What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-07 compared with 2023-03-10 · 606 added, 574 removed, 1189 unchanged (50% of the section changed)

7 unchanged sentences

Cash and cash equivalents

Debt securities available for sale

Debt securities available for sale (net of allowance for credit losses of $ 1,283 as of December 31, 2023 and $ 0 as of December 31, 2022)

Debt securities held to maturity

8 unchanged sentences

Residential construction loans

Allowance for loan losses

Allowance for credit losses

Premises and equipment, net

Bank owned life insurance ("BOLI")

Deferred tax assets

Federal Home Loan Bank ("FHLB") stock

Accrued interest receivable

3 unchanged sentences

Interest-bearing demand

Time, under $100,000

Time, $100,000 to $250,000

Time, $250,000 and over

Brokered time deposits

Time deposits

Total deposits

6 unchanged sentences

Common stock, no par value, 12,500 shares authorized, 11,424 shares issued and 10,063 shares outstanding as of December 31, 2023;

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

12,500 shares authorized, 11,289 shares issued and 10,584 shares outstanding as of December 31, 2022

Retained earnings

Treasury stock, at cost ( 1,361 shares as of December 31, 2023 and 705 shares as of December 31, 2022)

Accumulated other comprehensive (loss) income

Accumulated other comprehensive loss

Total shareholders’ equity

20 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses, loans

Provision for credit losses, off-balance sheet

Provision for impairment losses, AFS securities

Net interest income after provision for credit losses

NONINTEREST INCOME

3 unchanged sentences

Gain on sale of mortgage loans, net

Net securities (losses) gains

Net securities gains (losses)

Total noninterest income

4 unchanged sentences

Professional services

Other loan expenses

Loan related expenses

Deposit insurance

Director fees

Loan collection expenses

Other expenses

11 unchanged sentences

Other comprehensive income

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:

Investment securities available for sale:

Unrealized holding gains on securities arising during the period

reclassification adjustment for gains on securities included in net income

reclassification adjustment for losses on securities included in net income

Total unrealized gains on securities available for sale

Adjustments related to defined benefit plan:

Amortization of prior service cost

Total adjustments related to defined benefit plan

Net unrealized gains from cash flow hedges:

Unrealized holding gains on cash flow hedges arising during the period

Total unrealized gains on cash flow hedges

Net unrealized losses from cash flow hedges:

Unrealized holding losses on cashflow hedges arising during the period

reclassification adjustment for losses on cashflow hedges included in net income

Total unrealized losses on cash flow hedges

Total other comprehensive income

3 unchanged sentences

Other comprehensive income

Investment securities available for sale:

Debt securities available for sale:

Unrealized holding losses on securities arising during the period

reclassification adjustment for gains on securities included in net income

Total unrealized losses on securities available for sale

Adjustments related to defined benefit plan:

Amortization 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 cashflow hedges

Total other comprehensive loss

Net unrealized gains from cash flow hedges:

Unrealized holding gains on cash flow 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

8 unchanged sentences

Dividends on common stock ($ 0.43 per share)

Common stock issued and related tax effects (1)

Share-based compensation (1)

Treasury stock purchased, at cost

2 unchanged sentences

Dividends on common stock ($ 0.48 per share)

Common stock issued and related tax effects (1)

Treasury stock purchased, at cost

Balance, December 31, 2021

Other comprehensive loss, net of tax

Dividends on common stock ($ 0.43 per share)

Common stock issued and related tax effects (1)

Effect of adopting Accounting Standards Update ("ASU") No.

2016-13 ("CECL") (2)

Share-based compensation (1)

Treasury stock purchased, at cost

1 unchanged sentence

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

(2) See further disclosure surrounding CECL transition in Note 1 to the Consolidated Financial Statements.

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

4 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

Provision for credit losses, loans

Provision for credit losses, AFS securities

Net amortization of purchase premiums and discounts on securities

4 unchanged sentences

Stock compensation expense

Gain on sale of OREO

Gain on sale of mortgage loans, net

6 unchanged sentences

Purchases of securities available for sale

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

Proceeds from sale of (purchases 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

Proceeds from sales of securities available for sale

Proceeds from sales of equity securities

Proceeds from sale of OREO

Net decrease (increase) in SBA PPP loans

Net decrease in SBA PPP loans

Net increase in loans

Proceeds from BOLI

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

Purchases of premises and equipment, net

Net cash used in investing activities

1 unchanged sentence

Net increase in deposits

Proceeds from (repayments of) borrowings, net

(Repayments of) proceeds from short-term borrowings, net

Proceeds from long-term borrowings, net

Proceeds from exercise of stock options, net of withheld taxes

2 unchanged sentences

Net cash provided by financing activities

(Decrease) increase in cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

6 unchanged sentences

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, Ocean, 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 twenty-one branch offices located in Bergen, Hunterdon, Middlesex, Morris, 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.

3 unchanged sentences

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:

Unity (NJ) Statutory Trust II and Unity Risk Management, Inc.

The Company has a wholly-owned subsidiary:

Unity (NJ) Statutory Trust II.

For additional information on Unity (NJ) Statutory Trust II, see Note 7 to the Consolidated Financial Statements.

Unity Risk Management, Inc.

is the Company’s captive insurance company that insures risks to the Bank not insured by the traditional commercial insurance market.

In 2023, the Company dissolved Unity Risk Management, Inc.

which was the Company’s captive insurance company that insured risks to the Bank not insured by the traditional commercial insurance market.

Use of Estimates in the Preparation of Financial Statements

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.

GAAP, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Balance Sheet and Income Statement for the periods indicated.

Amounts requiring the use of significant estimates include the allowance for credit losses, valuation of deferred tax and servicing assets, the valuation of securities and the determination of impairment for securities and fair value disclosures.

Actual results could differ from those estimates.

Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic.

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

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.

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 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, debt securities held to maturity and equity securities with readily determinable fair values ("equity securities").

Restrictions on Cash

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 $ 262 thousand as of December 31, 2023 and 2022, respectively.

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

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.

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, for asset/liability management purposes or liquidity needs.

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

1 unchanged sentence

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.

Such debt securities are stated at cost, adjusted for unamortized purchase premiums and discounts.

For debt securities, purchase discounts are amortized using the interest method over the stated terms of the securities, where purchase premiums are amortized through the earliest call date.

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.

2 unchanged sentences

For additional information on securities, see Note 2 to the Consolidated Financial Statements.

Other-Than-Temporary Impairment

The Company has a process in place to identify debt securities that could potentially incur credit impairment that is other-than-temporary.

Allowance for Credit Losses - Securities

The Company has a process in place to identify debt securities that could potentially incur credit impairment.

This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concern warrants such evaluation.

This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary.

Relevant facts and circumstances considered include:

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

(2) the reasons for the decline in value;

(3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.

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.

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.

Management evaluates securities for 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 there is credit or interest rate-related impairment of a security.

The CECL standard requires credit losses on both held to maturity and available for sale securities to be recognized through a valuation allowance, ACL, instead of as a direct write-down to the amortized cost basis of the security.

Management assesses its intent to sell and 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 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.

The credit loss component is recognized in earnings as provision expense and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows.

The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

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The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

The Company elected the practical expedient of zero loss estimates for securities issued by U.S.

government entities and agencies for AFS and HTM securities.

These securities are either explicitly or implicitly guaranteed by the U.S.

Government, are highly rated by major agencies and have a long history of no credit losses.

The Company considers a debt security to be past due in terms of payment based on its contractual terms.

As debt security may be placed on nonaccrual, with interest no longer recognized, when collectability of principal or interest is doubtful.

As of December 31,2023, there were no nonaccrual or past due held-to-maturity and available for sale debt securities.

The Company elected the practical expedient of zero loss estimates for securities issued by U.S.

government entities and agencies for available for sale and held to maturity debt securities.

These securities are either explicitly or implicitly guaranteed by the U.S.

Government, are highly rated by major agencies and have a long history of no credit losses.

A security may be partially or fully charged off against the allowance if it is determined to be uncollectible.

Recoveries of previously charged-off available for sale securities are recognized when received, while recoveries on held to maturity securities are recognized when expected.

For additional information on the allowance for credit losses, see Note 4 to the Consolidated Financial Statements.

Transfers of Financial Assets

1 unchanged sentence

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

During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan.

In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest.

If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing.

In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

Loans Held for Sale

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.

Loans held for sale represent the guaranteed portion of certain SBA loans, other than loans originated under the Paycheck Protection Program, that the Company has elected to hold for sale 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.

13 unchanged sentences

Loans Held for Investment

Loans held for investment are stated at the unpaid principal balance, net of unearned discounts and deferred loan origination fees and costs.

In accordance with the level yield method, loan origination fees, net of direct loan origination

costs, are deferred and recognized over the estimated life of the related loans as an adjustment to the loan yield.

Loans held for investment are stated at the unpaid principal balance, net of unearned discounts, deferred loan origination fees and costs and net charge-offs.

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.

6 unchanged sentences

Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income.

Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest.

Loans may be returned to an accrual status when the ability to collect is reasonably assured or when the loan is brought current as to principal and interest.

Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet.

3 unchanged sentences

All unsecured loans are charged off upon the establishment of the loan’s nonaccrual status.

Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off.

Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off, subject to government guarantee.

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.

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

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

The Company evaluates its loans for impairment.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

The Company has defined impaired loans to be all TDRs and nonperforming loans individually evaluated for impairment.

Impairment of a loan is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or as a practical expedient, based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral-dependent.

If the value of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge to the provision for loan losses.

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

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date.

The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio and historical loan loss experience.

The allowance for loan losses consists of specific reserves for individually impaired credits and TDRs, reserves for nonimpaired loans based on historical loss factors adjusted for general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends.

This risk assessment process is performed at least quarterly and, as adjustments become necessary, they are realized in the periods in which they become known.

Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values.

In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses.

These agencies may require the Company to make additional provisions based on their judgments about information available at the time of the examination.

The Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses.

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

For additional information on the allowance for loan losses and reserve for unfunded loan commitments, see Note 4 to the Consolidated Financial Statements.

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

Effective January 1, 2023, the Company adopted the provisions of ASC 326 and modified its accounting policy for the allowance for credit losses on loans.

The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date.

The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost.

It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit.

The allowance is established through a provision for credit losses that is charged against income.

The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses.

The allowance for credit losses is reported separately as a contra-asset on the Consolidated Balance Sheet.

The expected credit losses for unfunded lending commitments and unfunded loan commitments is reported on the Consolidated Balance Sheet in other liabilities.

The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected.

Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics.

At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics.

If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics.

If the loan does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis.

Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off.

The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk.

Such segments include SBA, Commercial, Residential mortgage, Consumer and Residential construction.

The Commercial segment is further bifurcated into SBA 504, Commercial & industrial, Commercial real estate and Commercial real estate construction.

The Consumer segment is further bifurcated into Home equity and Consumer other.

For most segments the Company calculates estimated credit losses using a weighted average remaining maturity methodology.

The Company estimates the allowance for credit losses on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts.

The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts.

After the reasonable and supportable forecast period, the Company reverts, after four quarters, on a straight-line basis, to the historical average economic variables.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above.

Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations and the volume and severity of past due loans and non-accrual loans.

On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics.

When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable.

If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable.

To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate.

To determine the expected funding rate, the Company uses a historical utilization rate for each segment.

As noted above, the allowance for credit losses on unfunded loan commitments is included in other liabilities on the Consolidated Balance Sheet.

Prior to January 1, 2023

As further noted in the New Accounting Pronouncements Adopted in 2023 section, on January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (or CECL) methodology.

Prior to the adoption of ASC 326, the ACL on loans and leases was maintained at a level that the Company believed was adequate to provide for probable loan losses as of the balance sheet date.

The level of the allowance was based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio and historical loan loss experience.

The allowance for loan losses consists of specific reserves for individually impaired credits, reserves for nonimpaired loans based on historical loss factors adjusted for general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends.

This risk assessment process was performed at least quarterly and, as adjustments become necessary, they were realized in the periods in which they become known.

For additional information on the allowance for credit losses and reserve for unfunded loan commitments, see Note 4 to the Consolidated Financial Statements.

Premises and Equipment, net

8 unchanged sentences

The Company purchased life insurance policies on certain members of management.

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

Bank owned life insurance is recorded at its cash surrender value or the amount that can be realized and the appreciation and death benefits from Bank owned life insurance are not subject to income tax.

Federal Home Loan Bank (“FHLB”) Stock

7 unchanged sentences

The Company recognizes accrued interest receivable as it is earned.

The Company is using the practical expedient to exclude accrued interest receivable from credit loss measurement.

Other Real Estate Owned

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.

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 credit 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.

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, 2023.

Reclassification

Certain reclassifications have been made in the consolidated financial statements to conform to the current year presentation.

Such reclassifications had no impact on net income or stockholders’ equity as previously reported.

All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”).

1 unchanged sentence

Evaluations are completed by a person independent of Company management.

The content of the appraisal depends on the complexity of the property.

The content of the appraisal depends on the complexity and location of the property.

Derivative Instruments and Hedging Activities

11 unchanged sentences

For additional information on derivative instruments and hedging activities, see Note 7 to the Consolidated Financial Statements.

The Company follows Financial Accounting Standards Board Accounting Standards Codification ("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.

22 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 (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.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) consists of the change in unrealized gains (losses) on 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.

5 unchanged sentences

Accordingly, there is only one reportable segment.

Revenue Recognition

ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers.

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 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:

● Branch fee income - 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 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).

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

● Other non-interest income primarily includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to the requirements of ASC 606.

Recent Accounting Pronouncements

ASU 2020- 04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting."

ASU 2020-04 provides temporary optional guidance intended to ease the burden of reference rate reform on financial reporting.

The guidance provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions that are expected to be affected by reference rate reform and meet certain scope guidance.

ASU 2020-04 provides various optional expedients, including the following, for hedging relationships affected by reference rate reform, if certain criteria are met:

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

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

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

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

In addition, ASU 2020-04 permits an entity to make a one-time election to sell, transfer or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that were classified as held to maturity before January 1, 2020.

ASU 2020-04 was effective upon its issuance on March 12, 2020.

However, it cannot be applied to contract modifications that occur after December 31, 2022.

With certain exceptions, the ASU also cannot be applied to hedging relationships entered into or evaluated after that date.

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

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

Scope.” ASU 2021-01 was issued to clarify certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting applied to derivatives that are affected by the discounting transaction.

In addition, the ASU clarifies that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered eligible as a hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of the reference rate reform.

ASU 2021-01 became effective January 7, 2021.

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

ASU 2022-06, “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

ASU 2023-07, "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures” requires public entities to disclose information about their reportable segments’ significant expenses on an interim and annual basis.

Under ASU 2023-07, public entities must disclose significant expense categories and amounts for each reportable segment, where significant expense categories are defined as those that are regularly reported to an entity’s chief operating decision-maker and included in a segment’s reported measures of profit or loss.

Additionally, public entities must disclose the amount of other segment items and a description of its composition.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023.

As the Company has only one reportable segment, ASU 2023-07is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures” requires entities to improve the transparency of certain income tax related disclosures, including the rate reconciliation and taxes paid disclosures.

This ASU is effective for public business entities for the annual periods beginning after December 15, 2024.

ASU 2023-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

New Accounting Guidance Adopted in 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.

The FASB issued this guidance to replace the incurred loss impairment methodology with a new current expected 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.

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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.

The Company adopted 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 established a governance structure to implement the CECL accounting guidance and 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 then-current GAAP.

Based on the Company’s day one CECL model results that it performed alongside the then-current process, the Company saw adoption of the new guidance resulting in an increase to the allowance for credit losses , including the reserve for off-balance sheet credit exposure (recorded in other liabilities) of $ 0.9 million.

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

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 2022-01 was effective January 1, 2023 and did not have a significant impact on the Company’s consolidated financial statements.

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

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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

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.

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

Subsequent Events

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

During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

Restrictions on Cash

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.

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.

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

ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases.

The Company saw inconsequential impact of the adoption of ASU 2022-02 on its consolidated financial statements and the accompanying footnotes disclose the new requirements.

December 31, 2023

(In thousands)

credit losses

Available for sale:

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Total equity securities

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.

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

Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.

After one through

After five through

Total carrying

Within one year

After ten years

December 31, 2022

(In thousands)

Available for sale at fair value:

Available for sale:

Government sponsored entities

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Total debt securities available for sale

Held to maturity at cost

Held to maturity:

Government sponsored entities

1 unchanged sentence

Residential mortgage-backed securities

Total debt securities held for maturity

Equity Securities at fair value:

Total debt securities held to maturity

Equity securities:

Total equity securities

For the year ended December 31, 2023, the provision for credit loss on AFS debt securities was $ 1.3 million, compared to no provision for the year ended December 31, 2022.

The following table summarizes the amortized cost of held to maturity debt securities by external credit rating at December 31, 2023 and 2022:

Non-investment

(In thousands)

AAA/AA/A rated

December 31, 2023

Government sponsored entities

State and political subdivisions

Residential mortgage-backed securities

December 31, 2022

Government sponsored entities

State and political subdivisions

Residential mortgage-backed securities

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

The carrying value of securities at December 31, 2023 is distributed by contractual maturity.

Securities, which may have principal prepayment provisions, are distributed based on contractual maturity.

Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls.

(In thousands)

Available for sale, at fair value:

Due in one year

Due after one year through five years

Due after five years through ten years

Due after ten years

Residential mortgage-backed securities

Held to maturity, at amortized cost:

Due in one year

Due after one year through five years

Due after five years through ten years

Due after ten years

Residential mortgage-backed securities

The number of securities in an unrealized loss position as of December 31, 2023 totaled 98 , compared to 102 at December 31, 2022.

This decrease is primarily due to market interest rate fluctuations.

As of December 31, 2023, the company had accrued interest receivable of $ 1.5 million relating to debt securities, compared to $ 1.0 million at December 31, 2022.

At the year-end 2023 and 2022, there were no holdings of securities of any one issuer, other than the U.S.

Government and its agencies, in an amount greater than 10 % of shareholders’ equity.

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

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Available for sale:

Government sponsored entities

State and political subdivisions

8 unchanged sentences

Realized Gains and Losses

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.

There were no available for sale or held to maturity gross realized gains or losses relating to sales in 2023 or 2022.

Pledged Securities

Securities with a carrying value of $ 9.7 million and $ 0.8 million at December 31, 2023 and December 31, 2022, respectively, were pledged to secure other borrowings and for other purposes required or permitted by law.

Equity Securities

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

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

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

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

For the year ended December 31,

(In thousands)

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

Net unrealized losses recognized during the period on equity securities

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

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

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:

Gains (losses) recognized during the reporting period on equity securities

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

(In thousands)

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SBA 504 loans

Commercial other

Commercial & industrial

Commercial real estate

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SBA loans held for sale

Loans are made to individuals as well as commercial entities.

Loans are made to individuals and commercial entities.

Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower.

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The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.

SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes.

SBA loans are for the purpose of providing working capital, business acquisitions, financing the purchase of equipment, inventory or commercial real estate and for other business purposes.

Loans are guaranteed by the businesses’ major owners.

SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

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

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

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

economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various relief programs and measures that the U.S.

Department of the Treasury, the Small Business Administration, the Federal Reserve Board (“FRB”) and other federal banking agencies have implemented or may implement.

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

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

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

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

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

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

Applications for the PPP loans started on April 3, 2020 and were extended through August 8, 2020.

The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law o n December 27, 2020 .

Among other things, the Economic Aid Act extended the PPP through March 31, 2021 and allocated additional funds for new PPP loans, to be guaranteed by the SBA.

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 had substantially the same terms as existing PPP loans.

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

Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value.

When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income.

All criteria for sale accounting must be met in order for the loan sales to occur.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold.

Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues.

Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term.

Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets.

Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

Commercial Loans:

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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.

Restrictions were placed on the loans purchased to limit the purchases to borrowers residing in New Jersey, southern New York, and eastern Pennsylvania and to limit purchases to borrowers with higher credit quality with a 700 FICO minimum.

Upgrade services the loans on behalf of the Company.

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.

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Credit Ratings

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

A loan’s internal risk rating is 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.

The Company places all SBA and commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt.

The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends.

This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

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

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

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Special Mention:

Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention.

If not checked or corrected, these trends will weaken the Bank’s collateral and position.

While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated.

As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification.

Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in start up or deteriorating industries, or borrowers with a poor market share in an average industry.

"Special Mention"

loans may include an element of asset quality, financial flexibility or below average management.

Management and ownership may have limited depth or experience.

Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”.

A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt.

The loan is inadequately protected by the current paying capacity of the obligor or by the collateral pledged, if any.

Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned.

There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected.

Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

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

Pending factors include proposed merger, acquisition or liquidation procedures;

capital injection;

perfecting liens on additional collateral;

and refinancing plans.

Partial charge-offs are likely.

Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss” and charged-off immediately.

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

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

These loans have a potential weakness that deserves management’s close attention.

If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Once a borrower is deemed incapable of repayment of unsecured debt, the loan is termed a “Loss” and charged off immediately, subject to government guarantee.

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

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These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2022:

December 31, 2022

SBA & Commercial loans - Internal risk ratings

The following table shows the internal loan classification risk by loan portfolio classification by origination year as of December 31, 2023:

Amortized Cost Basis by Origination Year

(In thousands)

2018 and Earlier

Revolving Loans Amortized Cost Basis

SBA loans held for investment

Special Mention

Total SBA loans held for investment

SBA loans held for investment

Current-period gross writeoffs

SBA PPP loans

Total SBA PPP loans

Commercial loans

SBA 504 loans

Commercial other

Commercial real estate

Commercial real estate construction

Special Mention

Total commercial loans

Total commercial loans and SBA loans held for investment

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

(In thousands)

Commercial loans

Current-period gross writeoffs

Residential mortgage loans

Nonperforming

Total residential mortgage loans

Residential mortgage loans

Current-period gross writeoffs

Consumer loans

Consumer other

Nonperforming

Total consumer loans

Consumer loans

Current-period gross writeoffs

Residential construction loans

Total residential mortgage, consumer and residential construction loans

Nonperforming

Total residential construction loans

Residential construction

Current-period gross writeoffs

Total loans held for investment

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2022:

7 unchanged sentences

SBA 504 loans

Commercial other

Commercial & industrial

Commercial real estate

11 unchanged sentences

Total residential mortgage, consumer and residential construction loans

Nonperforming and Past Due Loans

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being delinquent for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt.

Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well secured and in process of collection.

Nonaccrual and Past Due Loans

Nonaccrual loans consist of loans that are not accruing interest as a result of principal or interest being delinquent for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt.

When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings.

Loans may be returned to an accrual status when the ability to collect is reasonably assured or when the loan is brought current as to principal and interest.

The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors.

6 unchanged sentences

SBA 504 loans

Commercial other

Commercial & industrial

Commercial real estate

7 unchanged sentences

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.

(1) At December 31, 2023, the Company had no SBA PPP loans past due.

December 31, 2022

3 unchanged sentences

SBA 504 loans

Commercial other

Commercial & industrial

Commercial real estate

7 unchanged sentences

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

The Company has defined impaired loans to be all nonperforming loans and troubled debt restructurings.

Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract.

The following tables provide detail on the Company’s loans individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2022 and December 31, 2021:

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

As of December 31, 2023, the company had accrued interest receivable of $ 11.7 million relating to loans receivable.

Individually Evaluated Loans

The Company has defined individually evaluated loans to be all nonperforming loans.

Management individually evaluates a loan when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract.

The following tables provide detail on the Company’s loans individually evaluated in the Company’s CECL evaluation with the associated allowance amount, if applicable, as of December 31, 2023 and December 31, 2022:

December 31, 2023

Allowance for

Credit Losses

(In thousands)

2 unchanged sentences

Commercial loans

Commercial other

Commercial real estate

1 unchanged sentence

Residential mortgage loans

Total impaired loans with no related allowance

Consumer loans

Total consumer loans

Residential construction loans

Total individually evaluated loans with no related allowance

With an allowance:

1 unchanged sentence

Commercial loans

Commercial other

Commercial & industrial

Commercial real estate

Total commercial loans

Residential mortgage loans

Residential construction loans

Total impaired loans with a related allowance

Total individually evaluated impaired loans:

Total individually evaluated loans with a related allowance

Total individually evaluated loans:

SBA loans held for investment

Commercial loans

Commercial other

Commercial & industrial

Commercial real estate

1 unchanged sentence

Residential mortgage loans

Consumer loans

Total consumer loans

Residential construction loans

Total individually evaluated impaired loans

Total individually evaluated loans

December 31, 2022

Allowance for

(In thousands)

2 unchanged sentences

Commercial loans

Commercial other

Commercial & industrial

Commercial real estate

1 unchanged sentence

Residential mortgage loans

Consumer loans:

Residential construction loans

Total impaired loans with no related allowance

2 unchanged sentences

Commercial loans

Commercial other

Commercial real estate

Commercial & industrial

Total commercial loans

Residential mortgage loans

Consumer loans:

Residential construction loans

Total impaired loans with a related allowance

Total individually evaluated impaired loans:

Total impaired loans:

SBA loans held for investment

Commercial loans

Commercial other

Commercial & industrial

Commercial real estate

1 unchanged sentence

Residential mortgage loans

Consumer loans:

Residential construction loans

Total individually evaluated impaired loans

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.

The average balances are calculated based on the month-end balances of impaired loans.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, therefore no interest income is recognized.

The interest recognized on impaired loans noted below represents accruing troubled debt restructurings only and nominal amounts of income recognized on a cash basis for well-collateralized impaired loans.

For the years ended December 31,

(In thousands)

SBA loans held for investment

Commercial loans

SBA 504 loans

Commercial other

Commercial real estate

Commercial real estate construction

Residential mortgage loans

Consumer loans

Consumer other

Residential construction loans

Troubled Debt Restructurings

The Company’s loan portfolio includes certain loans that have been modified as a troubled debt restructuring (“TDR”).

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

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

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

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

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

TDRs of $ 1.4 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.

The TDRs are in accrual status since they are performing in accordance with the restructured terms.

There are no commitments to lend additional funds on these loans.

To date, the Company’s TDRs consisted of principal reduction, interest only periods and maturity extensions.

There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the year ended December 31, 2022.

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

Total impaired loans

The Company did not recognize interest income on nonaccrual loans for the year ended December 31, 2023 and recognized $ 371 thousand for the year ended December 31, 2022.

Other Loan Information

2 unchanged sentences

The total amount of such loans serviced, but owned by third party investors, amounted to approximately $ 99.0 million and $ 85.8 million at December 31, 2023 and 2022, respectively.

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:

At December 31, 2023 and 2022, the carrying value of servicing assets was $ 0.9 million and $ 0.7 million, respectively, and is included in Other assets.

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

For the years ended December 31,

5 unchanged sentences

In addition, the Company had a $ 600 thousand and $ 641 thousand in discounts related to the retained portion of unsold SBA loans at December 31, 2023 and 2022, respectively.

These discounts are amortized to income over the same period of the balance of the loans sold.

Officer and Director Loans:

14 unchanged sentences

This could lead to greater losses in the event of defaults on loans 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

Allowance for Loan Losses

The Company has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio.

At a minimum, the adequacy of the allowance for loan losses is reviewed by management on a quarterly basis.

At December 31, 2023 and December 31, 2022, approximately 96 % of the Company’s loan portfolio was secured by real estate.

Modifications

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.

The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.

The Company uses a weighted-average remaining maturity model to determine the allowance for credit losses.

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans.

When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses.

The amount of the principal forgiveness is deemed to be uncollectible;

therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions.

Typically, one type of concession, such as a term extension, is granted initially.

If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of gross loans and type of concession granted (numbers in thousands) at December 31, 2023:

(In thousands)

SBA loans held for investment

Commercial loans

Commercial & industrial

Commercial real estate

Consumer loans

Balance, end of year

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

No loans that were modified during the year ended December 31, 2023 had a payment default during the period and all loans were current as of December 31, 2023.

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

Allowance for Credit Losses

The Company has an established methodology to determine the adequacy of the allowance for credit losses that assesses the risks and losses inherent in the loan portfolio.

At a minimum, the adequacy of the allowance for credit losses is reviewed by management on a quarterly basis.

The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

For purposes of determining the allowance for loan losses, the Company has segmented the loans in its portfolio by loan type.

For purposes of determining the allowance for credit losses, the Company has segmented the loans in its portfolio by loan type.

Loans are segmented into the following pools:

SBA 7(a), commercial, residential mortgages, consumer and residential construction loans.

SBA, commercial, residential mortgages, consumer and residential construction loans.

Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan.

Commercial loans are divided into the following five classes:

commercial real estate, commercial real estate construction, unsecured business line of credit, commercial other and SBA 504.

Commercial loans are divided into the following four classes:

commercial real estate, commercial real estate construction, commercial & industrial and SBA 504.

Consumer loans are divided into two classes as follows:

2 unchanged sentences

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

Specific reserves are evaluated for individual impaired loans and TDRs.

Specific reserves are evaluated for individually evaluated loans.

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

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

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

Within the historical net charge-off rate, the Company weights the data dating back to 2015 on a straight line basis and projects the losses on a weighted average remaining maturity basis for each segment.

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

1 unchanged sentence

Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

The Company also elected an economic overlay as part of its methodology which incorporates the probability of recession based upon the Federal Reserve NYFYPROB Index.

● For SBA 7(a) and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis.

2 unchanged sentences

● For residential mortgage, consumer and residential construction loans, the estimate of loss is based on pools of loans with similar characteristics.

Factors such as credit score, delinquency status and type of collateral are evaluated.

Factors such as delinquency status and type of collateral are evaluated.

Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectable.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for credit losses as soon as a loan is recognized as uncollectable.

All credits which are 90 days past due must be analyzed for the Company’s ability to collect on the credit.

4 unchanged sentences

The total allowance is available to absorb losses from any segment of the portfolio.

The following tables detail the activity in the allowance for loan losses by portfolio segment for the past three years:

For the year ended December 31, 2022

(In thousands)

Balance, beginning of period

Net (charge-offs) recoveries

Provision for (credit to) loan losses charged to expense

Balance, end of period

The following tables detail the activity in the allowance for credit losses by portfolio segment for the past two years:

For the year ended December 31, 2023

1 unchanged sentence

Balance, beginning of period

Net recoveries (charge-offs)

Provision for (credit to) loan losses charged to expense

Impact of adoption of ASU 2016-13 ("CECL")

Net charge-offs

Provision for (credit to) credit losses charged to expense

Balance, end of period

3 unchanged sentences

Net (charge-offs) recoveries

Provision for loan losses charged to expense

(Credit to) provision for loan losses charged to expense

Balance, end of period

The following tables present loans and their related allowance for loan losses, by portfolio segment, as of December 31 st for the past two years:

The following tables present loans and related allowance for credit losses, by portfolio segment, as of December 31 st for the past two years:

December 31, 2023

(In thousands)

Allowance for loan losses ending balance:

for Investment

Allowance for credit losses ending balance:

Individually evaluated for impairment

3 unchanged sentences

Collectively evaluated for impairment

Total loans held for investment

December 31, 2022

7 unchanged sentences

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

At December 31, 2023 and 2022, all loans individually evaluated for credit losses were secured by residential and commercial real estate.

The provision for credit losses for loans decreased $ 2.4 million for the year ended 2023 primarily due to slower loan growth, as well as management's view of current economic conditions.

Reserve for Unfunded Loan Commitments

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses.

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

At 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.

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable.

To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate.

To determine the expected funding rate, the Company uses a historical utilization rate for each segment.

As noted above, the allowance for credit losses on unfunded loan commitments is included in Other liabilities on the Consolidated Balance Sheet.

At December 31, 2023, a $ 0.6 million commitment reserve was reported, compared to a $ 0.5 million commitment reserve at December 31, 2022.

Reserve for AFS Debt Security Impairment

The Company maintains a reserve for credit losses on AFS debt securities.

Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified in “Debt securities available for sale” on the balance sheet.

At December 31, 2023, a $ 1.3 million reserve was reported, compared to none at December 31, 2022.

Premises and Equipment

9 unchanged sentences

Net premises and equipment

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

Amounts charged to noninterest expense for depreciation of premises and equipment amounted to $ 1.4 million in 2023 and 2022, 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 $ 135.3 million and $ 67.3 million at December 31, 2023 and 2022, respectively.

Deposits from principal officers, directors, and their affiliates at year-end 2023 and 2022 were $ 33.0 million and $ 27.8 million, respectively.

Borrowed Funds, Subordinated Debentures and Derivatives

2 unchanged sentences

FHLB borrowings:

At December 31,

Non-overnight, fixed rate advances

Overnight advances

Puttable advances

Subordinated debentures:

At December 31,

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

The following table presents borrowed funds and subordinated debentures by maturity or call date over the next five years:

(In thousands)

FHLB borrowings:

Non-overnight, fixed rate advances

Overnight advances

Puttable advances

Subordinated debentures:

4 unchanged sentences

The subordinated debentures are redeemable in whole or part, prior to maturity but after July 24, 2011.

The floating interest rate on the subordinated debentures is the three-month LIBOR plus 159 basis points and reprices quarterly.

For 2023, the floating interest rate on the subordinated debentures is the three-month CME term SOFR plus 262 basis points and reprices quarterly.

For 2022, the floating interest rate on the subordinated debentures was three-month LIBOR plus 159 basis points and repriced quarterly.

The floating interest rate was 7.212 % at December 31, 2023 and 6.319 % at December 31, 2022.

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.

● In connection with the formation of the statutory business trust, the trust also issued $ 465 thousand of common equity securities to the Company, which together with the proceeds stated above were used to purchase the subordinated debentures, under the same terms and conditions.

13 unchanged sentences

Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any.

Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s balance sheet as Other assets or Other liabilities.

Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s Consolidated Balance Sheet as Other assets or Other liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to any derivative agreement.

11 unchanged sentences

Conversely, if interest rates decrease, interest expense decreases.

Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore hedges its variable-rate interest payments.

Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore hedges its variable interest rate payments.

To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.

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

At December 31, 2023, and 2022 the Company had no cash collateral pledged for these derivatives.

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

(In thousands, except percentages and years)

(Dollars in thousands)

December 31, 2023

5 unchanged sentences

Number of contracts

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.

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.

During the twelve months ended December 31, 2023 the Company received variable rate SOFR payments from and paid fixed rates in accordance with its interest rate swap agreements.

In 2022, the Company utilized LIBOR.

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 Consolidated Balance Sheet.

The unrealized losses are recorded as a derivative liability and are included in Accrued expenses and 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.

The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective.

The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

The following table presents the net gains (losses) recorded in other comprehensive income and the consolidated financial statements relating to the cash flow derivative instruments at December 31, 2022, and 2021 respectively:

The following table presents the net (losses) gains recorded in other comprehensive income and the Consolidated Financial statements relating to the cash flow derivative instruments at December 31, 2023 and 2022, respectively:

For the years ended December 31,

(In thousands)

Gain recognized in OCI, net of tax

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

(Loss) gain recognized in OCI

(Loss) gain reclassified from AOCI into net income

Leases and Commitments

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.

Operating leases in which the Company 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.

5 unchanged sentences

Certain lease arrangements contain extension options which typically range from 1 to 5 years at the then fair market rental rates.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI").

Extension options which are reasonably certain to be exercised are included in the calculation of the ROU asset and lease liability.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI").

The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.

12 unchanged sentences

ROU assets obtained in exchange for new operating lease liabilities

As of December 31, 2023, the Company had no lease terminations.

In 2022, the Company terminated one lease.

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

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

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

(In thousands, except percentages and years)

December 31, 2023

19 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.

Accumulated Other Comprehensive Income (Loss)

The following tables shows the changes in other comprehensive (loss) income for the past three years:

Accumulated Other Comprehensive (Loss) Income

The following tables shows the changes in other comprehensive (loss) income for the past two years:

For the year ended December 31, 2023

1 unchanged sentence

Net unrealized

(losses) gains

gains (losses)

(losses) gains on

defined benefit

from cash flow

3 unchanged sentences

Balance, beginning of period

Other comprehensive (loss) income before reclassifications

Other comprehensive income (loss) before reclassifications

Less amounts reclassified from accumulated other comprehensive loss

4 unchanged sentences

Net unrealized

(losses) gains

(losses) gains on

defined benefit

from cash flow

comprehensive

(In thousands)

(loss) income

Balance, beginning of period

Other comprehensive loss before reclassifications

Less amounts reclassified from accumulated other comprehensive income (loss)

Period change

Balance, end of period

For the year ended December 31, 2020

Net unrealized

gains (losses)

gains (losses) on

defined benefit

from cash flow

3 unchanged sentences

Balance, beginning of period

Other comprehensive loss 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) income

Period change

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".

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 $ 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.

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

On April 27, 2023, the Board authorized a repurchase plan of up to 500 thousand shares, or approximately 5.0 % of the Company’s outstanding common stock.

This plan is in addition to the previously approved repurchase plan, under which the Company was authorized to purchase up to 750 thousand outstanding shares of common stock.

A total of 656 thousand shares were repurchased at an average price of $ 23.69 during 2023, of which 570 thousand shares were repurchased under the prior repurchase plan, leaving 414 thousand shares available for repurchase.

A total of 1,572 shares were repurchased at an average price of $ 26.49 during 2022, leaving 570 thousand shares available for repurchase as of December 31, 2022.

The timing and amount of additional purchases, if any, will depend upon several factors including the Company’s capital needs, the performance of its loan portfolio, the need for additional provisions for credit losses and the market price of the Company’s stock.

Total Number of

11 unchanged sentences

October 1, 2023 through December 31, 2023

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

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

For the years ended December 31,

7 unchanged sentences

Total provision for income taxes

Reconciliation between the reported income tax provision and the amount computed by multiplying income before taxes by the statutory Federal income tax rate for the past three years is as follows:

Reconciliation between the reported income tax provision and the amount computed by multiplying income before taxes by the statutory Federal income tax rate for the past two years is as follows:

For the years ended December 31,

(In thousands, except percentages)

Federal income tax provision at statutory rate

Increases (decreases) resulting from:

Federal income tax provision at statutory rate of 21%

(Decreases) increases resulting from:

Stock option and restricted stock

Bank owned life insurance

Tax-exempt interest

Tax-exempt income

Meals and entertainment

Captive insurance premium

State income taxes, net of federal income tax effect

State income taxes, net of federal benefit

Provision for income taxes

6 unchanged sentences

Deferred tax assets:

Allowance for loan losses

Allowance for credit losses

Stock-based compensation

Deferred compensation

Deferred fees and loan costs, net

EVP retirement plan

Deferred loan fees and costs, net

Net unrealized securities losses

5 unchanged sentences

Deferred servicing fees

Net unrealized securities gains

REIT deferral

Bond accretion

Deferred loan fees and costs, net

Interest rate swaps

Total deferred tax liabilities

Gross deferred tax liabilities

Net deferred tax asset

3 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.

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.

Included as a component of deferred tax assets is an income tax expense (benefit) related to unrealized gains (losses) on securities available for sale 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 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 after-tax component related to securities available for sale was an unrealized loss of $ 3.4 million in 2023, compared to unrealized loss of $ 4.4 million in 2022.

The after tax component related to the interest rate swaps was an unrealized gain of $ 0.7 million for 2023, compared to an unrealized gain of $ 1.1 million for 2022.

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, 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.

The Company accrued penalties related to income taxes during the year ended December 31, 2023 relating to prior tax years.

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

The Company does not have an accrual for uncertain tax positions as of December 31, 2023 or 2022, as deductions taken or benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law.

Tax returns for all years 2020 and thereafter are subject to future examination by tax authorities.

Net Income per Share

The following is a reconciliation of the calculation of basic and diluted net income per share for the past three years:

The following is a reconciliation of the calculation of basic and diluted net income per share for the past two years:

For the years ended December 31,

7 unchanged sentences

Regulatory Capital

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

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

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

At December 31, 2022

At December 31, 2021

The Bank is subject to various regulatory capital requirements administered by federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s Consolidated Financial Statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Bank’s and consolidated Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

The minimum capital level requirements include:

(i) a Tier 1 leverage ratio of 4% (ii) common equity Tier 1 capital ratio of 4.5%;

(iii) a Tier 1 capital ratio of 6%;

and (iv) a total capital ratio of 8% for all institutions.

The Bank and the consolidated Company are also required to maintain a “capital conservation buffer” of 2.5 % above the regulatory minimum capital ratios which results in the following minimum ratios:

(i) a common equity Tier 1 capital ratio of 7.0 %;

(ii) a Tier 1 capital ratio of 8.5 %;

and (iii) a total capital ratio of 10.5 %.

An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.

These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.

The following table shows information regarding the Company’s and the Bank’s regulatory capital levels at December 31, 2023 and at December 31, 2022, as if the Company were subject to consolidated capital requirements.

However, due to a Federal Reserve policy applicable to bank holding companies with less than $3 billion in consolidated assets, the Company is not subject to consolidated capital requirements:

Required for Capital

Adequacy Purposes

To be Well Capitalized

Corrective Action

(Dollars in thousands)

As of December 31, 2023

Total risk-based capital (to risk-weighted assets)

Common equity tier 1 (to risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to average total assets)

As of December 31, 2022

(1) The Bank elected to cease being subject to the CBLR effective December 31, 2023 and to report its capital ratios using standard regulatory measures.

Employee Benefit Plans

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Outstanding at December 31, 2023

Options granted

Options exercised

Options forfeited

Options expired

Outstanding at December 31, 2022

Exercisable at December 31, 2023

On April 25, 2019, the Company adopted the 2019 Equity Compensation Plan providing for grants of up to 500,000 shares to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and deferred stock.

The Plan replaced all previously approved and established equity plans then currently in effect.

As of December 31, 2022, 281,500 options and 209,400 shares of restricted stock have been awarded from the plan.

In addition, 15,496 unvested options and 12,400 unvested shares of restricted stock were cancelled and returned to the plan leaving 36,996 shares available for future grants.

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,

Number of options granted

Weighted average exercise price

Weighted average fair value of options

Expected life in years (1)

Expected volatility (2)

Risk-free interest rate (3)

Dividend yield (4)

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

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

(3) The risk-free interest rate is the U.S.

Treasury rate commensurate with the expected life of the options on the date of grant.

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

On May 5, 2023, the Company adopted the 2023 Equity Compensation Plan providing for grants of up to 500,000 shares to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and

deferred stock.

The Plan, along with the 2019 Equity Compensation Plan adopted on April 25, 2019, replaced all previously approved and established equity plans then currently in effect.

As of December 31, 2023, 281,500 options and 267,900 shares of restricted stock have been awarded from the plans.

In addition, 16,162 unvested options and 15,250 unvested shares of restricted stock were cancelled and returned to the plans, leaving 482,012 shares available for future grants.

There were no options granted during 2023 and 2022.

Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options.

5 unchanged sentences

Tax deduction realized from options

The following table summarizes information about stock options outstanding and exercisable at December 31, 2022:

The following table summarizes information about stock options outstanding at December 31, 2023:

Options outstanding

2 unchanged sentences

remaining contractual

Range of exercise prices

exercise prices

life (in years)

4 unchanged sentences

20.89 - 22.57

$ 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).

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Restricted Stock Awards

Restricted stock is issued under the 2019 Equity Compensation Plan to reward employees and directors and to retain them by distributing stock over a period of time.

Restricted stock is issued under the Company’s active Equity Compensation plans to reward employees and directors and to retain them by distributing stock over a period of time.

Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period.

17 unchanged sentences

The Bank has a 401(k) savings plan covering substantially all employees.

Under the Plan, an employee can contribute up to 75 percent of their salary on a tax deferred basis.

The Bank may also make discretionary contributions to the Plan.

The Bank contributed $ 790 thousand, $ 786 thousand, and $ 675 thousand to the Plan in 2022, 2021 and 2020, respectively.

Deferred Fee Plan

The Company has a deferred fee plan for Directors and eligible management.

Directors of the Company have the option to elect to defer up to 100 percent of their respective retainer and Board of Director fees, and each eligible member of management has the option to elect to defer 100 percent of their total compensation.

Director and executive deferred compensation totaled $ 674 thousand in 2022, $ 593 thousand in 2021 and $ 591 thousand in 2020, and the interest paid on deferred balances totaled $ 162 thousand in 2022, $ 136 thousand in 2021 and $ 132 thousand in 2020.

The deferred balances distributed totaled $ 14 thousand in 2022, 2021 and 2020.

Under the 401(k) plan, an employee can contribute up to 75 percent of their salary on a tax deferred basis.

The Bank may also make discretionary contributions to the 401(k) plan.

The Bank contributed $ 846 thousand and $ 790 thousand to the Plan in 2023 and 2022 respectively.

Deferred Compensation Plan

The Company has a deferred compensation plan for Directors and eligible management.

Director and executive deferred compensation totaled $ 1.0 million in 2023 and $ 674 thousand in 2022, and the interest paid on deferred balances totaled $ 422 thousand in 2023 and $ 162 thousand in 2022.

The deferred balances distributed totaled $ 724 thousand in 2023 and $ 14 thousand in 2022.

The total deferred balances included in the Company’s Consolidated Balance Sheet was $ 4.8 million and $ 4.1 million as of December 31, 2023 and 2022, respectively.

Benefit Plans

6 unchanged sentences

A discount rate of four percent ( 4 %) was used to calculate the present value of the benefit obligation.

The President and CEO commenced vesting to this retirement benefit on January 1, 2014, and it will vest an additional three percent ( 3 %) each year until fully vested on January 1, 2024.

In the event that the President and CEO’s separation from service from the Company were to occur prior to full vesting, the President and CEO would be entitled to and shall be paid the vested portion of the retirement benefit calculated as of the date of separation from service.

Notwithstanding the foregoing, upon a Change in Control, and provided that within 6 months following the Change in Control the President and CEO is involuntarily terminated for reasons other than “cause” or the President and CEO resigns for “good reason”, as such is defined in the SERP, or the President and CEO voluntarily terminates his employment after being offered continued employment in a position that is not a “Comparable Position”, as such is also defined in the SERP, the President and CEO shall become one hundred percent ( 100 %) vested in the full retirement benefit.

The President and CEO commenced vesting in this retirement benefit on January 1, 2014, and it will vest an additional three percent ( 3 %) each year until fully vested on January 1, 2024.

No contributions or payments have been made for the year 2023 or 2022.

11 unchanged sentences

Benefit obligation, end of period

On October 22, 2015, the Company entered into an Executive Incentive Retirement Plan (the “Plan”) with key executive officers other than the President and CEO.

The Plan has an effective date of January 1, 2015.

The Plan is an unfunded, nonqualified deferred compensation plan.

For any Plan Year, a guaranteed annual Deferral Award percentage of seven and one half percent ( 7.5 %) of the participant’s annual base salary shall be credited to each Participant’s Deferred Benefit Account.

On October 22, 2015, the Company entered into an Executive Incentive Retirement Plan (the “EIRP”) with key executive officers other than the President and CEO.

The EIRP has an effective date of January 1, 2015.

The EIRP is an unfunded, nonqualified deferred compensation plan.

For any EIRP Year, a guaranteed annual Deferral Award percentage of seven and one half percent ( 7.5 %) of the participant’s annual base salary shall be credited to each Participant’s Deferred Benefit Account.

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

1 unchanged sentence

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

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

As of December 31, 2023, the Company had total expenses related to the EIRP of $ 132 thousand, compared to $ 142 thousand in 2022.

The EIRP is reflected on the Company’s Consolidated Balance Sheet as Accrued expenses.

Certain members of senior 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.

Total expenses related to this plan were $ 5 thousand in 2023 and $ 22 thousand in 2022.

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

7 unchanged sentences

The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.

The fair value hierarchy ranks the quality and

reliability of the information used to determine fair values.

Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

4 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

11 unchanged sentences

Debt Securities Available for Sale

The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1).

If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

8 unchanged sentences

Market inputs used in the other valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government bond yield curves, credit spreads, and trade execution data.

The following table presents a reconciliation of the Level 3 available for sale debt securities measured at fair value on a recurring basis for the years ended December 31, 2022 and 2021:

For the year ended December 31,

The following table presents a reconciliation of the Level 3 available for sale debt securities measured at fair value on a

recurring basis for the years ended December 31, 2023 and 2022:

Collateralized Debt Obligations

(In thousands)

Balance at beginning of period

Purchases/additions

Sales/reductions

Unrealized (losses) gains

Balance at end of period

Balance of Recurring Level 3 assets at January 1

Losses in other comprehensive income

Transfers into Level 3

Balance of recurring Level 3 assets at December 31

Equity Securities with Readily Determinable Fair Values

3 unchanged sentences

All of the Company’s equity securities were classified as Level 1 assets at December 31, 2023.

The valuation of securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.

The valuation of securities using Level 1 inputs was primarily determined by active markets with readily determinable fair value using quoted market prices.

There were no changes in the inputs or methodologies used to determine fair value during the period ended December 31, 2023, as compared to the period ended December 31, 2022.

49 unchanged sentences

Fair Value on a Nonrecurring Basis

The following tables present the assets and liabilities subject to fair value adjustments (impairment) on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):

The following tables present the assets and liabilities subject to fair value adjustments on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):

Fair Value Measurements at December 31, 2023 Using

6 unchanged sentences

Financial assets:

Impaired collateral-dependent loans

Collateral-dependent loans

Fair Value Measurements at December 31, 2022 Using

6 unchanged sentences

Financial assets:

Impaired collateral-dependent loans

Collateral-dependent loans

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

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

Impaired Collateral-Dependent Loans

The fair value of impaired collateral-dependent loans is derived in accordance with FASB ASC Topic 310, "Receivables."

Fair value is determined based on the loan’s observable market price or the fair value of the collateral.

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

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

Collateral-Dependent Loans

Fair value is determined based on the fair value of the collateral.

Partially charged-off loans are measured for impairment based upon a third-party appraisal for collateral-dependent loans.

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

If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status.

The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status.

The Company removes loans from nonaccrual status generally when the borrower makes three months of contractual payments and demonstrates the ability to service the debt going forward.

The Company removes loans from nonaccrual status generally when the ability to collect is reasonably assured or when the loan is brought current as to principal and interest.

Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets.

At December 31, 2022, the valuation allowance for impaired loans was $ 1.8 million, a decrease of $ 1.0 million from $ 2.8 million at December 31, 2021.

The valuation allowance for individually evaluated loans is included in the allowance for credit losses in the Consolidated Balance Sheets.

At December 31, 2023, the valuation allowance for individually evaluated loans was $ 1.0 million, a decrease of $ 0.8 million from $ 1.8 million at December 31, 2022.

Fair Value of Financial Instruments

6 unchanged sentences

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

Cash and Cash Equivalents

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

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

1 unchanged sentence

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

Deposit Liabilities

4 unchanged sentences

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

Standby Letters of Credit

At December 31, 2022, the Bank had standby letters of credit outstanding of $ 5.6 million, as compared to $ 4.3 million at December 31, 2021.

The fair value of these commitments is nominal.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments not previously presented as of December 31 st for the past two years:

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments (not presented previously) presented as of December 31 st for the past two years:

December 31, 2023

(In thousands)

Financial assets:

Debt securities held to maturity

SBA loans held for sale

Loans, net of allowance for credit losses

Financial liabilities:

Borrowed funds and subordinated debentures

December 31, 2022

1 unchanged sentence

Financial assets:

Cash and cash equivalents

Securities (1)

Debt securities held to maturity

SBA loans held for sale

Loans, net of allowance for loan losses (2)

Loans, net of allowance for credit losses

Financial liabilities:

Borrowed funds and subordinated debentures

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

These securities had book values of $ 5.1 million and market values of $ 4.7 million.

(2) Includes impaired loans that are considered Level 3 and reported separately in the tables under the “Fair Value on a Nonrecurring Basis” heading.

Collateral-dependent impaired loans, net of specific reserves totaled $ 8.8 million and $ 8.9 million at December 31, 2022 and 2021.

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument.

10 unchanged sentences

Cash and cash equivalents

Debit securities, available for sale

Equity securities

13 unchanged sentences

Gain on sales of securities

Market value appreciation on equity securities

Interest expenses

3 unchanged sentences

Income before provision for income taxes and equity in undistributed net income of subsidiary

(Benefit) provision for income taxes

Benefit for income taxes

Income before equity in undistributed net income of subsidiary

10 unchanged sentences

INVESTING ACTIVITIES

Purchase of land and building

Purchases of securities

Proceeds from business divestitures

Proceeds from sales of securities

Net cash (used in) provided by investing activities

Net cash provided by (used in) investing activities

FINANCING ACTIVITIES

4 unchanged sentences

Net cash used in financing activities

Increase (decrease) in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

3 unchanged sentences

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Unity Bancorp, Inc.

and Subsidiaries

To the Shareholders and the Board of Directors of Unity Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc.

and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

and its subsidiaries (the Company) as of December 31, 2023, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the year ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated March 7, 2024 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January, 1, 2023 upon the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses (ASC 326).

Basis for Opinion

1 unchanged sentence

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Company in accordance with U.S.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

4 unchanged sentences

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or

complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses – Collectively Evaluated Loans

As described in Notes 1, 3 and 4 to the financial statements, the Company has recorded an allowance for credit losses (ACL) in the amount of $25.9 million as of December 31, 2023, representing management’s estimate of credit losses over the remaining expected life of the Company’s loan portfolio as of that date.

Upon adoption of ASC 326 on January 1, 2023, the Company recorded a cumulative effect adjustment to opening retained earnings which increased the ACL, including the reserve for off-balance sheet credit exposure (recorded in other liabilities) by $0.9 million, net of $0.3 million of related deferred income tax effects.

Management determined these amounts, and corresponding provision for credit loss expense, pursuant to the application of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses .

The Company’s methodology to determine its allowance for credit losses incorporates quantitative and qualitative assessments of its historical losses, current loan portfolio and economic conditions, the application of forecasted economic conditions, and related modeling.

We determined that performing procedures relating to the qualitative and forecasted components of the Company’s methodology is a critical audit matter.

The principal considerations for our determination are (i) the application of significant judgment and estimation on the part of management, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence obtained, and (ii) significant audit effort was necessary in evaluating management’s methodology, significant assumptions and calculations.

How the Critical Audit Matter was addressed in the Audit

Following are some of the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collectively evaluated ACL, including controls over the following:

● Model validation of the model for appropriateness of model usage along with recalculation of model results.

● Completeness and accuracy of loan data.

● Mathematical accuracy of the calculation.

● Development of qualitative adjustments to model results.

● Evaluation of the reasonableness and relevance of management’s assumptions including general qualitative factors and economic forecasts.

Addressing the matters above involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures also included, among others, reviewing the Company’s model oversight ensuring appropriate recalculation of the model used along with management’s review of model validation results, testing various assumptions used in the calculation, testing management’s process for determining the qualitative reserve component, evaluating the appropriateness of management’s methodology relating to the qualitative reserve component and testing the completeness and accuracy of data utilized by management.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

March 7, 2024

We have served as the Company's auditor since 2023.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Unity Bancorp, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited Unity Bancorp, Inc.

and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated March 7, 2024 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

March 7, 2024

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Unity Bancorp, Inc.

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Unity Bancorp, Inc.

and Subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows, for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

6 unchanged sentences

The general reserve is set based upon a 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.

experience changes, national and local economic trends, industry conditions and credit concentration changes.

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

6 unchanged sentences

/s/ RSM US LLP

We have served as the Company’s auditor since 2007.

We have served as the Company's auditor from 2007 to 2023.

New York, New York

8 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Total noninterest income

Total noninterest expense

Income before provision for income taxes

Provision for income taxes

Net income per common share - Basic

Net income per common share - Diluted

(In thousands, except per share data)

Total interest income

Total interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses

Net interest income after provision for credit losses

Total noninterest income

17 unchanged sentences

Supplementary Data (Unaudited)

Selected Consolidated Financial Data

At or for the years ended December 31,

4 unchanged sentences

Net interest income

Provision for loan losses

Provision for credit losses

Noninterest income

8 unchanged sentences

Selected Balance Sheet Data

Allowance for loan losses

Allowance for credit losses

Borrowed funds and subordinated debentures

10 unchanged sentences

Asset Quality Ratios

Allowance for loan losses to loans

Allowance for loan losses to nonperforming loans

Allowance for credit losses to loans

Allowance for credit losses to nonperforming loans

Nonperforming loans to total loans

12 unchanged sentences

Total risk-based capital ratio

(1) Selected Consolidated Financial Data The efficiency ratio is a non-GAAP measure of operational performance.

It is defined as noninterest expense divided by the sum of net interest income plus noninterest income, excluding net gains and losses on securities.

(2) Defined as dividends declared per share divided by diluted net income per share.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

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