collateral, and/or 3) strength of co-makers and guarantors. All unsecured loans are charged off upon the establishment of the loan’s

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nonaccrual status. Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off. All loan charge-offs are approved by the Board of Directors.

Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses’ major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans, other than loans originated under the Paycheck Protection Program, and are reflected at the lower of aggregate cost or market value. The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various relief programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board (“FRB”) and other federal banking agencies have implemented or may implement.

The CARES Act provided assistance to small businesses through the establishment of the SBA Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds were provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and the application period was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. Applications for the renewed PPP loan program started on January 13, 2021 and were available until March 31, 2021.

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Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination.

Residential Mortgage, Consumer and Residential Construction Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans and residential construction lines. The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and the Company’s relationship with the borrower.

During the quarter ended September 30, 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” to purchase consumer unsecured loans. This loan product has a fixed rate, a fully amortizing term for up to five years and a maximum loan size of $50 thousand. Restrictions were placed on the loans purchased to limit the purchases to borrowers residing in New Jersey, southern New York, and eastern Pennsylvania and to limit purchases to borrowers with higher credit quality with a 700 FICO minimum. Upgrade services the loans on behalf of the Company. Upgrade is a financial technology company that utilizes artificial intelligence to underwrite personal loan and credit card installment loans to retail customers, in addition to credit monitoring and education tools.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval. The loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm.

The Company’s extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company’s loans. This policy and the underlying procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings

For SBA 7(a) and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating. The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

Pass: Risk ratings of 1 through 6 are used for loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments. These performing loans are termed “Pass”.

Special Mention: Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s collateral and position. While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated. As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification. Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in startup or deteriorating industries, or borrowers with a poor market share in an average industry. "Special Mention" loans may include an element of asset

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quality, financial flexibility, or below average management. Management and ownership may have limited depth or experience. Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Substandard: Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”. A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt. The loan is inadequately protected by the current paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Partial charge-offs are likely.

Loss: Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss”, and charged-off immediately. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be affected in the future.

For residential mortgage, consumer and residential construction loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

At March 31, 2022, there were $184 thousand of residential consumer loans in the process of foreclosure, compared to $106 thousand at December 31, 2021.

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The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of March 31, 2022:

March 31, 2022

SBA & Commercial loans - Internal risk ratings

(In thousands)

Pass

Special mention

Substandard

Total

SBA loans held for investment

31,980

735

333

33,048

SBA PPP loans

28,618

—

28,618

Commercial loans

SBA 504 loans

27,534

—

27,534

Commercial other

112,554

5,282

2,509

120,345

Commercial real estate

716,912

9,705

2,035

728,652

Commercial real estate construction

103,380

—

103,380

Total commercial loans

960,380

14,987

4,544

979,911

Total SBA and commercial loans

1,020,978

15,722

4,877

1,041,577

Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming

(In thousands)

Performing

Nonperforming

Total

Residential mortgage loans

424,166

2,999

427,165

Consumer loans

Home equity

63,336

200

63,536

Consumer other

14,166

—

14,166

Total consumer loans

77,502

200

77,702

Residential construction loans

126,385

3,273

129,658

Total residential mortgage, consumer and residential construction loans

628,053

6,472

634,525

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The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2021:


	December 31, 2021
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	34,959	$	745	$	371	$	36,075
SBA PPP loans		46,450		—		—		46,450
Commercial loans
SBA 504 loans		27,479		—		—		27,479
Commercial other		105,388		1,976		2,539		109,903
Commercial real estate		694,627		7,980		2,067		704,674
Commercial real estate construction		86,770		2,900		—		89,670
Total commercial loans		914,264		12,856		4,606		931,726
Total SBA and commercial loans	$	995,673	$	13,601	$	4,977	$	1,014,251

			Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	406,093	$	3,262	$	409,355
Consumer loans
Home equity				65,170		210		65,380
Consumer other				12,564		—		12,564
Total consumer loans				77,734		210		77,944
Residential construction loans				117,403		3,122		120,525
Total residential mortgage, consumer and residential construction loans			$	601,230	$	6,594	$	607,824

Nonperforming and Past Due Loans

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well collateralized and in the process of collection. When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market.

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The following tables set forth an aging analysis of past due and nonaccrual loans as of March 31, 2022 and December 31, 2021:

March 31, 2022

90+ days

30‑59 days

60‑89 days

and still

Total past

(In thousands)

past due

accruing

Nonaccrual

due

Current

Total loans

SBA loans held for investment

—

537

32,511

33,048

SBA PPP loans

—

28,618

Commercial loans

SBA 504 loans

—

27,534

Commercial other

—

1,931

1,959

118,386

120,345

Commercial real estate

373

—

361

734

727,918

728,652

Commercial real estate construction

—

103,380

Residential mortgage loans

3,772

334

488

2,999

7,593

419,572

427,165

Consumer loans

Home equity

—

427

—

200

627

62,909

63,536

Consumer other

—

14,105

14,166

Residential construction loans

1,281

404

—

3,273

4,958

124,700

129,658

Total loans held for investment

5,426

1,193

549

9,301

16,469

1,659,633

1,676,102

SBA loans held for sale

—

25,282

Total loans

5,426

1,193

549

9,301

16,469

1,684,915

1,701,384


	December 31, 2021
					90+ days
	30‑59 days		60‑89 days		and still				Total past
(In thousands)	past due		past due		accruing		Nonaccrual		due		Current		Total loans
SBA loans held for investment	$	1,558	$	—	$	—	$	510	$	2,068	$	34,007	$	36,075
SBA PPP loans		—		79		—		—		79		46,371		46,450
Commercial loans
SBA 504 loans		—		—		—		—		—		27,479		27,479
Commercial other		—		33		—		2,216		2,249		107,654		109,903
Commercial real estate		334		565		—		366		1,265		703,409		704,674
Commercial real estate construction		—		—		—		—		—		89,670		89,670
Residential mortgage loans		3,688		—		—		3,262		6,950		402,405		409,355
Consumer loans
Home equity		39		—		—		210		249		65,131		65,380
Consumer other		—		—		—		—		—		12,564		12,564
Residential construction loans		—		845		—		3,122		3,967		116,558		120,525
Total loans held for investment		5,619		1,522		—		9,686		16,827		1,605,248		1,622,075
SBA loans held for sale		—		—		—		—		—		27,373		27,373
Total loans	$	5,619	$	1,522	$	—	$	9,686	$	16,827	$	1,632,621	$	1,649,448

Impaired Loans

The Company has defined impaired loans to be all nonperforming loans individually evaluated for impairment and TDRs. Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract. Impairment is evaluated on an individual basis for SBA and commercial loans.

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Impairment is evaluated in total for smaller-balance loans of a similar nature (consumer and residential mortgage loans), and on an individual basis for all other loans. Impairment of a loan is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or as a practical expedient, based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral-dependent. If the value of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge to the provision for loan losses.

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of March 31, 2022:


	March 31, 2022
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	634	$	533	$	—
Commercial loans
Commercial other		96		95		—
Commercial real estate		2,327		2,327		—
Total commercial loans		2,423		2,422		—
Residential mortgage loans		1,369		1,369		—
Consumer loans
Home equity		200		200		—
Residential construction loans		2,637		2,637		—
Total impaired loans with no related allowance		7,263		7,161		—

With an allowance:
SBA loans held for investment		34		4		4
Commercial loans
Commercial other		2,287		2,223		2,223
Commercial real estate		961		127		126
Total commercial loans		3,248		2,350		2,349
Residential mortgage loans		1,777		1,777		224
Consumer loans
Home equity		427		427		56
Residential construction loans		636		636		219
Total impaired loans with a related allowance		6,122		5,194		2,852

Total individually evaluated impaired loans:
SBA loans held for investment		668		537		4
Commercial loans
Commercial other		2,383		2,318		2,223
Commercial real estate		3,288		2,454		126
Total commercial loans		5,671		4,772		2,349
Residential mortgage loans		3,146		3,146		224
Consumer loans
Home equity		627		627		56
Residential construction loans		3,273		3,273		219
Total individually evaluated impaired loans	$	13,385	$	12,355	$	2,852

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The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2021:


	December 31, 2021
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	606	$	506	$	—
Commercial loans
Commercial other		71		70
Commercial real estate		1,493		1,493		—
Total commercial loans		1,564		1,563		—
Residential mortgage loans		1,630		1,630		—
Consumer loans
Home equity		210		210		—
Residential construction loans		2,636		2,636		—
Total impaired loans with no related allowance		6,646		6,545		—

With an allowance:
SBA loans held for investment		35		4		4
Commercial loans
Commercial other		2,832		2,531		2,490
Commercial real estate		973		126		125
Total commercial loans		3,805		2,657		2,615
Residential mortgage loans		1,632		1,632		80
Consumer loans
Home Equity		427		427		56
Residential construction loans		486		486		68
Total impaired loans with a related allowance		6,385		5,206		2,823

Total individually evaluated impaired loans:
SBA loans held for investment		641		510		4
Commercial loans
Commercial other		2,903		2,601		2,490
Commercial real estate		2,466		1,619		125
Total commercial loans		5,369		4,220		2,615
Residential mortgage loans		3,262		3,262		80
Consumer loans
Home equity		637		637		56
Residential construction loans		3,122		3,122		68
Total individually evaluated impaired loans	$	13,031	$	11,751	$	2,823

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The following tables present the average recorded investments in impaired loans and the related amount of interest received during the time period in which the loans were impaired for the three months ended March 31, 2022 and 2021. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized.

For the three months ended March 31,

2022

2021

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

520

1,901

Commercial loans

Commercial other

2,188

374

Commercial real estate

2,502

2,237

Residential mortgage loans

2,827

5,561

—

Consumer loans

Home equity

572

701

Residential construction loans

4,203

2,610

Total

12,812

119

13,384

103

TDRs

The Company’s loan portfolio also includes certain loans that have been modified as TDRs. TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Interest income on accruing TDRs is credited to operations primarily based upon the principal amount outstanding Under the CARES Act and regulatory guidance issued in regards to the COVID-19 pandemic, loan payment deferrals for periods of up to 180 days granted to borrowers adversely effected by the pandemic are not considered TDR’s if the borrower was current on its loan payments at year end 2019 or until the deferral was granted. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if the loan is collateral-dependent. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

TDRs of $1.9 million and $1.1 million are included in the impaired loan numbers as of March 31, 2022 and December 31, 2021, respectively. The increase in TDRs was due to the addition of two loans, partially offset by principal pay downs. At March 31, 2022 and December 31, 2021, there were no specific reserves on the TDRs. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.

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There were two loans modified as TDRs during the three months ended March 31, 2022. There were two loans modified during the three months ended March 31, 2021 that were deemed to be TDRs. The following table details loans modified during the three months ended March 31, 2022, including the number of modifications and the recorded investment at the time of the modification:


	For the three months ended March 31, 2022
	Number of	Recorded investment
(In thousands, except number of contracts)	contracts	at time of modification
Home equity	2	$	882
Total	2	$	882

To date, the Company’s TDRs consisted of principal reduction, interest only periods and maturity extensions. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the three months ended March 31, 2022. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

NOTE 9. Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

Allowance for Loan Losses

The Company has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. At a minimum, the adequacy of the allowance for loan losses is reviewed by management on a quarterly basis. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. For purposes of determining the allowance for loan losses, the Company has segmented the loans in its portfolio by loan type. Loans are segmented into the following pools: SBA 7(a), commercial, residential mortgages, consumer, and residential construction loans. Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan. Commercial loans are divided into the following five classes: commercial real estate, commercial real estate construction, unsecured business line of credit, commercial other, and SBA 504. Consumer loans are divided into two classes as follows: home equity and other.

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio, and historical loan loss experience. The allowance for loan losses consists of specific reserves for individually impaired credits and TDRs, reserves for nonimpaired loans based on historical loss factors and reserves based on general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans and TDRs. The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, changes in risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes. Within the five-year historical net charge-off rate, the Company weights the past three years more heavily as it believes it is more indicative of future charge-offs. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

●

For SBA 7(a) and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and

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updated on a continuous basis. The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. It also incorporates analysis of the type of collateral and the relative loan to value ratio.

●

For residential mortgage, consumer, and residential construction loans, the estimate of loss is based on pools of loans with similar characteristics. Factors such as credit score, delinquency status and type of collateral are evaluated. Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectable. All credits which are 90 days past due must be analyzed for the Company’s ability to collect on the credit. Once a loss is known to exist, the charge-off approval process is immediately expedited. This charge-off policy is followed for all loan types.

Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses. These agencies may require the Company to make additional provisions based on their judgments about information available to them at the time of their examination.

The allocated allowance is the total of identified specific and general reserves by loan category. The allocation is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio.

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2022 and 2021:


	For the three months ended March 31, 2022
	SBA held
	for								Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,074	$	15,053	$	4,114	$	671	$	1,390	$	22,302
Charge-offs		—		—		—		(6)		—		(6)
Recoveries		22		28		—		—		—		50
Net recoveries (charge-offs)		22		28		—		(6)		—		44
Provision for (credit to) loan losses charged to expense		(155)		(376)		170		(23)		206		(178)
Balance, end of period	$	941	$	14,705	$	4,284	$	642	$	1,596	$	22,168


	For the three months ended March 31, 2021
	SBA held
	for									Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,301	$	14,992	$	5,318	$	681	$	813	$	23,105
Charge-offs		(282)		(373)		—		(1)		—		(656)
Recoveries		15		1		—		—		—		16
Net (charge-offs) recoveries		(267)		(372)		—		(1)		—		(640)
Provision for (credit to) loan losses charged to expense		620		107		(309)		(131)		213		500
Balance, end of period	$	1,654	$	14,727	$	5,009	$	549	$	1,026	$	22,965

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The following tables present loans and their related allowance for loan losses, by portfolio segment, as of March 31, 2022 and December 31, 2021:

March 31, 2022

SBA held

for

Residential

(In thousands)

investment

Commercial

Residential

Consumer

construction

Total

Allowance for loan losses ending balance:

Individually evaluated for impairment

2,349

224

219

2,852

Collectively evaluated for impairment

937

12,356

4,060

586

1,377

19,316

Total

941

14,705

4,284

642

1,596

22,168

Loan ending balances:

Individually evaluated for impairment

537

4,772

3,146

627

3,273

12,355

Collectively evaluated for impairment

61,129

975,139

424,019

77,075

126,385

1,663,747

Total

61,666

979,911

427,165

77,702

129,658

1,676,102


	December 31, 2021
	SBA held
	for									Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	4	$	2,615	$	80	$	56	$	68	$	2,823
Collectively evaluated for impairment		1,070		12,438		4,034		615		1,322		19,479
Total	$	1,074	$	15,053	$	4,114	$	671	$	1,390	$	22,302
Loan ending balances:
Individually evaluated for impairment	$	510	$	4,220	$	3,262	$	637	$	3,122	$	11,751
Collectively evaluated for impairment		82,015		927,506		406,093		77,307		117,403		1,610,324
Total	$	82,525	$	931,726	$	409,355	$	77,944	$	120,525	$	1,622,075

Changes in Methodology

The Company allocated an additional reserve for loans with a substandard rating, not otherwise considered for specific reserves.

Reserve for Unfunded Loan Commitments

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the reserve are made through other expense and applied to the reserve which is classified as other liabilities. At March 31, 2022, a $439 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $400 thousand commitment reserve at December 31, 2021, due to a larger amount of unfunded commitments.

NOTE 10. New Accounting Pronouncements

ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 was issued to replace the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt

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securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost.

In May 2019, FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief." ASU 2019-05 was issued to address concerns with the adoption of ASU 2016-13. ASU 2019-05 gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-03. Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-10, "Financial Instruments - Credit Losses - Measured at Amortized Costs." An exception to this is held-to-maturity debt securities, which do not qualify for this transition election. The effective date for the amendment is the same as the effective date in ASU 2016-03. In November 2019, FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates." ASU 2019-10 was issued to defer the effective dates for certain guidance in its Accounting Standard Codification ("ASC") for certain entities. The amendments in this update amend the mandatory effective dates for ASC 326, "Financial Instruments - Credit Losses", for entities eligible to be smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

In November 2019, FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses." ASU 2019-11 was issued to address issues raise by stakeholders during the implementation of ASU 2016-13. ASU 2019-11 provides transition relief when adjusting the effective interest rate for troubled debt restructurings ("TDRs") that exist as of the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to additional disclosures involving amortized cost basis, and provides clarification regarding application of the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provides a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date. The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13.

ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and removes the exception to the interim period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies the accounting for income taxes by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax, that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill originally was recognized, and that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public business entities, ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020. The Company adopted this standard as of January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force)." ASU 2020-01 clarifies that the observable price changes in orderly transactions that should be considered when applying the measurement alternative in accordance with ASC 321 include transactions that require it to either apply or discontinue the equity method of accounting under ASC 323. ASU 2020-01 also addresses questions about how to apply the guidance in Topic 815, “Derivatives and Hedging,” for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. The ASU clarifies that, for the purpose of applying ASC 815-10-15-141(a), an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with the financial instruments guidance in Topic 825, “Financial Instruments.” For public business entities, ASU 2020-01 is effective for interim and annual periods beginning after December 15, 2020. The Company adopted this

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standard as of January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

ASU 2020-03, "Codification Improvement to Financial Instruments." ASU 2020-03 clarifies that all entities are required to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s Accounting Standards Codification (ASC). ASU 2020-03 also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “Leases,” should be the contractual term used to measure expected credit losses under ASC 326, “Financial Instruments – Credit Losses.” ASU 2020-03 also addresses amendments to ASC 860-20, “Transfers and Servicing – Sales of Financial Assets,” that clarifies when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with ASC 326. The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13. The Company is currently evaluating the impact of the adoption of ASU 2020-03 on its consolidated financial statements.

ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides temporary optional guidance intended to ease the burden of reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions that are expected to be affected by reference rate reform and meet certain scope guidance. ASU 2020-04 provides various optional expedients, including the following, for hedging relationships affected by reference rate reform, if certain criteria are met:

●

An entity can change certain critical terms of the hedging instrument or hedged item or transaction without having to de-designate the relationship.

●

For fair value hedging relationships in which the designated interest rate is LIBOR or another rate that is expected to be discontinued, an entity may change the hedged risk to another permitted benchmark rate without de-designating the relationship.

●

For cash flow hedging relationships in which the designated hedged risk is LIBOR or another rate that is expected to be discontinued, an entity may assert that the occurrence of the hedged forecasted transaction remains probable.

●

Certain qualifying conditions for the shortcut method and other methods that assume perfect effectiveness may be disregarded.

In addition, ASU 2020-04 permits an entity to make a one-time election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that were classified as held to maturity before January 1, 2020. ASU 2020-04 was effective upon its issuance on March 12, 2020. However, it cannot be applied to contract modifications that occur after December 31, 2022. With certain exceptions, the ASU also cannot be applied to hedging relationships entered into or evaluated after that date. The Company is currently evaluating the various optional expedients as well as impact of the adoption of ASU 2020-04 on its consolidated financial statements.

ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” ASU 2020-06 was issued to address the complexities of its guidance for certain financial instruments with characteristics of liabilities and equity, including:

●

Removing the accounting models that require beneficial conversion features or cash conversion features associated with convertible instruments to be recognized as a separate component of equity.

●

Adding certain disclosure requirements for convertible instruments.

●

Amending the guidance for the derivatives scope exception for contracts in an entity’s own equity.

●

Simplifying the diluted earnings per share calculation for certain situations.

For public business entities, ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of the adoption of ASU 2020-06 on its consolidated financial statements.

ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 was issued to clarify certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting applied to derivatives that are affected by the discounting transition. In addition, the ASU clarifies that a receive-variable-rate, pay-variable-rate cross-

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currency interest rate swap may be considered eligible as a hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of the reference rate reform. ASU 2021-01 became effective January 7, 2021. The Company currently uses the shortcut method as the practical expedient.

ASU 2022-01, “Derivatives and Hedging (Topic 815): ASU 2022-01 ws issued to clarify the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. The Company is currently evaluating the impact of the adoption of ASU 2022-02 on its consolidated financial statements.

NOTE 11. Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments

The Company has derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s balance sheet as other assets or other liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to any derivative agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

Derivative instruments are generally either negotiated OTC contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.

Risk Management Policies – Hedging Instruments

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company evaluates the effectiveness of entering into any derivative agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

Interest Rate Risk Management – Cash Flow Hedging Instruments

The Company has variable rate debt as a source of funds for use in the Company’s lending and investment activities and for other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore hedges its variable-rate interest payments. To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.

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The Company had 2 interest rate swaps designed as cash flow hedging instruments with notional amounts totaling $40.0 million at March 31,2022 and December 31, 2021. A summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at March 31, 2022 and December 31, 2021, respectively is as follows:


(In thousands, except percentages and years)	March 31, 2022			December 31, 2021
Notional amount	$	40,000		$	40,000
Fair value	$	1,942		$	408
Weighted average pay rate		0.84	%		0.98	%
Weighted average receive rate		0.19	%		0.19	%
Weighted average maturity in years		2.94			2.37
Number of contracts		2			2

During the three months ended March 31, 2022, the Company received variable rate London Interbank Offered Rate ("LIBOR") payments from and paid fixed rates in accordance with its interest rate swap agreements. At March 31, 2022, the unrealized loss relating to interest rate swaps was recorded as a derivative liability. Changes in the fair value of the interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. The following table presents the net gains and losses recorded in other comprehensive income and the consolidated financial statements relating to the cash flow derivative instruments at March 31, 2022 and 2021, respectively:


	For the three months ended March 31,
(In thousands)	2022		2021
Gain recognized in OCI on derivatives	$	1,534	$	807
Gain (loss) reclassified from AOCI into interest expense	$	85	$	(154)

NOTE 12. Employee Benefit Plans

Stock Option Plans

The Company has incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors. Grants under the Company’s incentive and nonqualified option plans generally vest over 3 years and must be exercised within 10 years of the date of grant. Transactions under the Company’s stock option plans for the three months ended March 31, 2022 are summarized in the following table:


				Weighted
		Weighted		average
		average		remaining	Aggregate
		exercise		contractual	intrinsic
	Shares	price		life in years	value
Outstanding at December 31, 2021	688,533	$	17.56	6.6	$	5,986,666
Options granted	—
Options exercised	(47,374)		13.49
Options forfeited	(9,164)		19.62
Options expired	—
Outstanding at March 31, 2022	631,995	$	17.83	6.5	$	6,414,948
Exercisable at March 31, 2022	502,179	$	17.36	6.0	$	5,335,232

On April 25, 2019, the Company adopted the 2019 Equity Compensation Plan providing for grants of up to 500,000 shares to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and deferred stock. The Plan replaced all previously approved and established equity plans then currently in effect. As of March 31, 2022, 281,500 options and 181,700 shares of restricted stock have been awarded from the plan. In addition, 11,164 unvested options and 9,150 unvested shares of restricted stock were cancelled and returned to the plan leaving 57,114 shares available for future grants.

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The fair values of the options granted during the three months ended March 31, 2021 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. There were no options granted during the three months ended March 31, 2022:


	For the three months ended March 31,
	2022			2021
Number of options granted		—			89,000
Weighted average exercise price	$	—		$	19.21
Weighted average fair value of options	$	—		$	7.72
Expected life in years (1)		—			8.38
Expected volatility (2)		—	%		43.69	%
Risk-free interest rate (3)		—	%		1.14	%
Dividend yield (4)		—	%		1.68	%

(1)	The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding.

(2)	The expected volatility of the Company’s stock price was based on the historical volatility over the period commensurate with the expected life of the options.

(3)	The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of grant.

(4)	The expected dividend yield is the projected annual yield based on the grant date stock price.

Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options. The following table presents information about options exercised during the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
	2022		2021
Number of options exercised		47,374		12,467
Total intrinsic value of options exercised	$	746,292	$	170,023
Cash received from options exercised	$	639,214	$	80,113
Tax deduction realized from options	$	224,522	$	51,151

The following table summarizes information about stock options outstanding and exercisable at March 31, 2022:


	Options outstanding					Options exercisable
			Weighted average	Weighted			Weighted
		Options	remaining contractual	average		Options	average
Range of exercise prices		outstanding	life (in years)	exercise price		exercisable	exercise price
$6.01 - $12.00		108,261	3.3	$	9.06	108,261	$	9.06
$12.01 - $18.00		123,933	7.0		16.48	85,607		16.17
$18.01 - $24.00		399,801	7.3		20.62	308,311		20.60
Total		631,995	6.5	$	17.83	502,179	$	17.36

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Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options and the related income tax benefit for the three months ended March 31, 2022 and 2021 are detailed in the following table:


	For the three months ended March 31,
	2022		2021
Compensation expense	$	163,327	$	207,602
Income tax benefit	$	47,201	$	59,997

As of March 31, 2022, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $811 thousand. That cost is expected to be recognized over a weighted average period of 1.6 years.

Restricted Stock Awards

Restricted stock is issued under the 2019 Equity Compensation Plan to reward employees and directors and to retain them by distributing stock over a period of time. Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. The following table summarizes nonvested restricted stock activity for the three months ended March 31, 2022:


		Average grant
	Shares	date fair value
Nonvested restricted stock at December 31, 2021	119,487	$	21.00
Granted	70,000		27.52
Cancelled	(8,025)		22.89
Vested	(26,092)		19.72
Nonvested restricted stock at March 31, 2022	155,370	$	24.06

Restricted stock awards granted during the three months ended March 31, 2022 and 2021 were as follows:


	For the three months ended March 31,
	2022		2021
Number of shares granted		70,000		30,000
Average grant date fair value	$	27.52	$	19.46

Compensation expense related to restricted stock for the three months ended March 31, 2022 and 2021 is detailed in the following table:


	For the three months ended March 31,
	2022		2021
Compensation expense	$	231,003	$	166,349
Income tax benefit	$	66,760	$	48,075

As of March 31, 2022, there was approximately $2.3 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s stock incentive plans. That cost is expected to be recognized over a weighted average period of 3.0 years.

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 75 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The

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Bank contributed $203 thousand and $261 thousand to the Plan during the three months ended March 31, 2022 and 2021.

Deferred Compensation Plan

The Company has a deferred fee plan for Directors and eligible management. Directors of the Company have the option

to elect to defer up to 100 percent of their respective retainer and Board of Director fees, and each eligible member of

management has the option to elect to defer up to 100 percent of their total compensation. Director and executive deferred compensation totaled $535 thousand and $128 thousand during the three months ended March 31, 2022 and 2021. The interest paid on the deferred balances totaled $36 thousand and $28 thousand during the three months ended March 31, 2022 and 2021. The deferred balances distributed totaled $2 thousand during the three months ended March 31, 2022 and $3 thousand during 2021.

Benefit Plans

In addition to the 401(k) savings plan which covers substantially all employees, in 2015 the Company established an unfunded supplemental defined benefit plan to provide additional retirement benefits for the President and Chief Executive Officer (“CEO”) and unfunded, non-qualified deferred retirement plans for certain other key executives.

On June 4, 2015, the Company approved the Supplemental Executive Retirement Plan (“SERP”) pursuant to which the President and CEO is entitled to receive certain supplemental nonqualified retirement benefits. The retirement benefit under the SERP is an amount equal to sixty percent (60%) of the average of the President and CEO’s base salary for the thirty-six (36) months immediately preceding the executive’s separation from service after age 66, adjusted annually thereafter by a percentage equal to the Consumer Price Index as reported by the U.S. Bureau of Labor Statistics for All Urban Consumers (CPI-U). The total benefit is to be made payable in fifteen annual installments. The future

payments are estimated to total $7.2 million. A discount rate of four percent (4%) was used to calculate the present value

of the benefit obligation.

The President and CEO commenced vesting in this retirement benefit on January 1, 2014, and vests an additional three percent (3%) each year until fully vested on January 1, 2024. In the event that the President and CEO’s separation from service from the Company were to occur prior to full vesting, the President and CEO would be entitled to and shall be paid the vested portion of the retirement benefit calculated as of the date of separation from service. Notwithstanding the foregoing, upon a Change in Control, and provided that within 6 months following the Change in Control the President and CEO is involuntarily terminated for reasons other than “cause” or the President and CEO resigns for “good reason,” as such is defined in the SERP, or the President and CEO voluntarily terminates his employment after being offered continued employment in a position that is not a “Comparable Position,” as such is also defined in the SERP, the President and CEO shall become one hundred percent (100%) vested in the full retirement benefit.

No contributions or payments have been made during the three months ended March 31, 2022. The following table summarizes the components of the net periodic pension cost of the defined benefit plan recognized during the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
(In thousands)	2022		2021
Service cost (1)	$	37	$	(34)
Interest cost		47		34
Amortization of prior service cost (2)		—		21
Net periodic benefit cost	$	84	$	21

(1)	Reduction in service in 2021 cost totaling $137 thousand to be recognized over one year due to the recalculation of the President and CEO’s salary projection.

The following table summarizes the changes in benefit obligations of the defined benefit plan during the three months ended March 31, 2022 and 2021:

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	For the three months ended March 31,
(In thousands)	2022		2021
Benefit obligation, beginning of year	$	4,521	$	3,845
Service cost (1)		37		(34)
Interest cost		47		34
Benefit obligation, end of period	$	4,605	$	3,845

(1)	Reduction in service cost totaling $137 thousand to be recognized over one year due to the recalculation of the President and CEO’s salary projection.

On October 22, 2015, the Company entered into an Executive Incentive Retirement Plan (the “Plan”) with certain key executive officers other than the President and CEO. The Plan has an effective date of January 1, 2015.

The Plan is an unfunded, nonqualified deferred compensation plan. For any Plan Year, a guaranteed annual Deferral Award percentage of seven and one half percent (7.5%) of the participant’s annual base salary will be credited to each Participant’s Deferred Benefit Account. A discretionary annual Deferral Award equal to seven and one half percent (7.5%) of the participant’s annual base salary may be credited to the Participant’s account in addition to the guaranteed Deferral Award, if the Bank exceeds the benchmarks set forth in the Annual Executive Bonus Matrix. The total Deferral Award shall never exceed fifteen percent (15%) of the participant’s base salary for any given Plan Year. Each Participant shall be one hundred percent (100%) vested in all Deferral Awards as of the date they are awarded.

As of March 31, 2022, the Company had total year to date expenses of $28 thousand related to the Plan. The Plan is reflected on the Company’s balance sheet as accrued expenses.

Certain members of management are also enrolled in a split-dollar life insurance plan with a post retirement death benefit of $250 thousand. Total expenses related to this plan were $6 thousand and $1 thousand for the three months ended March 31, 2022 and 2021. Additionally, $55 thousand of prior period expense was reversed during the three months ended March 31, 2022. This was related to adjustments made to the members of management participating in the plan.

NOTE 13. Regulatory Capital

On September 17, 2019, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies) with less than $10 billion in total consolidated assets, implementing provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). Under the proposal, a qualifying community banking organization (“QCBO”) would be eligible to elect the community bank leverage ratio framework, or continue to measure capital under the existing Basel III requirements. The new rule was effective beginning January 1, 2020, and qualifying community banking organizations may elect to opt into the new community bank leverage ratio (“CBLR”) in their call report beginning in the first quarter of 2020.

A QCBO is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:

●

A leverage capital ratio of greater than 9.0%;

●

Total consolidated assets of less than $10.0 billion;

●

Total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; and

●

Total trading assets and trading liabilities of 5% or less of total consolidated assets.

On April 6, 2020, the federal banking regulators implemented the applicable provisions of the CARES Act, which modified the CBLR framework so that: (i) beginning in the second quarter 2020 and until the end of 2020, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is re-established at greater than 9%. Under the interim rules, the minimum CBLR was 8% beginning in the second quarter

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and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter. The numerator of the CBLR is Tier 1 capital, as calculated under the Basel III rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions less assets deducted from Tier 1 capital.

The Bank has opted into the CBLR, and is therefore not required to comply with the Basel III capital requirements.

The following table shows the CBLR ratio for the Company and the Bank as of March 31, 2022 and December 31, 2021:


	At March 31, 2022				At December 31, 2021
	Company		Bank		Company		Bank
CBLR	10.87	%	10.35	%	10.51	%	10.00	%

NOTE 14. Leases

The Company follows ASU 2016-02, "Leases (Topic 842)," which revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. ASU 2016-02 requires that a lessee recognize the assets and liabilities on its balance sheet that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset.

Operating leases in which the Bank is the lessee are recorded as right-of-use ("ROU") assets and lease liabilities and are included in Prepaid expenses and other assets and Accrued expenses and other liabilities, respectively, on the Bank’s Consolidated Balance Sheets. The Bank does not currently have any finance leases in which it is the lessee.

Operating lease ROU assets represent the Bank’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate was calculated for each lease by taking a variable rate FHLB ARC product and then swapping it to a fixed rate borrowing by adding a fixed mid swap rate for the desired term. The borrowing rate for each lease is unique based on the lease term. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in Occupancy expense in the Consolidated Statements of Income.

The Bank’s leases relate primarily to bank branches, office space and equipment with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options which typically range from 1 to 5 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI"). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.

Operating lease ROU assets totaled $5.4 million at March 31, 2022, compared to $5.2 million at December 31, 2021. As of March 31, 2022, operating lease liabilities totaled $5.4 million, compared to $5.3 million at December 31, 2021.

The table below summarizes our net lease cost:


	For the three months ended March 31,
(In thousands)	2022		2021
Operating lease cost	$	188	$	149
Net lease cost	$	188	$	149

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The table below summarizes the cash and non-cash activities associated with our leases:


	For the three months ended March 31,
(In thousands)	2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	182	$	145
ROU assets obtained in exchange for new operating lease liabilities	$	582	$	—

The table below summarizes other information related to our operating leases:


(In thousands, except percentages and years)	March 31, 2022			December 31, 2021
Weighted average remaining lease term in years		11.33			11.40
Weighted average discount rate		3.17	%		3.20	%
Operating lease right-of-use assets	$	5,353		$	5,249

The table below summarizes the maturity of remaining lease liabilities:


(In thousands)	March 31, 2022
2022	$	549
2023		670
2024		624
2025		622
2026		624
2027 and thereafter		3,168
Total lease payments	$	6,257
Less: Interest		(818)
Present value of lease liabilities	$	5,439

As of March 31, 2022, the Company had not entered into any material leases that have not yet commenced.

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ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2021 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”. Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company’s Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent filings with the Securities and Exchange Commission, the following: changes in general, economic, and market conditions, legislative and regulatory conditions, the development of an interest rate environment that adversely affects Unity Bancorp, Inc.’s interest rate spread or other income anticipated from operations and investments and the impact of the COVID-19 pandemic on our employees, operations and customers.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is a bank holding company incorporated in New Jersey and registered under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank” or, when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through the Internet and its twenty branch offices located in Bergen, Hunterdon, Middlesex, Ocean, Somerset, Union, and Warren counties in New Jersey, and Northampton County in Pennsylvania. These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits. The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios.

The Company has two other wholly-owned subsidiaries: Unity (NJ) Statutory Trust II and Unity Risk Management, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. These floating rate securities are treated as subordinated debentures on the Company’s financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes, subject to certain limitations. Unity Risk Management, Inc. is the Company’s captive insurance company that insures risks to the Bank not covered by the traditional commercial insurance market. The Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust II, but it does consolidate the accounts of Unity Risk Management, Inc.

COVID-19

On March 13, 2020, the Coronavirus Disease (“COVID-19”) pandemic was declared a national emergency by the President of the United States. The spread of COVID-19 has negatively impacted the national and local economy, disrupted supply chains and increased unemployment levels. In response to the initial COVID-19 pandemic, many businesses were faced with restrictions in an effort to prioritize public health. The initial temporary closure and gradual reopening of many businesses and the mitigation policies adopted by Federal, state and local governments have impacted many of the Company’s customers.

The Company is committed to supporting its customers, employees and communities during this difficult time and has adapted to the changing environment. We have taken and continue taking steps to protect the health and safety of our employees and to work with our customers experiencing economic consequences from the epidemic. The Company worked with its loan customers to provide short term payment deferrals and to waive certain fees. These accommodations are likely to have a negative impact on the Company’s results of operations during the duration of the epidemic, and, depending on how quickly the businesses of our customers rebound after the emergency, could lead to an increase in nonperforming assets.

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The full impact of the pandemic remains unknown and continues to evolve. The outbreak has had a significant adverse impact on certain industries the Company serves, including retail, accommodations, and restaurants and food services. Although the COVID-19 pandemic continues, many restrictions have been lifted as vaccines are administered and people start to feel safer. It is still unknown what changes in the behavior of customers, businesses and their employees will result from the COVID-19 pandemic. While states have re-opened, certain restrictions remain in place, which have impacted commercial activity. These impacts may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our customers and prospects, and on the local and national economy, there can be no assurances as to how the crisis may ultimately affect the Company's loan portfolio, and business as a whole. The extent of such impact will depend on future developments, which remain uncertain. As such, the Company could be subject to certain risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.

CARES Act

The CARES Act provided assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds were provided in the form of loans that would be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and the application period was extended to August 8, 2020, and then reopened pursuant to the terms of the Economic Aid Act discussed below. As an existing SBA 7(a) lender, the Company opted to participate in the program.

The Company approved 1,224 applications and provided funding of approximately $143.0 million during the year ended December 31, 2020. The Company has $1.1 million of PPP loans originated under the CARES Act remaining on our balance sheet as of March 31, 2022 and believes that the majority of these loans will be forgiven by the SBA.

Economic Aid Act

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act was signed into law. It provided additional assistance to the hardest-hit small businesses, nonprofits, and venues that were struggling to recover from the impact of the COVID-19 pandemic. The Economic Aid Act provided funding for a second round of PPP loans for small businesses and nonprofits experiencing significant revenue losses, made programmatic improvements to PPP, funded grants to shuttered venues, and enacted emergency enhancements to other SBA lending programs.

The PPP allowed certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP Loan with the same general loan terms as their First Draw PPP Loan, and for borrowers that did not initially receive a PPP loan to apply for one. Most small businesses with 300 or fewer employees that could demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 were eligible. Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and were available until March 31, 2021. The Company participated in the re-opened PPP loan process.

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The Company approved 955 applications and provided funding of approximately $101.0 million. As of March 31, 2022, the Company has $27.5 million of PPP loans originated under the Economic Aid Act in its portfolio.

Deferrals

On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encouraged financial institutions to work prudently with borrowers that were unable to meet their contractual obligations because of the effects of COVID-19. The guidance went on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications made on a good faith basis to borrowers who were current as of the implementation date of a relief program were not TDRs. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019, were not TDRs.

Beginning in March 2020, the Company proactively communicated with its customers to address their financial needs. The Company worked closely with its customers to educate and guide them on their options for financial assistance, including disaster loans, the PPP and payment relief through deferrals and waived fees. As a result of our proactive approach to provide financial assistance to our customers, loans have been modified through payment deferrals and are not categorized as TDRs, in accordance with regulatory guidance and the CARES Act. The table below summarizes the loans that are in deferral as of March 31, 2022:


(In thousands)	Total loan portfolio balance		Unpaid principal balance of full deferrals		Unpaid principal balance of principal only deferrals		Unpaid principal balance of deferrals		% total deferrals to total loans
SBA loans held for sale	$	25,282	$	—	$	—	$	—	0.00	%
SBA loans held for investment		33,048		—		—		—	0.00
SBA PPP loans		28,618		—		—		—	0.00
Commercial loans		979,911		1,860		—		1,860	0.19
Residential mortgage loans		427,165		—		—		—	0.00
Consumer loans		77,702		—		—		—	0.00
Residential construction loans		129,658		—		—		—	0.00
Total loans	$	1,701,384	$	1,860	$	—	$	1,860	0.11	%

Consent Order

In July 2020, Unity Bank agreed to the issuance of a Consent Order by the Federal Deposit Insurance Corporation (“FDIC”) and agreed to an Acknowledgement and Consent of the FDIC Consent Order with the Commissioner of Banking and Insurance for the State of New Jersey. The Consent Order requires the Bank to strengthen its Bank Secrecy Act (“BSA”)/anti-money laundering (“AML”) program, and to address related matters. The Bank hired a consulting firm to assist management in effectively addressing all matters pertaining to the order. Although the Bank believes it is complying with all requirements of the Consent Order, we can give no assurance that the FDIC and the NJDOBI will agree that the Bank is fully complying or that the Bank will not incur material additional expense in complying with the Consent Order.

Earnings Summary

Net income totaled $9.1 million, or $0.85 per diluted share for the quarter ended March 31, 2022, compared to $8.5 million, or $0.80 per diluted share for the same period a year ago. Return on average assets and average common equity for the quarter were 1.80 percent and 17.64 percent, respectively, compared to 1.85 percent and 19.51 percent for the same period a year ago.

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First quarter highlights include:

●

Net interest income increased 10.5 percent compared to the prior year’s quarter due to commercial loan growth and residential construction loan growth.

●

Net interest margin equaled 4.11 percent this quarter compared to 4.09 percent in the prior years’ quarter.

●

The Company released $178 thousand of its provision for loan losses for the quarter ended March

31, 2022. The provision for loan losses decreased $678 thousand compared to the prior year’s period due to an improved outlook on credit quality.

●

Noninterest expense increased 6.2 percent compared to the prior year’s quarter, primarily due to increased compensation expenses.

●

The effective tax rate was 23.5 percent compared to 25.7 percent in the prior year’s quarter.

The Company’s performance ratios may be found in the table below.


	For the three months ended March 31,
	2022			2021
Net income per common share - Basic (1)	$	0.87		$	0.81
Net income per common share - Diluted (2)	$	0.85		$	0.80
Return on average assets		1.80	%		1.85	%
Return on average equity (3)		17.64	%		19.51	%
Efficiency ratio (4)		45.86	%		45.74	%

(1)	Defined as net income divided by weighted average shares outstanding.

(2)	Defined as net income divided by the sum of the weighted average shares and the potential dilutive impact of the exercise of outstanding options.

(3)	Defined as net income divided by average shareholders’ equity.

(4)	The efficiency ratio is a non-GAAP measure of operational performance. It is defined as noninterest expense divided by the sum of net interest income plus noninterest income less any gains or losses on securities.

Net Interest Income

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans to individuals and businesses, investment securities and interest-earning deposits. Interest-bearing liabilities include interest-bearing demand, savings and time deposits, FHLB advances and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities. The Company’s net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and general levels of nonperforming assets.

During the three months ended March 31, 2022, tax-equivalent net interest income amounted to $19.9 million, an increase of $1.9 million or 10.5 percent when compared to the same period in 2021. The net interest margin increased 2 basis points to 4.11 percent for the three months ended March 31, 2022, compared to 4.09 percent for the same period in 2021. The net interest spread was 3.98 percent for the first quarter of 2022, a 16 basis point increase compared to the same period in 2021.

During the three months ended March 31, 2022, tax-equivalent interest income was $21.1 million, an increase of $543 thousand or 2.6 percent when compared to the same period in 2021. This increase was mainly driven by the increase in the balance of securities residential construction loans.

●

Of the $543 thousand net increase in interest income on a tax-equivalent basis, $729 thousand is due to an increase in yields on the earning assets, partially offset by a $186 thousand decrease to average earning assets.

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●

The average volume of interest-earning assets increased $179.8 million to $2.0 billion for the first quarter of 2022 compared to $1.8 billion for the same period in 2021. This was due primarily to a $119.8 million increase in interest-bearing deposits, $44.6 million increase in investment securities, and a $17.1 million increase in average loans, primarily commercial and residential construction.

●

The yield on total interest-earning assets decreased 31 basis points to 4.36 percent for the three months ended March 31, 2022 when compared to the same period in 2021. The yield on the loan portfolio decreased 2 basis points to 4.95 percent.

Total interest expense was $1.2 million for the three months ended March 31, 2022, a decrease of $1.3 million or 52.5 percent compared to the same period in 2021. This decrease was driven by the decreased rates on and volume of time deposits and the decreased volume of borrowed funds and subordinated debentures compared to a year ago:

●

Of the $1.3 million decrease in interest expense, $980 thousand was due to a decrease in the rates on interest-bearing liabilities, and $363 thousand was due to decreased volume of average interest-bearing liabilities.

●

Interest-bearing liabilities averaged $1.3 billion for the first quarter of 2022, an increase of $75.6 million or 6.2 percent compared to the prior year’s quarter.

●

The average cost of total interest-bearing liabilities decreased 47 basis points to 0.38 percent. The cost of interest-bearing deposits decreased 48 basis points to 0.32 percent for the first quarter of 2022 and the cost of borrowed funds and subordinated debentures increased 21 basis points to 1.82 percent.

The following table reflects the components of net interest income, setting forth for the periods presented herein: (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread, and (5) net interest income/margin on average earning assets. Rates/Yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 21 percent in 2022 and 2021.

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Consolidated Average Balance Sheets

(Dollar amounts in thousands, interest amounts and interest rates/yields on a fully tax-equivalent basis)


	For the three months ended
	March 31, 2022						March 31, 2021
	Average						Average
	Balance		Interest		Rate/Yield		Balance		Interest		Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits	$	210,601	$	96	0.18	%	$	90,830	$	24	0.11	%
Federal Home Loan Bank ("FHLB") stock		3,550		33	3.81			5,167		63	4.98
Securities:
Taxable		84,739		652	3.12			38,741		292	3.06
Tax-exempt		990		8	3.07			2,405		12	2.03
Total securities (A)		85,729		660	3.12			41,146		304	3.00
Loans:
SBA loans		63,543		923	5.89			48,845		783	6.50
SBA PPP loans		36,989		777	8.52			142,581		1,730	4.92
Commercial loans		949,948		11,497	4.91			849,065		10,474	5.00
Residential mortgage loans		413,308		4,390	4.31			455,782		5,128	4.56
Consumer loans		78,989		921	4.73			63,440		857	5.48
Residential construction loans		122,993		1,824	6.01			88,992		1,215	5.54
Total loans (B)		1,665,770		20,332	4.95			1,648,705		20,187	4.97
Total interest-earning assets	$	1,965,650	$	21,121	4.36	%	$	1,785,848	$	20,578	4.67	%

Noninterest-earning assets:
Cash and due from banks		23,679						23,781
Allowance for loan losses		(22,331)						(23,308)
Other assets		79,631						76,309
Total noninterest-earning assets		80,979						76,782
Total assets	$	2,046,629					$	1,862,630

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	249,329	$	164	0.27	%	$	209,020	$	309	0.60	%
Savings deposits		701,281		345	0.20			476,463		431	0.37
Time deposits		288,155		480	0.68			438,250		1,463	1.35
Total interest-bearing deposits		1,238,765		989	0.32			1,123,733		2,203	0.80
Borrowed funds and subordinated debentures		50,310		226	1.82			89,699		355	1.61
Total interest-bearing liabilities	$	1,289,075	$	1,215	0.38	%	$	1,213,432	$	2,558	0.85	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		526,931						455,146
Other liabilities		21,217						17,418
Total noninterest-bearing liabilities		548,148						472,564
Total shareholders' equity		209,406						176,634
Total liabilities and shareholders' equity	$	2,046,629					$	1,862,630

Net interest spread			$	19,906	3.98	%			$	18,020	3.82	%
Tax-equivalent basis adjustment				(2)						(2)
Net interest income			$	19,904					$	18,018
Net interest margin					4.11	%					4.09	%

(A)	Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 21 percent in 2022 and 2021, as well as all applicable state rates.

(B)	The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

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(A)

The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volume and rates over the periods presented. Changes that are not solely due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Amounts have been computed on a tax-equivalent basis, assuming a federal income tax rate of 21 percent.


	For the three months ended March 31, 2022 versus March 31, 2021
	Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)	Volume		Rate		Net
Interest income:
Interest-bearing deposits	$	48	$	24	$	72
FHLB stock		(17)		(13)		(30)
Securities		345		11		356
Loans		(562)		707		145
Total interest income	$	(186)	$	729	$	543
Interest expense:
Demand deposits	$	51	$	(196)	$	(145)
Savings deposits		159		(245)		(86)
Time deposits		(402)		(581)		(983)
Total interest-bearing deposits		(192)		(1,022)		(1,214)
Borrowed funds and subordinated debentures		(171)		42		(129)
Total interest expense		(363)		(980)		(1,343)
Net interest income - fully tax-equivalent	$	177	$	1,709	$	1,886
Decrease in tax-equivalent adjustment						—
Net interest income					$	1,886

Provision for Loan Losses

During the three months ended March 31, 2022, the Bank released $178 thousand of provision, compared to a provision of $500 thousand for the three months ended March 31, 2021. The $678 thousand decrease in provision for loan losses was primarily due to an improved outlook on credit quality.

Each period’s loan loss provision is the result of management’s analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions “Financial Condition - Asset Quality” and “Financial Condition - Allowance for Loan Losses and Reserve for Unfunded Loan Commitments.” The current provision is considered appropriate under management’s assessment of the adequacy of the allowance for loan losses.

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Noninterest Income

The following table shows the components of noninterest income for the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
(In thousands)	2022		2021
Branch fee income	$	275	$	295
Service and loan fee income		584		625
Gain on sale of SBA loans held for sale, net		852		245
Gain on sale of mortgage loans, net		521		1,750
BOLI income		163		129
Net security (losses) gains		(557)		310
Other income		401		372
Total noninterest income	$	2,239	$	3,726

For the three months ended March 31, 2022, noninterest income decreased $1.5 million to $2.2 million, compared to the same period last year. The decrease was primarily due to decreased gains on sales of mortgage loans and net security losses.

Changes in our noninterest income for the three months ended March 31, 2022 compared to the prior year period reflect:

●

Branch fee income decreased $20 thousand, primarily due to service charges on deposit related accounts.

●

Service and loan fee income decreased $41 thousand primarily due to a decrease in prepayment penalties relating to loan payoff charges, mortgage application fees, and SBA and Residential Mortgage servicing income.

●

SBA loan sales during the first quarter of 2022 totaled $6.8 million with a net gain of $852 thousand, compared to $2.2 million in sales with a net gain of $245 thousand in the prior year’s quarter.

●

Mortgage loan sales were $27.0 million with a gain of 1.93% for the three months ended March 31, 2022, compared to $101.9 million with a gain of 1.73% for prior year’s quarter.

●

Bank owned life insurance ("BOLI") income increased $34 thousand in the three months ended in March 31, 2022, when compared to the same period in the prior year.

●

Net security losses totaled $557 thousand during the first quarter of 2022, compared to gains of $310 thousand in the prior year’s quarter. There were approximately $557 thousand in losses which resulted from decreases in the market values of equity securities, compared to an increase of $267 thousand in the prior year’s quarter.

●

Other income, which includes check card related income and miscellaneous service charges, increased $29 thousand for the three months ended March 31, 2021, primarily due to an increase in card interchange fees.

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Noninterest Expense

The following table presents a breakdown of noninterest expense for the three months ended March 31, 2022 and 2021:


	For the three months ended March 31,
(In thousands)	2022		2021
Compensation and benefits	$	6,508	$	6,063
Occupancy		775		706
Processing and communications		752		807
Furniture and equipment		576		649
Professional services		447		380
Deposit insurance		269		214
Director fees		233		208
Advertising		225		268
Other loan expenses		135		143
Loan collection & OREO expenses (recoveries)		58		(49)
Other expenses		432		413
Total noninterest expense	$	10,410	$	9,802

Noninterest expense increased $608 thousand to $10.4 million for the three months ended March 31, 2022, compared to $9.8 million in March 31, 2021, primarily due to increased compensation expenses.

Changes in noninterest expense for the three months ended March 31, 2022 versus 2021 reflect:

●

Compensation and benefits expense, the largest component of noninterest expense, increased $445 thousand for the three months ended March 31, 2022, when compared to 2021, primarily due to increased compensation expenses.

●

Occupancy expense increased $69 thousand in the three months ended March 31, 2022, when compared to 2021, primarily due to increased rent and depreciation expenses.

●

Processing and communications expense decreased $55 thousand when compared to 2021.

●

Furniture and equipment expense, which includes network and software maintenance, decreased $73 thousand for the three months ended March 31, 2022, primarily due to decreases in software maintenance expenses.

●

Professional service fees increased $67 thousand for the three months ended March 31, 2022, when compared to 2021, primarily due to higher consulting related expenses.

●

Deposit Insurance increased $55 thousand in the three months ended March 31, 2022.

●

Director fees increased $25 thousand in the three months ended March 31, 2022.

●

Advertising expenses decreased $43 thousand in the three months ended March 31, 2022.

●

Other loan expenses, which consist of expenses such as appraisals, loan property tax expenses, and credit reports, decreased $8 thousand for the three months ended March 31, 2022.

●

Loan collection and OREO costs increased $107 thousand in the three months ended March 31, 2022, primarily due to the increase in loan legal and SBA Reimbursement expenses.

●

Other expenses increased $19 thousand for the three months ended March 31, 2022.

Income Tax Expense

For the quarter ended March 31, 2022, the Company reported income tax expense of $2.8 million for an effective tax rate of 23.5 percent, compared to income tax expense of $2.9 million and an effective tax rate of 25.7 percent for the prior year’s quarter.

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or after January 1, 2020, through December 31, 2021. In addition, New Jersey adopted mandatory unitary combined reporting for its Corporation Business Tax, which became effective for periods on or after January 1, 2019.

For additional information on income taxes, see Note 4 to the Consolidated Financial Statements.

Financial Condition at March 31, 2022

Total assets increased $34.0 million or 1.7 percent, to $2.1 billion at March 31, 2022, when compared to year end 2021. This increase was primarily due to increases of $52.1 million in net loans, mostly due to commercial and residential mortgage loan growth, and $36.9 million in total securities, partially offset by decreases of $57.1 million in cash and cash equivalents and $17.8 million in SBA PPP loans due to loans being forgiven and paid off.

Total deposits increased $12.3 million, primarily due to increases of $13.3 million in savings deposits and $12.8 million in noninterest-bearing demand deposits, partially offset by a decrease of $10.5 million in time deposits and a decrease of $3.3 million in interest-bearing demand deposits.

Total shareholders’ equity increased $9.2 million over year end 2021, primarily due to earnings, an increase in common stock and accumulated other comprehensive income, partially offset by treasury stock purchases and dividends paid during the three months ended March 31, 2022.

These fluctuations are discussed in further detail in the paragraphs that follow.

Securities Portfolio

The Company’s securities portfolio consists of AFS debt securities, HTM securities and equity investments. Management determines the appropriate security classification of AFS and HTM at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.

AFS debt securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. AFS debt securities consist primarily of obligations of state and political subdivisions, mortgage-backed securities, asset backed securities, corporate and other securities.

AFS debt securities totaled $77.9 million at March 31, 2022, an increase of $21.4 million or 37.9 percent, compared to $56.5 million at December 31, 2021. This net increase was the result of:

●

$24.2 million in additions from the purchase of five CMO fixed rate, six asset backed securities, and two agencies,

●

$1.8 million in principal payments, maturities and called bonds,

●

$1.1 million depreciation in the market value of the portfolio. At March 31, 2022, the portfolio had a net unrealized loss of $1.0 million compared to a net unrealized gain of $38 thousand at December 31, 2021. These net unrealized losses are reflected net of tax in shareholder’s equity as accumulated other comprehensive income, and,

●

$20 thousand in net amortization.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 7.1 years and 6.9 years at March 31, 2022 and December 31, 2021, respectively. The effective duration of AFS debt securities amounted to 1.7 years and 3.1 years at March 31, 2022 and December 31, 2021, respectively.

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HTM securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is primarily comprised of U.S. Government and obligations of state and political subdivisions.

HTM securities were $30.4 million at March 31, 2022, an increase of $16.1 million or 112.7 percent, compared to $14.3 million at December 31, 2021. This net increase was the result of:

●

$5.1 million in principal payments,

●

$9 thousand in net amortization and,

●

$18.7 million in addition from the purchase of six agency notes/ bonds and three CMO fixed rate securities.

The weighted average life of HTM securities, adjusted for prepayments, amounted to 16.4 years. As of March 31, 2022, the fair value of HTM securities was $28.9 million. The effective duration of HTM securities amounted to 9.1 years and 5.6 years at March 31, 2022 and December 31, 2021, respectively.

Equity securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. Equity securities consist of Community Reinvestment Act ("CRA") investments and the equity holdings of financial institutions.

Equity securities totaled $8.0 million at March 31, 2022, a decrease of $557 thousand or 6.5%, compared to $8.6 million at December 31, 2021. This net decrease is primarily due to market value adjustments throughout the year.

The average balance of taxable securities amounted to $84.7 million for the three months ended March 31, 2022, compared to $38.7 million for the same period in 2021. The average yield earned on taxable securities increased 6 basis points, to 3.12 percent for the three months ended March 31, 2022, from 3.06 percent for the same period in the prior year. The average balance of tax-exempt securities amounted to $990 thousand for the three months ended March 31, 2022, compared to $2.4 million for the same period in 2021. The average yield earned on tax-exempt securities increased 104 basis points, to 3.07 percent for the three months ended March 31, 2022, from 2.03 percent for the same period in 2021.

Securities with a carrying value of $1.0 million and $1.2 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure other borrowings, to collateralize hedging instruments and for other purposes required or permitted by law.

Approximately 52 percent of the total investment portfolio had a fixed rate of interest at March 31, 2022.

See Note 7 to the accompanying Consolidated Financial Statements for more information regarding Securities.

Loan Portfolio

The loan portfolio, which represents the Company’s largest asset group, is a significant source of both interest and fee income. The portfolio consists of SBA, commercial, residential mortgage, consumer, and residential construction loans. Each of these segments is subject to differing levels of credit and interest rate risk.

Total loans increased $51.9 million or 3.1 percent to $1.7 billion at March 31, 2022, compared to year end 2021. Commercial, residential mortgage and residential construction loans increased $48.2 million, $17.8 million and $9.1 million respectively, partially offset by decreases of $17.8 million, $5.1 million and $242 thousand in SBA PPP, SBA and consumer loans, respectively.

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The following table sets forth the classification of loans by major category, including unearned fees and deferred costs and excluding the allowance for loan losses as of March 31, 2022 and December 31, 2021:


	March 31, 2022				December 31, 2021
			% of				% of
(In thousands, except percentages)	Amount		total		Amount		total
SBA loans held for investment	$	33,048	1.9	%	$	36,075	2.2	%
SBA PPP loans		28,618	1.7			46,450	2.8
Commercial loans		979,911	57.6			931,726	56.5
Residential mortgage loans		427,165	25.1			409,355	24.8
Consumer loans		77,702	4.6			77,944	4.7
Residential construction loans		129,658	7.6			120,525	7.3
Total loans held for investment	$	1,676,102	98.5	%	$	1,622,075	98.3	%
SBA loans held for sale		25,282	1.5			27,373	1.7
Total loans	$	1,701,384	100.0	%	$	1,649,448	100.0	%

Average loans increased $17.1 million or 1.0 percent to $1.7 billion for the three months ended March 31, 2022 from $1.6 billion for the same period in 2021. The increase in average loans was due to increases in average commercial, residential construction and consumer loans, partially offset by decreases in average SBA PPP, residential mortgage and SBA loans. The yield on the overall loan portfolio decreased 2 basis points to 4.95 percent for the three months ended March 31, 2022 when compared to the same period in the prior year.

SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made for the purposes of providing working capital or financing the purchase of equipment, inventory or commercial real estate. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. The deficiency may be a higher loan to value (“LTV”) ratio, lower debt service coverage (“DSC”) ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for startup businesses where there is no history or financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portion of the Company’s SBA loans are generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $25.3 million at March 31, 2022, a decrease of $2.1 million from $27.4 million at December 31, 2021. SBA 7(a) loans held to maturity amounted to $33.0 million at March 31, 2022, a decrease of $3.0 million from $36.1 million at December 31, 2021. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was 5.89 percent for the three months ended March 31, 2022, compared to 6.50 percent in the prior year.

The guarantee rates on SBA 7(a) loans range from 50 percent to 90 percent, with the majority of the portfolio having a guarantee rate of 75 percent at origination. The guarantee rates are determined by the SBA and can vary from year to year depending on government funding and the goals of the SBA program. The carrying value of SBA loans held for sale represents the guaranteed portion to be sold into the secondary market. The carrying value of SBA loans held to maturity represents the unguaranteed portion, which is the Company’s portion of SBA loans originated, reduced by the guaranteed portion that is sold into the secondary market. Approximately $90.5 million and $87.4 million in SBA loans were sold but serviced by the Company at March 31, 2022 and December 31, 2021, respectively, and are not included on the Company’s balance sheet. There is no relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company’s SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.

The CARES Act provided assistance to small businesses through the establishment of the PPP. The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds are provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and

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utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years and can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the employer/borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and the application period was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. The application period was then reopened under the provisions of the Economic Aid Act. Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and were available until March 31, 2021. These loans amounted to $28.6 million at March 31, 2022, a decrease of $17.8 million from year end 2021.

Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $979.9 million at March 31, 2022, an increase of $48.2 million from year end 2021. The yield on commercial loans was 4.91 percent for the three months ended March 31, 2022, compared to 5.00 percent for the same period in 2021. The SBA 504 program, which consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property, is included in the Commercial loan portfolio. Generally, the Company has a 50 percent LTV ratio on SBA 504 program loans at origination.

Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amounted to $427.2 million at March 31, 2022, an increase of $17.8 million from year end 2021. Sales of mortgage loans totaled $27.0 million for the three months ended March 31, 2022. The yield on residential mortgages was 4.31 percent for the three months ended March 31, 2022, compared to 4.56 percent in the same period in 2021. Residential mortgage loans maintained in portfolio are generally to individuals that do not qualify for conventional financing. In extending credit to this category of borrowers, the Bank considers other mitigating factors such as credit history, equity and liquid reserves of the borrower. As a result, the residential mortgage loan portfolio of the Bank includes adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but which are not considered high priced mortgages.

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being purchased. These loans amounted to $77.7 million, a decrease of $242 thousand from year end 2021. The yield on consumer loans was 4.73 percent for the three months ended March 31, 2022, compared to 5.48 percent for the same period in 2021.

Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to $129.7 million, an increase of $9.1 million from year end 2021. The yield on residential construction loans was 6.01 percent for the three months ended March 31, 2022, compared to 5.54 percent for the same period in 2021.

There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio and no foreign loans in the portfolio.

In the normal course of business, the Company may originate loan products whose terms could give rise to additional credit risk. Interest-only loans, loans with high LTV or debt service ratios, construction loans with payments made from interest reserves and multiple loans supported by the same collateral (e.g. home equity loans) are examples of such products. However, these products are not material to the Company’s financial position and are closely managed via credit controls designed to mitigate their additional inherent risk. Management does not believe that these products create a concentration of credit risk in the Company’s loan portfolio. The Company does not have any option adjustable rate mortgage loans.

The majority of the Company’s loans are secured by real estate. Declines in the market values of real estate in the Company’s trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. At March 31, 2022 approximately 93 percent of the Company’s loan portfolio was secured by real estate compared to 92 percent at December 31, 2021.

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Troubled Debt Restructurings (“TDRs”)

TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Deferrals complying with the terms of the CARES Act and regulatory guidance (i.e., deferrals of up to six months to borrowers impacted by the COVID-19 pandemic, where the borrower was current at either December 31, 2019 or prior to the deferral being granted) are not considered TDR’s. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

At March 31, 2022, there were five loans totaling $1.9 million that were classified as TDRs and deemed impaired, compared to three loan totaling $1.0 million at December 31, 2021. Restructured loans that are placed in nonaccrual status may be removed after six months of contractual payments and the borrower showing the ability to service the debt going forward. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.

The following table presents a breakdown of performing and nonperforming TDRs by class as of March 31, 2022 and December 31, 2021:


	March 31, 2022						December 31, 2021
	Performing		Nonperforming		Total		Performing		Nonperforming		Total
(In thousands)	TDRs		TDRs		TDRs		TDRs		TDRs		TDRs
Commercial real estate	$	1,464	$	—	$	1,464	$	619	$	—	$	619
Home equity		427		—		427		427		—		427
Commercial other		25				25		—				—
Total	$	1,916	$	—	$	1,916	$	1,046	$	—	$	1,046

Through March 31, 2022, TDRs consisted of principal reduction, interest only periods and maturity extensions. The following table shows the types of modifications done by date by class through March 31, 2022:

March 31, 2022

Commercial

Home

Commercial

(In thousands)

real estate

equity

Other

Total

Type of modification:

Principal reduction

1,464

—

1,464

Interest only with nominal principal

—

427

452

Total TDRs

1,464

427

1,916

Asset Quality

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to strict credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval.

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The loan portfolio is then subject to on-going internal reviews for credit quality, as well as independent credit reviews by an outside firm.

The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. In some cases, these factors have also resulted in significant impairment to the value of loan collateral. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market.

Nonperforming assets consist of nonperforming loans. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being delinquent for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal, until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans. Loans past due 90 days or more and still accruing generally represent loans that are well secured and in process of collection.

The following table sets forth information concerning nonperforming assets and loans past due 90 days or more and still accruing interest at each of the periods presented:


(In thousands, except percentages)	March 31, 2022			December 31, 2021			March 31, 2021
Nonperforming by category:
SBA loans held for investment	$	537		$	510		$	1,560
Commercial loans		2,292			2,582			952
Residential mortgage loans		2,999			3,262			6,711
Consumer loans		200			210			—
Residential construction loans		3,273			3,122			2,565
Total nonperforming assets	$	9,301		$	9,686		$	11,788
Past due 90 days or more and still accruing interest:
Commercial loans	$	—		$	—		$	—
Residential mortgage loans		488			—			2,145
Consumer loans		—			—			183
Residential construction loans		—			—			212
Total past due 90 days or more and still accruing interest	$	488		$	—		$	2,540
Nonperforming loans to total loans		0.55	%		0.59	%		0.71	%
Nonperforming loans and TDRs to total loans (1)		0.66			0.65			0.77
Nonperforming assets to total loans		0.55			0.59			0.71
Nonperforming assets to total assets		0.45			0.48			0.59
(1) Performing TDRs		1,917			1,046			1,079

Nonperforming loans were $9.3 million at March 31, 2022, a $385 thousand decrease from $9.7 million at December 31, 2021. Since year end 2021, nonperforming loans in the commercial, residential mortgage and consumer loan segments decreased, partially offset by an increase in nonperforming residential construction and SBA loans. In addition, there were $488 thousand of loans past due 90 days or more and still accruing interest at March 31, 2022, compared to none at December 31, 2021 and $2.5 million at March 31,2021.

The Company also monitors potential problem loans. Potential problem loans are those loans where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are categorized by their non-passing risk rating and performing loan status. Potential problem loans totaled $19.1 million at March 31, 2022.

See Note 8 to the accompanying Consolidated Financial Statements for more information regarding Asset Quality.

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Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

Management reviews the level of the allowance for loan losses on a quarterly basis. The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. Specific reserves are made to individual impaired loans, which have been defined to include all nonperforming loans and TDRs. The general reserve is set based upon a representative average historical net charge-off rate adjusted for certain environmental factors such as: delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.

When calculating the five-year historical net charge-off rate, the Company weights the past three years more heavily. The Company believes using this approach is more indicative of future charge-offs. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate, and high risk. The factors are evaluated separately for each type of loan. For example, commercial loans are broken down further into commercial and industrial loans, commercial mortgages, construction loans, etc. Each type of loan is risk weighted for each environmental factor based on its individual characteristics.

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The allowance for loan losses totaled $22.2 million at March 31, 2022, compared to $22.3 million at December 31, 2021, and $23.0 million at March 31, 2021, with a resulting allowance to total loan ratio of 1.30 percent at March 31, 2022, 1.35 percent at December 31, 2021, and 1.38 percent at March 31, 2021. Net recoveries (charge-offs) amounted to $44 thousand for the three months ended March 31, 2022, compared to $640 thousand for the same period in 2021. Net charge-offs to average loan ratios are shown in the table below for each major loan category.


	For the three months ended March 31,
(In thousands, except percentages)	2022			2021
Balance, beginning of period	$	22,302		$	23,105
Provision for loan losses charged to expense		(178)			500
Less: Chargeoffs
SBA loans held for investment		—			282
Commercial loans		—			373
Residential mortgage loans		—			—
Consumer loans		6			1
Total chargeoffs		6			656
Add: Recoveries
SBA loans held for investment		22			15
Commercial loans		28			1
Residential mortgage loans		—			—
Total recoveries		50			16
Net recoveries (charge-offs)		44			(640)
Balance, end of period	$	22,080		$	22,965
Selected loan quality ratios:
Net (charge-offs) recoveries to average loans:
SBA loans held for investment		0.09	%		(0.57)	%
Commercial loans		0.01			(0.18)
Residential mortgage loans		—			—
Consumer loans		(0.03)			(0.01)
Total loans		—			(0.16)
Allowance to total loans		1.30			1.38
Allowance to nonperforming loans		238.34	%		194.82	%

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses.

Adjustments to the reserve are made through other expense and applied to the reserve which is maintained in other liabilities. At March 31, 2022, a $439 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $400 thousand commitment reserve at December 31, 2021.

See Note 9 to the accompanying Consolidated Financial Statements for more information regarding the Allowance for Loan Losses and Reserve for Unfunded Loan Commitments.

Deposits

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing a comprehensive relationship with business borrowers, seeking deposits as well as lending relationships.

Total deposits increased $12.3 million to $1.8 billion at March 31, 2022, from year-end 2021. This increase in deposits was due to increases of $13.3 million in savings deposits and $12.8 million in noninterest-bearing demand deposits, partially offset by a decrease of $10.5 million in time deposits and $3.3 million in interest-bearing demand deposits.

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The Company’s deposit composition at March 31, 2022, consisted of 39.9 percent savings deposits, 30.6 percent noninterest-bearing demand deposits, 15.9 percent time deposits, and 13.6 percent interest-bearing demand deposits.

Borrowed Funds and Subordinated Debentures

Borrowed funds consist primarily of fixed rate advances from the Federal Home Loan Bank of New York. These borrowings are used as a source of liquidity or to fund asset growth not supported by deposit generation. Residential mortgages and commercial loans collateralize the borrowings from the FHLB.

Borrowed funds and subordinated debentures totaled $50.3 million at March 31, 2022 and December 31, 2021, respectively, and are broken down in the following table:


(In thousands)	March 31, 2022		December 31, 2021
FHLB borrowings:
Fixed rate advances	$	40,000	$	40,000
Subordinated debentures		10,310		10,310
Total borrowed funds and subordinated debentures	$	50,310	$	50,310

FHLB Borrowings

At March 31, 2022 and December 31, 2021, the Company had $40.0 million in fixed rate advances. The terms of this transaction are as follows:

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A $40.0 million FHLB borrowing with a maturity date of August 22, 2024, at a fixed rate of 1.810%.

There were no FHLB overnight advances or adjustable rate advances as of March 31, 2022 and December 31, 2021 respectively.

In March 2022, the FHLB issued a $105.0 million municipal deposit letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law.

At March 31, 2022, the Company had $383.3 million of additional credit available at the FHLB. Pledging additional collateral in the form of 1 to 4 family residential mortgages, commercial loans and investment securities can increase the line with the FHLB.

Subordinated Debentures

On July 24, 2006, Unity (NJ) Statutory trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part, prior to maturity but after July 24, 2011. The floating interest rate on the subordinated debentures is three-month LIBOR plus 159 basis points and reprices quarterly. The floating interest rate was 2.548% at March 31, 2022 and 1.806% at December 31, 2021.

Interest Rate Sensitivity

The principal objectives of the asset and liability management function are to establish prudent risk management guidelines, evaluate and control the level of interest-rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity requirements, and actively manage risk within the Board approved guidelines. The Company seeks to reduce the vulnerability of operations to changes in interest rates, and actions in this regard are taken under the guidance of the Asset/Liability Management

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Committee (“ALCO”) of the Board of Directors. The ALCO reviews the maturities and re-pricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.

The Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models to measure the impact of longer-term asset and liability mismatches beyond two years. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity, as a percentage of assets with rate shocks of 200 basis points at March 31, 2022, is a decrease of 1.1 percent in a rising-rate environment and a decrease of 4.3 percent in a falling-rate environment. The variances in the EVPE at March 31, 2022 are within the Board-approved guidelines of +/- 20.0 percent. In a falling rate environment with a rate shock of 200 basis points, benchmark interest rates are assumed to have floors of 0.00%. At December 31, 2021, the economic value of equity as a percentage of assets with rate shocks of 200 basis points was an increase of 4.3 percent in a rising-rate environment and a decrease of 12.3 percent in a falling-rate environment.

Liquidity

Consolidated Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Our liquidity is monitored by management and the Board of Directors, which reviews historical funding requirements, our current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient asset-based liquidity to cover potential funding requirements in order to minimize our dependence on volatile and potentially unstable funding markets.

The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit inflows and outflows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Consolidated Statement of Cash Flows provides detail on the Company’s sources and uses of cash, as well as an indication of the Company’s ability to maintain an adequate level of liquidity. At March 31, 2022, the balance of cash and cash equivalents was $187.7 million, a decrease of $57.1 million from December 31, 2021. A discussion of the cash provided by and used in operating, investing and financing activities follows.

Operating activities provided $7.6 million and $11.6 million of net cash for the three months ended March 31, 2022 and 2021, respectively. The primary sources of funds were net income from operations and adjustments to net income, such as the proceeds from the sale of mortgage and SBA loans held for sale, partially offset by originations of mortgage and SBA loans held for sale.

Investing activities used $76.4 million and $29.6 million in net cash for the three months ended March 31, 2022 and 2021, respectively. Cash was primarily used to purchase investment securites, and fund new loans.

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Securities. The Consolidated Bank’s available for sale investment portfolio amounted to $77.9 million and $56.5 million at March 31, 2022 and December 31, 2021, respectively. This excludes the Parent Company’s securities discussed under the heading “Parent Company Liquidity” below. Projected cash flows from securities based on current estimates over the next twelve months are $9.6 million.

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Loans. The SBA loans held for sale portfolio amounted to $25.3 million and $27.4 million at March 31, 2022 and December 31, 2021, respectively. Sales of these loans provide an additional source of liquidity for the Company.

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Outstanding Commitments. The Company was committed to advance approximately $438.7 million to its borrowers as of March 31, 2022, compared to $399.8 million at December 31, 2021. At March 31, 2022, $200.7 million of these commitments expire within one year, compared to $170.1 million at December 31, 2021. The Company had $4.3 million in standby letters of credit at March 31, 2022 and December 31, 2021, which are included in the commitments amount noted above. The estimated fair value of these guarantees is not significant. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded.

Financing activities used $11.7 million and $38.2 million in net cash for the three months ended March 31, 2022 and 2021, primarily due an increase in the Company’s deposits.

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Deposits. As of March 31, 2022, deposits included $251.3 million of New Jersey Municipality deposits, as compared to $247.7 million at year end 2021. These deposits are generally short in duration and are very sensitive to price competition. The Company believes that the current level of these types of deposits is appropriate. Included in the portfolio were $236.7 million of deposits from 15 municipalities with account balances in excess of $5.0 million. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company.

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Borrowed Funds. Total FHLB borrowings amounted to $40.0 million as of March 31, 2022 and December 31, 2021. As a member of the Federal Home Loan Bank of New York, the Company can borrow additional funds based on the market value of collateral pledged. At March 31, 2022, pledging provided an additional $383.3 million in borrowing capacity from the FHLB.

Parent Company Liquidity

The Parent Company’s cash needs are funded by dividends paid by and rental payments on corporate headquarters from the Bank. Other than its investment in the Bank, Unity Risk Management, Inc. and Unity Statutory Trust II, the Parent Company does not actively engage in other transactions or business. Only expenses specifically for the benefit of the Parent Company are paid using its cash, which typically includes the payment of operating expenses, cash dividends on common stock and payments on trust preferred debt.

At March 31, 2022, the Parent Company had $2.4 million in cash and cash equivalents and $4.7 million in investment securities valued at fair market value, compared to $1.7 million and $5.0 million at December 31, 2021.

Regulatory Capital

On September 17, 2019, the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies) with less than $10 billion in total consolidated assets, implementing provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). Under the proposal, a qualifying community banking organization (“QCBO”) would be eligible to elect the community bank leverage ratio framework, or continue to measure capital under the existing Basel III requirements. The new rule, effective beginning January 1, 2020, allowed qualifying community banking organizations to opt into the new community bank leverage ratio (“CBLR”) in their call report beginning in the first quarter of 2020.

A QCBO is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:

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A leverage capital ratio of greater than 9.0%;

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Total consolidated assets of less than $10.0 billion;

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Total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets; and

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Total trading assets and trading liabilities of 5% or less of total consolidated assets.

The numerator of the CBLR is Tier 1 capital, as calculated under the Basel III rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions less assets deducted from Tier 1 capital.

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The Bank has opted into the CBLR, and is therefore not required to comply with the Basel III capital requirements.

The following table shows the CBLR ratio for the Company and the Bank at March 31, 2022 and at December 31, 2021:


	At March 31, 2022				At December 31, 2021
	Company		Bank		Company		Bank
CBLR	10.87	%	10.35	%	10.51	%	10.00	%

For additional information on regulatory capital, see Note 13 to the Consolidated Financial Statements.

Shareholders’ Equity

Shareholders’ equity increased $9.2 million to $214.9 million at March 31, 2022 compared to $205.7 million at

December 31, 2021, primarily due to net income of $9.1 million. Other items impacting shareholders’ equity

included $1.0 million in dividends paid on common stock, $813 thousand from the issuance of common stock under employee benefit plans, and $286 thousand in accumulated other comprehensive income net of tax. The issuance of common stock under employee benefit plans includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

Repurchase Plan

On February 4, 2021, the Company authorized the repurchase of up to 750 thousand shares, or approximately 7.5 percent of its outstanding common stock. The new plan took effect after the Company’s prior share repurchase program was completed and all authorized shares were repurchased on February 16, 2021. No shares were repurchased during the three months ended March 31, 2022. Currently, 571 thousand shares are available for repurchase. The timing and amount of additional purchases, if any, will depend upon a number of factors including the Company’s capital needs, the performance of its loan portfolio, the need for additional provisions for loan losses and the market price of the Company’s stock. A total of 70 thousand shares were repurchased at an average price of $19.29, during the same period in 2021.

Impact of Inflation and Changing Prices

The financial statements and notes thereto, presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the operations. Unlike most industrial companies, nearly all the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 3 Quantitative and Qualitative Disclosures about Market Risk

During the three months ended March 31, 2022, there have been no significant changes in the Company’s assessment of market risk as reported in Item 6 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. (See Interest Rate Sensitivity in Management’s Discussion and Analysis herein.)

ITEM 4 Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2022. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it

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files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.

No significant change in the Company’s internal control over financial reporting has occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s controls over financial reporting.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition, or the results of the operation of the Company.

ITEM 1A Risk Factors

Information regarding this item as of March 31, 2022 appears under the heading, “Risk Factors” within the Company’s Form 10-K for the year ended December 31, 2021.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

See the discussion under the heading “Shareholders Equity - Repurchase Plan” under Item 2 “Management’s Discussion and Analysis of Financial Condition and results of Operations.”

ITEM 3 Defaults upon Senior Securities – None

ITEM 4 Mine Safety Disclosures - N/A

ITEM 5 Other Information – None

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ITEM 6 Exhibits



(a) Exhibits		Description
	Exhibit 10.1	Joinder Agreement with Executive Vice President and Chief Financial Officer George Boyan dated February 24, 2022 (incoproated by reference from Exbihit 10.1 to the Registrant’s Current Report on Form 8-K filed February 24, 2022
	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Rule 13a 14(a) or Rule 15d 14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Rule 13a 14(a) or Rule 15d 14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a 14(b) or Rule 15d 14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q


Exhibit No.	Description
10.1	Joinder Agreement with Executive Vice President and Chief Financial Officer George Boyan dated February 24, 2022 (incoproated by reference from Exbihit 10.1 to the Registrant’s Current Report on Form 8-K filed February 24, 2022
31.1	Exhibit 31.1-Certification of James A. Hughes. Required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Exhibit 31.2-Certification of George Boyan. Required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Exhibit 32.1-Certification of James A. Hughes and George Boyan. Required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
**101.INS	Inline XBRL Instance Document
**101.SCH	Inline XBRL Taxonomy Extension Schema Document
**101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
**101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
**104	Cover Page Interactive Data File (formatted as Inline XBRL and contained as Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		UNITY BANCORP, INC.

Dated:	May 10, 2022	/s/ George Boyan
		George Boyan
		Executive Vice President and Chief Financial Officer