Unity Bancorp 10Q 2022 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

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

For the transition period from ____ to ____.

Commission File Number 1-12431

Unity Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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


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

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

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

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

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


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

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

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

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of July 29, 2022 common stock, no par value: 10,508,898 shares outstanding.

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		Page #
PART I	CONSOLIDATED FINANCIAL INFORMATION

ITEM 1	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at June 30, 2022 and December 31, 2021	3

	Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021	5

	Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021	7

	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	8

	Notes to the Consolidated Financial Statements	9

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	64

ITEM 4	Controls and Procedures	64

PART II	OTHER INFORMATION	64

ITEM 1	Legal Proceedings	64

ITEM 1A	Risk Factors	65

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	65

ITEM 3	Defaults upon Senior Securities	65

ITEM 4	Mine Safety Disclosures	65

ITEM 5	Other Information	65

ITEM 6	Exhibits	66

	EXHIBIT INDEX	67

	Exhibit 31.1

	Exhibit 31.2

	Exhibit 32.1

	SIGNATURES	68

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PART I CONSOLIDATED FINANCIAL INFORMATION

ITEM 1 Consolidated Financial Statements (Unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)


(In thousands)	June 30, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	23,997	$	26,053
Interest-bearing deposits		85,046		218,765
Cash and cash equivalents		109,043		244,818
Securities:
Debt securities available for sale (amortized cost of $98,514 in 2022 and $56,442 in 2021)		93,972		56,480
Securities held to maturity (fair value of $32,653 in 2022 and $14,229 in 2021)		36,813		14,276
Equity securities with readily determinable fair values (amortized cost of $9,703 in 2022 and $8,163 in 2021)		9,050		8,566
Total securities		139,835		79,322
Loans:
SBA loans held for sale		32,183		27,373
SBA loans held for investment		33,089		36,075
SBA PPP loans		14,216		46,450
Commercial loans		1,026,313		931,726
Residential mortgage loans		481,687		409,355
Consumer loans		79,645		77,944
Residential construction loans		134,460		120,525
Total loans		1,801,593		1,649,448
Allowance for loan losses		(22,858)		(22,302)
Net loans		1,778,735		1,627,146
Premises and equipment, net		19,288		19,914
Bank owned life insurance ("BOLI")		26,464		26,608
Deferred tax assets		11,933		10,040
Federal Home Loan Bank ("FHLB") stock		9,223		3,550
Accrued interest receivable		9,961		9,586
Goodwill		1,516		1,516
Prepaid expenses and other assets		11,158		11,213
Total assets	$	2,117,156	$	2,033,713
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	511,062	$	529,227
Interest-bearing demand		249,997		244,073
Savings		670,129		694,161
Time, under $100,000		167,462		194,961
Time, $100,000 to $250,000		63,105		62,668
Time, $250,000 and over		36,212		33,791
Total deposits		1,697,967		1,758,881
Borrowed funds		165,000		40,000
Subordinated debentures		10,310		10,310
Accrued interest payable		128		129
Accrued expenses and other liabilities		22,962		18,664
Total liabilities		1,896,367		1,827,984
Shareholders’ equity:
Common stock		95,650		94,003
Retained earnings		139,394		123,037
Treasury stock		(11,633)		(11,633)
Accumulated other comprehensive (loss) income		(2,622)		322
Total shareholders’ equity		220,789		205,729
Total liabilities and shareholders’ equity	$	2,117,156	$	2,033,713

Shares issued		11,214		11,094
Shares outstanding		10,511		10,391
Treasury shares		703		703

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

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)	2022		2021		2022		2021
INTEREST INCOME
Interest-bearing deposits	$	152	$	33	$	248	$	57
FHLB stock		50		53		83		116
Securities:
Taxable		1,115		253		1,768		546
Tax-exempt		10		9		16		18
Total securities		1,125		262		1,784		564
Loans:
SBA loans		926		776		1,849		1,559
SBA PPP loans		492		1,748		1,269		3,477
Commercial loans		12,414		10,734		23,910		21,210
Residential mortgage loans		4,982		4,906		9,372		10,034
Consumer loans		919		682		1,840		1,538
Residential construction loans		2,011		1,486		3,835		2,701
Total loans		21,744		20,332		42,075		40,519
Total interest income		23,071		20,680		44,190		41,256
INTEREST EXPENSE
Interest-bearing demand deposits		198		307		362		616
Savings deposits		412		419		757		851
Time deposits		419		1,171		899		2,634
Borrowed funds and subordinated debentures		285		334		511		688
Total interest expense		1,314		2,231		2,529		4,789
Net interest income		21,757		18,449		41,661		36,467
Provision for loan losses		1,188		—		1,009		500
Net interest income after provision for loan losses		20,569		18,449		40,652		35,967
NONINTEREST INCOME
Branch fee income		281		269		556		564
Service and loan fee income		688		509		1,272		1,133
Gain on sale of SBA loans held for sale, net		—		496		852		741
Gain on sale of mortgage loans, net		431		1,066		952		2,817
BOLI income		161		133		324		261
Net security (losses) gains		(498)		23		(1,055)		333
Other income		1,686		399		2,088		772
Total noninterest income		2,749		2,895		4,989		6,621
NONINTEREST EXPENSE
Compensation and benefits		6,811		6,333		13,319		12,396
Processing and communications		706		750		1,458		1,557
Occupancy		727		631		1,502		1,337
Furniture and equipment		618		659		1,194		1,308
Other loan (income) expenses		(5)		165		839		720
Professional services		392		339		565		671
Advertising		340		403		130		308
Deposit insurance		250		225		519		439
Director fees		225		204		459		412
Loan collection expenses		36		54		93		5
Other expenses		610		697		1,044		1,110
Total noninterest expense		10,710		10,460		21,122		20,263
Income before provision for income taxes		12,608		10,884		24,519		22,325
Provision for income taxes		3,157		2,466		5,960		5,411
Net income	$	9,451	$	8,418	$	18,559	$	16,914
Net income per common share – Basic	$	0.90	$	0.81	$	1.77	$	1.62
Net income per common share – Diluted	$	0.88	$	0.80	$	1.74	$	1.60
Weighted average common shares outstanding – Basic		10,504		10,427		10,475		10,432
Weighted average common shares outstanding – Diluted		10,706		10,569		10,685		10,567

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

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Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended
	June 30, 2022						June 30, 2021
			Income tax
	Before tax		expense		Net of tax		Before tax		Income tax		Net of tax
(In thousands)	amount		(benefit)		amount		amount		expense		amount
Net income	$	12,608		3,157		9,451	$	10,884		2,466		8,418
Other comprehensive (loss) income
Debt securities available for sale:
Unrealized holding (losses) gains on securities arising during the period		(4,010)		(956)		(3,054)		164		45		119
Less: reclassification adjustment for (losses) gains on securities included in net income		(498)		(104)		(394)		23		5		18
Total unrealized (losses) gains on securities available for sale		(3,512)		(852)		(2,660)		141		40		101
Adjustments related to defined benefit plan:
Amortization of prior service cost		—		—		—		311		88		223
Total adjustments related to defined benefit plan		—		—		—		311		88		223
Net unrealized (losses) gains from cash flow hedges:
Unrealized holding (losses) gains on cash flow hedges arising during the period		(795)		(225)		(570)		18		5		13
Total unrealized (losses) gains on cash flow hedges		(795)		(225)		(570)		18		5		13
Total other comprehensive (loss) income		(4,307)		(1,077)		(3,230)		470		133		337
Total comprehensive income	$	8,301	$	2,080	$	6,221	$	11,354	$	2,599	$	8,755

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

Unity Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the six months ended
	June 30, 2022						June 30, 2021
			Income tax
	Before tax		expense		Net of tax		Before tax		Income tax		Net of tax
(In thousands)	amount		(benefit)		amount		amount		expense		amount
Net income	$	24,519	$	5,960	$	18,559	$	22,325	$	5,411	$	16,914
Other comprehensive (loss) income
Debt securities available for sale:
Unrealized holding (losses) gains on securities arising during the period		(5,637)		(1,331)		(4,306)		559		134		425
Less: reclassification adjustment for (losses) gains on securities included in net income		(1,055)		(222)		(833)		333		70		263
Total unrealized (losses) gains on securities available for sale		(4,582)		(1,109)		(3,473)		226		64		162
Adjustments related to defined benefit plan:
Amortization of prior service cost		—		—		—		332		94		238
Total adjustments related to defined benefit plan		—		—		—		332		94		238
Net unrealized gains from cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period		738		209		529		825		233		592
Total unrealized gains on cash flow hedges		738		209		529		825		233		592
Total other comprehensive (loss) income		(3,844)		(900)		(2,944)		1,383		391		992
Total comprehensive income	$	20,675	$	5,060	$	15,615	$	23,708	$	5,802	$	17,906

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Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three and six months ended June 30, 2022 and 2021

(Unaudited)


							Accumulated
							other					Total
	Stock				Retained		comprehensive			Treasury		shareholders’
(In thousands)	Shares		Amount		earnings		income (loss)		aa	stock		equity
Balance, December 31, 2021	10,391		$	94,003	$	123,037	$	322		$	(11,633)	$	205,729
Net income	—	A		—		9,108		—			—		9,108
Other comprehensive income, net of tax	—			—		—		286			—		286
Dividends on common stock ($0.10 per share)	—			37		(1,045)		—			—		(1,008)
Common stock issued & related tax effects (1)	102			813		—		—			—		813
Balance, March 31, 2022	10,493			94,853		131,100		608			(11,633)		214,928
Net income	—		$	—	$	9,451	$	—		$	—		9,451
Other comprehensive loss, net of tax	—	A		—		—		(3,230)			—		(3,230)
Dividends on common stock ($0.11 per share)	—			43		(1,157)		—			—		(1,114)
Common stock issued & related tax effects (1)	18			754		—		—			—		754
Balance, June 30, 2022	10,511			95,650		139,394		(2,622)			(11,633)		220,789


							Accumulated
							other					Total
	Stock				Retained		comprehensive		Treasury			shareholders’
(In thousands)	Shares		Amount		earnings		(loss) income		stock		aa	equity
Balance, December 31, 2020	10,456		$	91,873	$	90,669	$	(1,189)	$	(7,442)		$	173,911
Net income	—	A		—		8,496		—		—			8,496
Other comprehensive income, net of tax	—			—		—		655		—			655
Dividends on common stock ($0.08 per share)	—			30		(834)		—		—			(804)
Common stock issued & related tax effects (1)	36			277		—		—		—			277
Acquisition of treasury stock, at cost	(70)			—		—		—		(1,349)			(1,349)
Balance, March 31, 2021	10,422			92,180		98,331		(534)		(8,791)			181,186
Net income	—			—		8,418		—		—			8,418
Other comprehensive income, net of tax	—			—		—		337		—			337
Dividends on common stock ($0.09 per share)	—			33		(938)		—		—			(905)
Common stock issued & related tax effects (1)	34			597		—		—		—			597
Acquisition of treasury stock, at cost	(40)			—		—		—		(877)			(877)
Balance, June 30, 2021	10,416			92,810		105,811		(197)		(9,668)			188,756

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

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

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Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	For the six months ended June 30,
(In thousands)	2022		2021
OPERATING ACTIVITIES:
Net income	$	18,559	$	16,914
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,009		500
Net amortization of purchase premiums and discounts on securities		44		123
Depreciation and amortization		1,412		583
PPP deferred fees and costs		(1,120)		1,707
Deferred income tax benefit		(1,118)		(585)
Net security gains		0		(43)
Stock compensation expense		833		784
Gain on sale of mortgage loans, net		(952)		(3,467)
Gain on sale of SBA loans held for sale, net		(852)		(741)
Origination of mortgage loans sold		(49,356)		(183,843)
Origination of SBA loans held for sale		(20,108)		(7,178)
Proceeds from sale of mortgage loans, net		50,308		187,310
Proceeds from sale of SBA loans held for sale, net		7,609		6,466
BOLI income		(324)		(261)
Net change in other assets and liabilities		5,896		1,446
Net cash provided by operating activities		11,840		19,715
INVESTING ACTIVITIES
Purchases of securities held to maturity		(26,748)		(5,836)
Purchase of equity securities		(1,539)		0
Purchases of securities available for sale		(44,904)		(3,500)
Purchases of FHLB stock, at cost		(10,407)		(29,741)
Maturities and principal payments on securities held to maturity		4,244		3,836
Maturities and principal payments on debt securities available for sale		2,752		9,406
Proceeds from sales of debt securities available for sale		0		7,048
Proceeds from redemption of FHLB stock		4,734		31,275
Net decrease (increase) in SBA PPP loans		33,356		(15,962)
Net increase in loans		(172,173)		(11,037)
Proceeds from BOLI		468		215
Proceeds from sale of premises and equipment		0		20
Purchases of premises and equipment		(97)		(411)
Net cash used in investing activities		(210,314)		(14,687)
FINANCING ACTIVITIES
Net (increase) decrease in deposits		(60,913)		36,357
Proceeds from new borrowings		125,000		125,000
Repayments of borrowings		0		(160,000)
Proceeds from exercise of stock options		954		268
Fair market value of shares withheld to cover employee tax liability		(220)		(177)
Dividends on common stock		(2,122)		(1,709)
Purchase of treasury stock		0		(2,226)
Net cash provided by (used in) financing activities		62,699		(2,487)
(Decrease) increase in cash and cash equivalents		(135,775)		2,541
Cash and cash equivalents, beginning of period		244,818		219,311
Cash and cash equivalents, end of period	$	109,043	$	221,852
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid	$	2,531	$	4,806
Income taxes paid		4,687		6,780
Noncash investing activities:
Establishment of lease liability and right-of-use asset		582		0
Capitalization of servicing rights	$	131	$	125

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

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Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

June 30, 2022

NOTE 1. Significant Accounting Policies

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

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

Risks and Uncertainties

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.

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On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administration after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, although banks have continued to submit rates for the calculation of LIBOR in 2022, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, bankng regulators in the United States have required indired depository institutions in the United states to cease originating loans using LIBOR as a rate index as of December 31, 2021, and in March 2022 Congress adopted legislation providing for the replacement of LIBOR indexes in contracts without fall back language with the Secured Overnight Financing Rate, and for the Federal Reserve to adopt regulation by September of 2022 implementing this change. It is unclear at the time what effect these changes may have on the values of loans and liabilities whose interest rates are tied to LIBOR. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

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

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the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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)

2022

2021

2022

2021

Net income

9,451

8,418

18,559

16,914

Weighted average common shares outstanding - Basic

10,504

10,427

10,475

10,432

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Plus: Potential dilutive common stock equivalents		202		142		210		135
Weighted average common shares outstanding - Diluted		10,706		10,569		10,685		10,567
Net income per common share - Basic	$	0.90	$	0.81	$	1.77	$	1.62
Net income per common share - Diluted		0.88		0.80		1.74		1.60
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive		—		247		—		262

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, 2022, the Company reported income tax expense of $3.2 million for an effective tax rate of 25.0 percent, compared to an income tax expense of $2.5 million and an effective tax rate of 22.7 percent for the prior year’s quarter. For the six months ended June 30, 2022, the Company reported income tax expense of $6.0 million for an effective tax rate of 24.3 percent, compared to an income tax expense of $5.4 million and an effective tax rate of 24.2 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 six months ended June 30, 2022 or 2021. The Company did 0t have an accrual for uncertain tax positions as of June 30, 2022 or December 31, 2021, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2017 and thereafter are subject to future examination by tax authorities.

NOTE 5. Other Comprehensive Income (Loss)

The following tables show the changes in other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021, net of tax:

For the three months ended June 30, 2022

Adjustments

Accumulated

Net unrealized

related to

Net unrealized

other

losses on

defined benefit

gains (losses) from

comprehensive

(In thousands)

securities

plan

cash flow hedges

income (loss)

Balance, beginning of period

(784)

—

1,392

608

Other comprehensive loss before reclassifications

(3,054)

—

(570)

(3,624)

Less amounts reclassified from accumulated other comprehensive loss

(394)

—

(394)

Period change

(2,660)

—

(570)

(3,230)

Balance, end of period

(3,444)

—

822

(2,622)

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	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) gains
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)

For the six months ended June 30, 2022

Adjustments

Net unrealized

Accumulated

Net unrealized

related to

gains

other

gains (losses) on

defined benefit

from cash flow

comprehensive

(In thousands)

securities

plan

hedges

income (loss)

Balance, beginning of period

—

293

322

Other comprehensive (loss) income before reclassifications

(4,306)

—

529

(3,777)

Less amounts reclassified from accumulated other comprehensive loss

(833)

—

(833)

Period change

(3,473)

—

529

(2,944)

Balance, end of period

(3,444)

—

822

(2,622)


	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)

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

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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, 2022, the fair value of the Company’s AFS debt securities portfolio was $94.0 million. Approximately 19 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $17.5 million at June 30, 2022. Approximately $16.7 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, 2022. The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for

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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 2 corporate bonds which are classified as Level 3 assets at June 30, 2022. The valuation of these corporate bonds is determined using broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques. Market inputs used in the other valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government bond yield curves, credit spreads, and trade execution data.

The following table presents a reconciliation of the Level 3 available for sale debt securities measured at fair value on a recurring basis for the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Balance at beginning of period	$	4,895	$	4,538	$	5,074	$	4,400
Purchases/additions		—		—		—		—
Sales/reductions		—		—		—		—
Realized		—		—		—		—
Unrealized		(69)		137		(248)		275
Balance at end of period	$	4,826	$	4,675	$	4,826	$	4,675

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, 2022, the fair value of the Company’s equity securities portfolio was $9.1 million.

All of the Company’s equity securities were classified as Level 2 assets at June 30, 2022. The valuation of equity securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.

There were no changes in the inputs or methodologies used to determine fair value during the period ended June 30, 2022, as compared to the periods ended December 31, 2021 and June 30, 2021.

Loans Held for Sale

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

Interest Rate Swap Agreements

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

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

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

Fair Value Measurements at June 30, 2022 Using

Quoted Prices in

Assets/Liabilities

Active Markets

Significant Other

Significant

Measured at Fair

for Identical

Observable

Unobservable

(In thousands)

Value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Measured on a recurring basis:

Assets:

Debt securities available for sale:

U.S. Government sponsored entities

17,290

—

17,290

—

State and political subdivisions

854

—

854

—

Residential mortgage-backed securities

17,491

—

17,491

—

Corporate and other securities

58,337

—

53,511

4,826

Total debt securities available for sale

93,972

—

89,146

4,826

Equity securities with readily determinable fair values

9,050

—

9,050

—

Total equity securities

9,050

—

9,050

—

Loans held for sale

35,291

—

35,291

—

Total loans held for sale

35,291

—

35,291

—

Interest rate swap agreements

1,147

—

1,147

—

Total swap agreements

1,147

—

1,147

—


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

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

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

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

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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, 2022 Using

Quoted Prices

Significant

in Active

Other

Significant

Assets/Liabilities

Markets for

Observable

Unobservable

Net Credit

Measured at Fair

Identical Assets

Inputs

During

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

8,394

—

8,394

(815)

Fair Value Measurements at December 31, 2021 Using

Quoted Prices

Significant

in Active

Other

Significant

Net (Credit)

Assets/Liabilities

Markets for

Observable

Unobservable

Provision

Measured at Fair

Identical Assets

Inputs

During

(In thousands)

Value

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Financial assets:

Impaired collateral-dependent loans

8,928

—

8,928

(1,284)

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

Appraisal Policy

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

Impaired Collateral-Dependent Loans

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

The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. At June 30, 2022, the valuation allowance for impaired loans was $2.0 million compared to $2.8 million at December 31, 2021.

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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, 2022 and December 31, 2021 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

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

Cash and Cash Equivalents

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

Securities

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

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.

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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 June 30, 2022, the Bank had standby letters of credit outstanding of $5.6 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, 2022 and December 31, 2021:

June 30, 2022

December 31, 2021

Fair value

Carrying

Estimated

Carrying

Estimated

(In thousands)

level

amount

fair value

amount

fair value

Financial assets:

Cash and cash equivalents

Level 1

109,043

244,818

Securities (1)

Level 2

139,835

135,675

79,322

79,275

SBA loans held for sale

Level 2

32,183

35,291

27,373

31,014

Loans, net of allowance for loan losses (2)

Level 2

1,746,552

1,718,568

1,599,773

1,605,248

FHLB stock

Level 2

9,223

3,550

Servicing assets

Level 3

891

1,013

Accrued interest receivable

Level 2

9,961

9,586

Financial liabilities:

Deposits

Level 2

1,697,967

1,686,718

1,758,881

1,755,670

Borrowed funds and subordinated debentures

Level 2

175,310

173,935

50,310

50,842

Accrued interest payable

Level 2

128

129

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

(2)

Includes collateral-dependent impaired loans that are considered Level 3 and reported separately in the tables under the “Fair Value on a Nonrecurring Basis” heading. Collateral-dependent impaired loans, net of specific reserves totaled $8.4 million and $8.9 million at June 30, 2022 and December 31, 2021, respectively.

Limitations

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

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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, 2022 and December 31, 2021:


	June 30, 2022								December 31, 2021
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Amortized		unrealized		unrealized		Estimated
(In thousands)	cost		gains		losses		fair value		cost		gains		losses		fair value
Available for sale:
U.S. Government sponsored entities	$	17,502	$	—	$	(212)	$	17,290	$	—	$	—	$	—	$	—
State and political subdivisions		872		1		(19)		854		996		6		(8)		994
Residential mortgage-backed securities		18,627		41		(1,177)		17,491		9,485		277		(13)		9,749
Corporate and other securities		61,513		—		(3,176)		58,337		45,961		164		(388)		45,737
Total debt securities available for sale	$	98,514	$	42	$	(4,584)	$	93,972	$	56,442	$	447	$	(409)	$	56,480
Held to maturity:
U.S. Government sponsored entities	$	28,000	$	—	$	(3,314)	$	24,686	$	10,000	$	—	$	(67)	$	9,933
State and political subdivisions		1,086		—		(5)		1,081		—		—		—		—
Residential mortgage-backed securities		7,727		4		(845)		6,886		4,276		28		(8)		4,296
Total securities held to maturity	$	36,813	$	4	$	(4,164)	$	32,653	$	14,276	$	28	$	(75)	$	14,229
Equity securities:
Total equity securities	$	9,703	$	157	$	(810)	$	9,050	$	8,163	$	486	$	(83)	$	8,566

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This table provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at June 30, 2022 is distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.


					After one through				After five through								Total carrying
	Within one year				five years				ten years				After ten years				value
(In thousands, except percentages)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale at fair value:
U.S. Government sponsored entities	$	897	1.33	%	$	16,393	3.58	%	$	—	—	%	$	—	—	%	$	17,290	3.47	%
State and political subdivisions	$	200	3.87	%	$	361	3.05	%	$	—	—	%	$	293	2.75	%	$	854	3.14	%
Residential mortgage-backed securities		2	4.23			549	2.57			1,195	2.39			15,745	3.41			17,491	3.31
Corporate and other securities		—	—			4,949	6.71			14,367	4.79			39,021	3.33			58,337	3.98
Total debt securities available for sale	$	1,099	1.80	%	$	22,252	4.24	%	$	15,562	4.65	%	$	55,059	3.35	%	$	93,972	3.75	%
Held to maturity at cost:
U.S. Government sponsored entities	$	—	—	%	$	—	—	%	$	3,000	4	%	$	25,000	3.48	%	$	28,000	3.54	%
State and political subdivisions	$	—	—	%	$	—	—	%	$	—	—	%	$	1,086	5.19	%	$	1,086	5.19
Residential mortgage-backed securities		—	—			—	—			—	—			7,727	3.61			7,727	3.61
Total securities held to maturity	$	—	—	%	$	—	—	%	$	3,000	—	%	$	33,813	3.56	%	$	36,813	3.60	%
Equity Securities at fair value:
Total equity securities	$	—	—	%	$	—	—	%	$	—	—	%	$	9,050	2.54	%	$	9,050	2.54	%

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, 2022 and December 31, 2021 are as follows:


	June 30, 2022
		Less than 12 months				12 months and greater				Total
	Total
	number in a	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
(In thousands, except number in a loss position)	loss position	fair value		loss		fair value		loss		fair value		loss
Available for sale:
U.S. Government sponsored entities	8	$	17,291	$	(212)	$	—	$	—	$	17,290	$	(212)
State and political subdivisions	2	$	454	$	(19)	$	—	$	—	$	454	$	(19)
Residential mortgage-backed securities	40	$	16,993	$	(1,166)	$	143	$	(11)	$	17,136	$	(1,177)
Corporate and other securities	31		45,734		(2,386)		9,483		(790)		55,217		(3,176)
Total temporarily impaired securities	81	$	80,472	$	(3,783)	$	9,626	$	(801)	$	90,097	$	(4,584)
Held to maturity:
U.S. Government sponsored entities	11	$	24,686	$	(3,314)	$	—	$	—	$	24,686	$	(3,314)
State and political subdivisions	10		1,081		(5)		—		—		1,081		(5)
Residential mortgage-backed securities	3	$	6,008	$	(845)	$	—	$	—	$	6,008	$	(845)
Total temporarily impaired securities	24	$	31,775	$	(4,164)	$	—	$	—	$	31,775	$	(4,164)

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

Unrealized Losses

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

U.S. government sponsored entities and state and political subdivision securities: The unrealized losses on investments in these types of securities were caused by the increase in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments. Because the Company had the intent and ability to hold these investments, the Company did not consider these investments to be other-than temporarily impaired as of June 30, 2022 or December 31, 2021.

Residential and commercial mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by increases in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The majority of contractual cash flows of these securities are guaranteed by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of June 30, 2022 or December 31, 2021.

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, 2022 or December 31, 2021. The contractual terms do not allow the securities to be settled at a price less than the par value. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis, which may be at maturity, the Company did not consider these securities to be other-than-temporarily impaired as of June 30, 2022 or December 31, 2021.

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Realized Gains and Losses

Gross realized gains and losses on securities for the three and six months ended June 30, 2022 and 2021 are detailed in the table below:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Available for sale:
Realized gains	$	—	$	—	$		$	43
Realized losses		—		—		—		—
Total debt securities available for sale		—		—		—		43
Held to maturity:
Realized gains		—		—		—		—
Realized losses		—		—		—		—
Total securities held to maturity		—		—		—		—
Net gains on sales of securities	$	—	$	—	$	—	$	43

The net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were 0 gross realized gains during the three and six months ended June 30, 2022, compared to $43 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, 2022, or 2021.

Equity Securities

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

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, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Net (losses) gains recognized during the period on equity securities	$	(498)	$	23	$	(1,055)	$	290
Net gains (losses) recognized during the period on equity securities sold during the period		—		—		—		—
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date	$	(498)	$	23	$	(1,055)	$	290

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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, 2022 and December 31, 2021:


(In thousands)	June 30, 2022		December 31, 2021
SBA loans held for investment	$	33,089	$	36,075
SBA PPP loans		14,216		46,450
Commercial loans
SBA 504 loans		35,066		27,479
Commercial other		112,189		109,903
Commercial real estate		776,687		704,674
Commercial real estate construction		102,371		89,670
Residential mortgage loans		481,687		409,355
Consumer loans
Home equity		66,582		65,380
Consumer other		13,063		12,564
Residential construction loans		134,460		120,525
Total loans held for investment	$	1,769,410	$	1,622,075
SBA loans held for sale		32,183		27,373
Total loans	$	1,801,593	$	1,649,448

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

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

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

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

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

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

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

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

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

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

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

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

During the quarter ended September 30, 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” , sponsored by Upgrade, a financial technology company that utilizes artificial intelligence to underwrite personal loan and credit card installment loans to retail customers, in addition to credit monitoring and education tools,

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to purchase consumer unsecured loans. This loan product has a fixed rate, a fully amortizing term for up to five years and a maximum loan size of $50 thousand. Restrictions were placed on the loans purchased to limit the purchases to borrowers residing in New Jersey, southern New York, and eastern Pennsylvania and to limit purchases to borrowers with higher credit quality with a 700 FICO minimum. Upgrade services the loans on behalf of the Company.

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

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

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

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

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

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

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

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.

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At June 30, 2022, there were $2.1 million of residential consumer loans in the process of foreclosure, compared to $106 thousand at December 31, 2021.

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

June 30, 2022

SBA & Commercial loans - Internal risk ratings

(In thousands)

Pass

Special mention

Substandard

Total

SBA loans held for investment

32,535

229

325

33,089

SBA PPP loans

14,216

—

14,216

Commercial loans

SBA 504 loans

35,066

—

35,066

Commercial other

104,181

5,709

2,299

112,189

Commercial real estate

765,256

9,524

1,907

776,687

Commercial real estate construction

102,371

—

102,371

Total commercial loans

1,006,874

15,233

4,206

1,026,313

Total SBA and commercial loans

1,053,625

15,462

4,531

1,073,618

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

(In thousands)

Performing

Nonperforming

Total

Residential mortgage loans

479,019

2,668

481,687

Consumer loans

Home equity

66,582

—

66,582

Consumer other

13,063

—

13,063

Total consumer loans

79,645

—

79,645

Residential construction loans

131,769

2,691

134,460

Total residential mortgage, consumer and residential construction loans

690,433

5,359

695,792

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


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

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

Nonperforming and Past Due Loans

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

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

June 30, 2022

90+ days

30‑59 days

60‑89 days

and still

Total past

(In thousands)

past due

accruing

Nonaccrual

due

Current

Total loans

SBA loans held for investment

242

—

604

846

32,243

33,089

SBA PPP loans

282

—

288

13,928

14,216

Commercial loans

SBA 504 loans

—

35,066

Commercial other

363

—

1,351

1,714

110,475

112,189

Commercial real estate

2,381

—

366

2,747

773,940

776,687

Commercial real estate construction

—

102,371

Residential mortgage loans

1,317

1,721

2,668

5,749

475,938

481,687

Consumer loans

Home equity

—

66,582

Consumer other

—

106

12,957

13,063

Residential construction loans

—

2,691

131,769

134,460

Total loans held for investment

4,376

2,027

7,680

14,141

1,755,269

1,769,410

SBA loans held for sale

—

32,135

32,183

Total loans

4,424

2,027

7,680

14,189

1,787,404

1,801,593


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

Impaired Loans

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

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

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of June 30, 2022:


	June 30, 2022
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	642	$	542	$	—
Commercial loans
Commercial other		153		93		—
Commercial real estate		3,254		2,319		—
Total commercial loans		3,407		2,412		—
Residential mortgage loans		1,323		1,323		—
Consumer loans
Home equity	��	—		—		—
Residential construction loans		1,873		1,873		—
Total impaired loans with no related allowance		7,245		6,150		—

With an allowance:
SBA loans held for investment		93		62		62
Commercial loans
Commercial other		2,110		1,610		1,610
Commercial real estate		—		—		—
Total commercial loans		2,110		1,610		1,610
Residential mortgage loans		1,385		1,345		90
Consumer loans
Home equity		417		417		46
Residential construction loans		818		818		200
Total impaired loans with a related allowance		4,823		4,252		2,008

Total individually evaluated impaired loans:
SBA loans held for investment		735		604		62
Commercial loans
Commercial other		2,263		1,703		1,610
Commercial real estate		3,254		2,319		—
Total commercial loans		5,517		4,022		1,610
Residential mortgage loans		2,708		2,668		90
Consumer loans
Home equity		417		417		46
Residential construction loans		2,691		2,691		200
Total individually evaluated impaired loans	$	12,068	$	10,402	$	2,008

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


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

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

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

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The following tables present the average recorded investments in impaired loans and the related amount of interest received during the time period in which the loans were impaired for the three and six months ended June 30, 2022 and 2021. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized.

For the three months ended June 30,

2022

2021

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

(416)

1,334

Commercial loans

Commercial other

1,735

271

Commercial real estate

1,823

2,121

Residential mortgage loans

2,615

4,983

—

Consumer loans

Home equity

554

444

Residential construction loans

3,102

—

2,805

Total

9,413

101

11,958

115

For the six months ended June 30,

2022

2021

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

540

1,618

Commercial loans

SBA 504 loans

—

Commercial other

1,961

322

Commercial real estate

2,163

2,179

Residential mortgage loans

2,721

5,272

—

Consumer loans

Home equity

563

644

Consumer other

—

Residential construction loans

3,653

2,707

Total

11,601

219

12,742

218

TDRs

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

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determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

TDRs of $1.9 million and $1.1 million are included in the impaired loan numbers as of June 30, 2022 and December 31, 2021, respectively. The increase in TDRs was due to the addition of 2 loans, partially offset by principal pay downs. At June 30, 2022 and December 31, 2021, 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, 2022. There were 2 loans modified during the six months ended June 30, 2021 that were deemed to be TDRs. The following table details loans modified during the six months ended June 30, 2022, including the number of modifications and the recorded investment at the time of the modification:


	For the six months ended June 30, 2022
	Number of	Recorded investment
(In thousands, except number of contracts)	contracts	at time of modification
Home equity	2	$	872
Total	2	$	872

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, 2022. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

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

Allowance for Loan Losses

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

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

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans and TDRs. The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and

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

●

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

●

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

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

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

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

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2022 and 2021:

For the three months ended June 30, 2022

SBA held

for

Residential

(In thousands)

investment

Commercial

Residential

Consumer

construction

Total

Balance, beginning of period

941

14,705

4,284

642

1,596

22,168

Charge-offs

—

(501)

—

(40)

—

(541)

Recoveries

—

Net recoveries (charge-offs)

(469)

(36)

—

(498)

Provision for (credit to) loan losses charged to expense

(189)

672

501

197

1,188

Balance, end of period

758

14,908

4,786

803

1,603

22,858

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	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 six months ended June 30, 2022

SBA held

for

Residential

(In thousands)

investment

Commercial

Residential

Consumer

construction

Total

Balance, beginning of period

1,074

15,053

4,114

671

1,390

22,302

Charge-offs

—

(501)

—

(46)

—

(547)

Recoveries

—

Net recoveries (charge-offs)

(440)

(42)

—

(453)

Provision for (credit to) loan losses charged to expense

(344)

295

671

174

213

1,009

Balance, end of period

758

14,908

4,786

803

1,603

22,858


	For the six months ended June 30, 2021
	SBA held
	for									Residential
(In thousands)	investment		Commercial		Residential		Consumer		construction		Total
Balance, beginning of period	$	1,301	$	14,992	$	5,318	$	681	$	813	$	23,105
Charge-offs		(446)		(393)		—		(1)		—		(840)
Recoveries		34		2		—		—		—		36
Net charge-offs		(412)		(391)		—		(1)		—		(804)
Provision for (credit to) loan losses charged to expense		797		410		(714)		(79)		86		500
Balance, end of period	$	1,686	$	15,011	$	4,604	$	601	$	899	$	22,801

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

June 30, 2022

SBA held

for

Residential

(In thousands)

investment

Commercial

Residential

Consumer

construction

Total

Allowance for loan losses ending balance:

Individually evaluated for impairment

1,610

200

2,008

Collectively evaluated for impairment

696

13,298

4,696

757

1,403

20,850

Total

758

14,908

4,786

803

1,603

22,858

Loan ending balances:

Individually evaluated for impairment

604

4,022

2,668

417

2,691

10,402

Collectively evaluated for impairment

46,701

1,022,291

479,019

79,228

131,769

1,759,008

Total

47,305

1,026,313

481,687

79,645

134,460

1,769,410


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

Changes in Methodology

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

Reserve for Unfunded Loan Commitments

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the reserve are made through other expense and applied to the reserve which is classified as other liabilities. At June 30, 2022, a $486 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $400 thousand commitment reserve at December 31, 2021, due to a larger amount of unfunded commitments.

NOTE 10. New Accounting Pronouncements

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

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

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

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

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

●

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

●

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

●

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

●

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

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

ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 was issued to clarify certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting applied to derivatives that are affected by the discounting transition. In addition, the ASU clarifies that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered eligible as a hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of the reference rate reform. ASU 2021-01 became effective January 7, 2021. The Company currently uses the shortcut method as the practical expedient.

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

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

NOTE 11. Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments

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

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

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

Risk Management Policies – Hedging Instruments

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

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Interest Rate Risk Management – Cash Flow Hedging Instruments

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

The Company had 1 interest rate swap designed as cash flow hedging instruments with notional amounts totaling $20.0 million at June 30, 2022, compared to 2 with notional amounts totaling $40.0 million at December 31, 2021. A summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at June 30, 2022 and December 31, 2021, respectively is as follows:


(In thousands, except percentages and years)	June 30, 2022			December 31, 2021
Notional amount	$	20,000		$	40,000
Fair value	$	1,147		$	408
Weighted average pay rate		0.83	%		0.98	%
Weighted average receive rate		0.50	%		0.19	%
Weighted average maturity in years		2.82			2.37
Number of contracts		1			2

During the three and six months ended June 30, 2022, the Company received variable rate London Interbank Offered Rate ("LIBOR") payments from and paid fixed rates in accordance with its interest rate swap agreements. At June 30, 2022, the unrealized loss relating to interest rate swaps was recorded as a derivative liability. Changes in the fair value of the interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. The following table presents the net gains and losses recorded in other comprehensive income and the consolidated financial statements relating to the cash flow derivative instruments at June 30, 2022 and 2021, respectively:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Gain (loss) recognized in OCI on derivatives	$	934	$	17	$	1,557	$	824
Gain (loss) reclassified from AOCI into interest expense	$	72	$	—	$	—	$	—

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NOTE 12. Employee Benefit Plans

Stock Option Plans

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


				Weighted
		Weighted		average
		average		remaining	Aggregate
		exercise		contractual	intrinsic
	Shares	price		life in years	value
Outstanding at December 31, 2021	688,533	$	17.56	6.6	$	5,986,666
Options granted	—		—
Options exercised	(62,709)		15.21
Options forfeited	(9,164)		19.62
Options expired	—		—
Outstanding at June 30, 2022	616,660	$	17.76	6.3	$	5,375,207
Exercisable at June 30, 2022	486,844	$	17.26	5.7	$	4,490,215

On April 25, 2019, the Company adopted the 2019 Equity Compensation Plan providing for grants of up to 500,000 shares to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and deferred stock. The Plan replaced all previously approved and established equity plans then currently in effect. As of June 30, 2022, 281,500 options and 182,700 shares of restricted stock have been awarded from the plan. In addition, 11,164 unvested options and 9,150 unvested shares of restricted stock were cancelled and returned to the plan leaving 56,114 shares available for future grants.

The fair values of the options granted during the three and six months ended June 30, 2022 and 2021 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. There were 0 options granted during the three months ended June 30, 2022 or 2021:


	For the six months ended June 30,
	2022			2021
Number of options granted		—			89,000
Weighted average exercise price	$	—		$	19.21
Weighted average fair value of options	$	—		$	7.72
Expected life in years (1)		—			8.38
Expected volatility (2)		—	%		43.69	%
Risk-free interest rate (3)		—	%		1.14	%
Dividend yield (4)		—	%		1.68	%

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

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

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

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

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Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options. The following table presents information about options exercised during the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Number of options exercised		15,335		24,131		62,709		36,598
Total intrinsic value of options exercised	$	120,065	$	347,759	$	866,357	$	517,782
Cash received from options exercised	$	314,323	$	187,513	$	953,537	$	267,626
Tax deduction realized from options	$	36,121	$	61,462	$	260,643	$	112,613

The following table summarizes information about stock options outstanding and exercisable at June 30, 2022:


	Options outstanding					Options exercisable
			Weighted average	Weighted			Weighted
		Options	remaining contractual	average		Options	average
Range of exercise prices		outstanding	life (in years)	exercise price		exercisable	exercise price
$6.01 - $12.00		108,261	3.1	$	9.06	108,261	$	9.06
$12.01 - $18.00		123,933	6.7		16.48	85,607		16.17
$18.01 - $24.00		384,466	7.0		20.63	292,976		20.60
Total		616,600	6.3	$	17.76	486,844	$	17.26

Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options and the related income tax benefit for the three and six months ended June 30, 2022 and 2021 are detailed in the following table:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Compensation expense	$	138,417	$	222,545	$	301,743	$	430,147
Income tax benefit	$	40,003	$	64,316	$	87,204	$	124,313

As of June 30, 2022, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s plans totaled approximately $645 thousand. That cost is expected to be recognized over a weighted average period of 1.4 years.

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Restricted Stock Awards

Restricted stock is issued under the 2019 Equity Compensation Plan to reward employees and directors and to retain them by distributing stock over a period of time. Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. The following table summarizes nonvested restricted stock activity for the six months ended June 30, 2022:


		Average grant
	Shares	date fair value
Nonvested restricted stock at December 31, 2021	119,487	$	21.00
Granted	71,000		27.53
Cancelled	(8,025)		22.89
Vested	(28,592)		19.88
Nonvested restricted stock at June 30, 2022	153,870	$	24.12

Restricted stock awards granted during the three and six months ended June 30, 2022 and 2021 were as follows:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Number of shares granted		1,000		10,000		71,000		40,000
Average grant date fair value	$	28.20	$	21.60	$	27.53	$	19.99

Compensation expense related to restricted stock for the three and six months ended June 30, 2022 and 2021 is detailed in the following table:


	For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021
Compensation expense	$	300,689	$	187,401	$	531,693	$	353,750
Income tax benefit	$	86,899	$	54,159	$	153,659	$	102,234

As of June 30, 2022, there was approximately $3.2 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s equity plans. That cost is expected to be recognized over a weighted average period of 3.2 years.

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 75 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $219 thousand and $199 thousand to the Plan during the three months ended June 30, 2022 and 2021, respectively, and $422 thousand and $460 thousand during the six months ended June 30, 2022 and 2021, respectively

Deferred Compensation Plan

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

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

management has the option to elect to defer up to 100 percent of their total compensation. Director and executive deferred compensation totaled $50 thousand and $388 thousand during the three months ended June 30, 2022 and 2021, respectively, and $585 thousand and $516 thousand during the six months ended June 30, 2022 and 2021, respectively. The interest paid on the deferred balances totaled $41 thousand and $40 thousand during the three months ended June 30, 2022 and 2021, respectively, and $77 thousand and $68 thousand during the six months ended June 30, 2022 and 2021, respectively. The fees distributed on the deferred balances totaled $3 thousand during the three months ended June 30, 2022 and 2021, and $6 thousand during the six months ended June 30, 2022 and 2021.

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Benefit Plans

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

On June 4, 2015, the Company approved the Supplemental Executive Retirement Plan (“SERP”) pursuant to which the President and CEO is entitled to receive certain supplemental nonqualified retirement benefits. The retirement benefit under the SERP is an amount equal to sixty percent (60%) of the average of the President and CEO’s base salary for the thirty-six (36) months immediately preceding the executive’s separation from service after age 66, adjusted annually thereafter by a percentage equal to the Consumer Price Index as reported by the U.S. Bureau of Labor Statistics for All Urban Consumers (CPI-U). The total benefit is to be made payable in 15 annual installments. The future

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

of the benefit obligation.

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

NaN contributions or payments have been made during the three and six months ended June 30, 2022. The following table summarizes the components of the net periodic pension cost of the defined benefit plan recognized during the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Service cost (1)	$	37	$	(35)	$	74	$	(69)
Interest cost		47		35		94		69
Amortization of prior service cost (2)		—		311		—		332
Net periodic benefit cost	$	84	$	311	$	168	$	332

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

(2)	Prior service cost fully amortized as of June 30,2021.

The following table summarizes the changes in benefit obligations of the defined benefit plan during the six months ended June 30, 2022 and 2021:


	For the six months ended June 30,
(In thousands)	2022		2021
Benefit obligation, beginning of year	$	4,521	$	3,845
Service cost (1)		74		(69)
Interest cost		94		69
Benefit obligation, end of period	$	4,689	$	3,845

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

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

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

As of June 30, 2022, the Company had total year to date expenses of $66 thousand related to the Plan. The Plan is reflected on the Company’s balance sheet as accrued expenses.

Certain members of management are also enrolled in a split-dollar life insurance plan with a post retirement death benefit of $250 thousand. Total expenses related to this plan were $5 thousand and $1 thousand for the three months ended June 30, 2022 and 2021, and $11 thousand and $3 thousand for the six months ended June 30, 2022 and 2021. Additionally, $55 thousand of prior period expense was reversed during the six months end June 30, 2022. This was related to changes to the members of management participating in the plan.

NOTE 13. Regulatory Capital

Under the Economic Growth, Regulatory Relief and Consumer Protection Act, the Bank is considered a qualifying community banking organization, which allows the Bank to elect to opt in to the community bank leverage ratio (“CBLR”) in its call report. The Bank has opted into the CBLR, and is therefore not required to comply with the Basel III capital requirements.

The following table shows the CBLR ratio for the Company and the Bank as of June 30, 2022 and December 31, 2021:


	At June 30, 2022				At December 31, 2021
	Company		Bank		Company		Bank
CBLR	11.20	%	10.66	%	10.51	%	10.00	%

NOTE 14. Leases

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

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

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

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

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

Operating lease ROU assets totaled $5.2 million at June 30, 2022 and December 31, 2021. Operating lease liabilities totaled $5.3 million at June 30, 2022 and December 31, 2021.

The table below summarizes our net lease cost:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Operating lease cost	$	188	$	149	$	376	$	298
Net lease cost	$	188	$	149	$	376	$	298

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


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	182	$	145	$	365	$	290
ROU assets obtained in exchange for new operating lease liabilities	$	—	$	—	$	582	$	—

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


(In thousands, except percentages and years)	June 30, 2022			December 31, 2021
Weighted average remaining lease term in years		11.18			11.40
Weighted average discount rate		3.14	%		3.20	%
Operating lease right-of-use assets	$	5,206		$	5,249

The table below summarizes the maturity of remaining lease liabilities:


(In thousands)	June 30, 2022
2022	$	366
2023		670
2024		624
2025		623
2026		624
2027 and thereafter		3,168
Total lease payments	$	6,075
Less: Interest		(776)
Present value of lease liabilities	$	5,299

As of June 30, 2022, the Company had not entered into any material leases that have not yet commenced.

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

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

Overview

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

COVID-19

The full impact of the Coronavirus Disease (“COVID-19”) pandemic remains unknown and continues to evolve. The outbreak has had a significant adverse impact on certain industries the Company serves, including retail, accommodations, and restaurants and food services. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Bank. It is reasonably possible that estimates made in the financial statements could be materially impacted in the near term as a result of these conditions. We continue to monitor the impact closely, including its impact on our employees, customers, communities and results of operations and the impact of other government or Federal Reserve actions.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided funding for the SBA's Paycheck Protection Program (PPP) and established rules for qualifying borrowers to receive loan forgiveness by the SBA under this program. The Company approved 1,224 applications and provided funding of approximately $143.0 million during the year ended December 31, 2020. As of June 30, 2022, the Company had $282 thousand of PPP loans originated under the CARES Act remaining on our balance sheet.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act provided additional assistance to the hardest-hit small businesses, nonprofits, and venues that were struggling to recover from the impact of the COVID-19 pandemic. The Company approved 955 applications and provided funding of approximately $101.0 million under the Economic Aid Act. As of June 30, 2022, the Company had $14.4 million of PPP loans originated under the Economic Aid Act in its portfolio.

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

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Consent Order

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

Earnings Summary

Net income totaled $9.5 million, or $0.88 per diluted share for the quarter ended June 30, 2022, compared to $8.4 million, or $0.80 per diluted share for the same period a year ago. Return on average assets and average common equity for the quarter were 1.83 percent and 17.32 percent, respectively, compared to 1.77 percent and 18.29 percent for the same period a year ago.

Second quarter highlights include:

●

Net interest income increased 17.9 percent compared to the prior year’s quarter due to loan growth.

●

Net interest margin equaled 4.39 percent this quarter compared to 4.03 percent in the prior year’s quarter.

●

The provision for loan losses was $1.2 million for the quarter ended June 30, 2022, compared to no provision for loan losses for the prior year’s quarter and the release of $178 thousand in provision for loan losses for the prior sequential quarter, due to the sizable increase in total loans.

●

Noninterest expense increased 2.4 percent compared to the prior year’s quarter, primarily due to increased compensation expenses.

●

The effective tax rate was 25.0 percent compared to 22.7 percent in the prior year’s quarter.

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


	For the three months ended June 30,						For the six months ended June 30,
	2022			2021			2022			2021
Net income per common share - Basic (1)	$	0.90		$	0.81		$	1.77		$	1.62
Net income per common share - Diluted (2)	$	0.88		$	0.80		$	1.74		$	1.60
Return on average assets		1.83	%		1.77	%		1.82	%		1.81	%
Return on average equity (3)		17.32	%		18.29	%		17.48	%		18.88	%
Efficiency ratio (4)		42.84	%		49.06	%		44.27	%		47.39	%

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

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

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

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

Net Interest Income

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on earning assets and fees earned on loans, and interest paid on interest-bearing liabilities. Earning assets include loans to individuals and businesses, investment securities and interest-earning deposits. Interest-bearing liabilities include interest-bearing demand, savings and time deposits, FHLB advances and other borrowings. Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing

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liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities. The Company’s net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and general levels of nonperforming assets.

During the quarter ended June 30, 2022, tax-equivalent net interest income amounted to $21.8 million, an increase of $3.3 million or 17.9 percent when compared to the same period in 2021. The net interest margin increased 36 basis points to 4.39 percent for the three months ended June 30, 2022, compared to 4.03 percent for the same period in 2021. The net interest spread was 4.25 percent for the second quarter of 2022, a 46 basis point increase compared to the same period in 2021.

During the three months ended June 30, 2022, tax-equivalent interest income was $23.1 million, an increase of $2.4 million or 11.6 percent when compared to the same period in 2021. This increase was mainly driven by the increase in market interest rates on earnings assets and an increase in the balance of average securities and the balance of average loans.

●

Of the $2.4 million net increase in interest income on a tax-equivalent basis, $1.6 million is due to an increase in yields on the earning assets and $758 thousand is due to an increase to average earning assets.

●

The average volume of interest-earning assets increased $150.0 million to $2.0 billion for the second quarter of 2022 compared to $1.8 billion for the same period in 2021. This was due primarily to a $92.4 million increase in investment securities and a $81.6 million increase in average loans, primarily commercial and residential construction.

●

The yield on total interest-earning assets increased 14 basis points to 4.66 percent for the three months ended June 30, 2022 when compared to the same period in 2021. The yield on the loan portfolio increased 10 basis points to 4.98 percent.

Total interest expense was $1.3 million for the three months ended June 30, 2022, a decrease of $917 thousand or 41.1 percent compared to the same period in 2021. This decrease was driven by the decreased rates and volume of time deposits and the decreased volume of borrowed funds and subordinated debentures compared to a year ago:

●

Of the $917 thousand decrease in interest expense, $688 thousand was due to a decrease in the rates on interest-bearing liabilities and $229 thousand was due to decreased volume of average interest-bearing liabilities.

●

Interest-bearing liabilities averaged $1.3 billion for the second quarter of 2022, an increase of $63.6 million or 5.2 percent compared to the prior year’s quarter.

●

The average cost of total interest-bearing liabilities decreased 32 basis points to 0.41 percent. The cost of interest-bearing deposits decreased 33 basis points to 0.33 percent for the second quarter of 2022 and the cost of borrowed funds and subordinated debentures increased 25 basis points to 1.94 percent.

During the six months ended June 30, 2022, tax-equivalent net interest income amounted to $41.7 million, an increase of $5.2 million or 14.2 percent when compared to the same period in 2021. The net interest margin increased 19 basis points to 4.25 percent for the six months ended June 30, 2022, compared to 4.06 percent for the same period in 2021. The net interest spread was 4.12 percent for the six months ended June 30, 2022, a 32 basis point increase compared to the same period in 2021.

During the six months ended June 30, 2022, tax-equivalent interest income was $44.2 million, an increase of $2.9 million or 7.1 percent when compared to the same period in the prior year. This increase was mainly driven by the increase in the balance of average loans and the increase in the average balance of securities and the rates on federal funds sold and interest-bearing deposits.

●

Of the $2.9 million net increase in interest income on a tax-equivalent basis, $2.4 million is due to an increase in yields on the earning assets and $518 thousand is due to an increase to average earning assets.

●

The average volume of interest-earning assets increased $164.8 million to $2.0 billion for the six months ended June 30, 2022 compared to $1.8 billion for the same period in 2021. This was due primarily to a $68.6 million

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increase in investment securities, a $49.5 million increase in average loans, primarily commercial and residential construction loans and a $47.8 million increase in interest-bearing deposits.

●

The yield on total interest-earning assets decreased 8 basis points to 4.51 percent for the six months ended June 30, 2022 when compared to the same period in 2021. The yield on the loan portfolio increased 4 basis points to 4.96 percent.

Total interest expense was $2.5 million for the six months ended June 30, 2022, a decrease of $2.3 million or 47.2 percent compared to the same period in 2021. This decrease reflects decreased rates and volume on interest-bearing deposits and decreased volume on borrowed funds and subordinated debentures compared to a year ago, partially offset by increased rates on borrowed funds and subordinated debentures.

●

Of the $2.3 million decrease in interest expense, $1.7 million was due to a decrease in the rates on interest-bearing liabilities and $591 thousand was due to decreased volume of average interest-bearing liabilities.

●

Interest-bearing liabilities averaged $1.3 billion for the six months ended June 30, 2022, an increase of $69.6 million or 5.7 percent compared to the prior year’s period.

●

The average cost of total interest-bearing liabilities decreased 39 basis points to 0.40 percent for the six months ended June 30, 2022. The cost of interest-bearing deposits decreased 40 basis points to 0.33 percent and the cost of borrowed funds and subordinated debentures increased 23 basis points to 1.88 percent.

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

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Consolidated Average Balance Sheets

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


	For the three months ended
	June 30, 2022						June 30, 2021
	Average						Average
	Balance		Interest		Rate/Yield		Balance			Interest		Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits	$	101,430	$	152	0.60	%	$	124,728		$	33	0.11	%
Federal Home Loan Bank ("FHLB") stock		3,996		50	4.99			4,725			53	4.46
Securities:									��
Taxable		127,539		1,115	3.51			34,609			253	2.94
Tax-exempt		1,258		11	3.69			1,754			11	2.49
Total securities (A)		128,797		1,126	3.51			36,363			264	2.92
Loans:
SBA loans		63,804		926	5.82			50,742			776	6.14
SBA PPP loans		23,900		492	8.25			164,073			1,748	4.27
Commercial loans		1,006,183		12,414	4.95			865,292			10,734	4.98
Residential mortgage loans		449,963		4,982	4.44			434,558			4,906	4.53
Consumer loans		78,400		919	4.70			61,357			682	4.46
Residential construction loans		129,780		2,011	6.21			94,388			1,486	6.31
Total loans (B)		1,752,030		21,744	4.98			1,670,410			20,332	4.88
Total interest-earning assets	$	1,986,253	$	23,072	4.66	%	$	1,836,226		$	20,682	4.52	%

Noninterest-earning assets:
Cash and due from banks		24,041						23,511
Allowance for loan losses		(22,179)						(23,043)
Other assets		79,130						75,300
Total noninterest-earning assets		80,992						75,768
Total assets	$	2,067,245					$	1,911,994

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	270,380	$	198	0.29	%	$	219,244		$	307	0.56	%
Savings deposits		686,058		412	0.24			509,476			419	0.33
Time deposits		278,206		419	0.60			422,472			1,171	1.11
Total interest-bearing deposits		1,234,644		1,029	0.33			1,151,192			1,897	0.66
Borrowed funds and subordinated debentures		59,090		285	1.94			78,991			334	1.69
Total interest-bearing liabilities	$	1,293,734	$	1,314	0.41	%	$	1,230,183		$	2,231	0.73	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		532,496						482,536
Other liabilities		22,192						14,713
Total noninterest-bearing liabilities		554,688						497,249
Total shareholders' equity		218,823						184,562
Total liabilities and shareholders' equity	$	2,067,245					$	1,911,994

Net interest spread			$	21,758	4.25	%				$	18,451	3.79	%
Tax-equivalent basis adjustment				(1)							(2)
Net interest income			$	21,757						$	18,449
Net interest margin					4.39	%						4.03	%

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

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

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Consolidated Average Balance Sheets

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


	For the six months ended
	June 30, 2022						June 30, 2021
	Average						Average
	balance		Interest		Rate/Yield		balance		Interest		Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits	$	155,714	$	248	0.32	%	$	107,873	$	57	0.11	%
FHLB stock		3,774		83	4.44			4,945		116	4.73
Securities:
Taxable		106,257		1,768	3.35			36,664		546	3.00
Tax-exempt		1,124		19	3.42			2,077		23	2.23
Total securities (A)		107,381		1,787	3.36			38,741		569	2.96
Loans
SBA loans		63,674		1,849	5.86			49,799		1,559	6.31
SBA PPP loans		30,408		1,269	8.42			153,387		3,477	4.57
Commercial loans		978,221		23,910	4.93			857,223		21,210	4.99
Residential mortgage loans		431,737		9,372	4.38			445,111		10,034	4.55
Consumer loans		78,693		1,840	4.71			62,393		1,538	4.97
Residential construction loans		126,405		3,835	6.12			91,705		2,701	5.94
Total loans (B)		1,709,138		42,075	4.96			1,659,618		40,519	4.92
Total interest-earning assets	$	1,976,007	$	44,193	4.51	%	$	1,811,177	$	41,261	4.59	%

Noninterest-earning assets:
Cash and due from banks		23,861						23,645
Allowance for loan losses		(22,254)						(23,175)
Other assets		79,379						75,803
Total noninterest-earning assets		80,986						76,273
Total assets	$	2,056,993					$	1,887,450

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	259,913	$	362	0.28	%	$	214,160	$	616	0.58	%
Savings deposits		693,627		757	0.22			493,061		851	0.35
Time deposits		283,153		899	0.64			430,317		2,634	1.23
Total interest-bearing deposits		1,236,693		2,018	0.33			1,137,538		4,101	0.73
Borrowed funds and subordinated debentures		54,724		511	1.88			84,316		688	1.65
Total interest-bearing liabilities	$	1,291,417	$	2,529	0.40	%	$	1,221,854	$	4,789	0.79	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		529,729						468,916
Other liabilities		21,706						16,069
Total noninterest-bearing liabilities		551,435						484,985
Total shareholders’ equity		214,141						180,611
Total liabilities and shareholders’ equity	$	2,056,993					$	1,887,450

Net interest spread			$	41,664	4.12	%			$	36,472	3.80	%
Tax-equivalent basis adjustment				(3)						(5)
Net interest income			$	41,661					$	36,467
Net interest margin					4.25	%					4.06	%

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

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

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


	For the three months ended June 30, 2022 versus June 30, 2021						For the six months ended June 30, 2022 versus June 30, 2021
	Increase (decrease) due to change in:						Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)	Volume		Rate		Net		Volume		Rate		Net
Interest income:
Interest-bearing deposits	$	(7)	$	126	$	119	$	36	$	155	$	191
FHLB stock		(9)		6		(3)		(26)		(7)		(33)
Securities		799		63		862		1,137		80		1,217
Loans		(26)		1,438		1,412		(630)		2,186		1,556
Total interest income	$	757	$	1,633	$	2,390	$	517	$	2,414	$	2,931
Interest expense:
Demand deposits	$	61	$	(170)	$	(109)	$	112	$	(366)	$	(254)
Savings deposits		124		(131)		(7)		283		(377)		(94)
Time deposits		(321)		(431)		(752)		(722)		(1,013)		(1,735)
Total interest-bearing deposits		(136)		(732)		(868)		(327)		(1,756)		(2,083)
Borrowed funds and subordinated debentures		(93)		44		(49)		(264)		87		(177)
Total interest expense		(229)		(688)		(917)		(591)		(1,669)		(2,260)
Net interest income - fully tax-equivalent	$	986	$	2,321	$	3,307	$	1,108	$	4,083	$	5,191
Decrease in tax-equivalent adjustment						1						3
Net interest income					$	3,308					$	5,194

Provision for Loan Losses

The provision for loan losses was $1.2 million during the three months ended June 30, 2022, compared to none during the three months ended June 30, 2021. For the six months ended June 30, 2022, the provision for loan losses totaled $1.0 million, compared to $500 thousand for the same period in 2021. The increase in provision for loan losses was primarily due to the sizeable increase in total loans.

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

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Noninterest Income

The following table shows the components of noninterest income and the increase or decrease for the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2022		2021		2022		2021
Branch fee income	$	281	$	269	$	556	$	564
Service and loan fee income		688		509		1,272		1,133
Gain on sale of SBA loans held for sale, net		—		496		852		741
Gain on sale of mortgage loans, net		431		1,066		952		2,817
BOLI income		161		133		324		261
Net security (losses) gains		(498)		23		(1,055)		333
Other income		1,686		399		2,088		772
Total noninterest income	$	2,749	$	2,895	$	4,989	$	6,621

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

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

●

Service and loan fee income increased for the three and six months ended June 30, 2022 compared to June 30, 2021, primarily due to loan payoff charges.

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

●

Gain on sale of SBA loans held for sale decreased for the three months ended June 30, 2022, due to the strategic decision by the Company to not sell SBA loans during the quarter.

●

Gain on sale of SBA loans held for sale increased for the six months ended June 30, 2022, when compared to the prior year, due to a larger volume of SBA loan sales (totaling $6.8 million with net gains of $852 thousand) in the first quarter of 2022.

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

●

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

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

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

●

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

Other income increased for the three and six months ended June 30, 2022 compared to June 30, 2021, primarily due to a non-recurring gain of $1.2 million recognized from the termination of a swap derivative instrument.

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Noninterest Expense

The following table presents a breakdown of noninterest expense for the three and six months ended June 30, 2022 and 2021:


	For the three months ended June 30,						For the six months ended June 30,
(In thousands)	2022		2021		Increase (decrease)		2022		2021		Increase (decrease)
Compensation and benefits	$	6,811	$	6,333	$	478	$	13,319	$	12,396	$	923
Processing and communications		706		750		(44)		1,458		1,557		(99)
Occupancy		727		631		96		1,502		1,337		165
Furniture and equipment		618		659		(41)		1,194		1,308		(114)
Professional services		392		339		53		839		720		119
Advertising		340		403		(63)		565		671		(106)
Other loan (income) expenses		(5)		165		(170)		130		308		(178)
Deposit insurance		250		225		25		519		439		80
Director fees		225		204		21		459		412		47
Loan collection expenses		36		54		(18)		93		5		88
Other expenses		610		697		(87)		1,044		1,110		(66)
Total noninterest expense	$	10,710	$	10,460	$	250	$	21,122	$	20,263	$	859

Noninterest expenses totaled $10.7 million, an increase of $251 thousand for the three months ended June 30, 2022, while year-to-date noninterest expenses totaled $21.1 million, an increase of $858 thousand versus prior year. The increases were primarily due to normal increased salary expenses and an increase in the accrual for year-end bonuses anticipated to be paid by the Company, partially offset by the recovery of property taxes paid on a former OREO property.

Income Tax Expense

For the quarter ended June 30, 2022, the Company reported income tax expense of $3.2 million for an effective tax rate of 25.0 percent, compared to income tax expense of $2.5 million and an effective tax rate of 22.7 percent for the prior year’s quarter. For the six months ended June 30, 2022, the Company reported income tax expense of $6.0 million for an effective tax rate of 24.3 percent, compared to an income tax expense of $5.4 million and an effective tax rate of 24.2 percent for the six months ended June 30, 2021.

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

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

Financial Condition at June 30, 2022

Total assets increased $83.4 million or 4.1 percent, to $2.1 billion at June 30, 2022, when compared to year end 2021. This increase was primarily due to increases of $151.6 million in net loans, mostly due to commercial and residential mortgage loan growth, and $60.5 million in total securities, partially offset by decreases of $135.8 million in cash and cash equivalents and $32.2 million in SBA PPP loans due to loans being forgiven and paid off.

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Total deposits decreased $60.9 million, due to decreases of $24.6 million in time deposits, $24.0 million in savings deposits, and $18.2 million in non-interest bearing deposits, offset by an increase of $5.9 million in interest-bearing demand deposits.

Total shareholders’ equity increased $15.1 million over year end 2021, due to earnings and an increase in common stock, offset by accumulated other comprehensive losses during the six months ended June 30, 2022.

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

Securities Portfolio

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

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

AFS debt securities totaled $94.0 million at June 30, 2022, an increase of $37.5 million or 66.4 percent, compared to $56.5 million at December 31, 2021. This net increase was the result of:

●

Purchases of $17.5 million in government agencies, $13.5 million in asset backed, $10.8 million in CMOs and $3.1 million in corporate bonds for a total of $44.9 million,

●

$2.8 million in principal payments, maturities and called bonds,

●

$4.6 million depreciation in the market value of the portfolio. At June 30, 2022, the portfolio had a net unrealized loss of $4.5 million compared to a net unrealized gain of $38 thousand at December 31, 2021. These net unrealized losses are reflected net of tax in shareholder’s equity as accumulated other comprehensive loss, and,

●

$78 thousand in net amortization.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 7.1 years and 6.9 years at June 30, 2022 and December 31, 2021, respectively. The effective duration of AFS debt securities amounted to 2.0 years and 3.1 years at June 30, 2022 and December 31, 2021, respectively.

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

HTM securities were $36.8 million at June 30, 2022, an increase of $22.5 million or 157.9 percent, compared to $14.3 million at December 31, 2021. This net increase was the result of:

●

Purchases of $18.0 million in government agencies, $7.7 million in CMOs and $1.0 million in municipal bonds for a total of $26.7 million

●

$4.2 million in principal payments and,

●

$34 thousand in net amortization.

The weighted average life of HTM securities, adjusted for prepayments, amounted to 18.6 years. As of June 30, 2022, the fair value of HTM securities was $32.7 million. The effective duration of HTM securities amounted to 10.1 years and 5.6 years at June 30, 2022 and December 31, 2021, respectively.

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

Equity securities totaled $9.0 million at June 30, 2022, an increase of $484 thousand or 5.7%, compared to $8.6 million at December 31, 2021. This net increase is primarily due to the purchase of equity holding in four additional financial institutions partially offset by market value adjustments throughout the year.

Securities with a carrying value of $924 thousand and $1.2 million at June 30, 2022 and December 31, 2021, respectively, were pledged to secure other borrowings, to collateralize hedging instruments and for other purposes required or permitted by law.

Approximately 62 percent of the total investment portfolio had a fixed rate of interest at June 30, 2022.

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

Loan Portfolio

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

Total loans increased $152.1 million or 9.2 percent to $1.8 billion at June 30, 2022, compared to year end 2021. Commercial, residential mortgage, residential construction, and consumer loans increased $94.6 million, $72.3 million, $13.9 million and $1.7 million respectively, partially offset by decreases of $32.2 million and $3.0 million in SBA PPP and SBA, respectively.

The following table sets forth the classification of loans by major category, including unearned fees and deferred costs and excluding the allowance for loan losses as of June 30, 2022 and December 31, 2021:


	June 30, 2022				December 31, 2021
			% of				% of
(In thousands, except percentages)	Amount		total		Amount		total
SBA loans held for investment	$	33,089	1.8	%	$	36,075	2.2	%
SBA PPP loans		14,216	0.8			46,450	2.8
Commercial loans		1,026,313	57.0			931,726	56.5
Residential mortgage loans		481,687	26.7			409,355	24.8
Consumer loans		79,645	4.4			77,944	4.7
Residential construction loans		134,460	7.5			120,525	7.3
Total loans held for investment	$	1,769,410	98.2	%	$	1,622,075	98.3	%
SBA loans held for sale		32,183	1.8			27,373	1.7
Total loans	$	1,801,593	100.0	%	$	1,649,448	100.0	%

Average loans increased $49.5 million or 3 percent to $1.7 billion for the six months ended June 30, 2022 from $1.7 billion for the same period in 2021. The increase in average loans was due to increases in average commercial, residential construction and consumer loans, partially offset by decreases in average SBA PPP, residential mortgage and SBA loans. The yield on the overall loan portfolio increased 4 basis points to 4.96 percent for the six months ended June 30, 2022 when compared to the same period in the prior year.

SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made for the purposes of providing working capital or financing the purchase of equipment, inventory or commercial real estate.

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Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. The deficiency may be a higher loan to value (“LTV”) ratio, lower debt service coverage (“DSC”) ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for startup businesses where there is no history or financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portion of the Company’s SBA loans are generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $32.2 million at June 30, 2022, an increase of $4.8 million from $27.4 million at December 31, 2021. SBA 7(a) loans held to maturity amounted to $33.1 million at June 30, 2022, a decrease of $3.0 million from $36.1 million at December 31, 2021. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was 5.86 percent for the six months ended June 30, 2022, compared to 6.31 percent in the prior year.

The guarantee rates on SBA 7(a) loans range from 50 percent to 90 percent, with the majority of the portfolio having a guarantee rate of 75 percent at origination. The guarantee rates are determined by the SBA and can vary from year to year depending on government funding and the goals of the SBA program. The carrying value of SBA loans held for sale represents the guaranteed portion to be sold into the secondary market. The carrying value of SBA loans held to maturity represents the unguaranteed portion, which is the Company’s portion of SBA loans originated, reduced by the guaranteed portion that is sold into the secondary market. Approximately $81.2 million and $87.4 million in SBA loans were sold but serviced by the Company at June 30, 2022 and December 31, 2021, respectively, and are not included on the Company’s balance sheet. There is no relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company’s SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.

The CARES Act provided assistance to small businesses through the establishment of the PPP. The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds are provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years and can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the employer/borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and the application period was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. The application period was then reopened under the provisions of the Economic Aid Act. Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and were available until March 31, 2021. These loans amounted to $14.2 million at June 30, 2022, a decrease of $32.2 million from year end 2021.

Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $1.0 billion at June 30, 2022, an increase of $94.6 million from year end 2021. The yield on commercial loans was 4.93 percent for the six months ended June 30, 2022, compared to 4.99 percent for the same period in 2021. The SBA 504 program, which consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property, is included in the Commercial loan portfolio. Generally, the Company has a 50 percent LTV ratio on SBA 504 program loans at origination.

Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amounted to $481.7 million at June 30, 2022, an increase of $72.3 million from year end 2021. Sales of mortgage loans totaled $49.4 million for the six months ended June 30, 2022, compared to $183.3 million in the prior year period. The yield on residential mortgages was 4.38 percent for the six months ended June 30, 2022, compared to 4.55 percent in the 2021. Residential mortgage loans maintained in portfolio are generally to individuals that do not qualify for conventional financing. In extending credit to this category of borrowers, the Bank considers other mitigating factors such as credit history, equity and liquid reserves of the borrower. As a result, the residential mortgage loan portfolio of the Bank

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includes adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but which are not considered high priced mortgages.

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being purchased. These loans amounted to $79.6 million, an increase of $1.7 million from year end 2021. The yield on consumer loans was 4.71 percent for the six months ended June 30, 2022, compared to 4.97 percent for the same period in 2021.

Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to $134.5 million, an increase of $13.9 million from year end 2021. The yield on residential construction loans was 6.12 percent for the six months ended June 30, 2022, compared to 5.94 percent for the same period in 2021.

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

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

The majority of the Company’s loans are secured by real estate. Declines in the market values of real estate in the Company’s trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. At June 30, 2022 approximately 94 percent of the Company’s loan portfolio was secured by real estate compared to 92 percent at December 31, 2021.

Troubled Debt Restructurings (“TDRs”)

At June 30, 2022, there were five loans totaling $1.9 million that were classified as TDRs and deemed impaired, compared to three such loans totaling $1.0 million at December 31, 2021. Restructured loans that are placed in nonaccrual status may be removed after six months of contractual payments and the borrower showing the ability to service the debt going forward. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.

The following table presents a breakdown of performing and nonperforming TDRs by class as of June 30, 2022 and December 31, 2021:


	June 30, 2022						December 31, 2021
	Performing		Nonperforming		Total		Performing		Nonperforming		Total
(In thousands)	TDRs		TDRs		TDRs		TDRs		TDRs		TDRs
Commercial real estate	$	1,446	$	—	$	1,446	$	619	$	—	$	619
Home equity		417		—		417		427		—		427
Commercial other		22				22		—				—
Total	$	1,885	$	—	$	1,885	$	1,046	$	—	$	1,046

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Through June 30, 2022, TDRs consisted of principal reduction, interest only periods and maturity extensions. The following table shows the types of modifications done by date by class through June 30, 2022:

June 30, 2022

Commercial

Home

Commercial

(In thousands)

real estate

equity

Other

Total

Type of modification:

Principal reduction

1,446

—

1,468

Interest only with nominal principal

—

417

—

417

Total TDRs

1,446

417

1,885

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

Asset Quality

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


(In thousands, except percentages)	June 30, 2022			December 31, 2021			June 30, 2021
Nonperforming by category:
SBA loans held for investment	$	604		$	510		$	1,713
Commercial loans		1,717			2,582			1,637
Residential mortgage loans		2,668			3,262			4,043
Consumer loans		—			210			3
Residential construction loans		2,691			3,122			2,289
Total nonperforming assets	$	7,680		$	9,686		$	9,685
Past due 90 days or more and still accruing interest:
Residential mortgage loans		43			—			574
Total past due 90 days or more and still accruing interest	$	43		$	—		$	574
Nonperforming loans to total loans		0.43	%		0.59	%		0.59	%
Nonperforming loans and TDRs to total loans (1)		0.53			0.65			0.65
Nonperforming assets to total loans		0.43			0.59			0.59
Nonperforming assets to total assets		0.36			0.48			0.49
(1) Performing TDRs		1,885			1,046			1,068

Nonperforming loans were $7.7 million at June 30, 2022, a $2.0 million decrease from $9.7 million at December 31, 2021 and June 30, 2021, respectively. Since year end 2021, nonperforming loans in the commercial, residential mortgage, residential construction, and consumer loan segments decreased, partially offset by an increase in nonperforming SBA loans. In addition, there were $43 thousand of loans past due 90 days or more and still accruing interest at June 30, 2022, compared to none at December 31, 2021 and $574 thousand at June 30, 2021.

The Company also monitors potential problem loans. Potential problem loans are those loans where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are categorized by their non-passing risk rating and performing loan status. Potential problem loans totaled $16.2 million at June 30, 2022.

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

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Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The allowance for loan losses totaled $22.9 million at June 30, 2022, compared to $22.3 million at December 31, 2021, and $22.8 million at June 30, 2021, with a resulting allowance to total loan ratio of 1.27 percent at June 30, 2022, 1.35 percent at December 31, 2021, and 1.38 percent at June 30, 2021. Net recoveries (charge-offs) amounted to $453 thousand for the six months ended June 30, 2022, compared to $804 thousand for the same period in 2021. Net charge-offs to average loan ratios are shown in the table below for each major loan category.


	For the three months ended June 30,						For the six months ended June 30,
(In thousands, except percentages)	2022			2021			2022			2021
Balance, beginning of period	$	22,168		$	22,965		$	22,302		$	23,105
Provision for loan losses charged to expense		1,188			—			1,009			500
Less: Charge-offs
SBA loans held for investment		—			(164)			—			(446)
Commercial loans		(501)			(20)			(501)			(393)
Residential mortgage loans		—			—			—			—
Consumer loans		(40)			—			(46)			(1)
Total charge-offs		(541)			(184)			(547)			(840)
Add: Recoveries
SBA loans held for investment		6			19			28			34
Commercial loans		32			1			61			2
Residential mortgage loans		1			—			1			—
Consumer loans		4						4
Total recoveries		43			20			94			36
Net charge-offs		(498)			(164)			(453)			(804)
Balance, end of period	$	22,858		$	22,801		$	22,858		$	22,801
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans:
SBA loans held for investment		0.03	%		(0.27)	%		0.06	%		(0.41)	%
Commercial loans		(0.19)			(0.01)			(0.09)			(0.09)
Residential mortgage loans		—			—			—			—
Consumer loans		(0.18)			—			(0.11)			—
Total loans		0.11			0.04			(0.03)			(0.05)
Allowance to total loans		1.27			1.38			1.27			1.38
Allowance to nonperforming loans		297.63	%		235.43	%		297.63	%		235.43	%

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

Deposits

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

Total deposits decreased $60.9 million to $1.7 billion at June 30, 2022, from year-end 2021. This decrease in deposits was due to a decrease of $24.6 million in time deposits, $24.0 million in savings deposits and $18.2 million in noninterest-bearing demand deposits, partially offset by an increase of $5.9 million in interest-bearing demand deposits.

The Company’s deposit composition at June 30, 2022, consisted of 39.5 percent savings deposits, 30.1 percent noninterest-bearing demand deposits, 15.7 percent time deposits, and 14.7 percent interest-bearing demand deposits.

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Borrowed Funds and Subordinated Debentures

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

Borrowed funds and subordinated debentures totaled $175.3 million at June 30, 2022 and $50.3 million at December 31, 2021, respectively, and are broken down in the following table:


(In thousands)	June 30, 2022		December 31, 2021
FHLB borrowings:
Fixed rate advances	$	40,000	$	40,000
Fixed short term borrowings		25,000		—
Overnight advances		100,000		—
Subordinated debentures		10,310		10,310
Total borrowed funds and subordinated debentures	$	175,310	$	50,310

In June 2022, the FHLB issued a $115.0 million municipal deposit letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law.

At June 30, 2022, the Company had $326.6 million of additional credit available at the FHLB. Pledging additional collateral in the form of 1 to 4 family residential mortgages, commercial loans and investment securities can increase the line with the FHLB.

Subordinated Debentures

On July 24, 2006, Unity (NJ) Statutory trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part, prior to maturity but after July 24, 2011. The floating interest rate on the subordinated debentures is three-month LIBOR plus 159 basis points and reprices quarterly. The floating interest rate was 3.744% at June 30, 2022 and 1.806% at December 31, 2021.

Interest Rate Sensitivity

The principal objectives of the asset and liability management function are to establish prudent risk management guidelines, evaluate and control the level of interest-rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity requirements, and actively manage risk within the Board approved guidelines. The Company seeks to reduce the vulnerability of operations to changes in interest rates, and actions in this regard are taken under the guidance of the Asset/Liability Management Committee (“ALCO”) of the Board of Directors. The ALCO reviews the maturities and re-pricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.

The Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models to measure the impact of longer-term asset and liability mismatches beyond two years. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity, as a percentage of assets with rate shocks of 200 basis points at June 30, 2022, is a decrease of 6.0 percent in a rising-rate environment and an increase of 3.3 percent in a falling-rate environment. The variances in the EVPE at June 30, 2022 are within the Board-approved guidelines of +/- 20.0 percent. In a falling rate environment with a rate shock of 200 basis points, benchmark interest rates are assumed to have floors of 0.00%. At December 31, 2021, the economic value of equity as a percentage of assets with rate shocks of 200 basis points was an increase of 4.3 percent in a rising-rate environment and a decrease of 12.3 percent

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in a falling-rate environment. The variances in the EVPE at December 31, 2021 are within the Board-approved guidelines of +/- 20.0 percent.

Liquidity

Consolidated Bank Liquidity

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

The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit inflows and outflows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Consolidated Statement of Cash Flows provides detail on the Company’s sources and uses of cash, as well as an indication of the Company’s ability to maintain an adequate level of liquidity. At June 30, 2022, the balance of cash and cash equivalents was $109.0 million, a decrease of $135.8 million from December 31, 2021. A discussion of the cash provided by and used in operating, investing and financing activities follows.

Operating activities provided $11.8 and $19.7 million of net cash for the six months ended June 30, 2022 and 2021, respectively. The primary sources of funds were net income from operations and adjustments to net income, such as the proceeds from the sale of mortgage loans, partially offset by originations of mortgage and SBA loans held for sale.

Investing activities used $210.3 million and $14.7 million in net cash for the six months ended June 30, 2022 and 2021, respectively. Cash was primarily used to fund new loans and purchase investment securities.

●

Securities. The Consolidated Bank’s available for sale investment portfolio amounted to $94.0 million and $56.5 million at June 30, 2022 and December 31, 2021, respectively. This excludes the Parent Company’s securities discussed under the heading “Parent Company Liquidity” below. Projected cash flows from securities based on current estimates over the next twelve months are $4.2 million.

●

Loans. The SBA loans held for sale portfolio amounted to $32.2 million and $27.4 million at June 30, 2022 and December 31, 2021, respectively. Sales of these loans provide an additional source of liquidity for the Company.

●

Outstanding Commitments. The Company was committed to advance approximately $485.8 million to its borrowers as of June 30, 2022, compared to $399.8 million at December 31, 2021. At June 30, 2022, $187.2 million of these commitments expire within one year, compared to $170.1 million at December 31, 2021. The Company had $5.6 million and $4.3 million in standby letters of credit at June 30, 2022 and December 31, 2021, respectively, which are included in the commitments amount noted above. The estimated fair value of these guarantees is not significant. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded.

Financing activities used $62.7 million and provided $2.5 million in net cash for the six months ended June 30, 2022 and 2021, primarily due to proceeds from new FHLB borrowings and an increase in the Company’s deposits.

●

Deposits. As of June 30, 2022, deposits included $250.6 million of New Jersey Municipality deposits, as compared to $247.7 million at year end 2021. These deposits are generally short in duration and are very sensitive to price competition. The Company believes that the current level of these types of deposits is appropriate. Included in the portfolio were $231.4 million of deposits from 15 municipalities with account

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balances in excess of $5.0 million. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company.

●

Borrowed Funds. Total FHLB borrowings amounted to $160.0 million as of June 30, 2022 and December 31, 2021. As a member of the Federal Home Loan Bank of New York, the Company can borrow additional funds based on the market value of collateral pledged. At June 30, 2022, pledging provided an additional $326.6 million in borrowing capacity from the FHLB.

Parent Company Liquidity

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

At June 30, 2022, the Parent Company had $1.2 million in cash and cash equivalents and $5.8 million in investment securities valued at fair market value, compared to $1.7 million and $5.0 million at December 31, 2021.

Regulatory Capital

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

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

●

A leverage capital ratio of greater than 9.0%;

●

Total consolidated assets of less than $10.0 billion;

●

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

●

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

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

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

The following table shows the CBLR ratio for the Company and the Bank at June 30, 2022 and at December 31, 2021:


	At June 30, 2022				At December 31, 2021
	Company		Bank		Company		Bank
CBLR	11.20	%	10.66	%	10.51	%	10.00	%

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

Shareholders’ Equity

Shareholders’ equity increased $15.1 million to $220.8 million at June 30, 2022 compared to $205.7 million at

December 31, 2021, primarily due to net income of $18.6 million. Other items impacting shareholders’ equity

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included $2.9 million in accumulated other comprehensive loss net of tax, $2.1 million in dividends paid on common stock, and $1.6 million from the issuance of common stock under employee benefit plans. The issuance of common stock under employee benefit plans includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

Repurchase Plan

On February 4, 2021, the Company authorized the repurchase of up to 750 thousand shares, or approximately 7.5 percent of its outstanding common stock. The new plan took effect after the Company’s prior share repurchase program was completed and all authorized shares were repurchased on February 16, 2021. No shares were repurchased during the six months ended June 30, 2022. Currently, 571 thousand shares are available for repurchase. The timing and amount of additional purchases, if any, will depend upon a number of factors including the Company’s capital needs, the performance of its loan portfolio, the need for additional provisions for loan losses and the market price of the Company’s stock. A total of 110 thousand shares were repurchased at an average price of $20.14, during the same period in 2021.

Impact of Inflation and Changing Prices

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

ITEM 3 Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 4 Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2022. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.

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

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

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

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ITEM 1A Risk Factors

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

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

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

ITEM 3 Defaults upon Senior Securities – None

ITEM 4 Mine Safety Disclosures - N/A

ITEM 5 Other Information – None

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ITEM 6 Exhibits



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

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q


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

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SIGNATURES

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


		UNITY BANCORP, INC.

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

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Unity Bancorp (UNTY) 10-Q2022 Q2 Quarterly report

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