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 ~~September 30, 2022~~March 31, 2023

☐ 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 ⌧

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuand 240.10D-1(b) ◻

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of ~~October 31, 2022~~April 30, 2023 common stock, no par value: ~~10,545,312~~10,068,593 shares outstanding.

Table of Contents

Table of Contents

~~the three months ended September 30, 2022 and 2021~~
		Page #
PART I	CONSOLIDATED FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3

	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	4

	Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	5

	Consolidated Statements of Changes in Shareholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	76

	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	87

	Notes to the Consolidated Financial Statements	98

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4335

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	6154

ITEM 4	Controls and Procedures	6154

PART II	OTHER INFORMATION	6254

ITEM 1	Legal Proceedings	6254

ITEM 1A	Risk Factors	6254

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	6254

ITEM 3	Defaults upon Senior Securities	6255

ITEM 4	Mine Safety Disclosures	6255

ITEM 5	Other Information	6255

ITEM 6	Exhibits	6356

	EXHIBIT INDEX	6457

	Exhibit 31.1

	Exhibit 31.2

	Exhibit 32.1

	SIGNATURES	6558

Table of Contents

PART I CONSOLIDATED FINANCIAL INFORMATION

ITEM 1 Consolidated Financial Statements (Unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands)

September 30, 2022

December 31, 2021
ASSETS

Cash and due from banks

$
24,959

$
26,053
Interest-bearing deposits

138,421

218,765
Cash and cash equivalents

163,380

244,818
Securities:

Debt securities available for sale

92,500

56,480
Debt securities held to maturity

35,897

14,276
Equity securities with readily determinable fair values

8,474

8,566
Total securities

136,871

79,322
Loans:




SBA loans held for sale

36,338

27,373
SBA loans held for investment

30,747

36,075
SBA PPP loans

6,706

46,450
Commercial loans

1,106,059

931,726
Residential mortgage loans

533,737

409,355
Consumer loans

79,662

77,944
Residential construction loans

149,165

120,525
Total loans

1,942,414

1,649,448
Allowance for loan losses

(23,861)

(22,302)
Net loans

1,918,553

1,627,146
Premises and equipment, net

19,094

19,914
Bank owned life insurance ("BOLI")

26,634

26,608
Deferred tax assets

12,910

10,040
Federal Home Loan Bank ("FHLB") stock

14,398

3,550
Accrued interest receivable

11,385

9,586
Goodwill

1,516

1,516
Prepaid expenses and other assets

34,796

11,213
Total assets

$
2,339,537

$
2,033,713
LIABILITIES AND SHAREHOLDERS’ EQUITY



Liabilities:




Deposits:




Noninterest-bearing demand

$
497,752

$
529,227
Interest-bearing demand

267,558

244,073
Savings

682,756

694,161
Time, under $100,000

233,447

194,961
Time, $100,000 to $250,000

70,649

62,668
Time, $250,000 and over

44,435

33,791
Total deposits

1,796,597

1,758,881
Borrowed funds

280,000

40,000
Subordinated debentures

10,310

10,310
Accrued interest payable

294

129
Accrued expenses and other liabilities

22,102

18,664
Total liabilities

2,109,303

1,827,984
Shareholders’ equity:




Common stock

96,493

94,003
Retained earnings

148,174

123,037
Treasury stock

(11,633)

(11,633)
Accumulated other comprehensive (loss) income

(2,800)

322
Total shareholders’ equity

230,234

205,729
Total liabilities and shareholders’ equity

$
2,339,537

$
2,033,713

Shares issued

11,236

11,094
Shares outstanding

10,533

10,391
Treasury shares

703

703

~~Table of Contents~~


(In thousands)	March 31, 2023		December 31, 2022
ASSETS
Cash and due from banks	$	23,893	$	19,699
Interest-bearing deposits		103,194		95,094
Cash and cash equivalents		127,087		114,793
Securities:
Debt securities available for sale		94,113		95,393
Debt securities held to maturity		35,824		35,760
Equity securities with readily determinable fair values		8,327		9,793
Total securities		138,264		140,946
Loans:
SBA loans held for sale		23,314		27,928
SBA loans held for investment		39,370		38,468
SBA PPP loans		2,545		5,908
Commercial loans		1,205,642		1,187,543
Residential mortgage loans		619,140		605,091
Consumer loans		76,784		78,164
Residential construction loans		164,124		163,457
Total loans		2,130,919		2,106,559
Allowance for credit losses		(26,201)		(25,196)
Net loans		2,104,718		2,081,363
Premises and equipment, net		19,868		20,002
Bank owned life insurance ("BOLI")		26,856		26,776
Deferred tax assets, net		12,360		12,345
Federal Home Loan Bank ("FHLB") stock		18,688		19,064
Accrued interest receivable		14,314		13,403
Other real estate owned ("OREO"), net		176		—
Goodwill		1,516		1,516
Prepaid expenses and other assets		12,004		14,740
Total assets	$	2,475,851	$	2,444,948
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	450,058	$	494,184
Interest-bearing demand		289,451		276,218
Savings		560,711		591,826
Brokered time deposits		197,792		189,644
Time deposits		325,909		235,656
Total deposits		1,823,921		1,787,528
Borrowed funds		374,000		383,000
Subordinated debentures		10,310		10,310
Accrued interest payable		932		691
Accrued expenses and other liabilities		26,229		24,192
Total liabilities		2,235,392		2,205,721
Shareholders’ equity:
Common stock		98,197		97,204
Retained earnings		165,335		156,958
Treasury stock		(19,894)		(11,675)
Accumulated other comprehensive loss		(3,179)		(3,260)
Total shareholders’ equity		240,459		239,227
Total liabilities and shareholders’ equity	$	2,475,851	$	2,444,948

Shares issued		11,335		11,289
Shares outstanding		10,292		10,584
Treasury shares		1,043		705

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

Table of Contents

Unity Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands, except per share amounts)	2022		2021		2022		2021		2023		2022
INTEREST INCOME
Interest-bearing deposits	$	168	$	48	$	416	$	105	$	333	$	96
FHLB stock		93		41		176		157		331		33
Securities:
Taxable		1,397		292		3,164		837		1,739		652
Tax-exempt		18		8		34		26		19		6
Total securities		1,415		300		3,198		863		1,758		658
Loans:
SBA loans		1,083		864		2,933		2,423		1,404		923
SBA PPP loans		277		1,751		1,546		5,228		77		777
Commercial loans		14,017		11,280		37,928		32,490		17,401		11,497
Residential mortgage loans		5,912		4,606		15,284		14,640		8,109		4,390
Consumer loans		1,075		736		2,914		2,274		1,354		921
Residential construction loans		2,184		1,628		6,018		4,330		2,586		1,824
Total loans		24,548		20,865		66,623		61,385		30,931		20,332
Total interest income		26,224		21,254		70,413		62,510		33,353		21,119
INTEREST EXPENSE
Interest-bearing demand deposits		320		247		682		863		982		164
Savings deposits		878		390		1,635		1,241		1,953		345
Time deposits		600		659		1,499		3,293		2,709		480
Borrowed funds and subordinated debentures		688		235		1,199		922		3,799		226
Total interest expense		2,486		1,531		5,015		6,319		9,443		1,215
Net interest income		23,738		19,723		65,398		56,191		23,910		19,904
Provision for loan losses		1,517		—		2,526		500
Net interest income after provision for loan losses		22,221		19,723		62,872		55,691
Provision (benefit) for credit losses										108		(178)
Net interest income after provision (benefit) for credit losses										23,802		20,082
NONINTEREST INCOME
Branch fee income		336		294		892		858		235		275
Service and loan fee income		543		804		1,815		1,937		503		584
Gain on sale of SBA loans held for sale, net		—		—		852		741		309		852
Gain on sale of mortgage loans, net		280		968		1,231		3,785		244		521
BOLI income		170		138		494		399		80		163
Net security (losses) gains		(576)		202		(1,631)		535
Net security losses										(322)		(557)
Other income		357		403		2,446		1,175		368		401
Total noninterest income		1,110		2,809		6,099		9,430		1,417		2,239
NONINTEREST EXPENSE
Compensation and benefits		6,471		5,720		19,790		18,116		7,090		6,508
Processing and communications		708		747		2,166		2,303		804		752
Occupancy		702		654		2,205		1,991		770		775
Furniture and equipment		617		627		1,811		1,935		689		576
Professional services		221		315		1,060		1,035		427		447
Advertising		307		261		873		932		260		225
Other loan expenses		109		452		238		759		128		135
Deposit insurance		233		198		752		637		348		269
Director fees		240		189		698		600		217		233
Loan collection expenses		45		62		138		67		47		58
Other expenses		411		635		1,454		1,748		648		432
Total noninterest expense		10,064		9,860		31,185		30,123		11,428		10,410
Income before provision for income taxes		13,267		12,672		37,786		34,998		13,791		11,911
Provision for income taxes		3,325		3,213		9,285		8,625		3,504		2,803
Net income	$	9,942	$	9,459	$	28,501	$	26,373	$	10,287	$	9,108
Net income per common share – Basic	$	0.94	$	0.91	$	2.72	$	2.53	$	0.98	$	0.87
Net income per common share – Diluted	$	0.93	$	0.90	$	2.67	$	2.50	$	0.96	$	0.85
Weighted average common shares outstanding – Basic		10,522		10,372		10,491		10,412		10,538		10,446
Weighted average common shares outstanding – Diluted		10,714		10,507		10,694		10,546		10,686		10,664

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

Table of Contents

Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

For the three months ended

September 30, 2022

September 30, 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

$
13,267

$
3,325

$
9,942

$
12,672

$
3,213

$
9,459

Other comprehensive (loss) income

Debt securities available for sale:

Unrealized holding (losses) gains on securities arising during the period

(1,238)

(281)

(957)

481

122

359

Less: reclassification adjustment for (losses) gains on securities included in net income

(576)

(121)

(455)

198

42

156

Total unrealized (losses) gains on securities available for sale

(662)

(160)

(502)

283

80

203

Net unrealized gains from cash flow hedges:













Unrealized holding gains on cash flow hedges arising during the period

452

128

324

86

24

62

Total unrealized gains on cash flow hedges

452

128

324

86

24

62

Total other comprehensive (loss) income

(210)

(32)

(178)

369

104

265

Total comprehensive income

$
13,057

$
3,293

$
9,764

$
13,041

$
3,317

$
9,724


	For the three months ended
	March 31, 2023						March 31, 2022

			Income tax						Income tax
		Before tax		expense		Net of tax		Before tax		expense		Net of tax
(In thousands)	amount		(benefit)		amount		amount		(benefit)		amount
Net income	$	13,791		3,504		10,287	$	11,911		2,803		9,108
Other comprehensive income (loss) before reclassifications
Debt securities available for sale:
Unrealized holding gains (losses) on securities arising during the period		359		93		266		(1,627)		(375)		(1,252)
Less: reclassification adjustment for losses on securities included in net income		—		—		—		(557)		(118)		(439)
Total unrealized gains (losses) on securities available for sale		359		93		266		(1,070)		(257)		(813)
Net unrealized (losses) gains from cash flow hedges:
Unrealized holding (losses) gains on cash flow hedges arising during the period		(433)		(92)		(341)		1,533		434		1,099
Less: reclassification adjustment for gains on cash flow hedges included in net income		(198)		(42)		(156)		—		—		—
Total unrealized (losses) gains on cash flow hedges		(235)		(50)		(185)		1,533		434		1,099
Total other comprehensive income		124		43		81		463		177		286
Total comprehensive income	$	13,915	$	3,547	$	10,368	$	12,374	$	2,980	$	9,394

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

~~Table of Contents~~

~~Unity Bancorp, Inc.~~

~~Consolidated Statements of Comprehensive Income~~

~~(Unaudited)~~

For the nine months ended

September 30, 2022

September 30, 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

$
37,786

$
9,285

$
28,501

$
34,998

$
8,625

$
26,373

Other comprehensive (loss) income

Debt securities available for sale:

Unrealized holding (losses) gains on securities arising during the period

(6,875)

(1,612)

(5,263)

1,042

257

785

Less: reclassification adjustment for (losses) gains on securities included in net income

(1,630)

(342)

(1,288)

533

113

420

Total unrealized (losses) gains on securities available for sale

(5,245)

(1,270)

(3,975)

509

144

365

Adjustments related to defined benefit plan:













Amortization of prior service cost

—

—

—

332

94

238

Total adjustments related to defined benefit plan

—

—

—

332

94

238

Net unrealized gains from cash flow hedges:













Unrealized holding gains on cash flow hedges arising during the period

1,190

337

853

911

257

654

Total unrealized gains on cash flow hedges

1,190

337

853

911

257

654

Total other comprehensive (loss) income

(4,055)

(933)

(3,122)

1,752

495

1,257

Total comprehensive income

$
33,731

$
8,352

$
25,379

$
36,750

$
9,120

$
27,630

Table of Contents

Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

(Unaudited)


							Accumulated															Accumulated
							other					Total										other		Total
	Stock				Retained		comprehensive			Treasury		shareholders’		Common Stock				Retained		Treasury		comprehensive		shareholders’
(In thousands)	Shares		Amount		earnings		income (loss)		aa	stock		equity		Shares		Amount		earnings		stock		loss		equity
Balance, December 31, 2021	10,391		$	94,003	$	123,037	$	322		$	(11,633)	$	205,729
Balance, December 31, 2022														10,584		$	97,204	$	156,958	$	(11,675)	$	(3,260)	$	239,227
Net income	—	A		—		9,108		—			—		9,108	—	A		—		10,287		—		—		10,287
Other comprehensive income, net of tax	—			—		—		286			—		286	—			—		—		—		81		81
Dividends on common stock ($0.10 per share)	—			37		(1,045)		—			—		(1,008)
Dividends on common stock ($0.12 per share)														2			46		(1,261)		—		—		(1,215)
Effect of adopting Accounting Standards Update ("ASU") No. 2016-13 ("CECL")														—			—		(649)		—		—		(649)
Common stock issued & related tax effects (1)	102			813		—		—			—		813	44			947		—		—		—		947
Balance, March 31, 2022	10,493			94,853		131,100		608			(11,633)		214,928
Net income	—		$	—	$	9,451	$	—		$	—		9,451
Other comprehensive loss, net of tax	—	A		—		—		(3,230)			—		(3,230)
Dividends on common stock ($0.11 per share)	—			43		(1,157)		—			—		(1,114)
Common stock issued & related tax effects (1)	18			754		—		—			—		754
Balance, June 30, 2022	10,511			95,650		139,394		(2,622)			(11,633)		220,789
Net income	—			—		9,942		—			—		9,942
Other comprehensive loss, net of tax	—			—		—		(178)			—		(178)
Dividends on common stock ($0.11 per share)	—			41		(1,162)		—			—		(1,121)
Common stock issued & related tax effects (1)	22			802		—		—			—		802
Balance, September 30, 2022	10,533		$	96,493	$	148,174	$	(2,800)		$	(11,633)	$	230,234
Treasury stock purchased, at cost														(338)			—		—		(8,219)		—		(8,219)
Balance, March 31, 2023														10,292			98,197		165,335		(19,894)		(3,179)		240,459


							Accumulated															Accumulated
							other					Total										other			Total
	Stock				Retained		comprehensive		Treasury			shareholders’		Common Stock				Retained		Treasury		comprehensive			shareholders’
(In thousands)	Shares		Amount		earnings		(loss) income		stock		aa	equity		Shares		Amount		earnings		stock		income		aa	equity
Balance, December 31, 2020	10,456		$	91,873	$	90,669	$	(1,189)	$	(7,442)		$	173,911
Balance, December 31, 2021														10,391		$	94,003	$	123,037	$	(11,633)	$	322		$	205,729
Net income	—	A		—		8,496		—		—			8,496	—	A		—		9,108		—		—			9,108
Other comprehensive income, net of tax	—			—		—		655		—			655	—			—		—		—		286			286
Dividends on common stock ($0.08 per share)	—			30		(834)		—		—			(804)
Dividends on common stock ($0.10 per share)														—			37		(1,045)		—		—			(1,008)
Common stock issued & related tax effects (1)	36			277		—		—		—			277	102			813		—		—		—			813
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
Net income	—			—		8,418		—		—			8,418
Other comprehensive income, net of tax	—			—		—		337		—			337
Dividends on common stock ($0.09 per share)	—			33		(938)		—		—			(905)
Common stock issued & related tax effects (1)	34			597		—		—		—			597
Acquisition of treasury stock, at cost	(40)			—		—		—		(877)			(877)
Balance, June 30, 2021	10,416			92,810		105,811		(197)		(9,668)			188,756
Net income	—			—		9,459		—		—			9,459
Other comprehensive income, net of tax	—			—		—		265		—			265
Dividends on common stock ($0.09 per share)	—			34		(933)		—		—			(899)
Common stock issued & related tax effects (1)	32			565		—		—		—			565
Acquisition of treasury stock, at cost	(85)			—		—		—		(1,879)			(1,879)
Balance, September 30, 2021	10,363		$	93,409	$	114,337	$	68	$	(11,547)		$	196,267
Balance, March 31, 2022														10,493			94,853		131,100		(11,633)		608			214,928

(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 nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2023		2022
OPERATING ACTIVITIES:
Net income	$	28,501	$	26,373	$	10,287	$	9,108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,526		500
Provision (benefit) for credit losses						108		(178)
Net amortization of purchase premiums and discounts on securities		26		180		36		11
Depreciation and amortization		2,112		1,125		(738)		447
PPP deferred fees and costs		(1,376)		368		(68)		(686)
Deferred income tax benefit		(2,064)		(2,300)
Deferred income tax (benefit) expense						91		(63)
Net realized security gains		—		(47)		(222)		—
Stock compensation expense		1,239		1,189		417		394
Valuation writedowns on OREO						113		—
Gain on sale of mortgage loans, net		(1,231)		(4,953)		(244)		(521)
Gain on sale of SBA loans held for sale, net		(852)		(741)		(309)		(852)
Origination of mortgage loans sold		(64,096)		(245,933)
Origination of SBA loans held for sale		(20,108)		(15,221)
Proceeds from sale of mortgage loans, net		65,327		250,886
Proceeds from sale of SBA loans held for sale, net		7,609		6,466
BOLI income		(494)		(399)		(80)		(163)
Net change in other assets and liabilities		(18,830)		2,681		4,359		12,114
Net cash (used in) provided by operating activities		(1,711)		20,174
Net cash provided by operating activities						13,750		19,611
INVESTING ACTIVITIES
Purchases of securities held to maturity		(26,748)		(10,248)		—		(18,666)
Purchase of equity securities		(1,539)		(2,500)
Purchases of equity securities						(126)		—
Purchases of securities available for sale		(45,249)		(12,251)		—		(24,245)
Net changes in FHLB Stock		(10,848)		6,191
Proceeds from redemption of FHLB stock, at cost						376		9
Maturities and principal payments on securities held to maturity		5,185		5,094		—		2,584
Maturities and principal payments on debt securities available for sale		3,901		11,434
Proceeds from sales of debt securities available for sale		—		7,048
Maturities, calls and principal payments on securities available for sale						1,639		1,756
Proceeds from sales of equity securities		—		53		1,269		—
Net decrease in SBA PPP loans		41,123		35,998		3,431		18,521
Net increase in loans		(321,382)		(64,936)		(26,339)		(68,439)
Proceeds from BOLI		468		326		—		119
Proceeds from sale of premises and equipment		—		20
Purchases of premises and equipment		(240)		(1,105)		(195)		(41)
Net cash used in investing activities		(355,329)		(24,876)		(19,945)		(88,402)
FINANCING ACTIVITIES
Net increase in deposits		37,716		148,226		36,393		12,288
Net changes from borrowings		240,000		(140,000)
Repayments of borrowings						(9,000)		—
Proceeds from exercise of stock options		1,395		445		754		639
Fair market value of shares withheld to cover employee tax liability		(266)		(195)		(224)		(220)
Dividends on common stock		(3,243)		(2,608)		(1,215)		(1,008)
Purchase of treasury stock		—		(4,105)		(8,219)		—
Net cash provided by financing activities		275,602		1,763		18,489		11,699
Decrease in cash and cash equivalents		(81,438)		(2,939)
Cash and cash equivalents, beginning of period		244,818		219,311
Increase (decrease) in cash and cash equivalents						12,294		(57,092)
Cash and cash equivalents, beginning of year						114,793		244,818
Cash and cash equivalents, end of period	$	163,380	$	216,372	$	127,087	$	187,726
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid	$	4,851	$	6,409	$	9,202	$	1,213
Income taxes paid		9,357		10,290		3,557		2,145
Noncash investing activities:
Establishment of lease liability and right-of-use asset		582		1,803		—		582
Capitalization of servicing rights	$	131	$	125		159		131
Transfer of loans to OREO						288		—

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)

~~September 30, 2022~~March 31, 2023

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 (“GAAP”) 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~~credit 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~~credit losses is adequate. While management uses available information to recognize credit losses, ~~on loans,~~ future additions to the allowance for ~~loan~~credit losses may be necessary based on changes in economic conditions.

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, that in the opnion of management, are necessary for the fair presentation of interim results. The results of operations for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, 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. GAAP 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.~~2022.

Risks and Uncertainties

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.

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, although banks have continued to submit rates for the calculation of LIBOR in 2022, 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 United Kingdom or elsewhere. Similarly, banking regulators in the United States have required insured depository institutions in the United States to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022, Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate, and for the Federal Reserve to adopt regulation by September of 2022 implementing this change. It is unclear at the time what effect these changes may have on the values of 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.

~~Table of Contents~~

Overall, the markets and customers serviced by the Company may be significantly impacted by ongoing macro-economic trends, such as inflation and recessionary pressures created by a higher interest rate environment. The Company ~~assess~~assesses the impact of inflation on an ongoing basis.

~~Other-Than-Temporary Impairment~~Recent industry events transpired, including the failures of Silicon Valley Bank (“SVB”) headquartered in Santa Clara, California and Signature Bank headquartered in New York, New York in March 2023, have led to uncertainty and concerns regarding the liquidity positions of the banking sector. SVB was placed into receivership on March 10, 2023, marking the second largest bank failure in U.S. history. Signature Bank was placed into receivership on March 12, 2023, marking the third largest bank failure in U.S. history.

Both banks appear to have had high ratios of uninsured deposits to total deposits, when compared to industry average. These failures underscore the importance of maintaining access to diverse sources of funding. The Company’s deposit base includes a combination of consumer, commercial and public funds deposits, without a high level of industry concentration.

Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the rising interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. The Company believes the sources of liquidity presented in the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements are sufficient to meet its needs on the balance sheet date.

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An unexpected influx of withdrawals of deposits could adversely impact the Company's ability to rely on organic deposits to primarily fund its operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources may include proceeds from Federal Home Loan Bank advances, sales of investment securities and loans, federal funds lines of credit from correspondent banks and out-of market time deposits.

Such reliance on secondary funding sources could increase the Company's overall cost of funding and thereby reduce net income. While the Company believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures or other investments, or liquidating assets.

New Accounting Guidance adopted in the First Quarter 2023

Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” amends the accounting guidance on the impairment of financial instruments. The Financial Accounting Standards Board (“FASB”) issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new current expected credit loss (“CECL”) model. Under the new guidance, the Company is required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loans and held to maturity debt securities. CECL also applies to certain off-balance sheet exposures.

The Company adopted ASU 2016-13 on January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company established a governance structure to implement the CECL accounting guidance and has developed a ~~process~~methodology and set of models to be used upon adoption. At adoption, the Company recorded $0.8 million increase to its allowance for credit losses, entirely related to loans. Further the Company increased its reserve for unfunded credit commitments by $0.1 million. The reserve for unfunded credit commitments is recorded in ~~place to identify~~Accrued expenses and other liabilities on the consolidated balance sheet. These increases in reserves were recorded through retained earnings and was $0.6 million, net of tax.

For available for sale 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~~an unrealized loss position, the Company first asseses 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 intentit intends to sell, ~~a security~~ or ~~whether it~~ is more likely than not ~~the Company~~that it 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~~basis. If either of the criteria regarding intent ~~to hold the security for a forecasted period of time that allows for the recovery in value.~~

~~Management assesses its intent~~or requirement to sell ~~or whether it~~ is ~~more likely than not that it will be required to sell a security before recovery of its~~met, the securiy’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is 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~~than amortized cost ~~basis,~~and adverse conditions related to the ~~amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all~~security, among other factors. ~~The~~If this assessment indicates that a credit loss ~~component is recognized in earnings and is the difference between the security’s amortized cost basis and~~exists, the present value of ~~its~~cash flows expected ~~future cash flows. The remaining difference between~~to be collected from the ~~security’s fair value and~~security are compared to the amortized cost basis of the security. If the present value of ~~future expected~~the cash flows expected to be collected is ~~due to factors~~less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that ~~are~~the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit ~~related and~~losses is recognized in other comprehensive ~~income.~~ income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses.

For other assets within the scope of the new CECL accounting guidance, such as held to maturity debt securities, ~~where~~available for sale securities and other receivables, management ~~has~~noted the ~~intent~~impact from adoption to ~~sell,~~be inconsequential. Additionally, the ~~amount~~Company noted the adoption of CECL had no significant impact on regulatory capital ratios of the ~~impairment is reflected~~Company and/or the Bank.

ASU 2022-01, “Derivatives and Hedging (Topic 815)”: ASU 2022-01 was issued to clarify the guidance in ~~earnings as realized losses.~~

~~The present~~ASC 815 on fair value hedge accounting of ~~expected future cash flows is determined using the best estimate cash flows discounted at the effective~~ interest rate ~~implicit to~~risk for portfolios and financial assets. Among other things, 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 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.amended

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~~Valuation reserves are~~guidance established ~~against certain deferred tax assets when it~~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 ~~more likely than not~~effective January 1, 2023. The Company adopted the guidance effective January 1, 2023, noting no material impact.

ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326)”: ASU 2022-02 eliminates the guidance on troubled debt restructurings (“TDRs”) 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 requires that entities disclose if the ~~deferred tax assets will not be realized. Increases~~modifications result in a new loan or ~~decreases~~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 adopted ASU 2022-02 effective January 1, 2023, noting no material impact.

New Accounting Guidance issued in the ~~valuation reserve are charged or credited~~First Quarter 2023

There were no material ASUs 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 recognizedCompany issued 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 resolutionfirst quarter 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.~~2023.

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. Common shares include vested and unvested restricted shares.

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~~treasury stock method.

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


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands, except per share amounts)	2022		2021		2022		2021		2023		2022
Net income	$	9,942	$	9,459	$	28,501	$	26,373	$	10,287	$	9,108
Weighted average common shares outstanding - Basic		10,522		10,372		10,491		10,412		10,538		10,446
Plus: Potential dilutive common stock equivalents		192		135		203		134		148		218
Weighted average common shares outstanding - Diluted		10,714		10,507		10,694		10,546		10,686		10,664
Net income per common share - Basic	$	0.94	$	0.91	$	2.72	$	2.53	$	0.98	$	0.87
Net income per common share - Diluted		0.93		0.90		2.67		2.50		0.96		0.85
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive		—		270		—		234		—		—

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NOTE 4. Other Comprehensive Income (Loss)

The following tables show the changes in other comprehensive (loss) income ~~(loss)~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ net of tax:

For the three months ended September 30, 2022

For the three months ended March 31, 2023

Adjustments

Accumulated

Net unrealized

related to

Net unrealized

other

Net unrealized

other

losses on

defined benefit

gains from

comprehensive

(losses) gains on

gains (losses) from

comprehensive

(In thousands)

securities

plan

cash flow hedges

loss

securities

cash flow hedges

income (loss)

Balance, beginning of period

(3,444)

—

822

(2,622)

(4,381)

1,121

(3,260)

Other comprehensive income before reclassifications

(957)

—

324

(633)

266

(341)

(75)

Less amounts reclassified from accumulated other comprehensive loss

(455)

—

(455)

—

(156)

Period change

(502)

—

324

(178)

266

(185)

Balance, end of period

(3,946)

—

1,146

(2,800)

(4,115)

936

(3,179)


	For the three months ended September 30, 2021								For the three months ended March 31, 2022
			Adjustments		Net unrealized		Accumulated				Net unrealized		Accumulated
	Net unrealized		related to		(losses) gains		other		Net unrealized		gains		other
	(losses) gains on		defined benefit		from cash flow		comprehensive		gains (losses) on		from cash flow		comprehensive
(In thousands)	securities		plan		hedges		(loss) income		securities		hedges		income (loss)
Balance, beginning of period	$	(52)	$	—	$	(145)	$	(197)	$	29	$	293	$	322
Other comprehensive income before reclassifications		359		—		62		421
Less amounts reclassified from accumulated other comprehensive income		156		—		—		156
Other comprehensive (loss) income before reclassifications										(1,252)		1,099		(153)
Less amounts reclassified from accumulated other comprehensive loss										(439)		—		(439)
Period change		203		—		62		265		(813)		1,099		286
Balance, end of period	$	151	$	—	$	(83)	$	68	$	(784)	$	1,392	$	608

For the nine months ended September 30, 2022

Adjustments

Net unrealized

Accumulated

Net unrealized

related to

gains

other

gains (losses) on

defined benefit

from cash flow

comprehensive
(In thousands)

securities

plan

hedges

income (loss)
Balance, beginning of period

$
29

$
—

$
293

$
322
Other comprehensive (loss) income before reclassifications

(5,263)

—

853

(4,410)
Less amounts reclassified from accumulated other comprehensive loss

(1,288)

—

—

(1,288)
Period change

(3,975)

—

853

(3,122)
Balance, end of period

$
(3,946)

$
—

$
1,146

$
(2,800)

For the nine months ended September 30, 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) income
Balance, beginning of period

$
(214)

$
(238)

$
(737)

$
(1,189)
Other comprehensive income before reclassifications

785

—

654

1,439
Less amounts reclassified from accumulated other comprehensive income (loss)

420

(238)

—

182
Period change

365

238

654

1,257
Balance, end of period

$
151

$
—

$
(83)

$
68

~~Table of Contents~~

NOTE 5. 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.

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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~~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.

●

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

~~Table of Contents~~

externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of ~~September 30, 2022,~~March 31, 2023, the fair value of the Company’s AFS debt securities portfolio was ~~$92.5~~$94.1 million. Most of the Company’s AFS debt securities were classified as Level 2 assets at ~~September 30, 2022.~~March 31, 2023. 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 ~~September 30, 2022.~~March 31, 2023. The valuation of these corporate bonds is determined using broker quotes or third-party vendor prices ~~or other valuation techniques, such as discounted cash flow techniques.~~that are not adjusted by management. 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.

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).

As of ~~September 30, 2022,~~March 31, 2023, the fair value of the Company’s equity securities portfolio was ~~$8.5~~$8.3 million.

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All of the Company’s equity securities were classified as Level 2 assets at ~~September 30, 2022.~~March 31, 2023. 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 ~~September 30, 2022,~~March 31, 2023, as compared to the periods ended December 31, ~~2021~~2022 and ~~September 30, 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.~~March 31, 2022.

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, 2023 and December 31, 2022:

Fair Value Measurements at March 31, 2023

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

16,398

—

16,398

—

State and political subdivisions

593

—

593

—

Residential mortgage-backed securities

15,410

—

15,410

—

Corporate and other securities

61,712

—

57,202

4,510

Total debt securities available for sale

94,113

—

89,603

4,510

Equity securities with readily determinable fair values

8,327

—

8,327

—

Total equity securities

8,327

—

8,327

—

Interest rate swap agreements

1,302

—

1,302

—

Total swap agreements

1,302

—

1,302

—

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~~The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:~~


	Fair value Measurements at December 31, 2022
			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	$	16,305	$	—	$	16,305	$	—
State and political subdivisions		613		—		613		—
Residential mortgage-backed securities		15,475		—		15,475		—
Corporate and other securities		63,000		—		58,325		4,675
Total debt securities available for sale	$	95,393	$	—	$	90,718	$	4,675

Equity securities with readily determinable fair values		9,793		—		9,793		—
Total equity securities	$	9,793	$	—	$	9,793	$	—

Interest rate swap agreements		1,537		—		1,537		—
Total swap agreements	$	1,537	$	—	$	1,537	$	—

Fair Value Measurements at September 30, 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

$
17,315

$
—

$
17,315

$
—
State and political subdivisions

$
615

$
—

$
615

$
—
Residential mortgage-backed securities

16,423

—

16,423

—
Corporate and other securities

58,147

—

53,403

4,744
Total debt securities available for sale

$
92,500

$
—

$
87,756

$
4,744

Equity securities with readily determinable fair values

8,474

—

8,474

—
Total equity securities

$
8,474

$
—

$
8,474

$
—

Loans held for sale

40,367

—

40,367

—
Total loans held for sale

$
40,367

$
—

$
40,367

$
—

Interest rate swap agreements

1,598

—

1,598

—
Total swap agreements

$
1,598

$
—

$
1,598

$
—

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

$
—

~~Table of Contents~~

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 September 30, 2022 Using

Fair Value Measurements at March 31, 2023

Quoted Prices

Significant

Quoted Prices

Significant

in Active

Other

Significant

in Active

Other

Significant

Assets/Liabilities

Markets for

Observable

Unobservable

Net Credit

Assets/Liabilities

Markets for

Observable

Unobservable

Measured at Fair

Identical Assets

Inputs

During

Measured at Fair

Identical Assets

Inputs

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Value

(Level 1)

(Level 2)

(Level 3)

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

8,111

—

8,111

(1,566)

Collateral-dependent loans & OREO

9,984

—

9,984

Fair Value Measurements at December 31, 2021 Using

Fair Value Measurements at December 31, 2022

Quoted Prices

Significant

Quoted Prices

Significant

in Active

Other

Significant

Net (Credit)

in Active

Other

Significant

Assets/Liabilities

Markets for

Observable

Unobservable

Provision

Assets/Liabilities

Markets for

Observable

Unobservable

Measured at Fair

Identical Assets

Inputs

During

Measured at Fair

Identical Assets

Inputs

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Value

(Level 1)

(Level 2)

(Level 3)

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

8,928

—

8,928

(1,284)

Collateral-dependent loans

8,803

—

8,803

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

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from nonaccrual status generally when the borrower makes ~~three~~six 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~~individually evaluated loans is included in the allowance for ~~loan~~credit losses in the consolidated balance sheets. At ~~September 30, 2022,~~March 31, 2023, the valuation allowance for impaired loans was ~~$1.3~~$1.7 million, compared to ~~$2.8~~$1.8 million at December 31, ~~2021.~~2022.

~~Table of Contents~~

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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 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).

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.

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

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At March 31, 2023, the Bank had standby letters of credit outstanding of $5.8 million, as compared to $5.6 million at December 31, 2022. The fair value of these commitments is nominal.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments presented as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

September 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Fair value

Carrying

Estimated

Carrying

Estimated

Fair value

Carrying

Estimated

Carrying

Estimated

(In thousands)

level

amount

fair value

amount

fair value

level

amount

fair value

amount

fair value

Financial assets:

Cash and cash equivalents

Level 1

163,380

244,818

Level 1

127,087

114,793

Securities (1)

Level 2

136,871

131,710

79,322

79,275

Level 2

138,264

132,272

140,946

133,764

SBA loans held for sale

Level 2

36,338

40,367

27,373

31,014

Level 2

23,314

25,031

27,928

30,141

Loans, net of allowance for loan losses (2)

Level 2

1,882,215

1,807,100

1,599,773

1,605,248

Loans, net of allowance for credit losses (2)

Level 2

2,081,404

2,022,666

2,053,435

1,990,010

Financial liabilities:

Deposits

Level 2

1,796,597

1,781,045

1,758,881

1,755,670

Level 2

1,823,921

1,810,997

1,787,528

1,772,270

Borrowed funds and subordinated debentures

Level 2

290,310

288,272

50,310

50,842

Level 2

384,310

382,585

393,310

391,312

(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~~$5.3 million and market values of ~~$4.9~~$4.7 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 ~~$8.1~~$9.8 million and ~~$8.9~~$8.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 6. Securities

This table provides the major components of debt securities available for sale ("AFS"), and held to maturity (“HTM”~~) and equity securities with readily determinable fair values ("equity securities"~~) at amortized cost and estimated fair value at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022								December 31, 2021								March 31, 2023								December 31, 2022
			Gross		Gross						Gross		Gross						Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated
(In thousands)	cost		gains		losses		fair value		cost		gains		losses		fair value		cost		gains		losses		fair value		cost		gains		losses		fair value
Available for sale:
U.S. Government sponsored entities	$	17,852	$	—	$	(537)	$	17,315	$	—	$	—	$	—	$	—	$	16,969	$	—	$	(571)	$	16,398	$	16,961	$	—	$	(656)	$	16,305
State and political subdivisions		637		—		(22)		615		996		6		(8)		994		633		—		(40)		593		635		—		(22)		613
Residential mortgage-backed securities		17,713		35		(1,325)		16,423		9,485		277		(13)		9,749		16,734		31		(1,355)		15,410		17,097		32		(1,654)		15,475
Corporate and other securities		61,505		—		(3,358)		58,147		45,961		164		(388)		45,737		65,213		121		(3,622)		61,712		66,495		106		(3,601)		63,000
Total debt securities available for sale	$	97,707	$	35	$	(5,242)	$	92,500	$	56,442	$	447	$	(409)	$	56,480	$	99,549	$	152	$	(5,588)	$	94,113	$	101,188	$	138	$	(5,933)	$	95,393
Held to maturity:
U.S. Government sponsored entities	$	28,000	$	—	$	(3,950)	$	24,050	$	10,000	$	—	$	(67)	$	9,933	$	28,000	$	—	$	(4,222)	$	23,778	$	28,000	$	—	$	(5,310)	$	22,690
State and political subdivisions		1,100		29		—		1,129		—		—		—		—		1,128		74		—		1,202		1,115		67		—		1,182
Residential mortgage-backed securities		6,797		—		(1,242)		5,555		4,276		28		(8)		4,296		6,696		—		(1,844)		4,852		6,645		—		(1,939)		4,706
Total securities held to maturity	$	35,897	$	29	$	(5,192)	$	30,734	$	14,276	$	28	$	(75)	$	14,229	$	35,824	$	74	$	(6,066)	$	29,832	$	35,760	$	67	$	(7,249)	$	28,578
Equity securities:
Total equity securities	$	9,702	$	150	$	(1,378)	$	8,474	$	8,163	$	486	$	(83)	$	8,566

This table provides the remaining contractual maturities within the investment portfolios. The carrying value of securities at ~~September 30, 2022~~March 31, 2023 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								Total carrying				After one through		After five through				Total carrying
		Within one year		five years		ten years		After ten years		value		Within one year		five years		ten years		After ten years		value
(In thousands)		Amount		Amount		Amount		Amount		Amount
Available for sale at fair value:
U.S. Government sponsored entities	$	1,382	$	15,933	$	—	$	—	$	17,315	$	1,218	$	15,180	$	—	$	—	$	16,398
State and political subdivisions		200		160		—		255		615		201		160		—		232		593
Residential mortgage-backed securities		8		468		1,098		14,849		16,423		2		358		986		14,064		15,410
Corporate and other securities		—		4,961		14,249		38,937		58,147		—		12,365		12,642		36,705		61,712
Total debt securities available for sale	$	1,590	$	21,522	$	15,347	$	54,041	$	92,500	$	1,421	$	28,063	$	13,628	$	51,001	$	94,113
Held to maturity at cost:
U.S. Government sponsored entities	$	—	$	—	$	3,000	$	25,000	$	28,000	$	—	$	—	$	3,000	$	25,000	$	28,000
State and political subdivisions		—		—		—		1,100		1,100		—		—		—		1,128		1,128
Residential mortgage-backed securities		—		—		—		6,797		6,797		—		—		—		6,696		6,696
Total securities held to maturity	$	—	$	—	$	3,000	$	32,897	$	35,897	$	—	$	—	$	3,000	$	32,824	$	35,824

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The fair value of debt securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are as follows:

September 30, 2022

March 31, 2023

Less than 12 months

12 months and greater

Total

Less than 12 months

12 months and greater

Total

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

Estimated

Unrealized

(In thousands)

fair value

loss

fair value

loss

fair value

loss

fair value

loss

fair value

loss

fair value

loss

Available for sale:

U.S. Government sponsored entities

15,933

(505)

1,428

(32)

17,361

(537)

15,905

(567)

493

(4)

16,398

(571)

State and political subdivisions

160

(5)

255

(17)

415

(22)

—

393

(40)

393

(40)

Residential mortgage-backed securities

15,763

(1,271)

437

(54)

16,200

(1,325)

8,623

(665)

6,647

(690)

15,270

(1,355)

Corporate and other securities

42,823

(2,153)

15,323

(1,205)

58,146

(3,358)

13,166

(466)

45,925

(3,156)

59,091

(3,622)

Total temporarily impaired securities

74,679

(3,934)

17,443

(1,308)

92,122

(5,242)

Total

37,694

(1,698)

53,458

(3,890)

91,152

(5,588)

Held to maturity:

U.S. Government sponsored entities

20,361

(2,639)

3,689

(1,311)

24,050

(3,950)

10,394

(606)

13,384

(3,616)

23,778

(4,222)

Residential mortgage-backed securities

5,555

(1,242)

—

5,555

(1,242)

150

(72)

4,702

(1,772)

4,852

(1,844)

Total temporarily impaired securities

25,916

(3,881)

3,689

(1,311)

29,605

(5,192)

Total

10,544

(678)

18,086

(5,388)

28,630

(6,066)


	December 31, 2021												December 31, 2022
	Less than 12 months				12 months and greater				Total				Less than 12 months				12 months and greater				Total

	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands)	fair value		loss		fair value		loss		fair value		loss		fair value		loss		fair value		loss		fair value		loss
Available for sale:
U.S. Government sponsored entities													$	15,817	$	(622)	$	1,432	$	(34)	$	17,249	$	(656)
State and political subdivisions	$	370	$	(8)	$	—	$	—	$	370	$	(8)		160		(5)		253		(17)		413		(22)
Residential mortgage-backed securities		1,821		(13)		—		—		1,821		(13)		14,023		(1,448)		1,311		(206)		15,334		(1,654)
Corporate and other securities		17,281		(19)		8,394		(369)		25,675		(388)		23,445		(966)		31,948		(2,635)		55,393		(3,601)
Total temporarily impaired securities	$	19,472	$	(40)	$	8,394	$	(369)	$	27,866	$	(409)
Total temporarily impaired AFS securities													$	53,445	$	(3,041)	$	34,944	$	(2,892)	$	88,389	$	(5,933)
Held to maturity:
U.S. Government sponsored entities	$	9,933	$	(67)	$	—	$	—	$	9,933	$	(67)	$	15,659	$	(2,341)	$	7,031	$	(2,969)	$	22,690	$	(5,310)
Residential mortgage-backed securities		823		(8)		—		—		823		(8)		4,707		(1,939)		—		—		4,707		(1,939)
Total temporarily impaired securities	$	10,756	$	(75)	$	—	$	—	$	10,756	$	(75)
Total temporarily impaired HTM securities													$	20,366	$	(4,280)	$	7,031	$	(2,969)	$	27,397	$	(7,249)

Unrealized losses in each of the categories presented in the tables above were primarily driven by market interest rate fluctuations. Residential mortgage-backed securities are guaranteed by either Ginnie Mae, Freddie Mac or Fannie Mae.

Allowance for Credit Losses

The Company has zero-loss expectation for certain securities within the held to maturity and available for sale portfolios, and therefore is not required to estimate an allowance for credit losses related to these securities under the CECL standard. The Company does not provide credit quality indicators for held to maturity securities that have zero-loss expectation. After an evaluation of quantitative factors, the following securities types are believed to qualify for this exclusion: U.S Government sponsored entities, residential mortgage-backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac.

Management recognized no impairment for held to maturity debt securities during the three months ended March 31, 2023 and 2022. There was no allowance for credit losses for held to maturity debt securities at March 31, 2023 and 2022.

Available for sale debt securities in unrealized loss positions are evaluated for impairment on a quarterly basis. The Company has evaluated available for sale securities that are in an unrealized loss position and has determined that the declines in fair value are attributable to market volatility, not credit quality or other factors. Management recognized no

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impairment during the three months ended March 31, 2023 and 2022. There was no allowance for credit losses for available for sale debt securities at March 31, 2023 and 2022.

Realized Gains and Losses on Debt Securities

~~Gross realized gains and losses on debt securities for the three and nine months ended September 30, 2022 and 2021 are detailed below:~~

~~The net~~Net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were no realized gains or losses on available ~~for~~ sale ~~or held to maturity~~securities three months ended March 31, 2023 and March 31, 2022. There was no gross realized ~~gains~~gain or loss for held for maturity debt securities during the three ~~and nine~~ months ended ~~September 30, 2022, compared to $43 thousand of gross realized gains during the nine months ended in 2021. There were no gross realized losses for the three~~March 31, 2023 and ~~nine months ended September 30, 2022, or 2021.~~2022.

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.

~~Table of Contents~~

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Net unrealized (losses) gains recognized during the period on equity securities	$	(576)	$	198	$	(1,631)	$	488
Net gains recognized during the period on equity securities sold during the period		—		4		—		4
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date	$	(576)	$	202	$	(1,631)	$	492
Net unrealized losses occurring during the period on equity securities									$	(544)	$	(557)
Net realized gains recognized during the period on equity securities sold during the period										222		—
Net losses recognized during the reporting period on equity securities									$	(322)	$	(557)

NOTE 7. 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


(In thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
SBA loans held for investment	$	30,747	$	36,075	$	39,370	$	38,468
SBA PPP loans		6,706		46,450		2,545		5,908
Commercial loans
SBA 504 loans		36,852		27,479		34,678		35,077
Commercial other		120,826		109,903		117,428		117,566
Commercial real estate		828,415		704,674		907,260		903,126
Commercial real estate construction		119,966		89,670		146,276		131,774
Residential mortgage loans		533,737		409,355		619,140		605,091
Consumer loans
Home equity		68,113		65,380		68,071		68,310
Consumer other		11,549		12,564		8,713		9,854
Residential construction loans		149,165		120,525		164,124		163,457
Total loans held for investment	$	1,906,076	$	1,622,075	$	2,107,605	$	2,078,631
SBA loans held for sale		36,338		27,373		23,314		27,928
Total loans	$	1,942,414	$	1,649,448	$	2,130,919	$	2,106,559

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

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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 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

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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”)~~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.~~occur.

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"). As an existing SBA 7(a) lender, the Company opted to participate in the program. The PPP program was renewed in 2021. Applications for the renewed PPP loan program started on January 13, 2021, and were available until March 31, 2021.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. 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. 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.

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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

~~Table of Contents~~

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”, sponsored by Upgrade, 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, to purchase consumer unsecured loans. This loan product is 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.

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~~the Company initiates 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 commercial 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

The Company places all SBA 7(a) and commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Pass: 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: These loans have a potential weakness that deserves management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Loss: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Once a borrower is deemed incapable of repayment of unsecured debt, the loan is termed a “Loss”, and charged off immediately.

~~Table of Contents~~

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 September 30, 2022, there were $2.3 million of residential consumer loans in the process of foreclosure, compared to $106 thousand at December 31, 2021.~~

~~The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of September 30, 2022:~~

September 30, 2022

SBA & Commercial loans - Internal risk ratings
(In thousands)

Pass

Special mention

Substandard

Total
SBA loans held for investment

$
29,503

$
420

$
824

$
30,747
SBA PPP loans

6,706

—

—

6,706
Commercial loans








SBA 504 loans

36,852

—

—

36,852
Commercial other

113,245

6,361

1,220

120,826
Commercial real estate

816,121

9,475

2,819

828,415
Commercial real estate construction

119,966

—

—

119,966
Total commercial loans

1,086,184

15,836

4,039

1,106,059
Total SBA and commercial loans

$
1,122,393

$
16,256

$
4,863

$
1,143,512




Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)



Performing

Nonperforming

Total
Residential mortgage loans

$
530,333

$
3,404

$
533,737
Consumer loans




Home equity

68,113

—

68,113
Consumer other

11,549

—

11,549
Total consumer loans

79,662

—

79,662
Residential construction loans

147,174

1,991

149,165
Total residential mortgage, consumer and residential construction loans

$
757,169

$
5,395

$
762,564

2421

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~~The tables below detail~~on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ~~Company’s loan portfolio by class according~~ultimate ability to ~~their credit quality indicators discussed~~collect interest on a loan.

At March 31, 2023, the Company owned $0.2 million in commercial properties that were included in OREO in the ~~paragraphs above as of~~Consolidated Balance Sheets, compared to none at 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

2022. Additionally, there were $3.3 million in the process of foreclosure at March 31, 2023, compared to $2.1 million at December 31, 2022.

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.

The following tables set forth an aging analysis of past due and nonaccrual loans as of March 31, 2023 and December 31, 2022:


	March 31, 2023
					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	$	—	$	—	$	—	$	4,325	$	4,325	$	35,045	$	39,370
Commercial loans
SBA 504 loans		—		—		—		—		—		34,678		34,678
Commercial other		—		1,675		—		975		2,650		114,778		117,428
Commercial real estate		—		—		—		169		169		907,091		907,260
Commercial real estate construction		—		—		—		—		—		146,276		146,276
Residential mortgage loans		2,800		—		—		5,565		8,365		610,775		619,140
Consumer loans
Home equity		697		—		—		—		697		67,374		68,071
Consumer other		50		—		—		—		50		8,663		8,713
Residential construction loans		—		—		—		3,473		3,473		160,651		164,124
Total loans held for investment, excluding SBA PPP		3,547		1,675		—		14,507		19,729		2,085,331		2,105,060
SBA loans held for sale		—		—		—		—		—		23,314		23,314
Total loans, excluding SBA PPP	$	3,547	$	1,675	$	—	$	14,507	$	19,729	$	2,108,645	$	2,128,374

2522

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At March 31, 2023 The Company had $3.5 million of nonaccrual loans with no related allowance for credit loss.


	December 31, 2022
					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	$	—	$	576	$	—	$	690	$	1,266	$	37,202	$	38,468
Commercial loans
SBA 504 loans		—		—		—		—		—		35,077		35,077
Commercial other		198		300		—		777		1,275		116,291		117,566
Commercial real estate		22		188		—		805		1,015		902,111		903,126
Commercial real estate construction		—		—		—		—		—		131,774		131,774
Residential mortgage loans		—		982		—		3,361		4,343		600,748		605,091
Consumer loans
Home equity		—		—		—		—		—		68,310		68,310
Consumer other		18		7		—		—		25		9,829		9,854
Residential construction loans		—		—		—		3,432		3,432		160,025		163,457
Total loans held for investment, excluding SBA PPP		238		2,053		—		9,065		11,356		2,061,367		2,072,723
SBA loans held for sale		2,195		—		—		—		2,195		25,733		27,928
Total loans, excluding SBA PPP	$	2,433	$	2,053	$	—	$	9,065	$	13,551	$	2,087,100	$	2,100,651

At December 31, 2022, the Company had $1.4 million of SBA PPP loans past due. The Company is in process of working through these past due credits with the SBA and the relevant customers.

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~~The following tables set forth an aging analysis of past due and nonaccrual loans as of September 30, 2022 and December 31, 2021:~~

September 30, 2022






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

$
237

$
194

$
—

$
1,491

$
1,922

$
28,825

$
30,747
SBA PPP loans

—

—

—

—

—

6,706

6,706
Commercial loans












SBA 504 loans

—

—

—

—

—

36,852

36,852
Commercial other

416

18

—

777

1,211

119,615

120,826
Commercial real estate

896

596

—

370

1,862

826,553

828,415
Commercial real estate construction

—

—

—

—

—

119,966

119,966
Residential mortgage loans

634

42

—

3,404

4,080

529,657

533,737
Consumer loans



Home equity

—

—

—

—

—

68,113

68,113
Consumer other

73

112

75

—

260

11,289

11,549
Residential construction loans

—

—

—

1,991

1,991

147,174

149,165
Total loans held for investment

2,256

962

75

8,033

11,326

1,894,750

1,906,076
SBA loans held for sale

—

—

—

—

—

36,338

36,338
Total loans

$
2,256

$
962

$
75

$
8,033

$
11,326

$
1,931,088

$
1,942,414

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.

~~Table of Contents~~

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 September 30, 2022:~~

September 30, 2022


Unpaid




principal

Recorded

Specific
(In thousands)

balance

investment

reserves
With no related allowance:






SBA loans held for investment

$
641

$
494

$
—
Commercial loans






Commercial other

16

16

—
Commercial real estate

3,224

2,268

—
Total commercial loans

3,240

2,284

—
Residential mortgage loans

1,553

1,540

—
Consumer loans

Home equity

—

—

—
Residential construction loans

92

92

—
Total impaired loans with no related allowance

5,526

4,410

—

With an allowance:






SBA loans held for investment

457

350

129
Commercial loans






Commercial other

2,085

963

915
Commercial real estate

—

—

—
Total commercial loans

2,085

963

915
Residential mortgage loans

570

544

56
Consumer loans

Home equity

407

407

58
Residential construction loans

2,694

2,694

99
Total impaired loans with a related allowance

6,213

4,958

1,257

Total individually evaluated impaired loans:






SBA loans held for investment

1,098

844

129
Commercial loans






Commercial other

2,101

979

915
Commercial real estate

3,224

2,268

—
Total commercial loans

5,325

3,247

915
Residential mortgage loans

2,123

2,084

56
Consumer loans

Home equity

407

407

58
Residential construction loans

2,786

2,786

99
Total individually evaluated impaired loans

$
11,739

$
9,368

$
1,257

~~Table of Contents~~

~~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

~~Table of Contents~~

The following ~~tables present~~table shows the ~~average~~internal loan classification risk by loan portfolio classification by origination year as of March 31, 2023:


	Term Loans
	Amortized Cost Basis by Origination Year

(In thousands)			2023		2022		2021		2020		2019		2018 and Earlier		Revolving Loans Amortized Cost Basis		Total
SBA loans held for investment
Risk Rating:
Pass		$	58	$	7,186	$	5,017	$	6,289	$	2,970	$	12,006	$	-	$	33,526
Special Mention			-		-		-		702		-		745		-		1,447
Substandard			-		1,361		2,240		-		-		796		-		4,397
Total SBA loans held for investment		$	58	$	8,547	$	7,257	$	6,991	$	2,970	$	13,547	$	-	$	39,370
SBA loans held for investment
Current-period gross writeoffs		$	-	$	-	$	-	$	-	$	113	$	-	$	-	$	113

SBA PPP loans
Risk Rating:
Pass		$	-	$	-	$	2,545	$	-	$	-	$	-	$	-	$	2,545
Special Mention			-		-		-		-		-		-		-		-
Substandard			-		-		-		-		-		-		-		-
Total SBA PPP loans		$	-	$	-	$	2,545	$	-	$	-	$	-	$	-	$	2,545
Commercial loans
Risk Rating:
Pass		$	30,004	$	343,451	$	189,080	$	141,544	$	104,763	$	298,849	$	78,084	$	1,185,775
Special Mention			-		90		2,103		-		2,269		12,041		396		16,899
Substandard			-		-		-		20		-		2,648		300		2,968
Total commercial loans		$	30,004	$	343,541	$	191,183	$	141,564	$	107,032	$	313,538	$	78,780	$	1,205,642
Residential mortgage loans
Risk Rating:
Performing		$	40,533	$	274,612	$	80,711	$	56,606	$	34,653	$	126,460	$	-	$	613,575
Nonperforming			-		307		550		904		1,355		2,449		-		5,565
Total residential mortgage loans		$	40,533	$	274,919	$	81,261	$	57,510	$	36,008	$	128,909	$	-	$	619,140
Consumer loans
Risk Rating:
Performing		$	3,089	$	5,725	$	6,188	$	749	$	3,607	$	8,682	$	48,744	$	76,784
Nonperforming			-		-		-		-		-		-		-		-
Total consumer loans		$	3,089	$	5,725	$	6,188	$	749	$	3,607	$	8,682	$	48,744	$	76,784
Consumer loans
Current-period gross writeoffs		$	-	$	22	$	98	$	-	$	-	$	-	$	-	$	120

Residential construction
Risk Rating:
Performing		$	4,670	$	87,778	$	50,623	$	12,672	$	3,676	$	1,232	$	-	$	160,651
Nonperforming			-		-		257		-		-		1,781		1,435		3,473
Total residential construction loans		$	4,670	$	87,778	$	50,880	$	12,672	$	3,676	$	3,013	$	1,435	$	164,124
Total loans held for investment		$	78,354	$	720,510	$	339,314	$	219,486	$	153,293	$	467,689	$	128,959	$	2,107,605

Table of Contents

The following table shows the internal loan classification risk by loan portfolio classification as of December 31, 2022:

	December 31, 2022
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	37,163	$	558	$	747	$	38,468
SBA PPP loans		5,908		—		—		5,908
Commercial loans
SBA 504 loans		35,077		—		—		35,077
Commercial other		110,107		6,220		1,239		117,566
Commercial real estate		894,110		6,228		2,788		903,126
Commercial real estate construction		131,774		—		—		131,774
Total commercial loans		1,171,068		12,448		4,027		1,187,543
Total SBA and commercial loans	$	1,214,139	$	13,006	$	4,774	$	1,231,919

			Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	601,730	$	3,361	$	605,091
Consumer loans
Home equity				68,310		—		68,310
Consumer other				9,854		—		9,854
Total consumer loans				78,164		—		78,164
Residential construction loans				160,025		3,432		163,457
Total residential mortgage, consumer and residential construction loans			$	839,919	$	6,793	$	846,712

Modifications

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded ~~investments~~on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for creditlosses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a weighted-average remaining maturity model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modificiation.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in ~~impaired~~the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans ~~and~~by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the ~~related~~amortized cost basis of the asset is written off against the allowance for credit losses. The amount of ~~interest received during~~ the ~~time period in which the loans were impaired for the three and nine months ended September 30, 2022 and 2021. The average balances are calculated based on the month-end balances~~principal forgiveness is deemed to be uncollectible; therefore, that portion 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~~written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concessions, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal ~~under the cost recovery method, and therefore no interest income is recognized.~~forgiveness, may be granted.

For the three months ended September 30,

2022

2021








Interest

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

$
1,369

$
6

$
917

$
18

Commercial loans





Commercial other

1,151

38

727

1

Commercial real estate

1,813

21

1,355

42

Residential mortgage loans

2,647

3

3,571

13

Consumer loans

Home equity

414

7

427

5

Consumer other

—

—

2

—

Residential construction loans

1,935

16

2,659

18

Total

$
9,329

$
91

$
9,658

$
97

For the nine months ended September 30,

2022

2021








Interest

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired
(In thousands)

investment

loans

investment

loans
SBA loans held for investment

$
816

$
26

$
1,384

$
99
Commercial loans




Commercial other

1,691

83

457

11
Commercial real estate

2,046

89

1,904

119
Residential mortgage loans

2,696

18

4,705

13
Consumer loans

Home equity

513

19

572

23
Consumer other

—

—

2,691

—
Residential construction loans

3,080

49

1

38
Total

$
10,842

$
284

$
11,714

$
303

~~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 TDRs 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

2925

Table of Contents

~~determines that~~The following table shows the ~~value~~amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of gross loans and type of concession granted (numbers in thousands) during the three months ended March 31, 2023:

Modifications for the quarter made to borrowers exerpiencing financial difficulty added a weighted average of 5.7 years to the life of the modified loans, which reduced monthly payment amounts for the borrowers.

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is ~~less than~~reduced by the ~~recorded investment in~~uncollectible amount and the ~~loan, impairment~~allowance for credit losses is ~~recognized~~adjusted 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~~same amount. No loans ~~modified as TDRs~~ that ~~subsequently default on their modified terms.~~

TDRs of $1.9 million and $1.0 million are included in the impaired loan numbers as of September 30, 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 September 30, 2022 and December 31, 2021, there were ~~no specific reserves on 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.~~

~~There were two loans modified as TDRs during the nine months ended September 30, 2022. There were two loans~~ modified during the ~~nine months ended September 30, 2021 that were deemed to be TDRs. The following table details loans modified~~quarter had a payment default during the ~~nine months ended September 30, 2022, including the number~~period and all loans were current as of ~~modifications and the recorded investment at the time of the modification:~~March 31, 2023.

For the nine months ended September 30, 2022

Number of

Recorded investment
(In thousands, except number of contracts)

contracts

at time of modification
Commercial real estate

1

$
25
Commercial other

1

857
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 nine months ended September 30, 2022. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

NOTE 8. Allowance for ~~Loan~~Credit Losses and Reserve for Unfunded Loan Commitments

Allowance for ~~Loan~~Credit Losses

The Company has an established methodology to determine the adequacy of the allowance for ~~loan~~credit losses that assesses the risks and losses inherent in the loan portfolio. At a minimum, the adequacy of the allowance for ~~loan~~credit 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~~credit 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~~four 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 and/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 evaluated for

~~Table of Contents~~

individually ~~impaired loans and TDRs.~~evaluated loans. 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.~~data dating back to 2015 on a straight line basis and projects the losses on a weighted average remaining maturity basis for each segment. 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 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.

Table of Contents

●

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~~credit 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~~credit losses by portfolio segment for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

For the three months ended September 30, 2022

For the three months ended March 31, 2023

Residential

(In thousands)

SBA

Commercial

Residential

Consumer

construction

Total

SBA

Commercial

Residential

Consumer

construction

Total

Balance, beginning of period

758

14,908

4,786

803

1,603

22,858

875

15,254

5,450

990

2,627

25,196

Effect of adopting Accounting Standards Update ("ASU") No. 2016-13 ("CECL")

163

171

376

101

847

Charge-offs

—

(501)

—

(50)

—

(551)

(113)

—

(120)

—

(233)

Recoveries

—

271

—

283

Net recoveries (charge-offs)

(478)

—

(41)

—

(514)

Provision for (credit to) loan losses charged to expense

803

449

349

(152)

1,517

Net (charge-offs) recoveries

(113)

271

—

(108)

—

Provision for (credit to) credit losses charged to expense

178

(395)

309

(21)

108

Balance, end of period

831

15,233

5,235

1,111

1,451

23,861

1,103

15,301

6,135

1,020

2,642

26,201


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

3127

Table of Contents

For the three months ended September 30, 2021

Residential

(In thousands)

SBA

Commercial

Residential

Consumer

construction

Total
Balance, beginning of period

$
1,686

$
15,011

$
4,604

$
601

$
899

$
22,801
Charge-offs

(145)

(158)

—

(3)

—
a

(306)
Recoveries

—

—

42

—

—

42
Net charge-offs

(145)

(158)

42

(3)

—

(264)
Provision for (credit to) loan losses charged to expense

(763)

983

(540)

151

169

—
Balance, end of period

$
778

$
15,836

$
4,106

$
749

$
1,068

$
22,537

For the nine months ended September 30, 2022

Residential

(In thousands)

SBA

Commercial

Residential

Consumer

construction

Total
Balance, beginning of period

$
1,074

$
15,053

$
4,114

$
671

$
1,390

$
22,302
Charge-offs

—

(1,001)

—

(96)

—
a

(1,097)
Recoveries

33

83

1

13

—

130
Net recoveries (charge-offs)

33

(918)

1

(83)

—

(967)
Provision for (credit to) loan losses charged to expense

(276)

1,098

1,120

523

61

2,526
Balance, end of period

$
831

$
15,233

$
5,235

$
1,111

$
1,451

$
23,861

For the nine months ended September 30, 2021

Residential

(In thousands)

SBA

Commercial

Residential

Consumer

construction

Total
Balance, beginning of period

$
1,301

$
14,992

$
5,318

$
681

$
813

$
23,105
Charge-offs

(591)

(551)

—

(4)

—
a

(1,146)
Recoveries

34

2

42

—

—

78
Net charge-offs

(557)

(549)

42

(4)

—

(1,068)
Provision for (credit to) loan losses charged to expense

34

1,393

(1,254)

72

255

500
Balance, end of period

$
778

$
15,836

$
4,106

$
749

$
1,068

$
22,537

~~Table of Contents~~

The following tables present loans and their related allowance for ~~loan~~credit losses, by portfolio segment, as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

September 30, 2022

March 31, 2023

Residential

(In thousands)

SBA

Commercial

Residential

Consumer

construction

Total

SBA

Commercial

Residential

Consumer

construction

Total

Allowance for loan losses ending balance:

Individually evaluated for impairment

129

915

1,257

Collectively evaluated for impairment

702

14,318

5,179

1,053

1,352

22,604

Allowance for credit losses ending balance:

Individually evaluated

173

331

—

1,130

1,670

Collectively evaluated

930

14,970

6,099

1,020

1,512

24,531

Total

831

15,233

5,235

1,111

1,451

23,861

1,103

15,301

6,135

1,020

2,642

26,201

Loan ending balances:

Individually evaluated for impairment

844

3,247

2,084

407

2,786

9,368

Collectively evaluated for impairment

72,947

1,102,812

531,653

79,255

146,379

1,933,046

Individually evaluated

658

1,602

5,760

—

3,458

11,478

Collectively evaluated

64,571

1,204,040

613,380

76,784

160,666

2,119,441

Total

73,791

1,106,059

533,737

79,662

149,165

1,942,414

65,229

1,205,642

619,140

76,784

164,124

2,130,919


	December 31, 2021													December 31, 2022
										Residential													Residential
(In thousands)	SBA		Commercial		Residential		Consumer		construction			Total		SBA		Commercial		Residential		Consumer		construction			Total
Allowance for loan losses ending balance:
Allowance for credit losses ending balance:
Individually evaluated for impairment	$	4	$	2,615	$	80	$	56	$	68	a	$	2,823	$	115	$	516	$	36	$	—	$	1,112	a	$	1,779
Collectively evaluated for impairment		1,070		12,438		4,034		615		1,322			19,479		760		14,738		5,414		990		1,515			23,417
Total	$	1,074	$	15,053	$	4,114	$	671	$	1,390		$	22,302	$	875	$	15,254	$	5,450	$	990	$	2,627		$	25,196
Loan ending balances:
Individually evaluated for impairment	$	510	$	4,220	$	3,262	$	637	$	3,122		$	11,751	$	690	$	3,101	$	3,361	$	—	$	3,432		$	10,584
Collectively evaluated for impairment		82,015		927,506		406,093		77,307		117,403			1,610,324		71,614		1,184,442		601,730		78,164		160,025			2,095,975
Total	$	82,525	$	931,726	$	409,355	$	77,944	$	120,525		$	1,622,075	$	72,304	$	1,187,543	$	605,091	$	78,164	$	163,457		$	2,106,559

~~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~~credit 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 ~~September 30, 2022,~~March 31, 2023, a ~~$495 thousand~~$0.6 million commitment reserve was reported on the balance sheet as ~~an “other liability”~~“Accrued expenses and other liabilities”, compared to a ~~$358 thousand~~$0.5 million commitment reserve at December 31, ~~2021.~~

~~NOTE 9. 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 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

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~~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 2019, FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments~~ - Credit Losses." ASU 2019-11 was issued to address issues raised 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 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~~

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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 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-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 was 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 ~~10.~~9. 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 “Prepaid expenses and other ~~assets~~assets” or “Accrued expenses and other ~~liabilities.~~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.

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Derivative instruments are generally either negotiated ~~OTC~~over the counter (“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.

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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.

A summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively is as follows:


(In thousands, except percentages and years)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Notional amount	$	20,000		$	40,000		$	20,000		$	20,000
Fair value	$	1,598		$	408		$	1,302		$	1,537
Weighted average pay rate		0.83	%		0.98	%		0.83	%		0.83	%
Weighted average receive rate		1.75	%		0.19	%		4.75	%		1.50	%
Weighted average maturity in years		2.44			2.37			1.95			2.57
Number of contracts		1			2			1			1

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, 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 ~~September 30, 2022,~~March 31, 2023, the unrealized ~~loss~~gain relating to interest rate swaps was recorded as a derivative ~~liability.~~asset and is included in “Prepaid expenses and other assets” on the Company’s Balance Sheet. 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 ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Gain recognized in OCI on derivatives	$	452	$	86	$	1,386	$	911
(Loss) Gain recognized in OCI									$	(235)	$	1,534
Gain reclassified from AOCI into net income									$	198	$	85

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NOTE ~~11.~~10. Employee Benefit Plans

Stock Option Plans

The Company has maintained option plans and maintains an equity incentive plan, which allow for the grant of options to officers, employees and members of the Board of Directors. Grants of options under the Company’s plans generally vest over 3 years and must be exercised within 10 years of the date of grant. Transactions under the Company’s plans for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 are summarized in the following table:

Weighted

average

Weighted

average

remaining

Aggregate

average

remaining

Aggregate

exercise

contractual

intrinsic

exercise

contractual

intrinsic

Shares

price

life in years

value

Shares

price

life in years

value

Outstanding at December 31, 2021

688,533

17.56

6.6

5,986,666

Outstanding at December 31, 2022

559,499

18.09

5.9

5,168,740

Options granted

—

Options exercised

(85,877)

16.24

(37,201)

20.27

Options forfeited

(13,496)

19.75

(666)

18.64

Options expired

—

Outstanding at September 30, 2022

589,160

17.70

6.0

4,367,893

Exercisable at September 30, 2022

463,676

17.17

5.5

3,682,762

Outstanding at March 31, 2023

521,632

17.94

5.7

2,542,366

Exercisable at March 31, 2023

481,142

17.84

5.5

2,390,353

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 ~~September 30, 2022,~~March 31, 2023, 281,500 options and ~~184,700~~227,400 shares of restricted stock have been awarded from the plan. In addition, ~~15,496~~16,162 unvested options and ~~12,400~~14,000 unvested shares of restricted stock were cancelled and returned to the plan leaving ~~61,696~~21,262 shares available for future grants.

The fair values of the options granted ~~during the nine months ended September 30, 2021 were~~are estimated on the date of grant using the Black-Scholes option-pricing ~~model with the following weighted average assumptions.~~model. There were no options granted during the three months ended ~~September 30, 2022~~March 31, 2023 or ~~2021, or~~2022.

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 ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022:

For the nine months ended September 30,


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
%


	For the three months ended March 31,
	2023		2022
Number of options exercised		37,201		47,374
Total intrinsic value of options exercised	$	241,904	$	746,292
Cash received from options exercised	$	753,894	$	639,214
Tax deduction realized from options	$	72,777	$	224,522

~~(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.~~

The following table summarizes information about stock options outstanding and exercisable at March 31, 2023:


	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
$7.25 - 16.51		139,633	3.8	$	11.96	139,633	$	11.96
16.52 - 19.26		127,499	6.5		18.06	103,342		18.07
19.27 - 20.88		132,300	6.4		20.34	115,967		20.31
20.89 - 22.57		122,200	6.2		22.02	122,200		22.02
Total		521,632	5.7	$	17.94	481,142	$	17.84

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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 and nine months ended September 30, 2022 and 2021:

For the three months ended September 30,

For the nine months ended September 30,


2022

2021

2022

2021

Number of options exercised

23,168

23,869

85,877

60,467

Total intrinsic value of options exercised

$
215,476

$
358,798

$
1,081,833

$
876,580

Cash received from options exercised

$
441,272

$
177,362

$
1,394,809

$
444,988

Tax deduction realized from options

$
64,826

$
66,291

$
325,469

$
178,904

~~The following table summarizes information about stock options outstanding and exercisable at September 30, 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

2.8

$
9.06

108,261

$
9.06
$12.01 - $18.00

117,933

6.6

16.57

79,607

16.29
$18.01 - $24.00

362,966

6.8

20.64

275,808

20.60
Total

589,160

6.0

$
17.70

463,676

$
17.17

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 ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ are detailed in the following table:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Compensation expense	$	129	$	221	$	431	$	651	$	85	$	163
Income tax benefit	$	37	$	64	$	125	$	188	$	25	$	47

As of ~~September 30, 2022,~~March 31, 2023, unrecognized compensation costs related to nonvested share-based stock option compensation arrangements granted under the Company’s plans totaled approximately ~~$486~~$260 thousand. That cost is expected to be recognized over a weighted average period of ~~1.2~~0.9 years.

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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 ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


		Average grant			Average grant
	Shares	date fair value		Shares	date fair value
Nonvested restricted stock at December 31, 2021	119,487	$	21.00
Nonvested restricted stock at December 31, 2022				164,570	$	24.77
Granted	73,000		27.54	18,000		27.33
Cancelled	(11,587)		23.29	(1,600)		25.94
Vested	(32,467)		20.07	(34,973)		23.34
Nonvested restricted stock at September 30, 2022	148,433	$	24.24
Nonvested restricted stock at March 31, 2023				145,997	$	25.41

Restricted stock awards granted during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ were as follows:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
	2022		2021		2022		2021		2023		2022
Number of shares granted		2,000		8,000		73,000		48,000		18,000		70,000
Average grant date fair value	$	27.89	$	22.82	$	27.54	$	20.46	$	27.33	$	27.52

Compensation expense related to restricted stock for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ is detailed in the following table:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Compensation expense	$	276	$	184	$	808	$	538	$	332	$	231
Income tax benefit	$	80	$	53	$	234	$	155	$	80	$	67

As of ~~September 30, 2022,~~March 31, 2023, there was approximately ~~$2.9~~$3.4 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s equity plans. That cost is expected to be recognized over a weighted average period of ~~3.0~~2.9 years.

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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 Bank contributed ~~$207~~$233 thousand and ~~$158~~$203 thousand to the Plan during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $630 thousand and $618 thousand during the nine months ended September 30, 2022 and 2021,~~ respectively.

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 ~~$50~~$794 thousand and ~~$35~~$535 thousand during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $635 thousand and $551 thousand during the nine months ended September 30, 2022 and 2021,~~ respectively. The interest paid on the deferred balances totaled ~~$42~~$91 thousand and ~~$34~~$36 thousand during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $119 thousand and $102 thousand during the nine months ended~~

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~~September 30, 2022 and 2021,~~ respectively. The fees distributed on the deferred balances totaled $4$3 thousand and $3$2 thousand during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $9 thousand during the nine months ended September 30, 2022 and 2021.~~respectively.

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 ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023. The following table summarizes the components of the net periodic pension cost of the defined benefit plan recognized during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Service cost ~~(1)~~	$	38	$	(35)	$	112	$	(69)	$	39	$	37
Interest cost		46		35		140		69		50		47
Amortization of prior service cost (2)		—		311		—		332
Net periodic benefit cost	$	84	$	311	$	252	$	332	$	89	$	84

~~(1)~~

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

~~(2)~~

~~Prior service cost fully amortized as of June 30, 2021.~~

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The following table summarizes the changes in benefit obligations of the defined benefit plan during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

For the nine months ended September 30,
(In thousands)

2022

2021
Benefit obligation, beginning of year

$
4,521

$
3,845
Service cost (1)

112

(69)
Interest cost

140

69
Benefit obligation, end of period

$
4,773

$
3,845

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	For the three months ended March 31,
(In thousands)	2023		2022
Benefit obligation, beginning of year	$	4,857	$	4,521
Service cost		39		37
Interest cost		50		47
Benefit obligation, end of period	$	4,946	$	4,605

~~(1)~~

~~Reduction in service cost totaling $137 thousand in 2021 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 ~~September 30, 2022,~~March 31, 2023, the Company had total year to date expenses of ~~$104~~$34 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$1 thousand and $1$6 thousand for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and $17 thousand and $4~~ ~~thousand for the nine months ended September 30, 2022 and 2021.~~respectively. Additionally, ~~$55~~$55 thousand of prior period expense was reversed during the ~~nine~~three months ended ~~September 30,~~March 31, 2022. This was related to changes to the members of management participating in the plan.

NOTE ~~12.~~11. Regulatory Capital

Under the Economic Growth, Regulatory Relief and Consumer Protection Act, the Bank is considered a qualifying community banking organization, which allows the Bank to elect to opt into the community bank leverage ratio (“CBLR”) in its regulatory filings. The Bank has opted into the CBLR, and is therefore is 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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	At September 30, 2022				At December 31, 2021				At March 31, 2023				At December 31, 2022
	Company		Bank		Company		Bank		Company		Bank		Company		Bank
CBLR	10.85	%	10.78	%	10.51	%	10.00	%	10.38	%	9.96	%	10.88	%	10.34	%

NOTE ~~13.~~12. Leases

Operating leases in which the Bank is the lessee and the term is greater than 12 months, 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.

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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~~the Bank’s incremental borrowing rate. 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~~occupancy expense in the Consolidated Statements of Income.

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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, 2023, compared to $5.6 million at December 31, 2022. As of March 31, 2023, operating lease liabilities totaled $5.5 million, compared to $5.6 million at December 31, 2022.

The table below summarizes ~~our~~the Company’s net lease cost:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Operating lease cost	$	177	$	155	$	554	$	452	$	209	$	188
Net lease cost	$	177	$	155	$	554	$	452

The table below summarizes the cash and non-cash activities associated with ~~our~~the Company’s leases:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	183	$	152	$	547	$	442	$	199	$	182
ROU assets obtain in exchange for new operating lease liabilities									$	—	$	582

The table below summarizes other information related to ~~our~~the Company’s operating leases:


(In thousands, except percentages and years)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Weighted average remaining lease term in years		11.15			11.40			10.63			10.77
Weighted average discount rate		2.84	%		3.20	%		3.18	%		3.21	%
Operating lease right-of-use assets	$	4,554		$	5,249

The table below summarizes the ~~maturity~~future payments of remaining lease liabilities:


(In thousands)	September 30, 2022		March 31, 2023
2022	$	168
2023		606	$	538
2024		559		695
2025		557		691
2026		558		702
2027 and thereafter		2,765
2027				656
2028 and thereafter				3,010
Total lease payments	$	5,213	$	6,292
Less: Interest		(582)
Less: Imputed Interest				(810)
Present value of lease liabilities	$	4,631	$	5,482

As of ~~September 30, 2022,~~March 31, 2023, the Company had not entered into any material leases that have not yet commenced.

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NOTE 13. Subsequent Events

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements.

On April 27, 2023 the Company announced that its Board of Directors approved a new Share Repurchase Program. Under this new program, the Company may repurchase up to 500,000 shares, or approximately 5.0% of its outstanding common stock. The timing and amount of purchases will be dicated by a number of factors.

On April 27, 2023 the shareholders of the Company approved the 2023 Equity Compensation Plan (“The Plan”), which allows up to 500,000 shares of Common Stock or equivalents to be issued. The Plan will assist the Company in attracting and retaining the highest quality of experienced persons as directors and officers and in aligining the interest of such persons more closely with the interest of the Company’s shareholders by encouraging such parties to maintain an equity interest in the Company.

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~~2022 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. 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 and 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 ~~a Loan Production Office in Lakewood, NJ~~ and its ~~eighteen~~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.

~~COVID-19~~

The full impact of the Coronavirus Disease (“COVID-19”) 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. 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 Bank. It is reasonably possible that estimates made in the financial statements could be materially impacted in the near term as a result of these conditions. We continue to monitor the impact closely, including its impact on our employees, customers, communities and results of operations and the impact of other government or Federal Reserve actions.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. The Company approved 1,224 applications and provided funding of approximately $143.0 million during the year ended December 31, 2020. As of September 30, 2022, the Company had no PPP loans originated under the CARES Act remaining on our balance sheet.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act 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 Company approved 955 applications and provided funding of approximately $101.0 million under the Economic Aid Act. As of September 30, 2022, the Company had $6.7 million of PPP loans originated under the Economic Aid Act in its portfolio.

Additionally, in accordance with provisions set forth by the CARES Act and regulatory guidance, the Company provided financial assistance through loan payment deferrals and waived fees. The Company has no outstanding loans remaining that would qualify for the payment deferral period as set forth by the CARES Act and regulatory guidance.

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~~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 ~~$9.9~~$10.3 million, or ~~$0.93~~$0.96 per diluted share for the quarter ended ~~September 30, 2022,~~March 31, 2023, compared to ~~$9.5~~$9.1 million, or ~~$0.90~~$0.85 per diluted share for the same period ~~a year ago.~~in 2022. Return on average assets and average common equity for the quarter were ~~1.85~~1.72 percent and ~~17.39~~17.14 percent, respectively, compared to ~~1.96~~1.80 percent and ~~19.57~~17.64 percent for the same period ~~a year ago.~~in 2022.

~~Third~~First quarter highlights include:

●

Net interest income increased ~~20.4~~20.1 percent compared to the prior year’s quarter, primarily due to loan growth.

●

Net interest margin equaled ~~4.61~~4.19 percent this quarter compared to ~~4.27~~4.11 percent in the prior year’s quarter.

●

The provision for ~~loan~~credit losses was ~~$1.5 million~~$108 thousand for the quarter ended ~~September 30, 2022,~~March 31, 2023, compared to nothe release of $178 thousand in provision for loan losses for the prior year’s ~~quarter and $1.2 million in provision for loan losses for~~quarter.

●

Noninterest income decreased 36.7 percent compared to the prior ~~sequential~~year’s quarter, primarily due to a decrease in the ~~sizable increase in total loans, as well as our view~~volume of ~~general economic conditions.~~residential mortgage and SBA loan sales.

●

Noninterest expense increased ~~2.1~~9.8 percent compared to the prior year’s quarter, primarily due to increased compensation expenses.

●

The effective tax rate was ~~25.1~~25.4 percent compared to ~~25.4~~23.5 percent in the prior year’s quarter.

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


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended March 31,
	2022			2021			2022			2021			2023			2022
Net income per common share - Basic (1)	$	0.94		$	0.91		$	2.72		$	2.53		$	0.98		$	0.87
Net income per common share - Diluted (2)	$	0.93		$	0.90		$	2.67		$	2.50		$	0.96		$	0.85
Return on average assets		1.85	%		1.96	%		1.83	%		1.86	%		1.72	%		1.80	%
Return on average equity (3)		17.39	%		19.57	%		17.45	%		19.13	%		17.14	%		17.64	%
Efficiency ratio (4)		39.59	%		44.15	%		42.64	%		46.28	%		44.56	%		45.86	%

(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 interest-earning assets and fees earned on loans, versus interest paid on interest-bearing liabilities. Interest-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

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other borrowings. Net interest income is determined by the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities (“net interest spread”) and the relative amounts of interest-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 quarter ended ~~September 30, 2022,~~March 31, 2023, tax-equivalent net interest income amounted to ~~$23.7~~$23.9 million, an increase of $4.0 million or ~~20.4~~20.1 percent when compared to the same period in ~~2021.~~2022. The net interest margin increased 348 basis points to ~~4.61~~4.19 percent for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~4.27~~4.11 percent for the same period in ~~2021.~~2022. The net interest spread was ~~4.37~~3.57 percent for the ~~third~~first quarter of ~~2022,~~2023, a 2841 basis point ~~increase~~decrease compared to the same period in ~~2021.~~2022.

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During the three months ended ~~September 30, 2022,~~March 31, 2023, tax-equivalent interest income was ~~$26.2~~$33.4 million, an increase of ~~$5.0~~$12.2 million or ~~23.4~~57.9 percent when compared to the same period in ~~2021.~~2022. This increase was mainly driven by the ~~increase in market interest rates on earning assets and an increase~~increases in the balance of average securities, ~~and~~the yield on securities, the balance of average loans and the increase in the yield on loans.

●

Of the ~~$5.0~~$12.2 million net increase in interest income on a tax-equivalent basis, ~~$3.0~~$5.4 million is due to an increase in yields on earning assets and ~~$2.0~~$6.8 million is due to an increase in average earning assets.

●

The average volume of interest-earning assets increased ~~$211.4~~$350.4 million to ~~$2.0~~$2.3 billion for the ~~third~~first quarter of ~~2022~~2023 compared to ~~$1.8~~$2.0 billion for the same period in ~~2021.~~2022. This was due primarily to a ~~$96.5~~$460.6 million increase in average loans and a $54.4 million increase in average investment securities, ~~and a $211.5 million increase in average loans~~partially offset ~~partially~~ by a ~~$99.1~~$177.8 million decrease in average interest-bearing deposits.

●

The yield on total interest-earning assets increased 49148 basis points to ~~5.09~~5.84 percent for the three months ended ~~September 30, 2022~~March 31, 2023 when compared to the same period in ~~2021.~~2022. The yield on the loan portfolio increased 2187 basis points to ~~5.22~~5.82 percent.

Total interest expense was ~~$2.5~~$9.4 million for the three months ended ~~September 30, 2022,~~March 31, 2023, an increase of ~~$1.0~~$8.2 million or ~~62.4~~677.2 percent compared to the same period in ~~2021.~~2022. This increase was driven by the increased rates and volume of time deposits, increased rates of savings deposits and increased rates and volume of borrowed funds and subordinated debentures, partially offset by a decrease in the volume of savings deposits compared to a year ago.

●

Of the ~~$1.0~~$8.2 million increase in interest expense, ~~$0.6~~$5.0 million was due to an increase in the rates on interest-bearing liabilities and ~~$0.4~~$3.2 million was due to increased volume of average interest-bearing liabilities.

●

Interest-bearing liabilities averaged ~~$1.4~~$1.7 billion for the ~~third~~first quarter of ~~2022,~~2023, an increase of ~~$175.3~~$398.6 million or ~~14.8~~30.9 percent compared to the prior year’s quarter.

●

The average cost of total interest-bearing liabilities increased 21189 basis points to ~~0.72~~2.27 percent. The cost of interest-bearing deposits increased 12138 basis points to ~~0.57~~1.70 percent for the ~~third~~first quarter of ~~2022~~2023 and the cost of borrowed funds and subordinated debentures increased 88262 basis points to ~~2.53 percent.~~

During the nine months ended September 30, 2022, tax-equivalent net interest income amounted to $65.4 million, an increase of $9.2 million or 16.4 percent when compared to the same period in 2021. The net interest margin increased 24 basis points to 4.37 percent for the nine months ended September 30, 2022, compared to 4.13 percent for the same period in 2021. The net interest spread was 4.20 ~~percent for the nine months ended September 30, 2022, a 30 basis point increase compared to the same period in 2021.~~

During the nine months ended September 30, 2022, tax-equivalent interest income was $70.4 million, an increase of $7.9 million or 12.6 percent when compared to the same period in the prior year. This increase was mainly driven by the increase in the balance of average loans and the increase in the average balance of securities and the rates on loans, securities, and interest-bearing deposits.

●

Of the $7.9 million net increase in interest income on a tax-equivalent basis, $4.9 million is due to an increase in yields on the earning assets and $3.0 million is due to an increase to average earning assets.

●

The average volume of interest-earning assets increased $180.5 million to $2.0 billion for the nine months ended September 30, 2022 compared to $1.8 billion for the same period in 2021. This was due primarily to a

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~~$78.0 million increase in average investment securities, a $104.1 million increase in average loans, partially offset with a $1.6 million decrease in interest-bearing deposits.~~

●

The yield on total interest-earning assets increased 11 basis points to 4.71 percent for the nine months ended September 30, 2022 when compared to the same period in 2021. The yield on the loan portfolio increased 11 basis points to 5.06 percent.

Total interest expense was $5.0 million for the nine months ended September 30, 2022, a decrease of $1.3 million or 20.6 percent compared to the same period in 2021. This decrease reflects decreased rates on interest-bearing deposits and decreased volume on borrowed funds and subordinated debentures compared to a year ago, partially offset increased by rates on borrowed funds and subordinated debentures.

●

Of the $1.3 million decrease in interest expense, $1.1 million was due to a decrease in the rates on interest-bearing liabilities and $0.8 million was due to decreased volume of average time deposits. The decrease in time deposits was partially offset by higher average demand deposits and savings deposits, which are typically lower yielding compared to time deposits.

●

~~Interest-bearing liabilities averaged $1.3 billion for the nine months ended September 30, 2022, an increase of $105.2 million or 8.7 percent compared to the prior year’s period.~~

●

The average cost of total interest-bearing liabilities decreased 19 basis points to 0.51 percent for the nine months ended September 30, 2022. The cost of interest-bearing deposits decreased 23 basis points to 0.41 percent and the cost of borrowed funds and subordinated debentures increased 56 basis points to 2.214.44 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~~2023 and ~~2021~~2022

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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												For the three months ended
	September 30, 2022						September 30, 2021						March 31, 2023						March 31, 2022
��	Average						Average
													Average						Average
	Balance		Interest		Rate/Yield		Balance		Interest		Rate/Yield		Balance		Interest		Rate/Yield		Balance		Interest		Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits	$	34,605	$	168	1.92	%	$	133,660	$	48	0.14	%	$	32,778	$	333	4.12	%	$	210,601	$	96	0.18	%
Federal Home Loan Bank ("FHLB") stock		6,200		93	5.96			3,706		41	4.36			16,776		331	7.99			3,550		33	3.81
Securities:
Taxable		137,590		1,397	4.03			41,738		292	2.78			138,379		1,739	5.03			84,739		652	3.12
Tax-exempt		1,841		20	4.27			1,176		10	3.26			1,753		20	4.49			990		8	3.07
Total securities (A)		139,431		1,417	4.03			42,914		302	2.79			140,132		1,759	5.02			85,729		660	3.12
Loans:
SBA loans		65,941		1,083	6.52			54,686		864	6.27			66,625		1,404	8.43			63,543		923	5.89
SBA PPP loans		9,576		277	11.47			110,239		1,751	6.30			4,243		77	7.26			36,989		777	8.52
Commercial loans		1,069,917		14,017	5.20			898,589		11,280	4.98			1,199,577		17,401	5.80			949,948		11,497	4.91
Residential mortgage loans		504,787		5,912	4.65			417,166		4,606	4.38			614,936		8,109	5.27			413,308		4,390	4.31
Consumer loans		76,957		1,075	5.54			66,782		736	4.37			77,121		1,354	7.02			78,989		921	4.73
Residential construction loans		137,681		2,184	6.29			105,908		1,628	6.10			163,821		2,586	6.31			122,993		1,824	6.01
Total loans (B)		1,864,859		24,548	5.22			1,653,370		20,865	5.01			2,126,323		30,931	5.82			1,665,770		20,332	4.95
Total interest-earning assets	$	2,045,095	$	26,226	5.09	%	$	1,833,650	$	21,256	4.60	%	$	2,316,009	$	33,354	5.84	%	$	1,965,650	$	21,121	4.36	%

Noninterest-earning assets:
Cash and due from banks		24,350						23,085						22,738						23,679
Allowance for loan losses		(22,848)						(22,733)						(25,778)						(22,331)
Other assets		83,168						75,961						111,104						79,631
Total noninterest-earning assets		84,670						76,313						108,064						80,979
Total assets	$	2,129,765					$	1,909,963					$	2,424,073					$	2,046,629

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	269,486	$	320	0.47	%	$	227,152	$	247	0.43	%	$	287,749	$	982	1.38	%	$	249,329	$	164	0.27	%
Savings deposits		674,486		878	0.52			558,354		390	0.28			571,843		1,953	1.39			701,281		345	0.20
Time deposits		310,842		600	0.77			345,811		659	0.76			485,679		2,709	2.26			288,155		480	0.68
Total interest-bearing deposits		1,254,814		1,798	0.57			1,131,317		1,296	0.45			1,345,271		5,644	1.70			1,238,765		989	0.32
Borrowed funds and subordinated debentures		108,135		688	2.53			56,322		235	1.65			342,398		3,799	4.44			50,310		226	1.82
Total interest-bearing liabilities	$	1,362,949	$	2,486	0.72	%	$	1,187,639	$	1,531	0.51	%	$	1,687,669	$	9,443	2.27	%	$	1,289,075	$	1,215	0.38	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		516,898						514,518						468,407						526,931
Other liabilities		23,130						16,077						24,541						21,217
Total noninterest-bearing liabilities		540,028						530,595						492,948						548,148
Total shareholders' equity		226,788						191,729						243,456						209,406
Total liabilities and shareholders' equity	$	2,129,765					$	1,909,963					$	2,424,073					$	2,046,629

Net interest spread			$	23,740	4.37	%			$	19,725	4.09	%			$	23,911	3.57	%			$	19,906	3.98	%
Tax-equivalent basis adjustment				(2)						(2)						(1)						(2)
Net interest income			$	23,738					$	19,723					$	23,910					$	19,904
Net interest margin					4.61	%					4.27	%					4.19	%					4.11	%

(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.

~~Table of Contents~~

~~Consolidated Average Balance Sheets~~

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

For the nine months ended

September 30, 2022

September 30, 2021


Average





Average






balance

Interest

Rate/Yield

balance

Interest

Rate/Yield

ASSETS

Interest-earning assets:

Interest-bearing deposits

$
114,901

$
416

0.48
%
$
116,563

$
105

0.12
%
FHLB stock

4,592

176

5.13

4,527

157

4.63

Securities:

Taxable

116,816

3,164

3.62

38,374

837

2.92

Tax-exempt

1,366

39

3.80

1,774

33

2.46

Total securities (A)

118,182

3,203

3.62

40,148

870

2.90

Loans

SBA loans

64,438

2,933

6.08

51,446

2,423

6.30

SBA PPP loans

23,388

1,546

8.84

138,846

5,228

5.03

Commercial loans

1,009,122

37,928

5.03

871,163

32,490

4.99

Residential mortgage loans

456,354

15,284

4.48

435,694

14,640

4.49

Consumer loans

78,108

2,914

4.99

63,872

2,274

4.76

Residential construction loans

130,205

6,018

6.18

96,491

4,330

6.00

Total loans (B)

1,761,615

66,623

5.06

1,657,512

61,385

4.95

Total interest-earning assets

$
1,999,290

$
70,418

4.71
%
$
1,818,750

$
62,517

4.60
%

Noninterest-earning assets:

Cash and due from banks

24,026

23,456

Allowance for loan losses

(22,454)

(23,026)

Other assets

80,656

75,856

Total noninterest-earning assets

82,228

76,286

Total assets

$
2,081,518

$
1,895,036

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing liabilities:

Interest-bearing demand deposits

$
263,139

$
682

0.35
%
$
218,539

$
863

0.53
%
Savings deposits

687,177

1,635

0.32

515,065

1,241

0.32

Time deposits

292,484

1,499

0.69

401,839

3,293

1.10

Total interest-bearing deposits

1,242,800

3,816

0.41

1,135,443

5,397

0.64

Borrowed funds and subordinated debentures

72,724

1,199

2.21

74,882

922

1.65

Total interest-bearing liabilities

$
1,315,524

$
5,015

0.51
%
$
1,210,325

$
6,319

0.70
%

Noninterest-bearing liabilities:

Noninterest-bearing demand deposits

525,405

484,284

Other liabilities

22,186

16,069

Total noninterest-bearing liabilities

547,591

500,353

Total shareholders’ equity

218,403

184,358

Total liabilities and shareholders’ equity

$
2,081,518

$
1,895,036

Net interest spread

$
65,403

4.20
%

$
56,198

3.90
%
Tax-equivalent basis adjustment



(5)



(7)



Net interest income



$
65,398





$
56,191



Net interest margin





4.37
%





4.13
%

~~(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.~~

4838

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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 September 30, 2022 versus September 30, 2021						For the nine months ended September 30, 2022 versus September 30, 2021						For the three months ended March 31, 2023 versus March 31, 2022
	Increase (decrease) due to change in:						Increase (decrease) due to change in:						Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Interest income:
Interest-bearing deposits	$	(60)	$	180	$	120	$	(1)	$	312	$	311	$	(143)	$	380	$	237
FHLB stock		33		19		52		2		17		19		230		68		298
Securities		929		185		1,114		2,074		259		2,333		552		548		1,100
Loans		1,131		2,552		3,683		892		4,346		5,238		6,201		4,398		10,599
Total interest income	$	2,033	$	2,936	$	4,969	$	2,967	$	4,934	$	7,901	$	6,840	$	5,394	$	12,234
Interest expense:
Demand deposits	$	49	$	24	$	73	$	153	$	(334)	$	(181)	$	30	$	788	$	818
Savings deposits		95		393		488		394		—		394		(76)		1,684		1,608
Time deposits		(68)		9		(59)		(757)		(1,037)		(1,794)		507		1,722		2,229
Total interest-bearing deposits		76		426		502		(210)		(1,371)		(1,581)		461		4,194		4,655
Borrowed funds and subordinated debentures		286		167		453		(28)		305		277		2,778		795		3,573
Total interest expense		362		593		955		(238)		(1,066)		(1,304)		3,239		4,989		8,228
Net interest income - fully tax-equivalent	$	1,671	$	2,343	$	4,014	$	3,205	$	6,000	$	9,205	$	3,601	$	405	$	4,006
Decrease in tax-equivalent adjustment						—						2						1
Net interest income					$	4,014					$	9,207					$	4,007

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~credit losses was ~~$1.5 million~~$108 thousand during the three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~none~~a release of $178 thousand during the three months ended ~~September 30, 2021. For the nine months ended September 30, 2022, the provision for loan losses totaled $2.5 million, compared to $0.5 million for the same period in 2021.~~March 31, 2022. The increase ~~in provision for loan losses~~ was primarily due to ~~the sizeable~~an increase in ~~total loans, as well as management’s view of current economic conditions.~~the general reserve.

Each period’s ~~loan~~credit 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~~Credit 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~~credit losses.

~~Table of Contents~~

Noninterest Income

The following table shows the components of noninterest income ~~and the increase or decrease~~ for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

For the three months ended September 30,

For the nine months ended September 30,
(In thousands)

2022

2021

2022

2021
Branch fee income

$
336

$
294

$
892

$
858
Service and loan fee income

543

804

1,815

1,937
Gain on sale of SBA loans held for sale, net

—

—

852

741
Gain on sale of mortgage loans, net

280

968

1,231

3,785
BOLI income

170

138

494

399
Net security (losses) gains

(576)

202

(1,631)

535
Other income

357

403

2,446

1,175
Total noninterest income

$
1,110

$
2,809

$
6,099

$
9,430

~~Branch fee income consists primarily of services charges on deposits, overdraft fees, stop payment charges and statement rendering.~~

~~Service and loan fee income consists primarily of income earned through the servicing of sold loans and loan processing and late fees.~~

●

~~Service and loan fee income decreased for the three and nine months ended September 30, 2022 compared to September 30, 2021, primarily due to a reduction in loan payoff charges.~~

~~Gain on sale of SBA loans held for sale, net, includes the net gains on sales of the guaranteed portion of SBA loans in the secondary market.~~

●

~~There were no SBA loan sales for the three months ended September 30, 2022 and September 30, 2021.~~

●

Gain on sale of SBA loans held for sale increased for the nine months ended September 30, 2022, when compared to the prior year, due to a larger volume of SBA loan sales with net gains of $852 thousand in the first quarter of 2022.

~~Gain on sale of mortgage loans, net, included for each period are comprised of gains on sales of residential mortgages.~~

●

Gain on sale of mortgage loans decreased for the three and nine months ended September 30, 2022 compared to comparable periods ended September 30, 2021. These decreases were primarily due to the decreased volume of residential mortgage loans originated resulting from the slowdown in refinancing and home purchase activity in the higher interest rate environment.

~~Bank owned life insurance consists primarily of changes in the cash surrender value and any additional income related to net let life insurance death benefits.~~

Net security (losses) gains consist primarily of the net change in the mark to market gains and losses on our equity securities carried at fair value as well as gains recognized on the sale of securities.

●

The Company recognized additional net security losses for the three and nine months ended September 30, 2022, compared to September 30, 2021, primarily due to a decrease in the fair market value of equity securities.


	For the three months ended March 31,
(In thousands)	2023		2022
Branch fee income	$	235	$	275
Service and loan fee income		503		584
Gain on sale of SBA loans held for sale, net		309		852
Gain on sale of mortgage loans, net		244		521
BOLI income		80		163
Net security losses		(322)		(557)
Other income		368		401
Total noninterest income	$	1,417	$	2,239

5039

Table of Contents

Noninterest income was $1.4 million for the three months ended March 31, 2023, a $822 thousand decrease compared to $2.2 million for the three months ended March 31, 2022. This decrease was primarily due to decreased gains on sales of SBA loans held for sale and mortgage loans, as there was decreased volume of sales in 2023.

Noninterest Expense

The following table presents a breakdown of noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(In thousands)	2022		2021		2022		2021		2023		2022
Compensation and benefits	$	6,471	$	5,720	$	19,790	$	18,116	$	7,090	$	6,508
Processing and communications		708		747		2,166		2,303		804		752
Occupancy		702		654		2,205		1,991		770		775
Furniture and equipment		617		627		1,811		1,935		689		576
Professional services		221		315		1,060		1,035		427		447
Advertising		307		261		873		932		260		225
Other loan expenses		109		452		238		759		128		135
Deposit insurance		233		198		752		637		348		269
Director fees		240		189		698		600		217		233
Loan collection expenses		45		62		138		67		47		58
Other expenses		411		635		1,454		1,748		648		432
Total noninterest expense	$	10,064	$	9,860	$	31,185	$	30,123	$	11,428	$	10,410

Noninterest ~~expenses totaled $10.1~~expense increased $1.0 million ~~an increase of $0.2~~to $11.4 million for the three months ended ~~September 30, 2022, while year-to-date noninterest expenses totaled $31.2~~March 31, 2023, compared to $10.4 million anfor the three months ended March 31, 2022. The increase ~~of $1.1 million versus prior year. The increases were~~was primarily due to ~~normal increased salary expenses and an increase in~~a one-time severance payment of $500 thousand as a result of the ~~accrual for year-end bonuses anticipated to be paid by the Company, partially offset by the recovery of property taxes paid on a former OREO property and reduced loan expenses.~~Company’s Chief Administrative Officer resigning.

Income Tax Expense

For the quarter ended ~~September 30, 2022,~~March 31, 2023, the Company reported income tax expense of ~~$3.3~~$3.5 million for an effective tax rate of ~~25.1~~25.4 percent, compared to income tax expense of ~~$3.2~~$2.8 million and an effective tax rate of ~~25.4~~23.5 percent for the prior year’s quarter. For the nine months ended September 30, 2022, the Company reported income tax expense of $9.3 million for an effective tax rate of 24.6 percent, compared to an income tax expense of $8.6 million and an effective tax rate of 24.6 percent for the nine months ended September 30, 2021.

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 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 a rate of 1.5 percent for 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 percent corporate income surtax until December 31, 2023. If the federal corporate tax rate is increased to a rate of at least 35 percent of taxable income, the surtax will be suspended.

Financial Condition at ~~September 30, 2022~~March 31, 2023

Total assets increased ~~$305.8~~$30.9 million or ~~15.0~~1.3 percent, to ~~$2.3~~$2.5 billion at ~~September 30, 2022,~~March 31, 2023, when compared to year end ~~2021.~~2022. This increase was primarily due to increases of ~~$293.0~~$24.4 million in gross loans, mostly due to commercial and residential mortgage loan growth, ~~net with SBA PPP loans forgiven~~ and ~~paid off, and $57.5 million in total securities, partially offset by decreases of $81.4~~$12.3 million in cash and cash ~~equivalents.~~

~~Table~~equivalents, partially offset by a decrease of ~~Contents~~$2.7 million in total securities.

Total deposits increased ~~$37.7~~$36.4 million, due to increases of ~~$57.1~~$98.4 million in time deposits and ~~$23.5~~$13.2 million in interest-bearing demand deposits, partially offset by a decrease of ~~$31.5~~$44.1 million in noninterest-bearing demand deposits and ~~$11.4~~$31.1 million in savings ~~deposits,.~~deposits.

Total shareholders’ equity increased ~~$24.5~~$1.2 million over year end ~~2021,~~2022, due to earnings, ~~and~~ an increase in common stock ~~offset by dividends paid~~ and net accumulated other comprehensive ~~losses~~gain, partially offset by the repurchase of shares and dividends paid during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

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

Table of Contents

Securities Portfolio

The Company’s securities portfolio consists of AFS debt securities, HTM debt 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.

The following table provides the major components of AFS debt securities, HTM debt securities and equity investments at their carrying value as of March 31, 2023 and December 31, 2022:


(In thousands)		March 31, 2023		December 31, 2022
Available for sale, at fair value:
U.S. Government sponsored entities	$	16,398	$	16,305
State and political subdivisions		593		613
Residential mortgage-backed securities		15,410		15,475
Corporate and other securities		61,712		63,000
Total securities available for sale	$	94,113	$	95,393
Held to maturity, at amortized cost:
U.S. Government sponsored entities	$	28,000	$	28,000
State and political subdivisions		1,128		1,115
Residential mortgage-backed securities		6,696		6,645
Total securities held to maturity	$	35,824	$	35,760
Equity Securites, at fair value:
Total Equity Securites	$	8,327	$	9,793

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 U.S. Government, state and political subdivisions, mortgage-backed ~~securities, asset backed~~ securities, corporate and other securities.

AFS debt securities totaled ~~$92.5~~$94.1 million at ~~September 30, 2022, an increase~~March 31, 2023, a decrease of ~~$36.0~~$1.3 million or ~~63.8~~1.3 percent, compared to ~~$56.5~~$95.4 million at December 31, ~~2021.~~2022. This net ~~increase~~decrease was the result of:

●

~~Purchases for a total of $45.2~~$1.6 million principal payments, maturities and called bonds and,

●

~~$3.9 million~~The dcrease was partially offset by $359 thousand in ~~principal payments, maturities and called bonds,~~

●

~~$5.2 million in depreciation~~appreciation in the market value of the portfolio. At ~~September 30, 2022,~~March 31, 2023, the portfolio had a net unrealized loss of ~~$5.2~~$5.4 million compared to a net unrealized ~~gain~~loss of ~~$38 thousand~~$5.8 million at December 31, ~~2021.~~2022. These net unrealized losses are reflected net of tax in shareholder’s equity as accumulated other comprehensive ~~loss, and;~~

●

~~$85 thousand in net amortization.~~loss.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to ~~6.8~~6.2 years and ~~6.9~~6.4 years at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The effective duration of AFS debt securities amounted to ~~2.0 years and 3.1~~1.9 years at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, respectively.~~2022.

HTM debt 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, mortgage-backed securities and obligations of state and political subdivisions.

HTM debt securities were ~~$35.9~~$35.8 million at ~~September 30, 2022,~~March 31, 2023, an increase of ~~$21.6 million~~$64 thousand or ~~151.4~~0.2 percent, compared to ~~$14.3~~$35.8 million at December 31, ~~2021.~~2022. This net increase was the result of:

●

~~Purchases for a total of $26.7 million,~~

●

$~~5.2 million in principal payments and,~~

●

~~$58~~64 thousand in ~~net amortization.~~book value accretion

Table of Contents

The weighted average life of HTM securities, adjusted for prepayments, amounted to ~~18.1 years.~~18.0 years at March 31, 2023 and December 31, 2022. As of ~~September 30, 2022,~~March 31, 2023, the fair value of HTM securities was ~~$30.7 million.~~$29.8 million and $28.6 million at December 31, 2022. The effective duration of HTM securities amounted to ~~10.1~~10.8 years and ~~5.6~~10.5 years at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

~~Table of Contents~~

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") mutual fund investments and the equity holdings of other financial institutions.

Equity securities totaled ~~$8.5~~$8.3 million at ~~September 30, 2022,~~March 31, 2023, a decrease of ~~$92 thousand~~$1.5 million or ~~1.1~~15.0 percent, compared to ~~$8.6~~$9.8 million at December 31, ~~2021.~~2022. This net decrease iswas primarily due to equity sales and net market value ~~adjustment~~decreases throughout the year.

The followings table provides the remaining contractual maturities and average yields within the investment portfolios. The carrying value of securities at March 31, 2023 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.


		Within one year				After one through five years				After five through ten years				After ten years				Total carrying value
		Amount	Yield			Amount	Yield			Amount	Yield			Amount	Yield			Amount	Yield
(In thousands, except percentages)
Available for sale at fair value:
U.S. Government sponsored entities	$	1,218	2.45	%	$	15,180	3.66	%	$	—	-	%	$	—	-	%	$	16,398	3.57	%
State and political subdivisions		201	4.00			160	1.90			—	-			232	2.75			593	2.94
Residential mortgage-backed securities		2	2.84			358	2.63			986	2.61			14,064	3.43			15,410	3.36
Corporate and other securities		—	-			12,365	7.73			12,642	5.33			36,705	6.78			61,712	6.67
Total debt securities available for sale	$	1,421	2.67	%	$	28,063	5.43	%	$	13,628	5.13	%	$	51,001	5.84	%	$	94,113	5.57	%
Held to maturity at cost
U.S. Government sponsored entities		—	-	%		—	-	%		3,000	4.00	%		25,000	3.47	%		28,000	3.53	%
State and political subdivisions		—	-			—	-			—	-			1,128	5.19			1,128	5.19
Residential mortgage-backed securities		—	-			—	-			—	-			6,696	3.03			6,696	3.03
Total debt securities held for maturity	$	—	-	%	$	—	-	%	$	3,000	4.00	%	$	32,824	3.44	%	$	35,824	3.49	%
Equity Securities at fair value:
Total equity securities	$	—	-	%	$	—	-	%	$	—	-	%	$	8,327	2.21	%	$	8,327	2.21	%

Securities with a carrying value of ~~$878~~$814 thousand and ~~$1.2 million~~$835 thousand at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, were held at the FHLB and FRB and can be pledged ~~to secure other~~for borrowing purposes; however, no securities were pledged in connection with borrowings ~~to collateralize hedging instruments and for other purposes required or permitted by law.~~as of March 31, 2023.

Approximately 6264 percent of the total investment portfolio had a fixed rate of interest at ~~September 30, 2022.~~March 31, 2023.

See Note 6 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 ~~liquidity, market,~~ and interest rate risk.

~~Gross~~42

Table of Contents

Total loans increased ~~$293.0~~$24.4 million or ~~17.8~~1.2 percent to ~~$1.9~~$2.1 billion at ~~September 30, 2022,~~March 31, 2023, compared to year end ~~2021.~~2022. Commercial, residential mortgage, SBA held for investment and residential construction ~~and consumer~~ loans increased ~~$174.3~~$18.1 million, ~~$124.4~~$14.0 million, ~~$28.6~~$0.9 million and ~~$1.7~~$0.7 million, respectively, partially offset by decreases of ~~$39.7~~$3.4 million and ~~$5.3~~$1.4 million in SBA PPP and ~~SBA held for investment,~~consumer loans, respectively.

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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
			% of				% of				% of				% of
(In thousands, except percentages)	Amount		total		Amount		total		Amount		total		Amount		total
SBA loans held for investment	$	30,747	1.6	%	$	36,075	2.2	%	$	39,370	1.8	%	$	38,468	1.8	%
SBA PPP loans		6,706	0.3			46,450	2.8			2,545	0.1			5,908	0.3
Commercial loans		1,106,059	56.9			931,726	56.5			1,205,642	56.6			1,187,543	56.4
Residential mortgage loans		533,737	27.5			409,355	24.8			619,140	29.1			605,091	28.7
Consumer loans		79,662	4.1			77,944	4.7			76,784	3.6			78,164	3.7
Residential construction loans		149,165	7.7			120,525	7.3			164,124	7.7			163,457	7.8
Total loans held for investment	$	1,906,076	98.1	%	$	1,622,075	98.3	%	$	2,107,605	98.9	%	$	2,078,631	98.7	%
SBA loans held for sale		36,338	1.9			27,373	1.7			23,314	1.1			27,928	1.3
Total loans	$	1,942,414	100.0	%	$	1,649,448	100.0	%	$	2,130,919	100.0	%	$	2,106,559	100.0	%

During the three months ended March 31, 2023 the Company sold $7.1 million of portfolio residential mortgage loans and $3.5 million of SBA held for sale loans, realizing gains of $0.1 million and $0.3 million, respectively.

Average loans increased ~~$104.1~~$460.6 million or ~~6.3~~27.6 percent to ~~$1.8~~$2.1 billion ~~for the nine months ended September 30, 2022~~at March 31, 2023 from $1.7 billion for the same period in ~~2021.~~2022. The increase in average loans was due to increases in average commercial, residential construction, residential mortgage ~~consumer~~ and SBA loans, partially offset by decreases in average SBA PPP and consumer loans. The yield on the overall loan portfolio increased 1187 basis points to ~~5.06~~5.82 percent for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 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

~~Table of Contents~~

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 ~~$36.3~~$23.3 million at ~~September 30, 2022, an increase~~March 31, 2023, a decrease of ~~$8.9~~$4.6 million from ~~$27.4~~$27.9 million at December 31, ~~2021.~~2022. SBA 7(a) loans held for investment amounted to ~~$30.7~~$39.4 million at ~~September 30, 2022, a decrease~~March 31, 2023, an increase of ~~$5.3~~$0.9 million from ~~$36.1~~$38.5 million at December 31, ~~2021.~~2022. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was ~~6.08~~8.43 percent for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~6.30~~5.89 percent for the same period 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 for investment 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 ~~$73.3~~$72.4 million and ~~$87.4~~$72.1 million in SBA loans were sold but serviced by the Company at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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

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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.

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 ~~$1.1~~$1.2 billion at ~~September 30, 2022,~~March 31, 2023, an increase of ~~$174.3~~$18.1 million from year end ~~2021.~~2022. The yield on commercial loans was ~~5.03~~5.80 percent for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~4.99~~4.91 percent for the same period in ~~2021.~~2022. 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 ~~$533.7~~$619.1 million at ~~September 30, 2022,~~March 31, 2023, an increase of ~~$124.4~~$14.0 million from year end ~~2021.~~2022. Sales of conforming mortgage loans totaled ~~$64.1~~$16.1 million for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. The yield on residential mortgages was ~~4.48~~5.27 percent for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~4.49~~4.31 percent in the ~~2021.~~2022. 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 ~~$79.7~~$76.8 million, ~~an increase~~a decrease of ~~$1.7~~$1.4 million from year end ~~2021.~~2022. The yield on consumer loans was ~~4.99~~7.02 percent for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~4.76~~4.73 percent for the same period in ~~2021.~~2022.

Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to ~~$149.2~~$164.1 million, an increase of ~~$28.6~~$0.7 million from year end ~~2021.~~2022. The yield on residential construction loans was ~~6.18~~6.31 percent for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~6.00~~6.01 percent for the same period in ~~2021.~~2022.

~~Table of Contents~~

There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan 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 ~~September 30, 2022~~March 31, 2023 approximately 9996 percent of the Company’s loan portfolio was secured by real estate compared to 9296 percent at December 31, ~~2021.~~2022.

~~Troubled Debt Restructurings (“TDRs”)~~

At September 30, 2022, there were five loans totaling $1.9 million that were classified as TDRs and deemed impaired, compared to three such loans 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 September 30, 2022 and December 31, 2021:~~

September 30, 2022

December 31, 2021


Performing

Nonperforming

Total

Performing

Nonperforming

Total
(In thousands)

TDRs

TDRs

TDRs

TDRs

TDRs

TDRs
Commercial real estate

$
1,437

$
—

$
1,437

$
619

$
—

$
619
Home equity

407

—

407

427

—

427
Commercial other

16

16

—

—
Total

$
1,860

$
—

$
1,860

$
1,046

$
—

$
1,046

Through September 30, 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 September 30, 2022:

September 30, 2022


Commercial

Home

Commercial


(In thousands)

real estate

equity

Other

Total
Type of modification:

Principal reduction

$
596

$
—

$
—

$
596
Maturity extension

$
841

$
—

$
16

$
857
Interest only with nominal principal

—

407

—

407
Total TDRs

$
1,437

$
407

$
16

$
1,860

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

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Asset Quality

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)	September 30, 2022			December 31, 2021			September 30, 2021			March 31, 2023			December 31, 2022			March 31, 2022
Nonperforming by category:
SBA loans held for investment	$	1,491		$	510		$	660		$	4,325		$	690		$	537
Commercial loans		1,147			2,582			2,879			1,144			1,582			2,292
Residential mortgage loans		3,404			3,262			2,626			5,565			3,361			2,999
Consumer loans		—			210			—			—			—			200
Residential construction loans		1,991			3,122			2,637			3,473			3,432			3,273
Total nonperforming loans										$	14,507		$	9,065		$	9,301
OREO											176			—			—
Total nonperforming assets	$	8,033		$	9,686		$	8,802		$	14,683		$	9,065		$	9,301
Less: Amount guaranteed by SBA											3,625			—			1,102
Nonperforming assets, net of SBA guarantee										$	11,058		$	9,065		$	8,199
Past due 90 days or more and still accruing interest:
Commercial loans	$	—		$	—		$	129
Residential mortgage loans		—			—			1,960		$	—		$	—		$	488
Consumer loans		75			—			—
Residential construction loans		—			—			176
Total past due 90 days or more and still accruing interest	$	75		$	—		$	2,265		$	—		$	—		$	488
Nonperforming loans to total loans		0.41	%		0.59	%		0.53	%		0.68	%		0.43	%		0.55	%
Nonperforming loans and TDRs to total loans (1)		0.51			0.65			0.59
Nonperforming assets to total loans		0.41			0.59			0.53			0.69			0.43			0.55
Nonperforming assets to total assets		0.34			0.48			0.44			0.59			0.37			0.45
(1) Performing TDRs		1,860			1,046			1,057

Nonperforming loans were ~~$8.0~~$14.5 million at ~~September 30, 2022,~~March 31, 2023, a ~~$1.7~~$5.4 million ~~decrease~~increase from ~~$9.7~~$9.1 million at December 31, ~~2021~~2022 and a ~~$0.8~~$5.2 million ~~decrease~~increase from ~~$8.8~~$9.3 million at ~~September 30, 2021,~~March 31, 2022, respectively. Since year end ~~2021,~~2022, nonperforming loans in the commercial ~~residential construction, and consumer loan segments~~segment decreased, offset by an increase in nonperforming SBA, residential mortgage and residential ~~mortgage~~construction loans. In addition, there were ~~$75 thousand in~~no loans past due 90 days or more and still accruing interest at ~~September 30,~~March 31, 2023 and December 31, 2022, compared to ~~$2.3~~$0.5 million ~~and $0~~ at ~~September 30, 2021 and December~~March 31, ~~2021, respectively.~~2022.

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 ~~$18.1~~$19.4 million at ~~September 30, 2022.~~March 31, 2023.

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

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Allowance for ~~Loan~~Credit Losses and Reserve for Unfunded Loan Commitments

The allowance for ~~loan~~credit losses totaled ~~$23.9~~$26.2 million at ~~September 30, 2022,~~March 31, 2023, compared to ~~$22.3~~$25.2 million at December 31, ~~2021,~~2022 and ~~$22.5~~$22.2 million at ~~September 30, 2021,~~March 31, 2022, with a resulting allowance to total loan ratio of 1.23 percent at ~~September 30, 2022 and 1.35~~March 31, 2023, 1.20 percent at December 31, ~~2021~~2022 and ~~September 30, 2021,~~1.30 percent at March 31, 2022, respectively. Net ~~(recoveries) charge-offs~~recoveries amounted to ~~$1.0 million~~$50 thousand for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to ~~$1.1 million~~$44 thousand for the same period in ~~2021. Net charge-offs (recoveries)~~2022.

The following table is a summary of the changes to the allowance for credit losses for March 31, 2023 and 2022, including net recoveries (charge-offs) to average loan ratios ~~are shown in the table below~~ for each major loan ~~category.~~category:


	For the three months ended March 31,
(In thousands, except percentages)	2023			2022
Balance, beginning of period	$	25,196		$	22,302
Impact of the adoption of ASU 2016-13 ("CECL")		847			—
Provision (benefit) for credit losses charged to expense		108			(178)
Less: Charge-offs
SBA loans held for investment		(113)			—
Consumer loans		(120)			(6)
Total charge-offs		(233)			(6)
Add: Recoveries
SBA loans held for investment		—			22
Commercial loans		271			28
Consumer loans		12			—
Total recoveries		283			50
Net recoveries		50			44
Balance, end of period	$	26,201		$	22,168
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans, annualized:
SBA loans held for investment		0.64	%		(0.09)	%
Commercial loans		(0.02)			(0.01)
Residential mortgage loans		—			—
Consumer loans		(0.56)			0.03
Total loans		(0.01)			—
Allowance to total loans		1.23			1.30
Allowance to nonperforming loans		180.61	%		238.34	%

For the three months ended September 30,

For the nine months ended September 30,

(In thousands, except percentages)

2022

2021


2022

2021

Balance, beginning of period

$
22,858

$
22,801

$
22,302

$
23,105

Provision for loan losses charged to expense

1,517

—

2,527

500

Less: Charge-offs



SBA loans held for investment

—

(145)

—

(591)

Commercial loans

(501)

(158)

(1,002)

(551)

Residential mortgage loans

—

—

—

—

Consumer loans

(50)

(3)

(96)

(4)

Total charge-offs

(551)

(306)

(1,098)

(1,146)

Add: Recoveries









SBA loans held for investment

5

—

33

34

Commercial loans

23

—

83

2

Residential mortgage loans

—

42

1

42

Consumer loans

9

—

13

—

Total recoveries

37

42

130

78

Net charge-offs

(514)

(264)

(968)

(1,068)

Balance, end of period

$
23,861

$
22,537

$
23,861

$
22,537

Selected loan quality ratios:









Net charge-offs (recoveries) to average loans:









SBA loans held for investment

0.03
%

0.35
%

0.05
%

0.39
%
Commercial loans

(0.18)

0.07

(0.12)

0.08

Residential mortgage loans

—

(0.04)

—

(0.01)

Consumer loans

(0.21)

0.02

(0.14)

0.01

Total loans

0.11

0.06

(0.06)

0.06

Allowance to total loans

1.23

1.35

1.23

1.35

Allowance to nonperforming loans

297.04
%

256.07
%

297.04
%

256.07
%

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The following table sets forth, for each of the major lending categories, the amount and percentage of the allowance for credit losses allocated to each as of March 31, 2023 and 2022. 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.


	March 31, 2023				March 31, 2022
			%				%
			Allocated				Allocated
	Reserve		to total		Reserve		to total
(In thousands, except percentages)	amount		loans		amount		loans
Balance applicable to:
SBA loans	$	1,103	2.63	%	$	941	1.53	%
Commercial loans		15,301	1.27			14,705	1.50
Residential mortgage loans		6,135	0.99			4,284	1.00
Consumer loans		1,020	1.33			642	0.83
Residential construction loans		2,642	1.61			1,596	1.23
Allowance for loans as a % total loans	$	26,201	1.23	%	$	22,168	1.30	%

See Note 8 to the accompanying Consolidated Financial Statements for more information regarding the Allowance for ~~Loan~~Credit 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~~The following table shows period-end deposits ~~increased $37.7 million to $1.8 billion at September 30, 2022, from year-end 2021. This increase in deposits was due to increases~~and the concentration of ~~$57.1 million in~~each category of deposits:


	March 31, 2023				December 31, 2022
(In thousands, except percentages)	Amount		% of total		Amount		% of total
Ending balance:
Noninterest-bearing demand deposits	$	450,058	24.7	%	$	494,184	27.6	%
Interest-bearing demand deposits		289,451	15.9			276,218	15.5
Savings deposits		560,711	30.7			591,826	33.1
Time deposits		523,701	28.7			425,300	23.8
Total deposits	$	1,823,921	100.0	%	$	1,787,528	100.0	%

The following table presents the expected maturities of time deposits over the next five years and $23.5 million in interest-bearing demand deposits, offset by a decrease of $31.5 million in noninterest-bearing demand deposits and $11.4 million in savings deposits. The Company’s deposit composition at September 30, 2022 consisted of 38.0 percent savings deposits, 27.7 percent noninterest-bearing demand deposits, 19.4 percent time deposits and 14.9 percent interest-bearing demand deposits.thereafter:


(In thousands)	2023		2024		2025		2026		2027		Thereafter		Total
Balance maturing	$	249,817	$	181,509	$	64,604	$	16,787	$	10,562	$	422	$	523,701

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The following table details the maturity distribution of time deposits as of March 31, 2023 and December 31, 2022:

More than

three

six months

Three

months

through

More than

months or

through six

twelve

(In thousands)

less

months

Total

At March 31, 2023:

Less than $250,000

151,056

25,879

77,468

159,193

413,596

$250,000 or more

22,096

12,238

33,510

42,261

110,105

At December 31, 2022:

Less than $250,000

134,611

39,583

35,208

148,554

357,956

$250,000 or more

3,528

19,787

16,509

27,520

67,344

Total deposits increased $36.4 million to $1.8 billion at March 31, 2023 from year-end 2022. This increase was due to increases of $98.4 million in time deposits, of which $8.1 million was in brokered time deposits, and $13.2 million in interest-bearing demand deposits, partially offset by a decrease of $44.1 million in noninterest-bearing demand deposits and $31.1 million in savings deposits. The change in the composition of the portfolio from December 31, 2022 reflects a 23.1 percent increase in time deposits and a 4.8 percent increase in interest-bearing demand deposits, partially offset by a 8.9 percent decrease in noninterest-bearing demand deposits and a 5.3 percent decrease in savings deposits.

As of March 31, 2023 the Bank had $334.8 million in uninsured/uncollateralized deposits, or 18.4 percent of total deposits and the average deposit account size was approximately $38 thousand. Further, the Bank’s deposit base was 44.8 percent retail, 27.1 percent business, 17.3 percent municipal and 10.8 percent brokered time deposits.

The following table shows average deposits and the concentration of each category of deposits:


	March 31, 2023				Full Year December 31, 2022
(In thousands, except percentages)	Amount		% of total		Amount		% of total
Average balance:
Noninterest-bearing demand deposits	$	468,407	25.8	%	$	518,244	29.1	%
Interest-bearing demand deposits		287,749	15.9			269,789	15.2
Savings deposits		571,843	31.5			674,335	37.9
Time deposits		485,679	26.8			315,910	17.8
Total deposits	$	1,813,678	100.0	%	$	1,778,278	100.0	%

Borrowed Funds and Subordinated Debentures

As part of ~~our~~the Company’s overall funding and liquidity management program, from time to time ~~we borrow~~the Company borrows from the Federal Home Loan Bank of New York. Residential mortgages and commercial loans collateralize these borrowings.

Borrowed funds and subordinated debentures totaled ~~$290.3~~$384.3 million and $393.3 million at ~~September 30,~~ ~~2022~~March 31, 2023 and ~~$50.3 million at~~ December 31, ~~2021,~~2022, respectively, and are broken down in the following table:


(In thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
FHLB borrowings:
Fixed rate advances	$	40,000	$	40,000
Non-overnight, fixed rate advances					$	195,000	$	180,000
Overnight advances		240,000		—		179,000		203,000
Subordinated debentures		10,310		10,310		10,310		10,310
Total borrowed funds and subordinated debentures	$	290,310	$	50,310	$	384,310	$	393,310

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In ~~September 2022,~~March 2023, the FHLB issued a ~~$115.0~~$146.0 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. The FHLB issued an additional $17.0 million municipal deposit letter of credit in the name of Unity Bank naming Forks Township in Pennslyvania as beneficiary, to secure municipal deposits as required under Pennsylvania law.

At ~~September 30, 2022,~~March 31, 2023, the Company had ~~$267.1~~$253.6 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.

For the three months ending March 31, 2023, average FHLB Borrowings were $332.1 million with a weighted average cost of 4.4%. The maximum borrowing during the year was $374.0 million.

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 ~~5.194~~6.608 percent at ~~September 30, 2022~~March 31, 2023 and ~~1.806~~6.319 percent at December 31, ~~2021.~~2022.

~~Interest Rate Sensitivity~~Market Risk

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 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”~~EVE”) 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~~EVE 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~~EVE 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,~~EVE, as a percentage of assets with rate shocks of 200 basis points at ~~September 30, 2022,~~March 31, 2023, is a decrease of ~~9.4~~12.9 percent in a rising-rate environment and an increase of ~~6.5~~5.6 percent in a falling-rate environment. The variances in the ~~EVPE~~EVE at ~~September 30, 2022~~March 31, 2023 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~~0.0 percent. At December 31, ~~2021,~~2022, the ~~economic value of equity~~EVE as a percentage of assets with rate shocks of 200 basis points was ~~an increase~~a decrease of ~~4.3~~12.1 percent in a rising-rate environment and an increase of 6.8 percent in a ~~decrease~~falling-rate environment. The variances in the EVE at December 31, 2022 are within the Board-approved guidelines of +/- 20.0 percent.

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The following table presents the Company’s EVE and NII sensitivity exposure related to an instantenous and substained parallel shift in market interest rate of ~~12.3~~ ~~percent in a falling-rate environment. The variances in the EVPE~~100, 200 and 300 bps at March 31, 2023 and December 31, ~~2021~~2022.


	Estimated Increase/ (Decrease) in EVE						Estimated 12 mo. Increase/ (Decrease) In NII
(In thousands, except percentages)	EVE		Amount		Percent		NII		Amount		Percent
March 31, 2023:
+300	$	248,555	$	(60,964)	(19.70)	%	$	90,433	$	(8,124)	(8.24)	%
+200		269,480		(40,039)	(12.94)			93,083		(5,474)	(5.55)
+100		290,326		(19,193)	(6.20)			95,705		(2,852)	(2.89)
0		309,519		—	—			98,557		—	—
-100		322,187		12,668	4.09			100,574		2,017	2.05
-200		326,786		17,267	5.58			99,990		1,433	1.45
-300		326,161		16,642	5.38			98,053		(504)	(0.51)
December 31, 2022:
+300	$	269,493	$	(61,049)	(18.47)	%	$	92,822	$	(8,275)	(8.19)	%
+200		290,558		(39,984)	(12.10)			95,567		(5,530)	(5.47)
+100		311,453		(19,089)	(5.78)			98,280		(2,817)	(2.79)
0		330,542		—	—			101,097		—	—
-100		346,750		16,208	4.90			102,688		1,591	1.57
-200		352,944		22,402	6.78			101,927		830	0.82
-300		353,361		22,819	6.90			100,183		(914)	(0.90)

Off Balance Sheet Arrangements and Contractual Obligations

The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as of March 31, 2023:


	One year		One to		Three to		Over five
(In thousands)	or less		three years		five years		years		Total
Off-balance sheet arrangements:
Standby letters of credit	$	3,703	$	1,395	$	120	$	593	$	5,811
Contractual obligations:
Time deposits		322,247		188,372		12,964		118		523,701
Borrowed funds and subordinated debentures		329,000		40,000		5,000		10,310		384,310
Total off-balance sheet arrangements and contractual obligations	$	654,950	$	229,767	$	18,084	$	11,021	$	913,822

Standby letters of credit represent guarantees of payment issued by the Bank on behalf of a client that is used as “payments of last resort” should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are ~~within~~typically short-term in duration, maturing in one year of less.

Time deposits have stated maturity dates.

Borrowed funds and subordinated debentures include fixed and adjustable rate borrowings from the ~~Board-approved guidelines~~Federal Home Loan Bank and subordinated debentures. The borrowings have defined terms and under certain circumstances are callable at the option of ~~+/- 20.0 percent.~~the lender.

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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 ~~September 30, 2022,~~March 31, 2023, the balance of cash and cash equivalents was ~~$163.4~~$127.1 million, a decrease of ~~$81.4~~$12.3 million from December 31, ~~2021.~~2022. A discussion of the cash provided by and used in operating, investing and financing activities follows.

Operating activities ~~used $1.7~~provided $13.8 million and ~~provided $20.2~~$19.6 million of net cash for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The primary sources of funds were net income from operations and adjustments to net income, such as stock compensation expense and the ~~proceeds from the sale of mortgage loans, partially offset by originations of mortgage~~net change in other assets and ~~SBA loans held for sale.~~liabilities.

Investing activities used ~~$355.3~~$19.9 million and ~~$24.9~~$88.4 million in net cash for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. Cash was primarily used to fund new ~~loans and purchase investment securities.~~loans.

●

Securities. The Consolidated Bank’s available for sale investment portfolio amounted to ~~$92.5~~$94.1 million and ~~$56.5~~$95.4 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 ~~$3.1~~$9.1 million.

●

Loans. The SBA loans held for sale portfolio amounted to ~~$36.3~~$23.3 million and ~~$27.4~~$27.9 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Sales of these loans provide an additional source of liquidity for the Company.

●

Outstanding Commitments. The Company was committed to advance approximately ~~$494.5~~$489.5 million to its borrowers as of ~~September 30, 2022,~~March 31, 2023, compared to ~~$399.8~~$514.8 million at December 31, ~~2021.~~2022. At ~~September 30, 2022, $159.5~~March 31, 2023, $167.3 million of these commitments expire within one year, compared to ~~$170.1~~$177.7 million at December 31, ~~2021.~~2022. The Company had ~~$5.1~~$5.8 million and ~~$4.3~~$5.6 million in standby letters of credit at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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 provided ~~$275.6~~$18.5 million and ~~$1.8~~$11.7 million in net cash for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ primarily due to ~~proceeds from new FHLB borrowings and an~~net increase in ~~the Company’s~~ deposits.

●

Deposits. As of ~~September 30, 2022,~~March 31, 2023, deposits included ~~$281.5~~$315.3 million of ~~New Jersey Municipality~~government deposits, as compared to ~~$247.7~~$296.5 million at year end ~~2021.~~2022. 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 ~~$260.4~~$286.7 million of deposits from 15nineteen municipalities with account

~~Table of Contents~~

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 ~~$280.0~~$374.0 million and ~~$40.0~~$383.0 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. 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 ~~September 30, 2022,~~March 31, 2023, pledging provided an additional ~~$267.1~~$253.6 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 ~~September 30, 2022,~~March 31, 2023, the Parent Company had ~~$1.6~~$0.8 million in cash and cash equivalents and ~~$5.4~~$4.2 million in investment securities valued at fair market value, compared to ~~$1.7~~$2.2 million and ~~$5.0~~$5.7 million at December 31, ~~2021.~~2022.

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:

●

A leverage capital ratio of greater than 9.0 percent;

●

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 percent or less of total consolidated assets; and

●

Total trading assets and trading liabilities of 5 percent 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.

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

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The following table shows the CBLR ratio for the Company and the Bank at ~~September 30, 2022~~March 31, 2023 and at December 31, ~~2021:~~2022.

In addition, below are the ratios under the Basel III risk-based capital guidelines for the Company and the Bank at March 31, 2023 and December 31, 2022, all of which are above minimum capital requirements:


	At September 30, 2022				At December 31, 2021				At March 31, 2023				At December 31, 2022
	Company		Bank		Company		Bank		Company		Bank		Company		Bank
CBLR	10.85	%	10.78	%	10.51	%	10.00	%
CBLR (Tier 1 Leverage Capital)									10.38	%	9.96	%	10.88	%	10.34	%
Common Equity Tier 1 Capital									11.76		11.78		11.76		11.69
Tier 1 Risk-based Capital									12.25		11.78		12.25		11.69
Total Risk-based Capital									13.50		13.03		13.48		12.93

For additional information on regulatory capital, see Note 1211 to the Consolidated Financial Statements.

Shareholders’ Equity

Shareholders’ equity increased ~~$24.5~~$1.2 million to ~~$230.2~~$240.5 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$205.7~~$239.2 million at

December 31, ~~2021,~~2022, primarily due to net income of ~~$28.5 million.~~$10.3 million partially offset by $8.2 million treasury stock purchased, at cost. Other items impacting shareholders’ equity included ~~$3.4~~$1.3 million in dividends paid on common stock, ~~$3.1 million in accumulated other comprehensive loss net of tax, and $2.5 million~~$947 thousand from the issuance of common stock under employee benefit ~~plans.~~plans and a one-time adjustment to retained earnings of $649 thousand relating to ASU No. 2016-13 ("CECL"). 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. NoA total 337,945 shares were repurchased at an average price of $25.14 during the ~~nine~~three months ended ~~September 30, 2022. Currently, 571~~March 31, 2023. As of March 31, 2023, 232 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 195 thousand shares were repurchased at an average price of $20.97, during the same period in 2021.~~


				Total Number of	Maximum Number
	Total		Weighted	Shares Purchased	of Shares that may
	Number of		Average	as Part of Publicly	yet be Purchased
	Shares		Price Paid	Announced Plans	Under the Plans
Period	Purchased		per Share	or Programs	or Programs
January 1, 2023 through January 31, 2023	35,854	$	26.27	35,854	534,290
February 1, 2023 through February 28, 2023	15,761		26.41	15,761	518,529
March 1, 2023 through March 31, 2023	286,330		23.93	286,330	232,199

Impact of Inflation and Changing Prices

The financial statements and notes thereto, presented elsewhere herein have been prepared in accordance with U.S.
GAAP, 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.

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ITEM 3 Quantitative and Qualitative Disclosures about Market Risk

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, 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.~~2022. (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 ~~September 30, 2022.~~March 31, 2023. 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,

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processing, summarizing and reporting the information the Company is required to disclose in the reports it 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 ~~September 30, 2022~~March 31, 2023 appears under the heading, “Risk Factors” within the Company’s Form 10-K for the year ended December 31, ~~2021.~~2022, in addition to the following:

Risks Related to Recent Events Impacting the Financial Services Industry

Recent events impacting the financial services industry, including the failure of Silicon Valley Bank and Signature Bank, have resulted in decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. Inability to access short-term funding, loss of client deposits or changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization. We may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial and cascading disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

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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 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
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:	~~November~~May 10, ~~2022~~2023	/s/ George Boyan
		George Boyan
		Executive Vice President and Chief Financial Officer

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	For the nine months ended
	September 30, 2022						September 30, 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	$	37,786	$	9,285	$	28,501	$	34,998	$	8,625	$	26,373
Other comprehensive (loss) income
Debt securities available for sale:
Unrealized holding (losses) gains on securities arising during the period		(6,875)		(1,612)		(5,263)		1,042		257		785
Less: reclassification adjustment for (losses) gains on securities included in net income		(1,630)		(342)		(1,288)		533		113		420
Total unrealized (losses) gains on securities available for sale		(5,245)		(1,270)		(3,975)		509		144		365
Adjustments related to defined benefit plan:
Amortization of prior service cost		—		—		—		332		94		238
Total adjustments related to defined benefit plan		—		—		—		332		94		238
Net unrealized gains from cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period		1,190		337		853		911		257		654
Total unrealized gains on cash flow hedges		1,190		337		853		911		257		654
Total other comprehensive (loss) income		(4,055)		(933)		(3,122)		1,752		495		1,257
Total comprehensive income	$	33,731	$	8,352	$	25,379	$	36,750	$	9,120	$	27,630


	September 30, 2022
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	641	$	494	$	—
Commercial loans
Commercial other		16		16		—
Commercial real estate		3,224		2,268		—
Total commercial loans		3,240		2,284		—
Residential mortgage loans		1,553		1,540		—
Consumer loans
Home equity		—		—		—
Residential construction loans		92		92		—
Total impaired loans with no related allowance		5,526		4,410		—

With an allowance:
SBA loans held for investment		457		350		129
Commercial loans
Commercial other		2,085		963		915
Commercial real estate		—		—		—
Total commercial loans		2,085		963		915
Residential mortgage loans		570		544		56
Consumer loans
Home equity		407		407		58
Residential construction loans		2,694		2,694		99
Total impaired loans with a related allowance		6,213		4,958		1,257

Total individually evaluated impaired loans:
SBA loans held for investment		1,098		844		129
Commercial loans
Commercial other		2,101		979		915
Commercial real estate		3,224		2,268		—
Total commercial loans		5,325		3,247		915
Residential mortgage loans		2,123		2,084		56
Consumer loans
Home equity		407		407		58
Residential construction loans		2,786		2,786		99
Total individually evaluated impaired loans	$	11,739	$	9,368	$	1,257


	For the nine months ended September 30, 2022
	Number of	Recorded investment
(In thousands, except number of contracts)	contracts	at time of modification
Commercial real estate	1	$	25
Commercial other	1		857
Total	2	$	882


	September 30, 2022
	Commercial		Home		Commercial
(In thousands)	real estate		equity		Other		Total
Type of modification:
Principal reduction	$	596	$	—	$	—	$	596
Maturity extension	$	841	$	—	$	16	$	857
Interest only with nominal principal		—		407		—		407
Total TDRs	$	1,437	$	407	$	16	$	1,860

Term Extension

Amortized Cost Basis

% of Total Class of

at 3/31/2023

Gross Loans

Commercial