Unity Bancorp (UNTY) 10-Q 2021 Q2 Quarterly report

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 June 30, 2021

OR

☐  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 (908) 730-7630

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

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

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

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

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

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

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

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

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

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of July 31, 2021 common stock, no par value: 10,369,513 shares outstanding.

Table of Contents

		Page #
PART I	CONSOLIDATED FINANCIAL INFORMATION
ITEM 1	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at June 30, 2021 and December 31, 2020	3
	Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020	7
	Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	8
	Notes to the Consolidated Financial Statements	9
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	70
ITEM 4	Controls and Procedures	70
PART II	OTHER INFORMATION	70
ITEM 1	Legal Proceedings	70
ITEM 1A	Risk Factors	71
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	71
ITEM 3	Defaults upon Senior Securities	71
ITEM 4	Mine Safety Disclosures	71
ITEM 5	Other Information	71
ITEM 6	Exhibits	72
	EXHIBIT INDEX	73
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	SIGNATURES	74

2

PART I        CONSOLIDATED FINANCIAL INFORMATION

ITEM 1        Consolidated Financial Statements (Unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands)	June 30, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	24,527	$	22,750
Federal funds sold and interest-bearing deposits		197,325		196,561
Cash and cash equivalents		221,852		219,311
Securities:
Debt securities available for sale (amortized cost of $32,888 in 2021 and $45,921 in 2020)		32,810		45,617
Securities held to maturity (fair value of $2,009 in 2021)		2,000		0
Equity securities with readily determinable fair values (amortized cost of $2,112 in 2021 and in 2020)		2,244		1,954
Total securities		37,054		47,571
Loans:
SBA loans held for sale		11,314		9,335
SBA loans held for investment		38,114		39,587
SBA PPP loans		132,375		118,257
Commercial loans		885,566		839,788
Residential mortgage loans		422,188		467,586
Consumer loans		64,557		66,100
Residential construction loans		99,874		87,164
Total loans		1,653,988		1,627,817
Allowance for loan losses		(22,801)		(23,105)
Net loans		1,631,187		1,604,712
Premises and equipment, net		19,799		20,226
Bank owned life insurance ("BOLI")		26,560		26,514
Deferred tax assets		9,377		9,183
Federal Home Loan Bank ("FHLB") stock		9,060		10,594
Accrued interest receivable		9,486		10,429
Goodwill		1,516		1,516
Prepaid expenses and other assets		7,420		8,858
Total assets	$	1,973,311	$	1,958,914
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	489,700	$	459,677
Interest-bearing demand		208,802		204,236
Savings		518,405		455,449
Time, under $100,000		245,423		264,671
Time, $100,000 to $250,000		74,282		95,595
Time, $250,000 and over		57,704		78,331
Total deposits		1,594,316		1,557,959
Borrowed funds		165,000		200,000
Subordinated debentures		10,310		10,310
Accrued interest payable		231		248
Accrued expenses and other liabilities		14,698		16,486
Total liabilities		1,784,555		1,785,003
Shareholders’ equity:
Common stock		92,810		91,873
Retained earnings		105,811		90,669
Treasury stock		(9,668)		(7,442)
Accumulated other comprehensive loss		(197)		(1,189)
Total shareholders’ equity		188,756		173,911
Total liabilities and shareholders’ equity	$	1,973,311	$	1,958,914
Shares issued		11,031		10,961
Shares outstanding		10,416		10,456
Treasury shares		615		505

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

3

Unity Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	For the three months ended June 30,				For the six months ended June 30,
(In thousands, except per share amounts)	2021		2020		2021		2020
INTEREST INCOME
Federal funds sold and interest-bearing deposits	$	33	$	23	$	57	$	212
FHLB stock		53		79		116		188
Securities:
Taxable		253		437		546		948
Tax-exempt		9		17		18		39
Total securities		262		454		564		987
Loans:
SBA loans		776		709		1,559		1,694
SBA PPP loans		1,748		723		3,477		723
Commercial loans		10,734		9,815		21,210		19,748
Residential mortgage loans		4,906		5,554		10,034		11,324
Consumer loans		682		875		1,538		1,835
Residential construction loans		1,486		1,046		2,701		2,153
Total loans		20,332		18,722		40,519		37,477
Total interest income		20,680		19,278		41,256		38,864
INTEREST EXPENSE
Interest-bearing demand deposits		307		329		616		706
Savings deposits		419		547		851		1,499
Time deposits		1,171		2,454		2,634		4,900
Borrowed funds and subordinated debentures		334		423		688		989
Total interest expense		2,231		3,753		4,789		8,094
Net interest income		18,449		15,525		36,467		30,770
Provision for loan losses		—		2,500		500		4,000
Net interest income after provision for loan losses		18,449		13,025		35,967		26,770
NONINTEREST INCOME
Branch fee income		269		207		564		523
Service and loan fee income		509		390		1,133		766
Gain on sale of SBA loans held for sale, net		496		92		741		565
Gain on sale of mortgage loans, net		1,066		1,553		2,817		2,604
BOLI income		133		154		261		327
Net security gains (losses)		23		79		333		(91)
Other income		399		336		772		662
Total noninterest income		2,895		2,811		6,621		5,356
NONINTEREST EXPENSE
Compensation and benefits		6,333		5,553		12,396		10,992
Processing and communications		750		769		1,557		1,477
Occupancy		631		630		1,337		1,253
Furniture and equipment		659		641		1,308		1,296
Professional services		339		261		720		531
Advertising		403		207		671		497
Deposit insurance		225		159		439		247
Director fees		204		181		412		381
BSA expenses		282		488		450		550
Other loan expenses		165		168		308		257
Loan collection and OREO expenses		54		1		5		187
Other expenses		415		119		660		833
Total noninterest expense		10,460		9,177		20,263		18,501
Income before provision for income taxes		10,884		6,659		22,325		13,625
Provision for income taxes		2,466		1,488		5,411		3,086
Net income	$	8,418	$	5,171	$	16,914	$	10,539
Net income per common share - Basic	$	0.81	$	0.48	$	1.62	$	0.97
Net income per common share - Diluted	$	0.80	$	0.47	$	1.60	$	0.96
Weighted average common shares outstanding – Basic		10,427		10,792		10,432		10,838
Weighted average common shares outstanding – Diluted		10,569		10,888		10,567		10,962

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

4

Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended
	June 30, 2021						June 30, 2020
									Income tax
	Before tax		Income tax		Net of tax		Before tax		expense		Net of tax
(In thousands)	amount		expense		amount		amount		(benefit)		amount
Net income	$	10,884		2,466		8,418	$	6,659		1,488		5,171
Other comprehensive income (loss) income
Debt securities available for sale:
Unrealized holding gains on securities arising during the period		164		45		119		497		135		362
Less: reclassification adjustment for gains on securities included in net income		23		5		18		79		17		62
Total unrealized gains on securities available for sale		141		40		101		418		118		300
Adjustments related to defined benefit plan:
Amortization of prior service cost		311		88		223		21		6		15
Total adjustments related to defined benefit plan		311		88		223		21		6		15
Net unrealized gains (losses) from cash flow hedges:
Unrealized holding gains (losses) on cash flow hedges arising during the period		18		5		13		(340)		(99)		(241)
Total unrealized gains (losses) on cash flow hedges		18		5		13		(340)		(99)		(241)
Total other comprehensive income (loss)		470		133		337		99		25		74
Total comprehensive income	$	11,354	$	2,599	$	8,755	$	6,758	$	1,513	$	5,245

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

5

Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the six months ended
	June 30, 2021						June 30, 2020
			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	$	22,325	$	5,411	$	16,914	$	13,625	$	3,086	$	10,539
Other comprehensive (loss) income
Debt securities available for sale:
Unrealized holding gains on securities arising during the period		559		134		425		331		100		231
Less: reclassification adjustment for gains (losses) on securities included in net income		333		70		263		(91)		(19)		(72)
Total unrealized gains on securities available for sale		226		64		162		422		119		303
Adjustments related to defined benefit plan:
Amortization of prior service cost		332		94		238		42		12		30
Total adjustments related to defined benefit plan		332		94		238		42		12		30
Net unrealized losses from cash flow hedges:
Unrealized holding gains (losses) on cash flow hedges arising during the period		825		233		592		(1,750)		(505)		(1,245)
Total unrealized gains (losses) on cash flow hedges		825		233		592		(1,750)		(505)		(1,245)
Total other comprehensive income (loss)		1,383		391		992		(1,286)		(374)		(912)
Total comprehensive income	$	23,708	$	5,802	$	17,906	$	12,339	$	2,712	$	9,627

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

6

Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three and six months ended June 30, 2021 and 2020

(Unaudited)

						Accumulated
						other					Total
	Stock			Retained		comprehensive			Treasury		shareholders’
(In thousands)	Shares	Amount		earnings		(loss) income		aa	stock		equity
Balance, December 31, 2020	10,456	$	91,873	$	90,669	$	(1,189)		$	(7,442)	$	173,911
Net income	—		—		8,496		—			—		8,496
Other comprehensive income, net of tax	—		—		—		655			—		655
Dividends on common stock ($0.08 per share)	—		30		(834)		—			—		(804)
Common stock issued and related tax effects (1)	36		277		—		—			—		277
Acquisition of treasury stock, at cost	(70)		—		—		—			(1,349)		(1,349)
Balance, March 31, 2021	10,422		92,180		98,331		(534)			(8,791)		181,186
Net income	—		—		8,418		—			—		8,418
Other comprehensive loss, net of tax	—		—		—		337			—		337
Dividends on common stock ($0.09 per share)	—		33		(938)		—			—		(905)
Common stock issued and 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

						Accumulated
						other					Total
	Stock			Retained		comprehensive		Treasury			shareholders’
(In thousands)	Shares	Amount		earnings		income (loss)		stock		aa	equity
Balance, December 31, 2019	10,881	$	90,113	$	70,442	$	154	$	—		$	160,709
Net income	—		—		5,368		—		—			5,368
Other comprehensive loss, net of tax	—		—		—		(986)		—			(986)
Dividends on common stock ($0.08 per share)	—		30		(871)		—		—			(841)
Common stock issued and related tax effects (1)	13		227		—		—		—			227
Acquisition of treasury stock, at cost	(11)		—		—		—		(172)			(172)
Balance, March 31, 2020	10,883		90,370		74,939		(832)		(172)			164,305
Net income	—		—		5,171		—		—			5,171
Other comprehensive loss, net of tax	—		—		—		74		—			74
Dividends on common stock ($0.08 per share)	—		29		(857)		—		—			(828)
Common stock issued and related tax effects (1)	45		704		—		—		—			704
Acquisition of treasury stock, at cost	(200)		—		—		—		(2,819)			(2,819)
Balance, June 30, 2020	10,728		91,103		79,253		(758)		(2,991)			166,607

(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.

7

Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended June 30,
(In thousands)	2021		2020
OPERATING ACTIVITIES:
Net income	$	16,914	$	10,539
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		500		4,000
Net amortization of purchase premiums and discounts on securities		123		115
Depreciation and amortization		583		791
PPP deferred fees and costs		1,707		4,419
Deferred income tax benefit		(585)		(1,343)
Net security gains		(43)		(306)
Stock compensation expense		784		707
Valuation writedowns on OREO		0		200
Gain on sale of mortgage loans, net		(3,467)		(1,861)
Gain on sale of SBA loans held for sale, net		(741)		(565)
Origination of mortgage loans sold		(183,843)		(105,855)
Origination of SBA loans held for sale		(7,178)		(3,150)
Proceeds from sale of mortgage loans, net		187,310		107,716
Proceeds from sale of SBA loans held for sale, net		6,466		7,095
BOLI income		(261)		(327)
Net change in other assets and liabilities		1,446		(2,746)
Net cash provided by operating activities		19,715		19,429
INVESTING ACTIVITIES
Purchases of securities held to maturity		(5,836)		0
Purchases of securities available for sale		(3,500)		(2,717)
Purchases of FHLB stock, at cost		(29,741)		(39,430)
Maturities and principal payments on securities held to maturity		3,836		0
Maturities and principal payments on debt securities available for sale		9,406		8,471
Proceeds from sales of debt securities available for sale		7,048		6,029
Proceeds from sales of equity securities		0		111
Proceeds from redemption of FHLB stock		31,275		41,985
Proceeds from sale of OREO		0		812
Net increase in SBA PPP loans		(15,962)		(140,516)
Net increase in loans		(11,037)		(34,351)
Proceeds from BOLI		215		215
Proceeds from sale of premises and equipment		20		0
Purchases of premises and equipment		(411)		(278)
Net cash used in investing activities		(14,687)		(159,669)
FINANCING ACTIVITIES
Net increase in deposits		36,357		233,343
Proceeds from new borrowings		125,000		183,000
Repayments of borrowings		(160,000)		(243,000)
Proceeds from exercise of stock options		268		396
Fair market value of shares withheld to cover employee tax liability		(177)		(172)
Dividends on common stock		(1,709)		(1,669)
Purchase of treasury stock		(2,226)		(2,991)
Net cash provided by financing activities		(2,487)		168,907
Increase in cash and cash equivalents		2,541		28,667
Cash and cash equivalents, beginning of period		219,311		158,016
Cash and cash equivalents, end of period	$	221,852	$	186,683
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid	$	4,806	$	8,321
Income taxes paid		6,780		3,632
Noncash investing activities:
Transfer of SBA loans held for sale to held to maturity		0		1,204
Capitalization of servicing rights	$	125	$	578

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

8

Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2021

NOTE 1. Significant Accounting Policies

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

The interim unaudited Consolidated Financial Statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”) and consist of normal recurring adjustments necessary for the fair presentation of interim results. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results which may be expected for the entire year. As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc., and its consolidated subsidiary, Unity Bank, depending on the context. Certain information and financial disclosures required by U.S. generally accepted accounting principles have been condensed or omitted from interim reporting pursuant to SEC rules. Interim financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Risks and Uncertainties

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

On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00 percent to 1.25 percent. This range was further reduced to 0 percent to 0.25 percent on March 16, 2020. On March 27, 2020, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. These reductions in interest rates and other effects of the COVID-19 pandemic may materially and adversely affect the Company’s financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions.

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administration after 2021. The

9

announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated debentures, what rate or rates may become accepted alternatives to LIBOR or the effect of any changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

Other-Than-Temporary Impairment

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

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

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

Transfers of Financial Assets

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

10

Loans

Loans Held for Sale

Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans, other than loans originated under the Paycheck Protection Program, and are reflected at the lower of aggregate cost or market value. The Company originates loans to customers under an SBA program that historically has provided for SBA guarantees of up to 90 percent of each loan. The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio. The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.

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

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

Loans Held for Investment

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

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

Nonperforming loans consist of loans that are not accruing interest 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 (nonaccrual loans). 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.

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.

Troubled debt restructurings ("TDRs") occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Interest income on

11

accruing TDRs is credited to operations primarily based upon the principal amount outstanding, as stated in the paragraphs above.

The Company evaluates its loans for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company has defined impaired loans to be all TDRs and nonperforming loans individually evaluated for impairment. 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.

For additional information on loans, see Note 8 to the Consolidated Financial Statements and the section titled "Loan Portfolio" under Item 2. Management’s Discussion and Analysis.

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

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

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 Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the allowance are made through other expenses and applied to the allowance which is maintained in other liabilities.

For additional information on the allowance for loan losses and unfunded loan commitments, see Note 9 to the Consolidated Financial Statements and the sections titled "Asset Quality" and "Allowance for Loan Losses and Reserve for Unfunded Loan Commitments" under Item 2. Management’s Discussion and Analysis.

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.

12

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

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

NOTE 2. Litigation

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

NOTE 3. Net Income per Share

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

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

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

	For the three months ended June 30,				For the six months ended June 30,
(In thousands, except per share amounts)	2021		2020		2021		2020
Net income	$	8,418	$	5,171	$	16,914	$	10,539
Weighted average common shares outstanding - Basic		10,427		10,792		10,432		10,838
Plus: Potential dilutive common stock equivalents		142		96		135		124
Weighted average common shares outstanding - Diluted		10,569		10,888		10,567		10,962
Net income per common share - Basic	$	0.81	$	0.48	$	1.62	$	0.97
Net income per common share - Diluted		0.80		0.47		1.60		0.96
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive		247		450		262		403

13

NOTE 4. Income Taxes

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

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

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

For the quarter ended June 30, 2021, the Company reported income tax expense of $2.5 million for an effective tax rate of 22.7 percent, compared to an income tax expense of $1.5 million and an effective tax rate of 22.3 percent for the prior year’s quarter. For the six months ended June 30, 2021, the Company reported income tax expense of $5.4 million for an effective tax rate of 24.2 percent, compared to an income tax expense of $3.1 million and an effective tax rate of 22.6 percent for the six months ended June 30, 2021. The Company did 0t recognize or accrue any interest or penalties related to income taxes during the three or the six months ended June 30, 2021 or 2020. The Company did 0t have an accrual for uncertain tax positions as of June 30, 2021 or December 31,2020, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2016 and thereafter are subject to future examination by tax authorities.

NOTE 5. Other Comprehensive Income (Loss)

The following tables show the changes in other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020, net of tax:

	For the three months ended June 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	$	(153)	$	(223)	$	(158)	$	(534)
Other comprehensive income before reclassifications		119		—		13		132
Less amounts reclassified from accumulated other comprehensive income (loss)		18		(223)		—		(205)
Period change		101		223		13		337
Balance, end of period	$	(52)	$	—	$	(145)	$	(197)

14

	For the three months ended June 30, 2020
			Adjustments		Net unrealized		Accumulated
	Net unrealized		related to		losses		other
	gains on		defined benefit		from cash flow		comprehensive
(In thousands)	securities		plan		hedges		(loss) income
Balance, beginning of period	$	284	$	(280)	$	(836)	$	(832)
Other comprehensive income (loss) before reclassifications		362		—		(241)		121
Less amounts reclassified from accumulated other comprehensive income (loss)		62		(15)		—		47
Period change		300		15		(241)		74
Balance, end of period	$	584	$	(265)	$	(1,077)	$	(758)

	For the six months ended June 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		425		—		592		1,017
Less amounts reclassified from accumulated other comprehensive income (loss)		263		(238)		—		25
Period change		162		238		592		992
Balance, end of period	$	(52)	$	—	$	(145)	$	(197)

	For the six months ended June 30, 2020
			Adjustments		Net unrealized		Accumulated
	Net unrealized		related to		gains (losses)		other
	gains (loss) on		defined benefit		from cash flow		comprehensive
(In thousands)	securities		plan		hedges		income (loss)
Balance, beginning of period	$	281	$	(295)	$	168	$	154
Other comprehensive income (loss) before reclassifications		231		—		(1,245)		(1,014)
Less amounts reclassified from accumulated other comprehensive loss		(72)		(30)		—		(102)
Period change		303		30		(1,245)		(912)
Balance, end of period	$	584	$	(265)	$	(1,077)	$	(758)

NOTE 6. Fair Value

Fair Value Measurement

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

15

hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

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

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

Level 2 Inputs

● Quoted prices for similar assets or liabilities in active markets.

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

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

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

Level 3 Inputs

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

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

Fair Value on a Recurring Basis

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

Debt Securities Available for Sale

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

As of June 30, 2021, the fair value of the Company’s AFS debt securities portfolio was $32.8 million. Approximately 39 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $12.9 million at June 30, 2021. Approximately $12.7 million of the residential mortgage-backed securities are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.

Most of the Company’s AFS debt securities were classified as Level 2 assets at June 30, 2021. The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for

16

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 June 30, 2021, which were previously classified as Level 2 assets.  The valuation of these corporate bonds is determined using broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques.  Market inputs used in the other valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government bond yield curves, credit spreads, and trade execution data. 

The following table presents a reconciliation of the Level 3 available for sale debt securities measured at fair value on a recurring basis for the three and six months ended June 30, 2021 and 2020:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2021		2020		2021		2020
Balance at beginning of period (1)	$	4,538	$	6,238	$	4,400	$	6,238
Purchases/additions		—		—		—		—
Sales/reductions		—		—		—		—
Realized gains (losses)		—		—		—		—
Unrealized gains		137		5		275		5
Balance at end of period	$	4,675	$	6,243	$	4,675	$	6,243

(1) Includes AFS debt securities classified as Level 2 at December 31, 2020, which were transferred to Level 3 during the three months ended June 30, 2021.

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 June 30, 2021, the fair value of the Company’s equity securities portfolio was $2.2 million.

All of the Company’s equity securities were classified as Level 2 assets at June 30, 2021. 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 June 30, 2021, as compared to the periods ended December 31, 2020 and June 30, 2020.

Loans Held for Sale

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

Interest Rate Swap Agreements

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

17

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 June 30, 2021 and December 31, 2020:

	Fair Value Measurements at June 30, 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:
State and political subdivisions	$	1,312	$	—	$	1,312	$	—
Residential mortgage-backed securities		12,883		—		12,883		—
Corporate and other securities		18,615		—		13,940		4,675
Total debt securities available for sale	$	32,810	$	—	$	28,135	$	4,675
Equity securities with readily determinable fair values		2,244		—		2,244		—
Total equity securities	$	2,244	$	—	$	2,244	$	—
Loans held for sale		13,396		—		13,396		—
Total loans held for sale	$	13,396	$	—	$	13,396	$	—
Interest rate swap agreements		(202)		—		(202)		—
Total swap agreements	$	(202)	$	—	$	(202)	$	—

	Fair value Measurements at December 31, 2020 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	$	2,003	$	—	$	2,003	$	—
State and political subdivisions		2,969		—		2,969		—
Residential mortgage-backed securities		17,410		—		17,410		—
Corporate and other securities		23,235		—		18,835		4,400
Total debt securities available for sale	$	45,617	$	—	$	41,217	$	4,400
Equity securities with readily determinable fair values		1,954		—		1,954		—
Total equity securities	$	1,954	$	—	$	1,954	$	—
Loans held for sale		10,712		—		10,712		—
Total loans held for sale	$	10,712	$	—	$	10,712	$	—
Interest rate swap agreements		(1,026)		—		(1,026)		—
Total swap agreements	$	(1,026)	$	—	$	(1,026)	$	—

18

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 June 30, 2021 Using
			Quoted Prices		Significant
			in Active		Other		Significant
	Assets/Liabilities		Markets for		Observable		Unobservable		Net Credit
	Measured at Fair		Identical Assets		Inputs		Inputs		During
(In thousands)	Value		(Level 1)		(Level 2)		(Level 3)		Period
Measured on a non-recurring basis:
Financial assets:
Impaired collateral-dependent loans	$	10,478	$	—	$	—	$	10,478	$	(716)

	Fair Value Measurements at December 31, 2020 Using
			Quoted Prices		Significant
			in Active		Other		Significant		Net (Credit)
	Assets/Liabilities		Markets for		Observable		Unobservable		Provision
	Measured at Fair		Identical Assets		Inputs		Inputs		During
(In thousands)	Value		(Level 1)		(Level 2)		(Level 3)		Period
Financial assets:
OREO	$	—	$	—	$	—	$	—	$	(225)
Impaired collateral-dependent loans		11,959		—		—		11,959		3,693

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.”

OREO

The fair value of OREO is determined using third party appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs).

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 in the manner discussed above. If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status. The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status. The Company removes loans from nonaccrual status generally when the borrower makes three months of contractual payments and demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

19

The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. At June 30, 2021, the valuation allowance for impaired loans was $3.4 thousand, a decrease of $716 thousand from $4.1 thousand at December 31, 2020.

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 June 30, 2021 and December 31, 2020 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.

FHLB Stock

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

Servicing Assets

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

20

Deposit Liabilities

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

Borrowed Funds and Subordinated Debentures

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

Standby Letters of Credit

At each of June 30, 2021 and Dember 31, 2020, the Bank had standby letters of credit outstanding of $4.5 million. 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 June 30, 2021 and December 31, 2020:

		June 30, 2021				December 31, 2020
	Fair value	Carrying		Estimated		Carrying		Estimated
(In thousands)	level	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	Level 1	$	221,852	$	221,852	$	219,311	$	219,311
Securities (1)	Level 2		37,054		35,054		47,571		47,571
SBA loans held for sale	Level 2		11,314		13,396		9,335		10,712
Loans, net of allowance for loan losses (2)	Level 2		1,619,873		1,634,039		1,595,377		1,613,593
FHLB stock	Level 2		9,060		9,060		10,594		10,594
Servicing assets	Level 3		1,476		1,476		1,857		1,857
Accrued interest receivable	Level 2		9,486		9,486		10,429		10,429
Financial liabilities:
Deposits	Level 2		1,594,316		1,593,544		1,557,959		1,561,502
Borrowed funds and subordinated debentures	Level 2		175,310		176,552		210		212,358
Accrued interest payable	Level 2		231		231		248		248

(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 $4.7 million and market values of $4.4 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 $10.5 million and $12.0 million at June 30, 2021 and December 31, 2020, 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.

21

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.

NOTE 7. Securities

This table provides the major components of debt securities available for sale ("AFS"), held to maturity (“HTM”) and equity securities with readily determinable fair values ("equity securities") at amortized cost and estimated fair value at June 30, 2021 and December 31, 2020:

	June 30, 2021								December 31, 2020
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated
(In thousands)	cost		gains		losses		fair value		cost		gains		losses		fair value
Available for sale:
U.S. Government sponsored entities	$	—	$	—	$	—	$	—	$	2,000	$	3	$	—	$	2,003
State and political subdivisions		1,293		19		—		1,312		2,935		34		—		2,969
Residential mortgage-backed securities		12,412		471		—		12,883		16,765		645		—		17,410
Corporate and other securities		19,183		196		(764)		18,615		24,221		132		(1,118)		23,235
Total debt securities available for sale	$	32,888	$	686	$	(764)	$	32,810	$	45,921	$	814	$	(1,118)	$	45,617
Held to maturity:
U.S. Government sponsored entities	$	2,000	$	9	$	—	$	2,009	$	—	$	—	$	—	$	—
Total securities held to maturity	$	2,000	$	9	$	—	$	2,009	$	—	$	—	$	—	$	—
Equity securities:
Total equity securities	$	2,112	$	205	$	(73)	$	2,244	$	2,112	$	—	$	(158)	$	1,954

This table provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at June 30, 2021 is distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.

					After one through				After five through								Total carrying
	Within one year				five years				ten years				After ten years				value
(In thousands, except percentages)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale at fair value:
State and political subdivisions	$	201	3.85	%	$	627	3.23	%	$	—	—	%	$	484	2.74	%	$	1,312	3.14	%
Residential mortgage-backed securities		3	4.68			452	2.88			1,286	2.25			11,142	1.89			12,883	1.96
Corporate and other securities		—	—			—	—			12,440	4.56			6,175	2.79			18,615	3.70
Total debt securities available for sale	$	204	3.86	%	$	1,079	3.08	%	$	13,726	4.34	%	$	17,801	2.22	%	$	32,810	3.15	%
Held to maturity at cost:
U.S. Government sponsored entities	$	—	—	%	$	—	—	%	$	—	—	%	$	2,000	2.49	%	$	2,000	2.49	%
Total securities held to maturity	$	—	—	%	$	—	—	%	$	—	—	%	$	2,000	2.49	%	$	2,000	2.49	%
Equity Securities at fair value:
Total equity securities	$	—	—	%	$	—	—	%	$	—	—	%	$	2,244	2.35	%	$	2,244	2.35	%

22

The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2021 and December 31, 2020 are as follows:

	June 30, 2021
		Less than 12 months				12 months and greater				Total
	Total
	number in a	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands, except number in a loss position)	loss position	fair value		loss		fair value		loss		fair value		loss
Available for sale:
Corporate and other securities	6	$	2,396	$	(104)	$	7,892	$	(660)	$	10,288	$	(764)
Total temporarily impaired securities	6	$	2,396	$	(104)	$	7,892	$	(660)	$	10,288	$	(764)

	December 31, 2020
		Less than 12 months				12 months and greater				Total
	Total
	number in a	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands, except number in a loss position)	loss position	fair value		loss		fair value		loss		fair value		loss
Available for sale:
Corporate and other securities	9	$	4,793	$	(20)	$	9,157	$	(1,098)	$	13,950	$	(1,118)
Total temporarily impaired securities	9	$	4,793	$	(20)	$	9,157	$	(1,098)	$	13,950	$	(1,118)

Unrealized Losses

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

U.S. government sponsored entities and state and political subdivision securities: The unrealized losses on investments in these types of securities were caused by the increase in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than temporarily impaired as of June 30, 2021 or December 31, 2020.

Residential and commercial mortgage-backed securities:  The unrealized losses on investments in mortgage-backed securities were caused by increases in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The majority of contractual cash flows of these securities are guaranteed by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2021 or December 31, 2020.

Corporate and other securities: Included in this category are corporate and other debt securities. The unrealized losses on corporate and other debt securities were due to widening credit spreads. The Company evaluated the prospects of the issuers and forecasted a recovery period; and as a result determined it did not consider these investments to be other-than-temporarily impaired as of June 30, 2021 or December 31, 2020. The contractual terms do not allow the securities to be settled at a price less than the par value. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis, which may be at maturity, the Company did not consider these securities to be other-than-temporarily impaired as of June 30, 2021 or December 31, 2020.

23

Realized Gains and Losses

Gross realized gains and losses on securities for the three and six months ended June 30, 2021 and 2020 are detailed in the table below:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2021		2020		2021		2020
Available for sale:
Realized gains	$	—	$	5	$	43	$	301
Realized losses		—		—		—		—
Total debt securities available for sale		—		5		43		301
Net gains on sales of securities	$	—	$	5	$	43	$	301

The net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were 0 gross realized gains and $43 thousand of gross realized gains during the three and six months ended June 30, 2021, compared to $5 thousand and $301 thousand of gross realized gains during the same period a year ago. There were 0 gross realized losses for the three and six months ended June 30, 2021, or 2020.

For the six months ended June 30, 2021, the net gain is attributed to:

● the sale of 6 corporate bonds with a total book value of $7.0 million and resulting gains of $39 thousand, and

● the call of 1 taxable municipal security with a book value of $496 thousand and resulting gains of $4 thousand.

For the six months ended June 30, 2020, the net gain is attributed to:

● the sale of 1 corporate bond with a book value of $2.2 million and resulting gains of $61 thousand,

● 3 mortgage-backed securities with a total book value of $2.8 million and resulting gains of $57 thousand,

● 1 tax-exempt municipal security with a book value of $456 thousand and resulting gains of $140 thousand, and

● the call of 3 tax-exempt municipal securities with a total book value of $3.8 million and resulting gains of $16 thousand.

Equity Securities

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

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended June 30, 2021 and 2020:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2021		2020		2021		2020
Net gains (losses) recognized during the period on equity securities	$	(100)	$	74	$	290	$	(397)
Net gains recognized during the period on equity securities sold during the period		—		—		—		5
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	(100)	$	74	$	290	$	(392)

24

Pledged Securities

Securities with a carrying value of $1.4 million and $1.6 million at June 30, 2021 and December 31, 2020, respectively, were pledged to secure deposits, secure other borrowings and for other purposes required or permitted by law.

NOTE 8. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of June 30, 2021 and December 31, 2020:

(In thousands)	June 30, 2021		December 31, 2020
SBA loans held for investment	$	38,114	$	39,587
SBA PPP loans		132,375		118,257
Commercial loans
SBA 504 loans		22,155		19,681
Commercial other		113,778		118,280
Commercial real estate		676,383		630,423
Commercial real estate construction		73,250		71,404
Residential mortgage loans		422,188		467,586
Consumer loans
Home equity		63,390		62,549
Consumer other		1,167		3,551
Residential construction loans		99,874		87,164
Total loans held for investment	$	1,642,674	$	1,618,482
SBA loans held for sale		11,314		9,335
Total loans	$	1,653,988	$	1,627,817

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

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

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

The CARES Act provided assistance to small businesses through the establishment of the SBA Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds were provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can

25

be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. Applications for the Second Draw PPP loans 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 market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination.

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

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

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

Credit Ratings

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

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

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

26

weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

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

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

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

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

At June 30, 2021, there were $2.4 million of residential consumer loans in the process of foreclosure, compared to $4.8 million at December 31, 2020.

27

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of June 30, 2021:

	June 30, 2021
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	36,714	$	524	$	876	$	38,114
SBA PPP loans		132,375		—		—		132,375
Commercial loans
SBA 504 loans		22,155		—		—		22,155
Commercial other		102,994		7,582		3,202		113,778
Commercial real estate		648,520		22,285		5,578		676,383
Commercial real estate construction		73,250		—		—		73,250
Total commercial loans		846,919		29,867		8,780		885,566
Total SBA and commercial loans	$	1,016,008	$	30,391	$	9,656	$	1,056,055
			Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	418,145	$	4,043	$	422,188
Consumer loans
Home equity				63,390		—		63,390
Consumer other				1,164		3		1,167
Total consumer loans				64,554		3		64,557
Residential construction loans				97,585		2,289		99,874
Total residential mortgage, consumer and residential construction loans			$	580,284	$	6,335	$	586,619

28

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2020:

	December 31, 2020
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	36,991	$	525	$	2,071	$	39,587
SBA PPP loans		118,257		—		—		118,257
Commercial loans
SBA 504 loans		19,681		—		—		19,681
Commercial other		109,672		5,533		3,075		118,280
Commercial real estate		603,482		25,206		1,735		630,423
Commercial real estate construction		71,404		—		—		71,404
Total commercial loans		804,239		30,739		4,810		839,788
Total SBA and commercial loans	$	959,487	$	31,264	$	6,881	$	997,632
			Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	462,369	$	5,217	$	467,586
Consumer loans
Home equity				61,254		1,295		62,549
Consumer other				3,551		—		3,551
Total consumer loans				64,805		1,295		66,100
Residential construction loans				85,414		1,750		87,164
Total residential mortgage, consumer and residential construction loans			$	612,588	$	8,262	$	620,850

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. 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.

29

The following tables set forth an aging analysis of past due and nonaccrual loans as of June 30, 2021 and December 31, 2020:

	June 30, 2021
					90+ days
	30‑59 days		60‑89 days		and still		Nonaccrual		Total past
(In thousands)	past due		past due		accruing		(1)		due		Current		Total loans
SBA loans held for investment	$	962	$	—	$	—	$	1,713	$	2,675	$	35,439	$	38,114
SBA PPP loans		—		—		—		—		—		132,375		132,375
Commercial loans
SBA 504 loans		—		—		—		—		—		22,155		22,155
Commercial other		201		71		—		132		404		113,374		113,778
Commercial real estate		625		572		—		1,505		2,702		673,681		676,383
Commercial real estate construction		—		—		—		—		—		73,250		73,250
Residential mortgage loans		4,772		155		574		4,043		9,544		412,644		422,188
Consumer loans
Home equity		1,325		178		—		—		1,503		61,887		63,390
Consumer other		—		—		—		3		3		1,164		1,167
Residential construction loans		1,435		—		—		2,289		3,724		96,150		99,874
Total loans held for investment		9,320		976		574		9,685		20,555		1,622,119		1,642,674
SBA loans held for sale		—		—		—		—		—		11,314		11,314
Total loans	$	9,320	$	976	$	574	$	9,685	$	20,555	$	1,633,433	$	1,653,988

(1) At June 30, 2021, nonaccrual loans included $139 thousand of loans guaranteed by the SBA.

	December 31, 2020
					90+ days
	30‑59 days		60‑89 days		and still		Nonaccrual		Total past
(In thousands)	past due		past due		accruing		(1)		due		Current		Total loans
SBA loans held for investment	$	792	$	1,280	$	—	$	2,473	$	4,545	$	35,042	$	39,587
SBA PPP loans		—		—		—		—				118,257		118,257
Commercial loans
SBA 504 loans		—		—		—		—		—		19,681		19,681
Commercial other		186		201		—		266		653		117,627		118,280
Commercial real estate		3,109		1,971		—		1,059		6,139		624,284		630,423
Commercial real estate construction		1,047		—		—		—		1,047		70,357		71,404
Residential mortgage loans		3,232		2,933		262		5,217		11,644		455,942		467,586
Consumer loans
Home equity		393		—		187		1,295		1,875		60,674		62,549
Consumer other		3		1		—		—		4		3,547		3,551
Residential construction loans		120		796		—		1,750		2,666		84,498		87,164
Total loans held for investment		8,882		7,182		449		12,060		28,573		1,589,909		1,618,482
SBA loans held for sale		448		—		—		—		448		8,887		9,335
Total loans	$	9,330	$	7,182	$	449	$	12,060	$	29,021	$	1,598,796	$	1,627,817

(1) At December 31, 2020, nonaccrual loans included $371 thousand of loans guaranteed by the SBA.

30

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.

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 June 30, 2021:

	June 30, 2021
	Unpaid
	principal			Recorded			Specific
(In thousands)	balance			investment		��	reserves
With no related allowance:
SBA loans held for investment (1)	$	739		$	640		$	—
Commercial loans
Commercial real estate		2,641			2,642			—
Total commercial loans		2,641			2,642			—
Residential mortgage loans		3,831			3,756			—
Consumer loans
Home equity		427			427			—
Residential construction loans		2,289			2,289			—
Total impaired loans with no related allowance		9,927			9,754			—
With an allowance:
SBA loans held for investment (1)		1,404			934			467
Commercial loans
Commercial other		2,745			2,745			2,745
Commercial real estate		994			146			146
Total commercial loans		3,739			2,891			2,891
Residential mortgage loans		287			287			30
Consumer loans
Consumer other		3			3			3
Total impaired loans with a related allowance		5,433			4,115			3,391
Total individually evaluated impaired loans:
SBA loans held for investment (1)		2,143			1,574			467
Commercial loans			���
Commercial other		2,745			2,745			2,745
Commercial real estate		3,635			2,788			146
Total commercial loans		6,380			5,533			2,891
Residential mortgage loans		4,118			4,043			30
Consumer loans
Home equity		427			427			—
Consumer other		3			3			3
Residential construction loans		2,289			2,289			—
Total individually evaluated impaired loans	$	15,360		$	13,869		$	3,391

(1) Balances are reduced by amount guaranteed by the SBA of $139 thousand at June 30, 2021.

31

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, 2020:

	December 31, 2020
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment (1)	$	1,799	$	1,698	$	—
Commercial loans
Commercial real estate		1,462		1,462		—
Total commercial loans		1,462		1,462		—
Residential mortgage loans		4,080		3,975		—
Consumer loans
Home equity		1,295		1,295		—
Residential construction loans		1,750		1,750		—
Total impaired loans with no related allowance		10,386		10,180		—
With an allowance:
SBA loans held for investment (1)		434		404		324
Commercial loans
Commercial other		3,160		3,160		3,106
Commercial real estate		1,730		1,080		576
Total commercial loans		4,890		4,240		3,682
Residential mortgage loans		1,242		1,242		101
Total impaired loans with a related allowance		6,566		5,886		4,107
Total individually evaluated impaired loans:
SBA loans held for investment (1)		2,233		2,102		324
Commercial loans
Commercial other		3,160		3,160		3,106
Commercial real estate		3,192		2,542		576
Total commercial loans		6,352		5,702		3,682
Residential mortgage loans		5,322		5,217		101
Consumer loans
Home equity		1,295		1,295		—
Residential construction loans		1,750		1,750		—
Total individually evaluated impaired loans	$	16,952	$	16,066	$	4,107

(1) Balances are reduced by amount guaranteed by the SBA of $371 thousand at December 31, 2020.

32

The following table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the three and six months ended June 30, 2021 and 2020. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized. The interest income recognized on impaired loans noted below represents primarily accruing TDRs and nominal amounts of income recognized on a cash basis for well-collateralized impaired loans.

	For the three months ended June 30,
	2021				2020
			Interest				Interest
			income				income
	Average		recognized		Average		recognized
	recorded		on impaired		recorded		on impaired
(In thousands)	investment		loans		investment		loans
SBA loans held for investment (1)	$	1,334	$	64	$	1,265	$	3
Commercial loans
Commercial other		271		6		99		12
Commercial real estate		2,121		30		1,282		33
Residential mortgage loans		4,983		—		6,054		52
Consumer loans
Home equity		444		5		505		4
Residential construction loans		2,805		10		—		—
Total	$	11,958	$	115	$	9,205	$	104

(1) Balances are reduced by the average amount guaranteed by the SBA of $139 thousand and $655 thousand for the three months ended June 30, 2021 and 2020, respectively.

	For the six months ended June 30,
	2021				2020
			Interest				Interest
			income				income
	Average		recognized		Average		recognized
	recorded		on impaired		recorded		on impaired
(In thousands)	investment		loans		investment		loans
SBA loans held for investment (1)	$	1,618	$	81	$	1,197	$	6
Commercial loans
SBA 504 loans		—		—		300		32
Commercial other		322		9		52		21
Commercial real estate		2,179		85		1,165		45
Residential mortgage loans		5,272		—		5,875		81
Consumer loans
Home equity		644		23		424		9
Consumer other		—		—		38		—
Residential construction loans		2,707		20		—		—
Total	$	12,742	$	218	$	9,051	$	194

(1) Balances are reduced by the average amount guaranteed by the SBA of $216 thousand and $418 thousand for the six months ended June 30, 2021 and 2020, respectively.

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

33

include reductions in interest rate, extending the maturity of a loan, or a combination of both. Under the CARES Act and regulatory guidance issued in regards to the COVID-19 pandemic, loan payment deferrals for periods of up to 180 days granted to borrowers adversely effected by the pandemic are not considered TDR’s if the borrower was current on its loan payments at year end 2019 or until the deferral was granted. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if the loan is collateral-dependent. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

TDRs of $1.1 million and $663 thousand are included in the impaired loan numbers as of June 30, 2021 and December 31, 2020, respectively. The increase in TDRs was due to the addition of 2 loans, partially offset by principal pay downs. At June 30, 2021 and December 31, 2020, there were 0 specific reserves on the TDRs. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.

There were 2 loans modified as TDRs during the six months ended June 30, 2021. There were 0 loans modified during the six months ended June 30, 2020 that were deemed to be TDRs. The following table details loans modified during the six months ended June 30, 2021, including the number of modifications and the recorded investment at the time of the modification:

	For the six months ended June 30, 2021
	Number of	Recorded investment
(In thousands, except number of contracts)	contracts	at time of modification
Home equity	2	$	427
Total	2	$	427

To date, the Company’s TDRs consisted of principal reduction, interest only periods and maturity extensions. There were 0 loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the six months ended June 30, 2021. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

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

Allowance for Loan Losses

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

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans and TDRs (see Note 1 for additional information on this term). 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

34

credit concentration changes. Within the five-year historical net charge-off rate, the Company weights the past three years more heavily as it believes it is more indicative of future charge-offs. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

● For SBA 7(a) and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower’s industry and future prospects. It also incorporates analysis of the type of collateral and the relative loan to value ratio.

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

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

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

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020:

	For the three months ended June 30, 2021
	SBA held
	for									Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,654	$	14,727	$	5,009	$	549	$	1,026	$	22,965
Charge-offs		(164)		(20)		—		—		—		(184)
Recoveries		19		1		—		—		—		20
Net charge-offs		(145)		(19)		—		—		—		(164)
Provision for (credit to) loan losses charged to expense		177		303		(405)		52		(127)		—
Balance, end of period	$	1,686	$	15,011	$	4,604	$	601	$	899	$	22,801

	For the three months ended June 30, 2020
	SBA held
	for									Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,005	$	10,129	$	4,763	$	671	$	808	$	17,376
Charge-offs		—		(219)		—		—		—		(219)
Recoveries		75		502		—		—		—		577
Net recoveries		75		283		—		—		—		358
Provision for (credit to) loan losses charged to expense		(76)		1,924		676		(60)		36		2,500
Balance, end of period	$	1,004	$	12,336	$	5,439	$	611	$	844	$	20,234

35