What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-25 · 266 added, 221 removed, 642 unchanged (43% of the section changed)

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(the “Parent Company”) is a bank holding company incorporated in New Jersey and is 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.

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 nineteen branch offices located in Bergen, Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania.

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● Net income before tax increased 54.7 percent to $48.1 million from $31.1 million in the prior year.

● Net interest income increased $6.8 million or 11.9 percent to $64.4 million from $57.6 million in the prior year, due to SBA PPP loans, commercial loan growth and a reduction in the cost of funds.

● Net interest margin decreased 10 basis points to 3.85 percent compared to 3.95 percent in the prior year.

The decrease was a direct result of interest rate cuts by the Federal Reserve Board in response to COVID-19.

● Noninterest income was $12.9 million, a $3.4 million increase compared to $9.5 million in the prior year, primarily due to increased gains on mortgage loan sales.

● Net interest income increased $12.6 million or 19.6 percent to $77.0 million from $64.4 million in the prior year, due to commercial loan growth, receipt of SBA PPP loan fees on forgiveness and residential construction loan growth.

● Net interest margin increased 31 basis points to 4.16 percent compared to 3.85 percent in the prior year.

● Noninterest income was $12.1 million, an $892 thousand decrease compared to $12.9 million in the prior year, primarily due to a decrease in the volume of residential mortgage loan sales and a decision to not sell SBA available for sale loans in the latter half of 2021, partially offset by an increase in servicing and loan fee income.

● Noninterest expense totaled $40.8 million, an increase of $1.5 million when compared to $39.3 million in the prior year.

The increase was primarily due to increased consulting expenses incurred in connection with compliance with our Consent Order with the FDIC and NJDOBI and increased compensation due to increased mortgage commissions.

The increase was primarily due to increased compensation expenses and a one-time adjustment in retirement benefit calculation.

● The effective tax rate increased to 25.0 percent compared to 24.0 percent in the prior year.

● A 14.2 percent increase in total loans driven by a 79.7 percent increase in SBA loans, which reflects $118.3 million from the funding of SBA PPP loans, a 9.8 percent increase in commercial loans and a 6.8 percent increase in consumer loans.

● A 24.6 percent increase in total deposits with a 64.3 percent increase in noninterest-bearing demand deposits and a 28.3 percent increase in interest-bearing demand deposits.

● A 1.3 percent increase in total loans driven by a 38.3 percent increase in residential construction loans and a 10.9 percent increase in commercial loans.

SBA PPP loans decreased 60.7 percent or $71.8 million due to loans being forgiven and paid off.

● A 12.9 percent increase in total deposits with a 52.4 percent increase in savings deposits, a 19.5 percent increase in interest-bearing demand deposits and a 15.1 percent increase in non-interest bearing demand deposits.

The Company’s performance ratios for the past three years are listed in the following table:

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In response to the COVID-19 pandemic, many businesses have been faced with restrictions in an effort to prioritize public health.

The initial temporary closure and gradual reopening of many businesses and the implementation of social distancing and stay-at-home policies has and will continue to impact many of the Company’s customers.

COVID-19 continues to aggressively spread globally and in the United States.

The initial temporary closure and gradual reopening of many businesses and the implementation of social distancing and stay-at-home policies as new variants have spread, has impacted many of the Company’s customers.

The Company is committed to supporting its customers, employees and communities during this difficult time and has adapted to the changing environment.

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The Company has and is working with its loan customers to provide short term payment deferrals and to waive certain fees.

These accommodations are likely to have a negative impact on the Company’s results of operations during the duration of the

epidemic, and, depending on how quickly the businesses of our customers rebound after the emergency, could lead to an increase in nonperforming assets.

The full impact of the pandemic is unknown and rapidly evolving.

The outbreak is having a significant adverse impact on certain industries the Company serves, including retail, accommodations, and restaurants and food services.

While most states have re-opened, it is under limited capacities and under other social-distancing restrictions, which have resulted in lower commercial activity and consumer spending.

These accommodations are likely to have a negative impact on the Company’s results of operations during the duration of the epidemic, and depending on how quickly the businesses of our customers rebound after the emergency, could lead to an increase in nonperforming assets.

The full impact of the pandemic remains unknown and continues to evolve.

The outbreak has had a significant adverse impact on certain industries the Company serves, including retail, accommodations, and restaurants and food services.

Although the COVID-19 pandemic continues, the restrictions that have been in place for over a year are beginning to loosen in many areas as vaccines are administered and people start to feel safer.

However, some of this progress has been interrupted by the spread of new variants of the virus.

It is still unknown what changes in the behavior of customers, businesses and their employees will result from the COVID-19 pandemic.

While states have re-opened, several restrictions remain in place, which have resulted in lower commercial activity and consumer spending.

This decrease in commercial activity may result in our customers' inability to meet their loan obligations to us.

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Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our customers and prospects, and on the local and national economy, there can be no assurances as to how the crisis may ultimately affect the Company's loan portfolio, and business as a whole.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the gradual reopening of businesses will result in a meaningful increase in economic activity.

The extent of such impact will depend on future developments,

which remain uncertain.

As such, the Company could be subject to certain risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.

It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

The CARES Act includes a range of other provisions designed to support the U.S.

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 provides assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP").

The PPP generally provides 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 will be deferred for up to six months.

The CARES Act provided assistance to small businesses through the establishment of the Paycheck Protection Program ("PPP").

The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits.

The funds were provided in the form of loans that would be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities.

The payments on these loans were deferred for up to six months.

Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can be extended to five years if the lender agrees.

Forgiveness of the PPP loans is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.

Most small businesses with 500 or fewer employees are eligible.

Most small businesses with 500 or fewer employees were eligible.

Applications for the PPP loans started on April 3, 2020 and the application period was extended to August 8, 2020, and then reopened pursuant to the terms of the Economic Aid Act discussed below.

As an existing SBA 7(a) lender, the Company has opted to participate in the program.

The Company approved 1,224 applications and provided fundings of approximately $143.0 million.

The Company has $118.3 million of PPP loans remaining on our balance sheet as of December 31, 2020 and believes that the majority of these loans will be forgiven by the SBA.

As an existing SBA 7(a) lender, the Company opted to participate in the program.

The Company approved 1,224 applications and provided fundings of approximately $143.0 million during the year ended December 31, 2020.

The Company has $1.9 million of PPP loans originated under the CARES Act remaining on our balance sheet as of December 31, 2021 and believes that the majority of these loans will be forgiven by the SBA.

Economic Aid Act

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues (“Economic Aid”) Act was signed into law.

It provides additional assistance to the hardest-hit small businesses, nonprofits, and venues that are struggling to recover from the impact of the COVID-19 pandemic.

The Economic Aid Act provides funding for a second round of PPP loans for small businesses and nonprofits experiencing significant revenue losses, makes programmatic improvements to PPP, funds grants to shuttered venues, and enacts emergency enhancements to other SBA lending programs.

The PPP now allows certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP Loan with the same general loan terms as their First Draw PPP Loan, and for borrowers that did not initially receive a PPP loan to apply for one.

Most small businesses with 300 or fewer employees that can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 are eligible.

Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and are available until March 31, 2021.

The Company is participating in the re-opened PPP loan process.

It provided additional assistance to the hardest-hit small businesses, nonprofits, and venues that were struggling to recover from the impact of the COVID-19 pandemic.

The Economic Aid Act provided funding for a new application period for PPP loans, a second round of PPP loans for small businesses and nonprofits experiencing significant revenue losses, made programmatic improvements to PPP, funded grants to shuttered venues, and enacted emergency enhancements to other SBA lending programs.

The PPP allowed certain eligible borrowers that previously received a PPP loan to apply for a Second Draw PPP Loan with the same general loan terms as their First Draw PPP Loan, and for borrowers that did not initially receive a PPP loan to apply for one.

Most small businesses with 300 or fewer employees that could demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020 were eligible.

Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and were available until March 31, 2021.

The Company participated in the re-opened PPP loan process.

The Company approved 955 applications and provided fundings of approximately $101.0 million under the Economic Aid Act.

As of December 31, 2021, the Company has $44.6 million of PPP loans originated under the Economic Aid Act in its portfolio.

On March 22, 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.

The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications (e.g.

six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not TDRs.

The guidance goes on to explain that, in consultation with the FASB staff, the federal bank regulatory agencies concluded that short-term modifications made on a good faith basis to borrowers who were current

as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”).

Section 4013 of the CARES Act also addresses COVID-19 related modifications and specifies that COVID-19 related modifications on loans that were current as of December 31, 2019, are not TDRs.

In March 2020, the Company proactively communicated with its customers to address their financial needs.

Beginning in March 2020, the Company proactively communicated with its customers to address their financial needs.

The Company worked closely with its customers to educate and guide them on their options for financial assistance, including disaster loans, the PPP and payment relief through deferrals and waived fees.

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Consumer loans

Residential construction loans

Consent Order

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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.

The Bank hired a consulting firm to assist management in effectively addressing all matters pertaining to the Consent 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.

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Earning assets include loans to individuals and businesses, investment securities, interest-earning deposits and federal funds sold.

Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank ("FHLB") advances and other borrowings.

Interest-bearing liabilities include interest-bearing demand, savings and time deposits, FHLB advances and other borrowings.

Net interest income is determined by the difference between the yields earned on earning assets and the rates paid on interest-bearing liabilities (“net interest spread”) and the relative amounts of earning assets and interest-bearing liabilities.

The Company’s net interest spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, deposit flows and general levels of nonperforming assets.

COVID-19 has and will continue to adversely affect economic activity globally, nationally and locally.

Following the COVID-19 outbreak, market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time.

Additionally, the Federal Open Market Committee reduced the target federal funds rate to 0% to 0.25% on March 16, 2020.

These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company's financial condition and results of operations.

2021 compared to 2020

During 2021, tax-equivalent net interest income amounted to $77.0 million, an increase of $12.6 million or 19.6 percent when compared to the same period in 2020.

The net interest margin increased 31 basis points to 4.16 percent for the year ended December 31, 2021, compared to 3.85 percent for the same period in 2020.

The net interest spread was 3.95 percent for 2021, a 47 basis point increase compared to the same period in 2020.

During 2021, tax-equivalent interest income was $84.8 million, an increase of $5.9 million or 7.4 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 yield on loans, partially offset by a decrease in the balance of average securities, and the decrease in the yield on securities.

● Of the $5.9 million increase in interest income on a tax-equivalent basis, $6.1 million was due to the increased volume of earning assets, partially offset by a $259 thousand decrease in yields on average interest-earning assets.

● The average volume of interest-earning assets increased $177.1 million to $1.9 billion for 2021 compared to $1.7 billion for 2020.

This was primarily due to a $114.6 million increase in average loans, primarily commercial, SBA PPP and residential construction loans and a $74.8 million increase in federal funds sold and interest-bearing deposits, partially offset by a $10.4 million decrease in investment securities.

● The yield on total interest-earning assets decreased 13 basis points to 4.58 percent for the year ended December 31, 2021 when compared to 2020.

The yield on the loan portfolio increased 5 basis points to 5.01 percent.

Total interest expense was $7.7 million in 2021, a decrease of $6.7 million or 46.5 percent compared to 2020.

This decrease was driven primarily by the decreased rates on interest-bearing deposits:

● Of the $6.7 million decrease in interest expense, $5.6 million was due to decreased rates on interest-bearing liabilities while $1.1 million was due to the decreased volume of average interest-bearing liabilities.

● The average cost of interest-bearing liabilities decreased 60 basis points to 0.63 percent in 2021 when compared to 2020.

The cost of interest-bearing deposits decreased 61 basis points in 2021.

● Interest-bearing liabilities averaged $1.2 billion in 2021, an increase of $52.7 million or 4.5 percent, compared to 2020.

The increase in interest-bearing liabilities was primarily due to an increase in savings and interest-bearing demand deposits offset by decreases in time deposits and borrowed funds.

2020 compared to 2019

Tax-equivalent net interest income amounted to $64.4 million in 2020, an increase of $6.8 million from $57.6 million in 2019.

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This increase was driven primarily by the increase in the average volume of loans:

● Of the $3.2 million increase in interest income on a tax-equivalent basis, $8.6 million was due to the increased volume of earning assets, partially offset by a $5.4 million decrease in yields on average interest-earning assets.

● Of the $3.2 million increase in interest income on a tax-equivalent basis, $8.6 million of the increase was due primarily to the increased volume of earning assets offset by a $5.4 million decline related to a decrease in yields on average interest-earning assets.

● The yield on interest-earning assets decreased 47 basis points to 4.71 percent in 2020 when compared to 2019.

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The increase in interest-bearing liabilities was primarily due to an overall increase in time, savings, and interest-bearing demand deposits.

2019 compared to 2018

Tax-equivalent net interest income amounted to $57.6 million in 2019, an increase of $3.8 million from $53.8 million in 2018.

The Company’s net interest margin decreased 2 basis points to 3.95 percent in 2019, compared to 3.97 percent in 2018.

The net interest spread was 3.54 percent, a decrease of 11 basis points from 3.65 percent in 2018.

During 2019, tax-equivalent interest income was $75.7 million, an increase of $8.4 million or 12.5 percent when compared to 2018.

This increase was driven primarily by the increase in the average volume of loans:

● Of the $8.4 million increase in interest income on a tax-equivalent basis, $5.2 million of the increase was due primarily to the increased volume of earning assets and $3.2 million of the increase was due to an increase in yields on average interest-earning assets.

● The yield on interest-earning assets increased 21 basis points to 5.18 percent in 2019 when compared to 2018.

● The average volume of interest-earning assets increased $105.3 million to $1.5 billion in 2019 compared to $1.4 billion in 2018.

This was due primarily to a $105.4 million increase in average loans, primarily residential mortgage, commercial and consumer loans, and a $2.6 million increase in average federal funds, interest-bearing deposits and repos, partially offset by a $2.0 million decrease in average investment securities.

Total interest expense was $18.1 million in 2019, an increase of $4.5 million or 33.6 percent compared to 2018.

This increase was driven by the increased rates on interest-bearing deposits and volume of time deposits, partially offset by a decrease in the average volume of borrowed funds and subordinated debentures compared to a year ago:

● Of the $4.5 million increase in interest expense, $3.0 million was due to increased rates on interest-bearing liabilities and $1.6 million was due to an increase in the volume of average interest-bearing liabilities.

● The average cost of interest-bearing liabilities increased 32 basis points to 1.64 percent in 2019 when compared to 2018.

The cost of interest-bearing deposits and borrowed funds and subordinated debentures increased 36 basis points and 14 basis points, respectively, in 2019

● Interest-bearing liabilities averaged $1.1 billion in 2019, an increase of $72.1 million or 7.0 percent, compared to 2018.

The increase in interest-bearing liabilities was primarily due to an increase in average time deposits.

The following table reflects the components of net interest income, setting forth for the periods presented herein:

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Interest-earning assets:

Federal funds sold and interest-bearing deposits

Interest-bearing deposits

Federal Home Loan Bank ("FHLB") stock

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Consumer loans

Residential construction loans

Total loans (B)

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(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 2020, 2019 and 2018 and 35 percent in prior years and applicable state rates.

They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 21 percent in 2021 and 2020.

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

Consolidated Average Balance Sheets (Continued)

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

For the years ended December 31,

Interest-earning assets:

Interest-bearing deposits

Federal Home Loan Bank ("FHLB") stock

Total securities (A)

Commercial loans

Residential mortgage loans

Consumer loans

Residential construction loans

Total loans (B)

Total interest-earning assets

Noninterest-earning assets:

Cash and due from banks

Allowance for loan losses

Total noninterest-earning assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:

Interest-bearing demand deposits

Savings deposits

Time deposits

Total interest-bearing deposits

Borrowed funds and subordinated debentures

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest-bearing demand deposits

Other liabilities

Total noninterest-bearing liabilities

Total shareholders' equity

Total liabilities and shareholders' equity

Net interest spread

Tax-equivalent basis adjustment

Net interest income

Net interest margin

(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 2019.

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

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.

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Interest income:

Federal funds sold and interest-bearing deposits

Interest-bearing deposits

Total interest income

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Provision for Loan Losses

The provision for loan losses totaled $7.0 million for 2020, $2.1 million in 2019 and $2.1 million in 2018.

The increase in provision for loan losses in 2020 was primarily due to the increased risk of loan defaults as a result of COVID-19.

The company may incur elevated provisions until restrictions on businesses have been loosened and they can fully open.

The provision for loan losses totaled $181 thousand for 2021, $7.0 million in 2020 and $2.1 million in 2019.

During 2020 the provision for loan losses was elevated due to uncertainty and the risk of loan defaults related to COVID-19.

The provision for loan losses decreased $6.8 million for the year ended 2021 due to a reduction of specific reserves on impaired 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 Unfunded Loan Commitments.” The current provision is considered appropriate based upon management’s assessment of the adequacy of the allowance for loan losses.

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.

Noninterest Income

6 unchanged sentences

Gain on sale of mortgage loans, net

Net security gains (losses)

Net security gains

Gain on sale of premises and equipment

1 unchanged sentence

2021 compared to 2020

Noninterest income was $12.1 million for 2021, an $892 thousand decrease compared to $12.9 million for 2020.

This decrease was primarily due to decreased gains on sales of mortgages and SBA loans held for sale.

Changes in noninterest income reflect:

● Branch fee income increased $84 thousand to $1.1 million when compared to 2020, primarily due reduced overdraft and transaction fees in 2020 related to COVID-19 compared to 2021.

● Service and loan fee income increased $1.0 million in 2021, primarily due to an increase in loan payoff charges and loan prepayment penalties.

● Net gains on the sale of SBA loans decreased $901 thousand in 2021 as a result of management’s decision to not sell SBA available for sale loans in the latter half of the year.

SBA loan sales totaled $5.37 million in 2021 and $18.2 million in 2020.

● Gains on sales of mortgage loans decreased $1.8 million in 2021 as a result of a volume decrease.

During the year, $255.5 million in residential mortgage loans were sold at a gain of $4.6 million compared to $290.8 million in loans sold at a gain of $6.3 million during the prior year.

● BOLI income increased $76 thousand from prior year, primarily due to a death benefit received.

● Gains on sales of securities totaled $43 thousand in 2021, compared to $322 thousand in 2020.

Gains of $561 thousand were realized from the increase in market value of equity securities in 2021, compared to a decrease of $229 thousand in 2020.

● There were no gains on sale of premises and equipment in 2021.

● Other income increased $95 thousand, primarily due to an increase in card interchange fees.

2020 compared to 2019

Noninterest income was $12.9 million for 2020, a $3.4 million increase compared to $9.5 million for 2019.

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● Other income increased $120 thousand, primarily due to an increase in wire transfer fee income.

2019 compared to 2018

Noninterest income was $9.5 million for 2019, a $508 thousand increase compared to $9.0 million for 2018.

This increase was primarily due to market fluctuations on our equity securities and increased gains on sales of mortgages.

Changes in noninterest income reflect:

● Branch fee income decreased $17 thousand to $1.5 million when compared to 2018.

● Service and loan fee income, which consists of prepayment fees, applications fees and servicing fees, decreased $165 thousand in 2019.

● Net gains on the sale of SBA loans decreased $771 thousand to $909 thousand in 2019 due to a decrease in the volume of SBA loans sales.

In 2019, $14.9 million in SBA loans were sold compared to $22.3 million in the prior year.

The Company elected not to sell SBA loans during the third quarter of 2019.

● During 2019, $120.2 million in residential mortgage loans were sold at a gain of $2.1 million compared to $80.7 million in loans sold at a gain of $1.7 million during the prior year.

● BOLI income decreased $387 thousand from prior year, primarily due to a $291 thousand death benefit in the third quarter of 2018.

● Net security gains totaled $373 thousand in 2019 compared to losses of $199 thousand in 2018.

Approximately $321 thousand of these gains resulted from an increase in the market value of equity securities, compared to a decrease of $195 thousand in 2018.

Gains on sales of securities totaled $52 thousand in 2019, compared to losses of $4 thousand in 2018.

● Gain on sale of premises and equipment totaled $766 thousand in 2019 versus none in 2018.

The increase was primarily due to the $768 thousand gain on the sale of our Union, NJ branch building in September 2019.

● Other income, which includes check card related income and miscellaneous service charges totaled $1.3 million and $1.2 million in 2019 and 2018, respectively.

Noninterest Expense

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Professional services

Director fees

Other loan expenses

Deposit insurance

Loan collection & OREO expenses (recoveries)

Director fees

Loan collection & OREO expenses

Other expenses

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Noninterest expense totaled $40.8 million for the year ended December 31, 2021, an increase of $1.5 million when compared to $39.3 million in 2020.

The majority of this increase is attributed to increased compensation due to mortgage commissions paid on a higher origination volume and expenses related to enhancing our BSA program and complying with our Consent Order with the FDIC and NJDOBI.

The majority of this increase is attributable to increased salary expenses and a one-time deferred compensation adjustment.

Changes in noninterest expense reflect:

● Compensation and benefits expense, the largest component of noninterest expense, increased $1.6 million for the year ended December 31, 2021, when compared to 2020.

The yearly increase is primarily due to increased salary expenses and a one-time deferred compensation adjustment.

● Processing and communications, which includes items processed and electronic banking fees, decreased $105 thousand for the year ended December 31, 2021 when compared to 2020.

● Occupancy expense increased $118 thousand in 2021 when compared to 2020 primarily due to increased ground maintenance and rent expenses.

● Furniture and equipment expense, which includes network and software maintenance, decreased $16 thousand in 2021.

● Professional service fees increased $293 thousand in 2021, primarily due to higher legal and consulting related expenses.

● Advertising expenses increased $330 thousand for the year ended December 31, 2021, versus 2020 primarily due to increased initiatives in mortgage advertising and community related events and a reduced level of marketing expenses in 2020 as a result of COVID-19.

● Other loan expenses, which consist of expenses such as appraisals, filings and credit reports, increased $300 thousand in 2021, when compared to 2020 primarily due to SBA expense reimbursements.

● Deposit insurance expense increased $170 thousand in 2021 when compared to 2020

● Director fees increased $37 thousand in 2021 when compared to 2020.

● BSA expenses were $701 thousand in 2021 due to consulting expenses in connection with BSA/AML remediation related to the Bank’s Consent Order.

● Loan collection and OREO expenses decreased $80 thousand in 2021, primarily due to the sale of all OREO properties.

● Other expenses decreased $75 thousand in 2021.

2020 compared to 2019

Noninterest expense totaled $39.3 million for the year ended December 31, 2020, an increase of $4.6 million when compared to $34.7 million in 2019.

The majority of this increase is attributable to increased compensation due to mortgage commissions paid on a higher origination volume and expenses related to enhancing our BSA program and complying with our Consent Order with the FDIC and NJDOBI.

Changes in noninterest expense reflect:

● Compensation and benefits expense, the largest component of noninterest expense, increased $2.5 million for the year ended December 31, 2020, when compared to 2019.

The yearly increase is primarily due to increased mortgage commissions on a higher origination volume.

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● Other expenses decreased $178 thousand in 2020 when compared to 2019, primarily due to lower officer and employee expenses.

2019 compared to 2018

Noninterest expense totaled $34.7 million for the year ended December 31, 2019, an increase of $1.3 million when compared to $33.4 million in 2018.

The majority of this increase is attributed to increased compensation and mortgage commissions paid on a higher origination volume and the continued investment in our technology infrastructure through software upgrades.

Changes in noninterest expense reflect:

● Compensation and benefits expense, the largest component of noninterest expense, increased $547 thousand for the year ended December 31, 2019, when compared to 2018.

The yearly increase is primarily due to increased salary expenses and year-end bonuses paid to employees.

● Occupancy expense decreased $89 thousand in 2019 when compared to 2018.

● Processing and communications increased $136 thousand for the year ended December 31, 2019 when compared to 2018, primarily due to increased electronic banking expenses.

● Furniture and equipment expense increased $546 thousand in 2019, due to investment in software and equipment to remain efficient, secure and competitive technologically.

● Professional service fees increased $127 thousand in 2019, primarily due to higher consulting expenses.

● Loan collection and OREO expenses increased $402 thousand in 2019, primarily due to a $317 thousand settlement related to an OREO property in the third quarter of 2018.

● Other loan expenses, which consist of expenses such as appraisals, filings and credit reports, increased $64 thousand in 2019, when compared to 2018.

● Deposit insurance expense decreased $481 thousand in 2019 when compared to 2018 primarily due to an FDIC assessment credit of $279 thousand during the second half of 2019.

● Advertising expenses decreased $53 thousand for the year ended December 31, 2019, versus 2018.

● Director fees remained relatively flat in 2019 when compared to 2018.

● Other expenses increased $95 thousand in 2019, primarily due to higher officer and employee expenses.

Income Tax Expense

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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.

In addition, New Jersey adopted mandatory unitary combined reporting for its Corporation Business Tax.

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.

The Division of Taxation will waive any underpayment penalties on 2020 estimated tax payments related to the retroactive increase.

In addition, if the federal corporate tax rate is increased to a rate of at least 35% of taxable income, the surtax will be suspended.

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Financial Condition

Total assets increased $240.0 million or 14.0%, to $2.0 billion at December 31, 2020, compared to $1.7 billion at December 31, 2019.

This increase was primarily due to an increase of $195.5 million in net loans, reflecting $118.3 million from the funding of PPP loans, strong commercial growth, and $61.3 million in cash and cash equivalents, partially offset by a decrease of $19.0 million in investments.

Total deposits increased $307.8 million, primarily due to increases of $179.9 million in noninterest-bearing demand deposits, $48.5 million in savings deposits, $45.1 million in interest-bearing demand deposits, and $34.4 million in time deposits.

Borrowed funds decreased $83.0 million to $200.0 million at December 31, 2020 due to a $63.0 million decrease in overnight borrowings and the maturity of a $20.0 million FHLB adjustable rate advance.

Total assets were $2.0 billion at December 31, 2021 and December 31, 2020, respectively.

The commercial loan portfolio increased by $91.9 million, the consumer construction and other consumer loan portfolios increased by $33.4 million and $11.8 million, respectively.

The increases were offset by a decrease of $58.2 million in the residential mortgage portfolio and a decrease of $57.3 million in the SBA Portfolio, which houses our PPP loan portfolio.

The investment portfolio increased $31.8 million primarily due to purchases, and Federal Home Loan Bank Stock decreased by $7.0 million due to a decrease in borrowings and their stock ownership requirements.

Total deposits increased $200.9 million, primarily due to increases of $69.6 million in noninterest-bearing demand deposits, $238.7 million in savings deposits, and $39.8 million in interest-bearing demand deposits, partially offset by a decrease of $147.2 million in time deposits.

Borrowed funds decreased $160.0 million to $40.0 million at December 31, 2021.

Total shareholders’ equity increased $31.8 million from year end 2020, primarily due to net income from operations, less dividends paid on our common stock.

Net income was $23.6 million for the year ended December 31, 2020, a decrease of $9.0 thousand from the prior year.

Other changes in shareholder’s equity included stock-based transactions of $1.6 million, offset by another comprehensive loss net of tax of $1.3 million, common stock dividends of $3.3 million paid in 2020 and treasury stock purchases of $7.4 million.

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

The Company’s securities portfolio consists of available for sale (“AFS”) debt securities and equity investments.

Net income was $36.1 million for the year ended December 31, 2021, an increase of $12.5 million from the prior year.

Other changes in shareholder’s equity included an increase in accumulated other comprehensive income of $1.5 million, common stock dividends of $3.7 million paid in 2021 and treasury stock purchases of $4.2 million.

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

The Company’s securities portfolio consists of available for sale (“AFS”) debt securities, held to maturity (“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.

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Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings.

AFS debt securities consist primarily of obligations of U.S.

Government sponsored entities, obligations of state and political subdivisions, mortgage-backed securities, and corporate and other securities.

AFS debt securities totaled $45.6 million at December 31, 2020, a decrease of $18.7 million or 29.0 percent, compared to $64.3 million at December 31, 2019.

This net decrease was the result of:

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 $56.5 million at December 31, 2021, an increase of $10.9 million or 23.8 percent, compared to $45.6 million at December 31, 2020.

This net increase was the result of:

● $12.5 million in principal payments, maturities and called bonds,

● $6.6 million in sales net of realized gains, which consisted of two corporate bonds, three mortgage-backed securities, one tax-exempt municipal security, and one taxable municipal security,

● $695 thousand of depreciation in the market value of the portfolio.

At December 31, 2020, the portfolio had a net unrealized loss of $304 thousand compared to a net unrealized gain of $392 thousand at

● $7.0 million in sales net of realized gains, which consisted of six corporate bonds,

● $343 thousand of appreciation in the market value of the portfolio.

At December 31, 2021, the portfolio had a net unrealized gain of $38 thousand compared to a net unrealized loss of $304 thousand at

December 31, 2020.

These net unrealized losses and gains are reflected net of tax in shareholders’ equity as accumulated other comprehensive income, and

● $241 thousand in net amortization, partially offset by

● An increase of $3.8 million from the purchase of two corporate bonds and three municipal tax-exempt securities.

These net unrealized losses and gains are reflected net of tax in shareholders’ equity as accumulated other comprehensive income,

● $205 thousand in net amortization, and

● An increase of $30.3 million from the purchase of thirteen asset backed securities and four corporate bonds.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 6.9 years and 4.6 years at December 31, 2021 and 2020, 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 was comprised of obligations of U.S.

Government and obligations of state and political subdivisions.

HTM debt securities totaled $14.3 million at December 31, 2021 compared to no HTM securities at December 31, 2020.

The increase was due to:

● $7.6 million in principal payments,

● $4 thousand of depreciation in the market value of the portfolio and

● An increase of $21.9 million from the purchase of three agency notes/ bonds and three mortgage-backed securities.

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.

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Equity securities consist of Community Reinvestment Act ("CRA") investments and the equity holdings of financial institutions.

Equity securities totaled $2.0 million at December 31, 2020, a decrease of $335 thousand or 14.6 percent, compared to $2.3 million at December 31, 2019.

This net decrease was the result of:

Equity securities totaled $8.6 million at December 31, 2021, an increase of $6.6 million, compared to $2.0 million at December 31, 2020.

This net increase was the result of:

● The purchase of two additional equity holdings of financial institutions for $3.5 million and $2.6 million in additional CRA investments,

● $565 thousand in market value adjustments throughout the year, and

● $111 thousand in sales net of realized gains from the sale of one community bank holding.

● $53 thousand in sales net of realized loss from the sale of one community bank holding.

The average balance of taxable securities amounted to $43.8 million in 2021 compared to $52.7 million in 2020.

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The average balance of tax-exempt securities amounted to $1.6 million in 2021 compared to $3.1 million in 2020.

The average yield earned on tax-exempt securities decreased 52 basis points to 2.42 percent in 2020, from 2.94 percent in 2019.

The average yield earned on tax-exempt securities increased 1 basis point to 2.45 percent in 2021, from 2.44 percent in 2020.

Securities with a carrying value of $1.2 million and $1.6 million at December 31, 2021 and December 31, 2020, respectively, were pledged to secure other borrowings, collateralize hedging instruments and for other purposes required or permitted by law.

Approximately 48 percent of the total investment portfolio had a fixed rate of interest at December 31, 2020, compared to 64 percent in 2019.

Approximately 48 percent of the total investment portfolio had a fixed rate of interest at December 31, 2021 and December 31, 2020.

For additional information on securities, see Note 3 to the Consolidated Financial Statements.

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 and consumer loans.

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 $202.3 million or 14.2 percent to $1.6 billion at December 31, 2020, compared to $1.4 billion at year-end 2019.

The increase was primarily driven by the funding of SBA Paycheck Protection Program (“PPP”) loans.

As of December 31, 2020, the Company had PPP loans totaling $118.3 million.

Commercial and consumer loans increased $74.8 million and $9.7 million respectively, partially offset by a decrease of $374 thousand and $120 thousand in SBA and residential loans.

Total loans were $1.6 billion at December 31, 2021, an increase of $21.6 million or 1.3 percent when compared to year-end 2020.

Commercial, residential construction, SBA and consumer loans increased $91.9 million, $33.4 million, $14.5 million and $11.8 million, respectively, partially offset by a decrease of $71.8 million and $58.2 million in SBA PPP and residential loans, respectively.

The following table sets forth the classification of loans by major category, including unearned fees, deferred costs and excluding the allowance for loan losses at December 31 st for the past five years:

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Consumer loans

Residential construction loans

Total loans held for investment

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Average loans increased $114.6 million or 7.4 percent from $1.5 billion in 2020, to $1.7 billion in 2021.

The increase in average loans was due to increases in average PPP, commercial, residential mortgages, consumer and SBA loans.

The yield on the overall loan portfolio decreased 41 basis points to 4.96 percent for the year ended December 31, 2020, compared to 5.37 percent for the prior year.

The increase in average loans was due to increases in average commercial, PPP, residential construction and SBA loans.

The yield on the overall loan portfolio increased 5 basis points to 5.01 percent for the year ended December 31, 2021, compared to 4.96 percent for 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, financing the purchase of equipment, inventory or commercial real estate.

These loans are made for the purposes of providing working capital and for financing the purchase of equipment, inventory or commercial real estate.

Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee.

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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 7(a) loans held for sale, carried at the lower of cost or market, amounted to $9.3 million at December 31, 2020, a decrease of $4.2 million from $13.5 million at December 31, 2019.

SBA 7(a) loans held for investment amounted to $39.6 million at December 31, 2020, an increase of $3.8 million from $35.8 million at December 31, 2019.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $27.4 million at December 31, 2021, an increase of $18.0 million from $9.3 million at December 31, 2020.

SBA 7(a) loans held for investment amounted to $36.1 million at December 31, 2021, a decrease of $3.5 million from $39.6 million at December 31, 2020.

The yield on SBA 7(a) loans, which is generally floating and adjusts quarterly to the Prime Rate, was 6.10 percent for the year ended December 31, 2021, compared to 6.24 percent in the prior year.

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SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.

The CARES Act provides assistance to small businesses through the establishment of the PPP.

The PPP generally provides eligible small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits.

The CARES Act provided assistance to small businesses through the establishment of the PPP.

The PPP provided eligible 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 will be deferred for up to six months.

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 maintaining or quickly rehiring employees and maintaining salary levels.

Applications for the PPP loans started on April 3, 2020 and the application

period was extended through August 8, 2020.

The Economic Aid Act provided additional funding for the PPP, and the application period was reopened.

As an existing SBA 7(a) lender, the Company opted to participate in the program.

Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and are available until March 31, 2021.

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.

Applications for PPP loans under the Economic Aid Act started on January 13, 2021 and were available until March 31, 2021.

As an existing SBA 7(a) lender, the Company opted to participated in the PPP program as initially enacted under the CARES Act and as extended by the Economic Aid Act.

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.

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Residential mortgage loans consist of loans secured by 1 to 4 family residential properties.

These loans amounted to $467.6 million at December 31, 2020, a decrease of $120.0 thousand from year end 2019.

These loans amounted to $409.4 million at December 31, 2021, a decrease of $58.2 million from year end 2020.

Sales of mortgage loans totaled $286.4 million for 2021.

Approximately $13.2 million of the loans sold were from portfolio, with the remainder consisting of new production.

Approximately $18.8 million and $29.7 million in residential loans were sold but serviced by the Company at December 31, 2021 and December 31, 2020, respectively, and are not included on the Company’s balance sheet.

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As a result, the residential mortgage loan portfolio of the Bank includes fixed and adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but are not considered high priced mortgages.

Consumer loans consist of home equity loans, construction 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.

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being purchased.

These loans amounted to $77.9 million at December 31, 2021, an increase of $11.8 million from December 31, 2020.

The yield on consumer loans was 4.73 percent for 2021, compared to 5.00 percent for 2020.

Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home.

These loans amounted to $120.5 million at December 31, 2021, an increase of $33.4 million from December 31, 2020.

The yield on residential construction loans was 5.97 percent for 2021, compared to 5.93 percent for 2020.

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.

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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.

This could lead to greater losses in the event

of defaults on loans secured by real estate.

At December 31, 2021 approximately 92 percent of the Company’s loan portfolio was secured by real estate compared to 87 percent at December 31, 2020.

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One to five years

Over five years

Five to fifteen years

Over fifteen years

SBA PPP loans

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Commercial real estate construction

Residential mortgage loans

Consumer loans

Consumer other

Residential construction loans

Amount of loans with maturities or repricing dates greater than one year:

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Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider.

These concessions typically include reductions in interest rate, extending the maturity of a loan, other modifications of payment terms, or a combination of modifications.

TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider.

These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both.

Deferrals complying with the terms of the CARES Act and regulatory guidance (i.e., deferrals of up to six months to borrowers impacted by COVID-19 pandemic, where the borrower was current at either December 31, 2019, or prior to the deferral being granted) are not considered TDR’s.

When the Company modifies a loan, management evaluates the loan 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.

When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs.

If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance.

This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

At December 31, 2020, there was one loan totaling $663 thousand that was classified as a TDR and deemed impaired, compared to one such loan totaling $705 thousand at December 31, 2019.

The TDR was a commercial real estate loan which was modified in 2017 to reduce the principal balance.

The loan remains in accrual status since it continues to perform in accordance with the restructured terms.

At December 31, 2021, there were three loans totaling $1.0 million that were classified as TDRs and deemed impaired, compared to one loan totaling $663 thousand at December 31, 2020.

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 December 31, 2021 and December 31, 2020:

December 31, 2021

December 31, 2020

Nonperforming

(In thousands)

Commercial real estate

Through December 31, 2021, TDRs consisted of principal reduction, interest only periods and maturity extensions.

The following table shows the types of modifications done by class through December 31, 2021:

December 31, 2021

(In thousands)

Type of modification:

Principal reduction

Interest only with nominal principal

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

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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.

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, as well as independent credit reviews by an outside firm.

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Consumer loans

Residential construction loans

Total nonperforming loans

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(1) Guaranteed SBA loans included above

(2) Nonperforming TDRs included above

(2) Performing TDRs

Nonperforming loans were $12.1 million at December 31, 2020, a $6.5 million increase from $5.6 million at year end 2019.

Since year end 2019, nonperforming loans in the consumer, SBA, residential and commercial segments increased.

The increase in nonperforming consumer loans was primarily due to three consumer construction loans totaling $1.7 million and four home equity loans totaling $1.3 million.

Nonperforming loans were $9.7 million at December 31, 2021, a $2.4 million decrease from $12.1 million at year end 2020.

Since year end 2020, nonperforming loans in the SBA, residential mortgage and consumer loan segments decreased, partially offset by an increase in nonperforming commercial and residential construction loans.

Included in nonperforming loans at December 31, 2021 are approximately $59 thousand of loans guaranteed by the SBA, compared to $371 thousand at December 31, 2020.

In addition, there were $449 thousand in loans past due 90 days or more and still accruing interest at December 31, 2020, compared to $930 thousand at December 31, 2019.

The Company did not have any OREO property at December 31, 2020, compared to $1.7 million at year end 2019.

During 2020, the Company charged off $225 thousand on two OREO properties.

The Company sold four properties, resulting in net recoveries of $68 thousand.

In addition, there were no loans past due 90 days or more and still accruing interest at December 31, 2021, compared to $449 thousand at December 31, 2020.

The Company also monitors potential problem loans.

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These loans are categorized by their non-passing risk rating and performing loan status.

Potential problem loans totaled $36.7 million at December 31, 2020, an increase of $29.3 million from $7.4 million at December 31, 2019.

Potential problem loans totaled $16.6 million at December 31, 2021, a decrease of $20.1 million from $36.7 million at December 31, 2020.

For additional information on asset quality, see Note 4 to the Consolidated Financial Statements.

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The factors are evaluated separately for each type of loan.

For example, commercial loans are broken down further into commercial and industrial loans, commercial mortgages, construction loans, etc.

For example, commercial loans are broken down further into commercial and

industrial loans, commercial mortgages, construction loans, etc.

Each type of loan is risk weighted for each environmental factor based on its individual characteristics.

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The allowance for loan losses totaled $22.3 million at December 31, 2021, compared to $23.1 million at December 31, 2020, with resulting allowance to total loan ratios of 1.35 percent and 1.42 percent, respectively.

Net charge-offs amounted to $290 thousand for 2020, compared to $1.2 million for 2019.

Net charge-offs amounted to $984 thousand for 2021, compared to $290 thousand for 2020.

The following table is a summary of the changes to the allowance for loan losses for the past five years, including net charge-offs to average loan ratios for each major loan category:

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Selected loan quality ratios:

Net (recoveries) chargeoffs to average loans:

Net chargeoffs (recoveries) to average loans:

SBA loans held for investment

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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.

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.

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Consumer loans

Residential construction loans

Total loans held for investment

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Total deposits increased $200.9 million to $1.8 billion at December 31, 2021, from $1.6 billion at December 31, 2020.

This increase in deposits was due to increases of $179.9 million in noninterest-bearing demand deposits, $48.5 million in savings deposits, $45.1 million in interest-bearing demand deposits, and $34.4 million in time deposits.

The Company’s deposit composition at December 31, 2020, consisted of 29.5 percent noninterest-bearing demand deposits, 29.2 percent savings deposits, 28.2 percent time deposits, and 13.1 percent interest-bearing demand deposits.

The change in the composition of the portfolio from December 31, 2019 reflects a 7.1 percent increase in noninterest-bearing demand deposits and a 0.4 percent increase in interest-bearing demand deposits, offset by a 4.1 percent decrease in time deposits and a 3.4 percent decrease in savings deposits.

2019 compared to 2018

Total deposits increased $42.4 million to $1.3 billion at December 31, 2019, from $1.2 billion at December 31, 2018.

This increase in deposits was due to increases of $47.2 million in time deposits, $9.6 million in noninterest-bearing demand deposits and $4.1 million in interest-bearing demand deposits, partially offset by a decrease of $18.4 million in savings deposits, respectively.

The Company’s deposit composition at December 31, 2019, consisted of 32.6 percent savings deposits, 32.3 percent time deposits, 22.4 percent noninterest-bearing demand deposits and 12.7 percent interest-bearing demand deposits.

The change in the composition of the portfolio from December 31, 2018 reflects a 2.7 percent increase in time deposits, offset by a 1.4 percent decrease in savings deposits and a 1.3 percent decrease in interest-bearing demand deposits.

The following table shows average deposits and the concentration of each category of deposits for the past three years:

This increase in deposits was due to increases of $238.7 million in savings deposits, $69.6 million in noninterest-bearing demand deposits and $39.8 million in interest-bearing demand deposits, partially offset by a decrease of $147.2 million in time deposits.

The Company’s deposit composition at December 31, 2021, consisted of 39.4 percent savings deposits, 30.1 percent noninterest-bearing demand deposits, 16.6 percent time deposits, and 13.9 percent interest-bearing demand deposits.

change in the composition of the portfolio from December 31, 2020 reflects a 0.8 percent increase in interest-bearing demand deposits, a 0.6 percent increase in noninterest-bearing demand deposits, and a 10.2 percent increase in savings deposits, partially offset by a 11.6 percent decrease in time deposits.

The following table shows average deposits and the concentration of each category of deposits for the past two years:

For the years ended December 31,

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Total borrowed funds and subordinated debentures

Borrowed funds decreased $83.0 million from prior year-end due to a $63.0 million decrease in FHLB overnight borrowings and a $20.0 million decrease in FHLB adjustable rate advances during the year ended December 31, 2020.

Borrowed funds decreased $160.0 million from prior year-end due to a $130.0 million decrease in FHLB overnight advances and a $30.0 million decrease in FHLB adjustable-rate advances during the year ended December 31, 2021.

FHLB Borrowings

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

At December 31, 2020, the $30.0 million FHLB adjustable rate (“ARC”) advances consisted of one $20.0 million advance and one $10.0 million advance.

At December 31, 2019, the $50.0 million FHLB ARC advances consisted of two $20.0 million advances and one $10.0 million advance.

These ARC advances roll over every six months.

The Company has opted to hedge rates in a fluctuating rate environment.

Each ARC advance has a swap instrument which modifies the borrowing to a 5 year fixed rate borrowing.

The terms of these transactions are as follows:

● A $20.0 million ARC FHLB borrowing with a maturity date of January 6, 2021, at a rate of 3 month LIBOR plus 0.165%.

The swap instrument modifies the borrowing to a 5 year fixed rate borrowing at 1.212% and matures on July 5, 2021.

● A $10.0 million ARC FHLB borrowing with a maturity date of February 18, 2021, at a rate of 3 month LIBOR plus 0.130%.

The swap instrument modifies the borrowing to a 5 year fixed rate borrowing at 1.232% that matures on February 16, 2021.

At December 31, 2020, there were FHLB overnight borrowings of $130.0 million at a rate of 0.340%, compared to $193.0 million at a rate of 1.810% at December 31, 2019.

At December 31, 2021, there were no adjustable rate (“ARC”) advances.

At December 31,2020, the $30.0 million FHLB adjustable rate advances consisted of one $20.0 million advance and one $10.0 million advance.

At December 31, 2021, there were no FHLB overnight borrowings compared to $130.0 million at a rate of 0.340% at December 31, 2020.

In December 2021, the FHLB issued a $112.0 million municipal deposit letter of credit in the name of Unity Bank naming the NJ Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law.

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At December 31, 2020 and 2019, the subordinated debentures had a swap instrument which modified the borrowing to a 3 year fixed rate borrowing at 3.435%.

The swap instrument matured on June 23, 2021.

For additional information on borrowed funds and subordinated debentures, see Note 9 to the Consolidated Financial Statements.

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Simulations are typically created over a 12 to 24 month time horizon.

At December 31, 2020, these simulations show that with a 200 basis point rate increase over a 12 month period, net interest income would decrease by approximately $1.1 million, or 1.6 percent.

A 200 basis point rate decline over a 12 month period would increase net interest income by approximately $552 thousand or 0.8 percent.

At December 31, 2021, these simulations show that with a 200 basis point immediate rate increase, net interest income would increase by approximately $3.5 million, or 4.6 percent in the first twelve months.

Assuming rates remain stable in the second year, net interest income would increase by approximately $9.7 million, or 13.0 percent.

A 200 basis point immediate rate decline would decrease net interest income by approximately $2 million or 2.6 percent in the first twelve months.

Assuming rates remain stable in the second year, net interest income would decrease net interest income by approximately $4.7 million or 6.3 percent.

These variances in net interest income are within the Board-approved guidelines of +/- 10 percent.

Finally, to measure the impact of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models.

The modified duration of

equity measures the potential price risk of equity to changes in interest rates.

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.

3 unchanged sentences

The Company’s variance in the economic value of equity with rate shocks of 200 basis points is an increase of 4.3 percent in a rising rate environment and a decrease of 12.3 percent in a falling rate environment at December 31, 2021.

At December 31, 2019, the Company’s variance in the economic value of equity with rate shocks of 200 basis points is a decline of 1.8 percent in a rising rate environment and a decrease of 1.9 percent in a falling rate environment.

At December 31, 2020, the Company’s variance in the economic value of equity with rate shocks of 200 basis points is an increase of 4.1 percent in a rising rate environment and a decrease of 7.5 percent in a falling rate environment.

The variance in the EVPE at December 31, 2021 and 2020 were within the Board-approved guidelines in place at the time of +/- 20 percent.

13 unchanged sentences

Investing activities used $31.4 million and $186.8 million in net cash for the years ended December 31, 2021 and 2020, respectively.

Cash was primarily used to fund new loans, primarily PPP loans, and purchase FHLB stock, partially offset by cash inflows from proceeds from the redemption of FHLB stock.

Cash was primarily used to purchase FHLB stock and other investment securities, partially offset by cash inflows from proceeds from the redemption of FHLB stock.

● Securities.

4 unchanged sentences

Sales of these loans provide an additional source of liquidity for the Company.

As an existing SBA 7(a) lender, the Company opted to participate in the PPP program.

Forgiveness of these loans provided $196.1 million of additional liquidity for the year ended December 31, 2021.

● Outstanding Commitments .

1 unchanged sentence

At December 31, 2021, $170.1 million of these commitments expire within one year, compared to $114.2 million at December 31, 2020.

The Company had $4.5 million and $4.8 million in standby letters of credit at

December 31, 2020 and December 31, 2019, respectively, which are included in the commitments amount noted above.

The Company had $4.3 million and $4.5 million in standby letters of credit at December 31, 2021 and December 31, 2020, respectively, which are included in the commitments amount noted above.

The estimated fair value of these guarantees is not significant.

1 unchanged sentence

Many of these commitments will expire and never be funded.

Financing activities provided $214.3 million and $112.4 million in net cash for the years ended December 31, 2020 and 2019, respectively, primarily due to an increase in the Company’s deposits and borrowings, partially offset by the Company’s repayment of borrowings.

Financing activities used $33.5 million and $214.3 million in net cash for the years ended December 31, 2021 and 2020, respectively, primarily due to repayments of borrowings, partially offset by proceeds from new borrowings and an increase in the Company’s deposits.

As of December 31, 2021, deposits included $247.7 million of Government deposits, as compared to $142.6 million at year end 2020.

1 unchanged sentence

The Company believes that the current level of these types of deposits is appropriate.

Included in the portfolio were $127.6 million of deposits from eleven municipalities with account balances in excess of $5.0 million.

Included in the portfolio were $233.5 million of deposits from fifteen municipalities with account balances in excess of $5.0 million.

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

8 unchanged sentences

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 December 31, 2020, the Parent Company had $640 thousand in cash and cash equivalents and $1.0 million in investment securities valued at fair market value, compared to $2.3 million in cash and cash equivalents and $1.4 million in investment securities at December 31, 2019.

At December 31, 2021, the Parent Company had $1.7 million in cash and cash equivalents and $5.0 million in investment securities valued at fair market value, compared to $640 thousand in cash and cash equivalents and $1.0 million in investment securities at December 31, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

6 unchanged sentences

Borrowed funds and subordinated debentures

Purchase obligations

Total off-balance sheet arrangements and contractual obligations

7 unchanged sentences

For additional information on borrowed funds and subordinated debentures, see Note 9 to the Consolidated Financial Statements.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing and ATM service agreements.

Capital Adequacy

1 unchanged sentence

Shareholders’ equity increased $31.8 million to $205.7 million at December 31, 2021 compared to $173.9 million at December 31, 2020, primarily due to net income of $36.1 million.

Other items impacting shareholders’ equity included $7.4 million in treasury stock purchased at cost, $3.3 million in dividends paid on common stock, $1.6 million from the issuance of common stock under employee benefit plans and $1.3 million in accumulated other comprehensive loss net of tax.

Other items impacting shareholders’ equity included $4.2 million in treasury stock purchased at cost, $3.6 million in dividends paid on common stock, $2.0 million from the issuance of common stock under employee benefit plans and $1.5 million in accumulated other comprehensive income net of tax.

The issuance of common stock under employee benefit plans includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

14 unchanged sentences

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 be required to comply with the Basel III capital requirements.

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

As of December 31, 2021, the Bank’s CBLR was 10.00% and the Company’s CBLR was 10.51%.

The following table shows the CBLR ratio for the Company and the Bank at December 31, 2020, and the capital ratios for the Company and Bank under Basel III requirements at December 31, 2019:

Required for capital adequacy purposes

To be well-capitalized under prompt corrective action regulations

At December 31, 2021

At December 31, 2020

Leverage ratio

Tier I risk-based capital ratio

Total risk-based capital ratio

(1) Excludes capital conservation buffer at December 31, 2019.

For additional information on regulatory capital, see Note 18 to the Consolidated Financial Statements.

22 unchanged sentences

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:

Relevant facts and circumstances considered include:

(1) the extent and length of time the fair value has been below cost;

25 unchanged sentences

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.

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 judgments about information available at the time of the examination.

19 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis