What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-10 compared with 2022-03-11 · 251 added, 444 removed, 1512 unchanged (31% of the section changed)

7 unchanged sentences

Cash and cash equivalents

Debt securities available for sale (amortized cost of $ 56,442 in 2021 and $ 45,921 in 2020)

Securities held to maturity (fair value of $ 14,229 in 2021)

Equity securities with readily determinable fair values (amortized cost of $ 8,163 in 2021 and $ 2,112 in 2020)

Debt securities available for sale

Debt securities held to maturity

Equity securities with readily determinable fair values

Total securities

26 unchanged sentences

Shareholders’ equity:

Common stock, no par value, 12,500 shares authorized, 11,094 shares issued and 10,391 shares outstanding in 2021;

10,961 shares issued and 10,456 shares outstanding in 2020

Common stock, no par value, 12,500 shares authorized, 11,289 shares issued and 10,584 shares outstanding as of December 31, 2022;

11,094 shares issued and 10,391 shares outstanding as of December 31, 2021

Retained earnings

Treasury stock, at cost ( 703 shares in 2021 and 505 shares in 2020)

Accumulated other comprehensive income (loss)

Treasury stock, at cost ( 705 shares as of December 31, 2022 and 703 shares as of December 31, 2021)

Accumulated other comprehensive (loss) income

Total shareholders’ equity

27 unchanged sentences

Gain on sale of mortgage loans, net

Net security gains

Gain on sale of premises and equipment

Net securities (losses) gains

Total noninterest income

7 unchanged sentences

Director fees

Loan collection & OREO expenses

Loan collection expenses

Other expenses

12 unchanged sentences

Debt securities available for sale:

Unrealized holding losses on securities arising during the period

Total unrealized losses on securities available for sale

Net unrealized gains from cash flow hedges:

Unrealized holding gains on cashflow hedges arising during the period

reclassification adjustment for gains on cashflow hedges included in net income

Total unrealized gains on cash flow hedges

Total other comprehensive losses

Total comprehensive income

For the year ended December 31, 2021

(In thousands)

Other comprehensive income

Debt securities available for sale:

Unrealized holding gains on securities arising during the period

12 unchanged sentences

Other comprehensive income

Debt securities available for sale:

Investment securities available for sale:

Unrealized holding losses on securities arising during the period

6 unchanged sentences

Unrealized holding losses on cash flow hedges arising during the period

Total unrealized losses on cash flow hedges

Total unrealized losses on cashflow hedges

Total other comprehensive loss

Total comprehensive income

For the year ended December 31, 2019

(In thousands)

Other comprehensive income

Investment securities available for sale:

Unrealized holding gains on securities arising during the period

reclassification adjustment for gains on securities included in net income

Total unrealized gains on securities available for sale

Adjustments related to defined benefit plan:

Amortization (accretion) of prior service cost

Total adjustments related to defined benefit plan

Net unrealized losses from cash flow hedges:

Unrealized holding losses on cash flow hedges arising during the period

Total unrealized losses on cash flow hedges

Total other comprehensive income

Total comprehensive income

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

5 unchanged sentences

Balance, December 31, 2019

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Dividends on common stock ($ 0.32 per share)

Common stock issued and related tax effects (1)

Treasury stock purchased, at cost

Balance, December 31, 2020

Other comprehensive loss, net of tax

Other comprehensive income, net of tax

Dividends on common stock ($ 0.36 per share)

2 unchanged sentences

Balance, December 31, 2021

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Dividends on common stock ($ 0.43 per share)

11 unchanged sentences

Net amortization of purchase premiums and discounts on securities

Depreciation and amortization

Depreciation and amortization, net

SBA PPP deferred fees and costs

Deferred income tax benefit

Net security gains

Net securities realized gains

Stock compensation expense

Gain on sale of OREO

Valuation writedowns on OREO

Gain on sale of mortgage loans, net

Gain on sale of SBA loans held for sale, net

Origination of mortgage loans sold

Origination of SBA loans held for sale

Proceeds from sale of mortgage loans, net

Proceeds from sale of SBA loans held for sale, net

Gain on sale of premises and equipment

Net change in other assets and liabilities

4 unchanged sentences

Purchases of securities available for sale

Purchases of FHLB stock, at cost

Maturities and principal payments on securities held to maturity

(Purchases of) proceeds from sale of FHLB stock, at cost

Maturities and principal payments on debt securities held to maturity

Maturities and principal payments on debt securities available for sale

1 unchanged sentence

Proceeds from sales of equity securities

Proceeds from redemption of FHLB stock

Proceeds from sale of OREO

2 unchanged sentences

Proceeds from BOLI

Purchase of BOLI

Proceeds from sale of premises and equipment

Purchases of premises and equipment

(Purchases of) proceeds from sale of premises and equipment, net

Net cash used in investing activities

1 unchanged sentence

Net increase in deposits

Proceeds from new borrowings

Repayments of borrowings

Proceeds from exercise of stock options

Fair market value of shares withheld to cover employee tax liability

Dividends on common stock

Proceeds from (repayments of) borrowings, net

Proceeds from exercise of stock options, net of withheld taxes

Cash dividends on common stock

Purchase of treasury stock

Net cash provided by financing activities

Increase in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

4 unchanged sentences

Noncash investing activities:

Transfer of securities held to maturity to available for sale

Establishment of lease liability and right-of-use asset

Transfer of SBA loans held for sale to held to maturity

Establishment of lease liability and right-of-use asset, net of terminations

Capitalization of servicing rights

Transfer of loans to OREO

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

7 unchanged sentences

Its wholly-owned subsidiary, the Bank, is chartered by the New Jersey Department of Banking and Insurance.

The Bank provides a full range of commercial and retail banking services through nineteen branch offices located in Bergen, Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey and Northampton County in Pennsylvania.

The Bank provides a full range of commercial and retail banking services through nineteen 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.

2 unchanged sentences

Unity Investment Services, Inc.

has one subsidiary, Unity Delaware Investment 2, Inc., which has one subsidiary, Unity NJ REIT, Inc.

Unity NJ REIT, Inc.

was formed in 2013 to hold loans.

has one subsidiary, Unity Delaware Investment 2, Inc., which has one subsidiary, Unity NJ REIT, Inc., which was formed in 2013 to hold real estate related loans.

The Company has two wholly-owned subsidiaries:

4 unchanged sentences

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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.

In preparing the consolidated financial statements in conformity with U.S.

GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial conditions and results of operations for the periods indicated.

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, other real estate owned, the valuation of securities and the determination of other-than-temporary impairment for securities and fair value disclosures.

Actual results could differ from those estimates.

2 unchanged sentences

The COVID-19 pandemic has adversely affected local, national and global economic activity.

Actions taken to help mitigate the spread of COVID-19 included restrictions on travel, localized quarantines, and government-mandated closures of certain businesses.

The spread of the outbreak has caused significant disruptions to the U.S.

economy and disrupted banking and other financial activity in the areas in which the Company operates.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic.

Other effects of the COVID-19 pandemic may materially and adversely affect the Company's financial condition and results of operations in future periods.

It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company.

It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions.

Although, the economy has generally improved since March 2020, there still remains much uncertainty around the containment of the pandemic and the trajectory of the broader economic recovery.

The Company continues to be subject to heightened business, operational (including fraud), market, credit and other risks related to the COVID-19 pandemic environment and changes in which people work and shop originating from the pandemic, which may have an adverse effect on the Company’s business, financial condition and results of operations.

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 administrator after 2021.

The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after

2021, although LIBOR rates of certain tenors may be published until June 2023.

The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, although LIBOR rates of certain tenors may be published until June 2023.

Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.

Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated notes, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR.

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities until LIBOR becomes unavailable, including the Company’s subordinated notes, or the effect of any such changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR.

Uncertainty as to the nature of such potential changes, the elimination and replacement of LIBOR or other reforms may adversely affect the value of, and the return on the Company's loans, and its investment securities.

Overall, the markets and customers serviced by the Company may be significantly impacted by the ongoing macro-economic trends, such as inflation and recessionary pressures created by a higher interest rate environment.

The Company assesses the impact of inflation on an ongoing basis and the impacts of inflation may have an adverse effect on the Company’s business, financial condition and results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits.

The Company classifies its securities into three categories, debt securities available for sale, securities held to maturity and equity securities with readily determinable fair values ("equity securities").

Securities that are classified as available for sale are stated at fair value.

Unrealized gains and losses on securities available for sale are generally excluded from results of operations and are reported as other comprehensive income, a separate component of shareholders’ equity, net of taxes.

Securities classified as available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risks or for asset/liability management purposes.

The cost of securities sold is determined on a specific identification basis.

Gains and losses on sales of securities are recognized in the Consolidated Statements of Income on the date of sale.

Securities are classified as held to maturity based on management’s intent and ability to hold them to maturity.

Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts using the level yield method.

If transfers between the available for sale and held to maturity portfolios occur, they are accounted for at fair value and unrealized holding gains and losses are accounted for at the date of transfer.

For securities transferred to available for sale from held to maturity, unrealized gains or losses as of the date of the transfer are recognized in other comprehensive income (loss), a separate component of shareholders’ equity.

For securities transferred into the held to maturity portfolio from the available for sale portfolio, unrealized gains or losses as of the date of transfer continue to be reported in other comprehensive income (loss), and are amortized over the remaining life of the security as an adjustment to its yield, consistent with amortization of the premium or accretion of the discount.

The Company classifies its securities into three categories, debt securities available for sale, debt securities held to maturity and equity securities with readily determinable fair values ("equity securities").

Debt securities that are classified as available for sale are stated at fair value.

Unrealized gains and losses on securities available for sale are excluded from results of operations and are reported as other comprehensive income, a separate component of shareholders’ equity, net of taxes.

Debt securities classified as available for sale include debt securities that may be sold in response to changes in interest rates, changes in prepayment risks or for asset/liability management purposes or liquidity needs.

The cost of debt securities sold is determined on a specific identification basis.

Gains and losses on sales of debt securities are recognized in the Consolidated Statements of Income on a trade date basis.

Debt securities are classified as held to maturity based on management’s intent and ability to hold them to maturity.

Such debt securities are stated at cost, adjusted for unamortized purchase premiums and discounts using the level yield method.

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.

These securities were transferred from available for sale and reclassified into equity securities on the balance sheet as a result of the adoption of ASU 2016-01 in January 2018.

Periodic net gains and losses on equity investments are recognized in the income statement as realized gains and losses.

4 unchanged sentences

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.

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 unchanged sentence

(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 where management has no intent to sell and the Company has 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.

(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.

9 unchanged sentences

Loans Held for Sale

Loans held for sale represent the guaranteed portion of SBA loans, other than loans originated under the Paycheck Protection Program, and are reflected at the lower of aggregate cost or market value.

Loans held for sale represent the guaranteed portion of certain SBA loans, other than loans originated under the Paycheck Protection Program, and are reflected at the lower of aggregate cost or market value.

The Company originates loans to customers under an SBA program that historically has provided for SBA guarantees of up to 90 percent of each loan.

The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio.

The Company may sell the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio.

The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale.

5 unchanged sentences

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.

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 generally be reported as a valuation allowance.

4 unchanged sentences

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.

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.

13 unchanged sentences

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.

All loan charge-offs are approved by executive management and the Board of Directors.

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

30 unchanged sentences

Bank owned life insurance is recorded at its cash surrender value or the amount that can be realized.

Federal Home Loan Bank Stock

Federal Home Loan Bank (“FHLB”) Stock

Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district FHLB according to a predetermined formula.

7 unchanged sentences

Other Real Estate Owned

Other real estate owned is recorded at the fair value, less estimated costs to sell at the date of acquisition, with a charge to the allowance for loan losses for any excess of the loan carrying value over such amount.

Other real estate owned (“OREO”) is recorded at the fair value, less estimated costs to sell at the date of acquisition, with a charge to the allowance for loan losses for any excess of the loan carrying value over such amount.

Subsequently, OREO is carried at the lower of cost or fair value, as determined by current appraisals.

Certain costs that increase the value or extend the useful life in preparing properties for sale are capitalized to the extent that the appraisal amount exceeds the carrying value and expenses of holding foreclosed properties are charged to operations as incurred.

The Company accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other,” which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.

perform the two-step quantitative goodwill impairment test.

Based on a qualitative assessment, management determined that the Company’s recorded goodwill totaling $ 1.5 million, which resulted from the 2005 acquisition of its Phillipsburg, New Jersey branch, is not impaired as of December 31, 2022.

The Company requires current real estate appraisals on all loans that become OREO or in-substance foreclosure, 1-4 family residential and consumer mortgage loans above $400,000, commercial credit facilities above $500,000 when supported by real property or nonperforming loans with properties that are securing credit.

Prior to each balance sheet date, the Company values impaired collateral-dependent loans and OREO based upon a third party appraisal, broker’s price opinion, drive by appraisal, automated valuation model, updated market evaluation, or a combination of these methods.

The amount is discounted for the decline in market real estate values for any known damage or repair costs, and for selling and closing costs.

The amount of the discount is dependent upon the method used to determine the original value.

The original appraisal is generally used when a loan is first determined to be impaired.

When applying the discount, the Company takes into consideration when the appraisal was performed, the collateral’s location, the type of collateral, any known damage to the property and the type of business.

Subsequent to entering impaired status and the Company determining that there is a collateral shortfall, the Company will generally, depending on the type of collateral, order a third party appraisal, broker’s price opinion, automated valuation model or updated market evaluation.

Subsequent to receiving the third party results, the Company will discount the value 6 to 10 percent for selling and closing costs.

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.

Derivative Instruments and Hedging Activities

The Company utilizes derivative instruments in the form of interest rate swaps to hedge its exposure to interest rate risk in conjunction with its overall asset and liability risk management process.

In accordance with accounting requirements, the Company formally designates all of its hedging relationships as either fair value hedges, intended to offset the changes in the value of certain financial instruments due to movements in interest rates, or cash flow hedges, intended to offset changes in the cash flows of certain financial instruments due to movement in interest rates, and documents the strategy for undertaking the hedge transactions, and its method of assessing ongoing effectiveness.

In accordance with accounting requirements, the Company formally designates all of its hedging relationships as either fair value hedges or cash flow hedges.

The Company’s derivative instruments currently consist of cash flow hedges.

We recognize all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement of Cash Flows.

The Company recognizes all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement of Cash Flows.

For derivatives designated cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows), the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings.

Derivative instruments qualify for hedge accounting treatment only if they are designated as such on the date on which the derivative contract is entered and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk.

Those derivative financial instruments that do not meet the hedging criteria discussed below would be classified as undesignated derivatives and would be recorded at fair value with changes in fair value recorded in income.

30 unchanged sentences

For additional information on the fair value of the Company’s financial instruments, see Note 15 to the Consolidated Financial Statements.

Other Comprehensive Income

Other comprehensive income consists of the change in unrealized gains (losses) on SERP, securities available for sale and swap related items that were reported as a component of shareholders’ equity, net of tax.

For additional information on other comprehensive income, see Note 12 to the Consolidated Financial Statements.

The Company expenses the costs of advertising in the period incurred.

Other Comprehensive Income (Losses)

Other comprehensive income (loss) consists of the change in unrealized gains (losses) on SERP, securities available for sale and derivative related items that were reported as a component of shareholders’ equity, net of tax.

For additional information on other comprehensive income (loss), see Note 9 to the Consolidated Financial Statements.

Dividend Restrictions

5 unchanged sentences

Recent Accounting Pronouncements

ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments."

ASU 2016-13 was issued to replace the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates.

Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation.

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

In May 2019, FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326):

Targeted Transition Relief."

ASU 2019-05 was issued to address concerns with the adoption of ASU 2016-13.

ASU 2019-05 gives entities the ability to irrevocably elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-03.

Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-10, "Financial Instruments - Credit Losses - Measured at Amortized Costs."

An exception to this is held-to-maturity debt securities, which do not qualify for this transition election.

The effective date for the amendment is the same as the effective date in ASU 2016-03.

In November 2019, FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

Effective Dates."

ASU 2019-10 was issued to defer the effective dates for certain guidance in its Accounting Standard Codification ("ASC") for certain entities.

The amendments in this update amend the mandatory effective dates for ASC 326, "Financial Instruments - Credit Losses", for entities eligible to be smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim reporting periods within that reporting period.

The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

In November 2019, FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses."

ASU 2019-11 was issued to address issues raise by stakeholders during the implementation of ASU 2016-13.

ASU 2019-11 provides transition relief when adjusting the effective interest rate for troubled debt restructurings ("TDRs") that exist as of the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to additional disclosures involving amortized cost basis, and provides clarification regarding application of the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provides a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date.

The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13.

ASU 2019- 12, "Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes."

ASU 2019-12 removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and removes the exception to the interim period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year.

ASU 2019-12 also simplifies the accounting for income taxes by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax, that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill originally was recognized, and that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

For public business entities, ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020.

The Company adopted this standard as of January 1, 2021.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815):

Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force)."

ASU 2020-01 clarifies that the observable price changes in orderly transactions that should be considered when applying the measurement alternative in accordance with ASC 321 include transactions that require it to either apply or discontinue the equity method of accounting under ASC 323.

2020-01 also addresses questions about how to apply the guidance in Topic 815, “Derivatives and Hedging,” for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting.

The ASU clarifies that, for the purpose of applying ASC 815-10-15- 141(a), an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method in ASC 323 or the fair value option in accordance with the financial instruments guidance in Topic 825, “Financial Instruments.” For public business entities, ASU 2020-01 is effective for interim and annual periods beginning after December 15, 2020.

The Company adopted this standard as of January 1, 2021.

The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

ASU 2020- 03, "Codification Improvement to Financial Instruments."

ASU 2020-03 clarifies that all entities are required to provide the fair value option disclosures in paragraphs 825-10-50-24 through 50-32 of the FASB’s Accounting Standards Codification (ASC).

ASU 2020-03 also clarifies that the contractual term of a net investment in a lease determined in accordance with ASC 842, “Leases,” should be the contractual term used to measure expected credit losses under ASC 326, “Financial Instruments – Credit Losses.” ASU 2020-03 also addresses amendments to ASC 860-20, “Transfers and Servicing – Sales of Financial Assets,” clarify that 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):

12 unchanged sentences

The company is currently evaluating the various optional expedients as well as impact of the adoption of ASU 2020-04 on its consolidated financial statements.

ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.” ASU 2020-06 was issued to address the complexities of its guidance for certain financial instruments with characteristics of liabilities and equity, including:

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

● Adding certain disclosure requirements for convertible instruments.

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

● Simplifying the diluted earning per share calculation for certain situations.

For public business entities, ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2021.

The Company is currently evaluating the impact of the adoption of ASU 2020-06 on its consolidated financial statements.

ASU 2021-01, “Reference Rate Reform (Topic 848):

3 unchanged sentences

The Company currently uses the shortcut method as the practical expedient.

ASU 2022-06, “Reference Rate Reform (Topic 848)”:

provides optional guidance to ease potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting during the transition period.

The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published.

At the time that Updated 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021.

As a result, the sunset provision was set for December 31, 2022 – 12 months after the expected cessation date of all currencies and tenors of LIBOR.

Because the current relief in Topic 848 may not cover

a period during which a significant number of modifications may take place, the amendments in this update defer the sunset date of Topic 848 from December 21, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

New Accounting Guidance Adopted in the First Quarter 2023

2016-13, “Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” amends the accounting guidance regarding the impairment of financial instruments.

The FASB issued this guidance to replace the incurred loss impairment methodology with a new current credit loss (“CECL”) model.

Under the new guidance, the Company will be required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses.

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.

The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loans and held to maturity debt securities.

CECL also applies to certain off-balance sheet exposures.

The Company will adopt the new CECL accounting guidance effective January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.

The Company has established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used upon adoption.

At December 31, 2022, the Company’s loan portfolio totaled, $ 2.1 billion with a corresponding allowance for loan losses of $ 25.2 million under current GAAP.

Based on the Company’s current CECL model results that it has performed alongside the current process, the Company estimates that the adoption of the new guidance will result in an increase to the allowance for credit losses, including the reserve for off-balance sheet credit exposure (recorded in other liabilities) between $ 0.5 million to $ 1.0 million.

For other assets within the scope of the new CECL accounting guidance, such as held to maturity debt securities and other receivables, management expects the impact from adoption to be inconsequential.

Additionally, the Company does not expect the adoption of CECL to have significant impact on regulatory capital ratios of the Company and/or the Bank.

The Company is reviewing the performance of its most recent model run.

As the Company finalizes the CECL implementation, final decisions made by management may result in a different impact than that stated above for financial statement and disclosure purposes.

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,” to clarify that 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 2022-01, “Derivatives and Hedging (Topic 815)”:

ASU 2022-01 was issued to clarify the guidance in ACS 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 the “portfolio layer” method.

ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326)”:

eliminates the guidance on troubled debt restructurings (“TDRs”) and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan.

ASU 2022-02 requires that entities disclose if 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.

Revenue Recognition

1 unchanged sentence

The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures.

Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures.

Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in its income statements as components of non-interest income are as follows:

● Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue.

Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer).

Revenue is recognized when the Company’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer).

Payment for such performance obligations are generally received at the time the performance obligations are satisfied.

4 unchanged sentences

Restrictions on Cash

Federal law requires depository institutions to hold reserves in the form of vault cash or, if vault cash is insufficient, in the form of a deposit maintained with a Federal Reserve Bank.

The dollar amount of a depository institution’s reserve requirement is determined by applying the reserve ratios specified in the FRB’s Regulation D to an institution’s reservable liabilities.

Federal law required depository institutions to hold reserves in the form of vault cash or, if vault cash is insufficient, in the form of a deposit maintained with a Federal Reserve Bank.

In response to COVID-19, on March 15, 2020, the FRB announced the reduction of the reserve requirement ratios to zero percent, effective March 26, 2020.

This action eliminated the reserve requirement for depository institutions to help support lending to households and businesses.

In addition, the Company’s contract with its current electronic funds transfer (“EFT”) provider requires a predetermined balance be maintained in a settlement account controlled by the provider equal to the Company’s average daily net

settlement position multiplied by four days.

The required balance was $ 156 thousand as of December 31, 2021 and 2020.

The required balance was $ 262 thousand and $ 156 thousand as of December 31, 2022 and 2021, respectively.

This balance can be adjusted periodically to reflect actual transaction volume and seasonal factors.

As of December 31, 2021, Unity Risk Management, Inc.

had a total cash balance of $ 2.7 million, compared to $ 2.0 million at December 31, 2020.

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

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 December 31, 2022 and December 31, 2021:

December 31, 2022

11 unchanged sentences

Residential mortgage-backed securities

Commercial mortgage-backed securities

Corporate and other securities

Total securities held to maturity

Total debt securities held to maturity

Equity securities:

Total equity securities

This table provides the remaining contractual maturities and yields of securities within the investment portfolios.

This table provides the remaining contractual maturities within the investment portfolios.

The carrying value of securities at December 31, 2022 is distributed by contractual maturity.

Yields for all debt securities are calculated based on amortized cost.

Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity.

5 unchanged sentences

After ten years

(In thousands, except percentages)

(In thousands)

Available for sale at fair value:

Government sponsored entities

State and political subdivisions

4 unchanged sentences

Government sponsored entities

State and political subdivisions

Residential mortgage-backed securities

6 unchanged sentences

12 months and greater

(In thousands, except number in a loss position)

loss position

(In thousands)

Available for sale:

Government sponsored entities

State and political subdivisions

9 unchanged sentences

12 months and greater

(In thousands, except number in a loss position)

loss position

(In thousands)

Available for sale:

State and political subdivisions

Residential mortgage-backed securities

Corporate and other securities

Total temporarily impaired securities

Unrealized Losses

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

government sponsored entities and state and political subdivision securities:

The unrealized losses on investments in these types of securities were caused by the increase in interest rate spreads or the increase in interest rates at the long end of the Treasury curve.

The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments.

Because the Company does not intend to sell the investments and it is

not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than temporarily impaired as of December 31, 2021 or December 31, 2020.

Held to maturity:

Government sponsored entities

Residential 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) and 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 December 31, 2021 or December 31, 2020.

Corporate and other securities:

Included in this category are corporate and other debt securities.

The unrealized losses on corporate and other debt securities were due to widening credit spreads.

The Company evaluated the prospects of the issuers and forecasted a recovery period;

and as a result determined it did not consider these investments to be other-than-temporarily impaired as of December 31, 2021 or December 31, 2020.

The contractual terms do not allow the securities to be settled at a price less than the par value.

Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis, which may be at maturity, the Company did not consider these securities to be other-than-temporarily impaired as of December 31, 2021 or December 31, 2020.

Total temporarily impaired securities

Unrealized losses in each of the categories presented in the tables above were primarily driven by market interest rate fluctuations.

Realized Gains and Losses

Gross realized gains and losses on securities for the past three years are detailed in the table below:

For the years ended December 31,

(In thousands)

Available for sale:

Realized gains

Realized losses

Total debt securities available for sale

Net gains on sales of securities

The net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains.

There were $ 44 thousand of gross realized gains in 2021, compared to $ 317 thousand of gross realized gains in 2020 and $ 35 thousand of gross realized gains in 2019.

Gross realized gains and losses on debt securities for the years ended December 31, 2022 and 2021 are detailed below.

There were no available for sale or held to maturity gross realized gains in 2022 , compared to $ 42 thousand of gross realized gains in 2021 and $ 317 thousand of gross realized gains in 2020.

There were no gross realized losses in 2022, 2021 or 2020.

● The net gain during 2021 is attributed to the sale of six corporate bonds with a total book value of $ 7.0 million and resulting gains of $ 39 thousand, and the call of one taxable municipal security with a total book value of $ 496 thousand and resulting gains of $ 5 thousand.

● The net gain during 2020 is attributed to the sale of two corporate bonds with a total book value of $ 2.7 million and resulting gains of $ 77 thousand, three mortgage-backed securities with a total book value of $ 2.8 million and resulting gains of $ 57 thousand, one taxable municipal security with a book value of $ 456 thousand and resulting gains of $ 140 thousand, one tax-exempt municipal security with a book value of $ 381 thousand and resulting gains of $ 27 thousand, and the call of three tax-exempt municipal securities with a total book value of $ 1.8 million and resulting gains of $ 16 thousand

● The net gain during 2019 is attributed to the sale of two commercial mortgage-backed securities with a total book value of $ 3.5 million and resulting gains of $ 64 thousand offset by the sale of two agency securities with a total book value of $ 2.1 million and resulting losses of $ 29 thousand.

Equity Securities

Included in this category are Community Reinvestment Act ("CRA") investments and the equity holdings of financial institutions.

Equity securities are defined to include (a) preferred, common and other ownership interests in entities including partnerships, joint ventures and limited liability companies and (b) rights to acquire or dispose of ownership interest in entities at fixed or determinable prices.

Included in this category are Community Reinvestment Act ("CRA") investments and the Company’s current other equity holdings of financial institutions.

The following is a summary of the gains and losses recognized in net income on equity securities for the past three years:

1 unchanged sentence

(In thousands)

Net gains (losses) recognized during the period on equity securities

Net unrealized (losses) gains recognized during the period on equity securities

Net gains recognized during the period on equity securities sold during the period

Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date

Pledged Securities

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 and for other purposes required or permitted by law.

Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses for the past two years:

21 unchanged sentences

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.

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.

9 unchanged sentences

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 or 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 but can be extended to five years if the lender agrees.

4 unchanged sentences

The extension included an authorization to make new PPP loans to existing PPP loan borrowers, and to make loans to parties that did not previously obtain a PPP loan.

Loans originated under the extended PPP will have substantially the same terms as existing PPP loans.

Loans originated under the extended PPP had substantially the same terms as existing PPP loans.

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

3 unchanged sentences

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.

Loans are generally 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:

1 unchanged sentence

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 Company relationship with the borrower.

During the quarter ended September 30, 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” to purchase consumer unsecured loans.

Each loan type is evaluated on debt to income, type of collateral, loan to collateral value, credit history and Company relationship with the borrower.

In 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” to purchase consumer unsecured loans.

This loan product has a fixed rate, fully amortizing term for up to five years and a maximum loan amount of $ 50 thousand.

1 unchanged sentence

Upgrade services the loans on behalf of the Company.

Upgrade is a financial technology company that utilizes artificial intelligence to underwrite personal loan and credit card installment loans to retail customers, in addition to credit monitoring and education tools.

Upgrade is a financial technology company that utilizes artificial intelligence to underwrite personal loans and credit card installment loans to retail customers, in addition to credit monitoring and education tools.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan.

2 unchanged sentences

Due diligence on loans begins when the Company initiates contact regarding a loan with a borrower.

Documentation,

including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval.

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.

3 unchanged sentences

For SBA 7(a) and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality.

A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating.

A loan’s internal risk rating is reviewed at least annually and more frequently if circumstances warrant a change in risk rating.

The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

20 unchanged sentences

Serious problems exist to the point where partial loss of principal is likely.

The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined.

The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loan’s classification as loss is deferred until a more exact status may be determined.

Pending factors include proposed merger, acquisition or liquidation procedures;

5 unchanged sentences

Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be affected in the future.

For residential mortgage, consumer and residential construction loans, management uses performing versus nonperforming as the best indicator of credit quality.

14 unchanged sentences

Total commercial loans

Total SBA and commercial loans

Total commercial loans and SBA loans held for investment

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

20 unchanged sentences

Total commercial loans

Total SBA and commercial loans

Total commercial loans and SBA loans held for investment

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

16 unchanged sentences

SBA loans held for investment

SBA PPP loans

Commercial loans

9 unchanged sentences

SBA loans held for sale

(1) At December 31, 2021, nonaccrual loans included $ 59 thousand of loans guaranteed by the SBA.

Total loans, excluding SBA PPP

(1) At December 31, 2022, the Company had $ 1.4 million of SBA PPP loans past due.

The Company is in process of working through these past due credits with the SBA and the relevant customers.

December 31, 2021

1 unchanged sentence

SBA loans held for investment

SBA PPP loans

Commercial loans

9 unchanged sentences

SBA loans held for sale

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

Total loans, excluding SBA PPP

(2) At December 31, 2021, the Company had $ 79 thousand of SBA PPP loans past due.

The Company is in process of working through these past due credits with the SBA and the relevant customers.

Impaired Loans

11 unchanged sentences

Residential mortgage loans

Consumer loans:

Residential construction loans

Total impaired loans with no related allowance

3 unchanged sentences

Commercial other

Commercial real estate

Total commercial loans

Residential mortgage loans

Consumer loans:

Residential construction loans

7 unchanged sentences

Residential mortgage loans

Consumer loans:

Residential construction loans

Total individually evaluated impaired loans

(1) Balances are reduced by amount guaranteed by the SBA of $ 59 thousand at December 31, 2021.

December 31, 2021

3 unchanged sentences

Commercial loans

Commercial other

Commercial real estate

11 unchanged sentences

Residential mortgage loans

Consumer loans:

Residential construction loans

Total impaired loans with a related allowance

9 unchanged sentences

Total individually evaluated impaired loans

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

The following table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the years ended December 31, 2022, 2021 and 2020.

14 unchanged sentences

Residential construction loans

(1) Balances are reduced by the average amount guaranteed by the SBA of $ 201 thousand, $ 719 thousand and $ 124 thousand for years ended December 31, 2021, 2020 and 2019, respectively.

Troubled Debt Restructurings

2 unchanged sentences

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

Under the CARES Act and regulatory guidance issued in regards to the COVID-19 pandemic, loan payment deferrals for periods of up to 180 days granted to borrowers adversely effected by the pandemic are not considered TDRs if the borrower was current on its loan payments at year end 2019 or until the deferral was granted.

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

1 unchanged sentence

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

TDRs of $ 1.0 million and $ 663 thousand are included in the impaired loan numbers as of December 31, 2021 and December 31, 2020, respectively.

The increase in TDRs was due to the addition of two loans, partially offset by principal pay downs.

TDRs of $ 1.4 million and $ 1.0 million are included in the impaired loan numbers as of December 31, 2022 and December 31, 2021, respectively.

The increase in TDRs was due to the addition of two loans, partially offset by the payoff of two TDRs.

At December 31, 2022 and December 31, 2021, there were no specific reserves on the TDRs.

8 unchanged sentences

The total amount of such loans serviced, but owned by third party investors, amounted to approximately $ 85.8 million and $ 106.1 million at December 31, 2022 and 2021, respectively.

At December 31, 2021 and 2020, the carrying value, which approximates fair value, of servicing assets was $ 1.0 million and $ 1.9 million, respectively, and is included in Other Assets.

The fair value of SBA servicing assets was determined using a discount rate of 15 %, constant prepayment speeds ranging from 15 % to 18 %, and interest strip multiples ranging from 2.08 % to 3.80 %, depending on each individual credit.

The fair value of mortgage servicing assets was determined using a discount rate of 12 % and the present value of excess servicing over 7 years.

At December 31, 2022 and 2021, the carrying value, which approximates fair value, of servicing assets was $ 691 thousand and $ 1.0 million, respectively, and is included in Other assets.

A summary of the changes in the related servicing assets for the past three years follows:

3 unchanged sentences

Servicing assets capitalized

Amortization of expense

Amortization of expense, net

Balance, end of year

In addition, the Company had a $ 915 thousand and $ 1.3 million discount related to the retained portion of the unsold SBA loans at December 31, 2021 and 2020, respectively.

In addition, the Company had a $ 641 thousand and $ 915 thousand in discounts related to the retained portion of unsold SBA loans at December 31, 2022 and 2021, respectively.

Officer and Director Loans:

8 unchanged sentences

Loan repayments

Loans removed

Balance, end of year

3 unchanged sentences

This could lead to greater losses in the event of defaults on loans secured by real estate.

At December 31, 2021, and December 31, 2020 approximately 92 % and 87 % of the Company’s loan portfolio was secured by real estate.

At December 31, 2022, and December 31, 2021, respectively, approximately 96 % and 92 % of the Company’s loan portfolio was secured by real estate.

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

1 unchanged sentence

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.

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.

8 unchanged sentences

The same standard methodology is used, regardless of loan type.

Specific reserves are made to individual impaired loans and troubled debt restructurings (see Note 1 for additional information on this term).

Specific reserves are evaluated for individual impaired loans and TDRs.

The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors:

delinquency and impairment trends, charge-off and recovery trends, changes in the volume of restructured loans, 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 because it believes they are more indicative of future losses.

delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, changes in risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.

Within the five-year historical net charge-off rate, the Company weights the past three years more heavily.

All of the environmental factors are ranked and assigned a basis points value based on the following scale:

25 unchanged sentences

Net recoveries (charge-offs)

Provision for loan losses charged to expense

Provision for (credit to) loan losses charged to expense

Balance, end of period

3 unchanged sentences

Net (charge-offs) recoveries

Provision for (credit to) loan losses charged to expense

Provision for loan losses charged to expense

Balance, end of period

16 unchanged sentences

Collectively evaluated for impairment

Changes in Methodology:

The Company did not make any changes to its allowance for loan losses methodology in the current period.

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

Reserve for Unfunded Loan Commitments

1 unchanged sentence

Adjustments to the reserve are made through other expense and applied to the reserve which is classified as other liabilities.

At December 31, 2021, a $ 400 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $ 288 thousand commitment reserve at December 31, 2020.

There were no losses on unfunded loan commitments during 2021 or 2020.

At December 31, 2022, a $ 0.5 million commitment reserve was reported on the balance sheet in “Other liabilities”, compared to a $ 0.4 million commitment reserve at December 31, 2021.

Premises and Equipment

9 unchanged sentences

Net premises and equipment

Amounts charged to noninterest expense for depreciation of premises and equipment amounted to $ 1.6 million in 2021 and 2020.

The detail of other assets as of December 31 st for the past two years is as follows:

(In thousands)

December 31, 2021

December 31, 2020

Right-of-use assets

Prepaid insurance

Prepaid expenses

Servicing assets:

Mortgage servicing asset

SBA servicing asset

Escrow advances

Unrealized gains on interest rate swap agreements

Net receivable due from SBA

Mortgage gains receivable

Total other assets

Amounts charged to noninterest expense for depreciation of premises and equipment amounted to $ 1.4 million and $ 1.6 in 2022 and 2021, respectively.

The following table details the maturity distribution of time deposits as of December 31 st for the past two years:

10 unchanged sentences

Time deposits with balances of $250 thousand or more totaled $ 67.3 million and $ 33.8 million at December 31, 2022 and 2021, respectively.

Borrowed Funds and Subordinated Debentures

The following table presents the period-end and average balances of borrowed funds and subordinated debentures for the past three years with resultant rates:

Borrowed Funds, Subordinated Debentures and Derivatives

The following table presents the period-end and weighted average rate for borrowed funds and subordinated debentures as of the past two year end dates:

(In thousands)

FHLB borrowings and repurchase agreements:

FHLB borrowings :

At December 31,

Year-to-date average

Maximum outstanding

Subordinated debentures:

At December 31,

Year-to-date average

Maximum outstanding

The following table presents the expected maturities of borrowed funds and subordinated debentures over the next five years:

3 unchanged sentences

Total borrowings

FHLB Borrowings

At December 31, 2021 and December 31, 2020, the Company had $ 40.0 million in fixed rate advances.

The terms of this transaction are as follows:

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

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.

Subordinated Debentures

4 unchanged sentences

The floating interest rate was 6.32 % at December 31, 2022 and 1.69 % at December 31, 2021.

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 % .

At December 31, 2020, 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.

1 unchanged sentence

At December 31, 2022 and 2021, $ 310 thousand of the common equity securities remained.

The capital securities in the above transaction have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital.

Under the terms of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, these securities will continue to qualify as Tier 1 capital as the Company has less than $ 10 billion in assets.

The capital securities in the above transaction have preference over the common securities with respect to liquidation and other distributions and qualify as Tier 1 capital.

Under the terms of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these securities will continue to qualify as Tier 1 capital as the Company has less than $ 10 billion in assets.

In accordance with FASB ASC Topic 810, “Consolidation,” the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust II because it is not the primary beneficiary.

25 unchanged sentences

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 a total of two interest rate swaps designated as cash flow hedging instruments with a notional amount of $ 40.0 million at December 31, 2021, compared to five interest rate swaps with a notional amount of $ 80.0 million at December 31, 2020.

At December 31, 2021, the Company had $ 1.3 million in cash collateral pledged for these derivatives which was included in cash and due from banks, compared to $ 1.5 million at December 31, 2020.

summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at December 31, 2021 and 2020, respectively is as follows:

At December 31, 2022, the Company had no cash collateral pledged for these derivatives, compared to $ 1.3 million at December 31, 2021.

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

(In thousands, except percentages and years)

7 unchanged sentences

During the twelve months ended December 31, 2022 and 2021, the Company received variable rate LIBOR payments from and paid fixed rates in accordance with its interest rate swap agreements.

The unrealized gains relating to interest rate swaps are recorded as a derivative asset and are included in Prepaid expenses and other assets in the Company’s Balance Sheet, and the unrealized losses are recorded as a derivative liability and are included in Accrued expenses and other liabilities.

other liabilities.

Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income.

4 unchanged sentences

(In thousands)

Gain (loss) recognized in OCI

Loss reclassified from AOCI into interest expense

Gain recognized in OCI, net of tax

Gain (loss) reclassified from AOCI into net income, net of tax

Leases and Commitments

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"

Operating leases in which the Bank is the lessee are recorded as right-of-use ("ROU") assets and lease liabilities and are included in Prepaid expenses and other assets and Accrued expenses and other liabilities, respectively, on the Bank’s Consolidated Balance Sheets.

Operating leases in which the Bank is the lessee and the term is greater than 12 months, are recorded as right of use ("ROU") assets and lease liabilities, and are included in Prepaid expenses and other assets and Accrued expenses and other liabilities, respectively, on the Bank’s Consolidated Balance Sheets.

The Bank does not currently have any finance leases in which it is the lessee.

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 (based on Libor plus a spread) and then swapping it to a fixed rate borrowing by adding a fixed mid swap rate for the desired term.

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 the Bank’s incremental borrowing rate.

The borrowing rate for each lease is unique based on the lease term.

2 unchanged sentences

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").

2 unchanged sentences

As of December 31, 2022, operating lease liabilities totaled $ 5.6 million, compared to $ 5.3 million at December 31, 2021.

The table below summarizes our net lease cost:

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

For the years ended December 31,

2 unchanged sentences

Net lease cost

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

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

For the years ended December 31,

3 unchanged sentences

ROU assets obtained in exchange for new operating lease liabilities

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

In 2022, the Company terminated one lease.

This decreased the ROU asset and lease liability by $ 0.5 million, respectively.

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

(In thousands, except percentages and years)

3 unchanged sentences

Weighted average discount rate

Operating lease right-of-use assets

The table below summarizes the maturity of remaining lease liabilities:

15 unchanged sentences

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.

Other Liabilities

The detail of other liabilities as of December 31 st for the past two years is as follows:

(In thousands)

December 31, 2021

December 31, 2020

Accrued expenses

Lease liabilities

Deferred compensation

Loan expense advances

Reserve for commitments

Unrealized losses on interest rate swap agreements

Total other liabilities

Accumulated Other Comprehensive Income (Loss)

11 unchanged sentences

Balance, beginning of period

Other comprehensive income before reclassifications

Less amounts reclassified from accumulated other comprehensive income (loss)

Other comprehensive (loss) income before reclassifications

Less amounts reclassified from accumulated other comprehensive (loss)

Period change

3 unchanged sentences

Net unrealized

gains (losses)

gains (losses) on

(losses) gains

(losses) gains on

defined benefit

2 unchanged sentences

(In thousands)

income (loss)

(loss) income

Balance, beginning of period

3 unchanged sentences

Balance, end of period

(1) AOCI does not reflect the net reclassification of $ 36 thousand to Retained Earnings as a result of ASU 2016-01, "Financial Instruments Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities"

& ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income".

For the year ended December 31, 2020

2 unchanged sentences

gains (losses)

(losses) gains on

gains (losses) on

defined benefit

2 unchanged sentences

(In thousands)

(loss) income

income (loss)

Balance, beginning of period (1)

Other comprehensive income (loss) before reclassifications

Other comprehensive loss before reclassifications

Less amounts reclassified from accumulated other comprehensive income (loss)

1 unchanged sentence

Balance, end of period (1)

(1) AOCI does not reflect the net reclassification of $ 36 thousand to Retained Earnings as a result of ASU 2016-01, "Financial Instruments Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities"

& ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income".

Shareholders’ Equity

Shareholders’ equity increased $ 33.5 million to $ 239.2 million at December 31, 2022 compared to $ 205.7 million at December 31, 2021, primarily due to net income of $ 38.5 million.

Other items impacting shareholders’ equity included treasury stock purchases of $ 4.2 million, $ 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.

Other items impacting shareholders’ equity included $ 4.4 million in cash dividends paid on common stock, and $ 3.6 million in accumulated other comprehensive loss, net of tax, $ 3.0 million from the issuance of common stock under employee benefit plans and treasury stock purchases of $ 42 thousand.

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.

A total of 199 thousand shares were repurchased at an average price of $ 21.04 during 2021, of which 20 thousand shares were repurchased from the prior repurchase plan, leaving 571 thousand shares available for repurchase.

The amount and timing of additional purchases, if any, will be dependent 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, whether related to the COVID-19 pandemic or otherwise, the market price of the Company’s stock and the general impact of the COVID-19 pandemic on the economy.

There were 504 thousand shares repurchased during 2020 and no shares repurchased during 2019.

The table below sets forth information regarding our repurchases during the year:

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.

A total of 1,572 shares were repurchased at an average price of $ 26.49 during 2022, leaving 570 thousand shares available for repurchase.

A total of 199 thousand shares were repurchased at an average price of $ 21.04 during 2021, of which 20 thousand shares were repurchased under the prior repurchase plan, leaving 571 thousand shares available for repurchase.

Total Number of

7 unchanged sentences

Paid per Share

Jan 1, 2021 through March 31, 2021

January 1, 2022 through March 31, 2022

April 1, 2022 through June 30, 2022

1 unchanged sentence

October 1, 2022 through December 31, 2022

The components of other income for the past three years are as follows:

For the years ended December 31,

(In thousands)

ATM and check card fees

Wire transfer fees

Safe deposit box fees

Total other income

Other Expenses

The components of other expenses for the past three years are as follows:

For the years ended December 31,

(In thousands)

Travel, entertainment, training and recruiting

Stationery and supplies

Retail losses

Total other expenses

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.

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 components of the provision for income taxes for the past three years are as follows:

30 unchanged sentences

Deferred compensation

Deferred loan costs

Interest rate swaps

State net operating loss

Deferred fees and loan costs, net

EVP retirement plan

Net unrealized security losses

Net unrealized securities losses

Commitment reserve

1 unchanged sentence

Gross deferred tax assets

Valuation allowance

Total deferred tax assets

Deferred tax liabilities:

Prepaid insurance

Deferred loan costs

Deferred servicing fees

2 unchanged sentences

Interest rate swaps

Net other deferred tax liabilities

Total deferred tax liabilities

4 unchanged sentences

A deferred tax asset is recognized for all temporary differences that will result in future tax deductions subject to reduction of the asset by a valuation allowance.

The Company had no valuation allowance for deferred tax assets related to its state net operating loss carry-forward deferred tax asset at December 31, 2021, compared to $ 209 thousand at December 31, 2020.

The Company had no state net operating loss carry-forwards at December 31, 2021, compared to $ 2.6 million at December 31, 2020.

Included as a component of deferred tax assets is an income tax expense (benefit) related to unrealized gains (losses) on securities available for sale, a supplemental retirement plan (“SERP”) and interest rate swaps.

The after-tax component of each of these is included in other comprehensive income (loss) in shareholders’ equity.

The after-tax component related to securities available for sale was an unrealized gain of $ 29 thousand for 2021, compared to an unrealized loss of $ 215 thousand in 2020.

The after-tax component related to the SERP was no unrealized gain or loss for 2021, compared to an unrealized loss of $ 238 thousand in 2020.

The after-tax component related to the interest rate swaps was an unrealized gain of $ 293 thousand for 2021, compared to an unrealized loss of $ 736 thousand in the prior year.

The after-tax component related to securities available for sale was an unrealized loss of $ 4.4 million for 2022, compared to an unrealized gain of $ 29 thousand in 2021.

The after-tax component related to the interest rate swaps was an unrealized gain of $ 1.1 million for 2022, compared to an unrealized gain of $ 293 thousand for 2021.

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.

The Company did not recognize or accrue any interest or penalties related to income taxes during the years ended December 31, 2021 and 2020.

ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes.

The Company did not recognize or accrue any interest or penalties related to income taxes during the years ended December 31, 2022 or 2021.

The Company does not have an accrual for uncertain tax positions as of December 31, 2022 or 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.

11 unchanged sentences

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 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 (“QCBO”) 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;

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

On April 6, 2020, the federal banking regulators, implementing the applicable provisions of the CARES Act, which modified the CBLR framework so that:

(i) beginning in the second quarter 2020 and until the end of 2020, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework;

and (ii) community banking organizations will have until January 1, 2022, before the CBLR requirement is re-established at greater than 9%.

Under the interim rules, the minimum CBLR will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9% thereafter.

The numerator of the CBLR is Tier 1 capital, as calculated under present 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.

Under the Economic Growth, Regulatory Relief and Consumer Protection Act, the Bank is considered a qualifying community banking organization, which allows the Bank to elect to opt into the community bank leverage ratio ("CBLR") in its regulatory filings.

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

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

3 unchanged sentences

Stock Option Plans

The Company has incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors.

Grants under the Company’s incentive and nonqualified option plans generally vest over 3 years and must be exercised within 10 years of the date of grant.

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 stock option plans for 2022, 2021 and 2020 are summarized in the following table:

22 unchanged sentences

The fair values of the options granted during 2021 and 2020 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions.

There were no options granted during 2022.

For the years ended December 31,

30 unchanged sentences

$ 19.27 - $ 20.88

$ 20.89 - $ 22.57

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).

3 unchanged sentences

Income tax benefit

As of December 31, 2021, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $ 1.0 million.

As of December 31, 2022, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $ 350 thousand.

That cost is expected to be recognized over a weighted average period of 1.1 years.

31 unchanged sentences

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 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.

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).

23 unchanged sentences

A discretionary annual Deferral Award equal to seven and one half percent ( 7.5 %) of the participant’s annual base salary may be credited to the Participant’s account in addition to the guaranteed Deferral Award, if the Bank exceeds the benchmarks set forth in the Annual Executive Bonus Matrix.

The total Deferral

Award shall never exceed fifteen percent ( 15 %) of the participant’s base salary for any given Plan Year.

The total Deferral Award shall never exceed fifteen percent ( 15 %) of the participant’s base salary for any given Plan Year.

Each Participant shall be one hundred percent ( 100 %) vested in all Deferral Awards as of the date they are awarded.

As of December 31, 2021, the Company had total expenses of $ 108 thousand, compared to $ 86 thousand in 2020 and $ 115 thousand in 2019.

As of December 31, 2022, the Company had total expenses related to the Plan of $ 142 thousand, compared to $ 108 thousand in 2021 and $ 86 thousand in 2020.

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 in 2021, 2020 and 2019.

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 $ 22 thousand in 2022 and $ 5 thousand in 2021 and 2020, respectively.

Additionally, $ 55 thousand of prior period expense was reversed during 2022.

This was related to adjustments made to the members of management participating in the plan.

Fair Value Measurement

12 unchanged sentences

Treasury, U.S.

Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Government and

sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

14 unchanged sentences

As of December 31, 2022, the fair value of the Company’s AFS debt securities portfolio was $ 95.4 million.

Approximately 17 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $ 9.7 million at December 31, 2021.

Approximately $ 9.6 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 portfolio contains residential mortgage-backed securities, most of which, 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.

2 unchanged sentences

It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities.

Included in the Company’s AFS debt securities are two corporate bonds which are classified as Level 3 assets at December 31, 2021, which were previously classified as Level 2 assets.

Included in the Company’s AFS debt securities are certain corporate bonds which are classified as Level 3 assets at December 31, 2022.

The valuation of these corporate bonds is determined using broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques.

6 unchanged sentences

Sales/reductions

Unrealized (losses) gains

Balance at end of period

(1) Includes AFS debt securities classified as Level 2 at December 31, 2019, which were transferred to Level 3 during the period ended December 31, 2020.

Equity Securities with Readily Determinable Fair Values

5 unchanged sentences

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

Loans Held for Sale

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

Interest Rate Swap Agreements

23 unchanged sentences

Total equity securities

Loans held for sale

Total loans held for sale

Interest rate swap agreements

20 unchanged sentences

Total equity securities

Loans held for sale

Total loans held for sale

Interest rate swap agreements

22 unchanged sentences

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."

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

Impaired Collateral-Dependent Loans

2 unchanged sentences

Partially charged-off loans are measured for impairment based upon an appraisal for collateral-dependent loans.

When an updated appraisal is received for a nonperforming loan, the value on the appraisal is discounted in the manner discussed above.

When an updated appraisal is received for a nonperforming loan, the value on the appraisal is 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.

18 unchanged sentences

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.

Federal Home Loan Bank stock is carried at cost.

Carrying value approximates fair value based on the redemption provisions of the issues.

Servicing Assets

Servicing assets do not trade in an active, open market with readily observable prices.

The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

16 unchanged sentences

Loans, net of allowance for loan losses (2)

Servicing assets

Accrued interest receivable

Financial liabilities:

Borrowed funds and subordinated debentures

Accrued interest payable

(1) Includes corporate securities that are considered Level 3 and reported separately in the table under the “Fair Value on a Recurring Basis” heading.

53 unchanged sentences

FINANCING ACTIVITIES

Proceeds from exercise of stock options

Proceeds from exercise of stock based compensation, net of taxes

Repayment of advances from subsidiaries

35 unchanged sentences

The allowance for loan losses as of December 31, 2022, was $25.2 million.

As described in Notes 1 and 5 to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans.

As described in Notes 1 and 5 to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgment, will be adequate to absorb losses on existing loans.

The allowance consists of specific and general components in the amounts of $1.8 million and $23.4 million, respectively.

Specific reserves are made to individual impaired loans, which have been defined to include all nonperforming loans and troubled debt restructurings.

Specific reserves are made for individual impaired loans, which have been defined to include all nonperforming loans and troubled debt restructurings.

The general reserve is set based upon a historical net charge-off rate adjusted for the following environmental factors:

evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity.

The evaluation of the qualitative factors requires a significant amount of judgment by management and involves a high degree of subjectivity.

We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

98 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 8. Financial Statements and Supplementary Data