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Item 7. Management’s Discussion and Analysis

2025-03-07 compared with 2024-03-07 · 194 added, 152 removed, 487 unchanged (42% of the section changed)

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Its wholly-owned subsidiary, Unity Bank (the “Bank” or, when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991.

The Bank provides a full range of commercial and retail banking services through online banking platforms and its 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.

The Bank provides a full range of commercial and retail banking services through online banking platforms and its 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, SBA and other commercial credits.

The Bank has multiple subsidiaries used to hold part of its investment, other real estate owned and loan portfolios.

The below table reflects a 5-year trend of the Company’s net income and return on average equity, (“ROE”):

Results of Operations

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● Net income increased 4.4 percent to $41.5 million from $39.7 million in the prior year.

● Net income before provision for income taxes increased 3.1 percent to $53.0 million from $51.4 million in the prior year.

● Net interest income increased $4.9 million, or 5.4 percent, to $95.0 million from $90.1 million in the prior year, primarily due to additional interest income resulting from increased commercial and residential mortgage loan rates and portfolio growth.

● Net interest margin for the year ending December 31, 2023 decreased 34 basis points to 4.06 percent compared to 4.40 percent in the prior year.

● Noninterest income was $8.1 million, a 1.2 percent increase compared to $8.0 million in the prior year, primarily due to net security gains in 2023 as compared to net security losses in 2022.

● Net income per diluted share increased 5.7 percent to $4.06 per share from $3.84 per share in the prior year.

● Net interest income increased $3.6 million, or 3.8 percent, to $98.6 million from $95.0 million in the prior year, primarily due to additional interest income primarily resulting from increases in the yield of interest-earning assets, partially offset by an increased cost of interest-bearing liabilities.

● Net interest margin for the year ending December 31, 2024 increased 10 basis points to 4.16 percent compared to 4.06 percent in the prior year.

● Noninterest income was $8.5 million, a 4.0 percent increase compared to $8.1 million in the prior year, primarily due to net securities gains, branch fee income and service and loan fees increasing, partially offset by a decrease in gain on sale of SBA loans held for sale and BOLI income.

● Noninterest expense totaled $48.7 million, an increase of $1.7 million when compared to $47.0 million in the prior year.

The increase was primarily due to increased compensation and benefits expenses and increased deposit insurance.

The increase was primarily due to increased compensation and benefits expenses and processing and communications expenses, partially offset by a decrease in deposit insurance expenses.

● Net income before provision for income taxes increased 2.6 percent to $54.4 million from $53.0 million in the prior year.

● The effective tax rate decreased to 23.8 percent compared to 25.1 percent in the prior year.

● Total gross loans increased $88.6 million, or 4.1 percent from the prior year.

The increase was driven by a 7.6 percent increase in commercial loans and a 4.4 percent increase in residential mortgage loans, partially offset by a 19.7 percent decrease in residential construction loans.

The increase was primarily driven by a 10.5 percent increase in commercial loans, partially offset by a 30.7 percent decrease in residential construction loans.

● Total deposits increased $176.2 million, or 9.2 percent from the prior year.

The increase was primarily driven by increases in interest-bearing demand and time deposits, partially offset by decreases in noninterest-bearing demand and savings deposits.

● Total securities decreased $5.3 million, or 3.7 percent from the prior year.

The decrease was primarily driven by a decrease in equity securities and debt securities classified as available for sale.

The increase was primarily driven by increases in time deposits, partially offset by a decrease in savings deposits.

● Total securities increased $9.3 million, or 6.9 percent from the prior year.

The increase was primarily driven by an increase in debt securities held to maturity and equity securities.

● Total borrowed funds decreased $135.9 million, or 38.1 percent from the prior year.

The decrease was primarily due to core deposit growth.

The decrease was primarily due to customer deposit growth.

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

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Dividend payout ratio (5)

Equity to assets ratio (6)

Average equity to average assets (6)

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

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(4) The efficiency ratio is a non-GAAP measure of operational performance.

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

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

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

(6) Defined as average equity divided by average total assets.

The below table provides net income for 2023 and the component reconciliation to net income for 2024 :

Net Interest Income

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and net fees earned on loans, versus interest paid on interest-bearing liabilities.

Interest-earning assets include loans to individuals and businesses, investment securities and interest-earning deposits.

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

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and net deferred fees earned on loans, versus interest paid on interest-bearing liabilities.

Interest-earning assets include loans to consumers and businesses, investment securities, Federal Home Loan Bank (“FHLB”) stock, and interest-earning deposits.

Interest-bearing liabilities include interest-bearing demand, savings, brokered and time deposits, borrowed funds and subordinated debentures.

2024 compared to 2023

During 2024, tax-equivalent net interest income amounted to $98.6 million, an increase of $3.6 million, or 3.8 percent, when compared to the same period in 2023.

The net interest margin decreased 34 basis points to 4.06 percent for the year ended December 31, 2023, compared to 4.40 percent for the same period in 2022.

The net interest spread was 3.32 percent for 2023, an 83 basis point decrease compared to 4.15 for the same period in 2022.

The net interest margin increased 10 basis points to 4.16 percent for the year ended December 31, 2024, compared to 4.06 percent for the same period in 2023.

The net interest spread was 3.29 percent for 2024, a 3 basis point decrease compared to 3.32 for the same period in 2023.

During 2024, tax-equivalent interest income was $155.7 million, an increase of $12.2 million, or 8.5 percent, when compared to the same period in the prior year.

This increase was mainly driven by increases in the yield on loans, the balance of average loans, the yield securities and the yield on interest-bearing deposits.

This increase was mainly driven by increases in the yield on loans and the balance of average loans.

● Of the $12.2 million increase in interest income on a tax-equivalent basis, $1.0 million was due to the increased average volume of interest-earning assets and $11.2 million was due to increased yields on average interest-earning assets.

● The average volume of interest-earning assets increased $30.2 million to $2.4 billion for 2024 compared to $2.3 billion for 2023.

This was primarily due to a $329.2 million increase in average loans, with growth in all portfolios except SBA, SBA PPP and Consumer loans.

The increase was complemented by a $14.7 million increase in investment securities, partially offset by a $61.2 million decrease in interest-bearing deposits.

This was primarily due to a $29.1 million increase in average loans, with growth in commercial.

The increase was complemented by a $4.3 million and $3.9 million increase in average interest-bearing deposits and average investment securities, respectively, partially offset by a $7.1 million decrease in average FHLB stock.

● The yield on total interest-earning assets increased 44 basis points to 6.57 percent for the year ended December 31, 2024 when compared to 2023.

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Total interest expense was $57.1 million in 2024, an increase of $8.6 million or 17.8 percent compared to 2023.

This increase was primarily driven by the increases in the rate paid on time deposits, savings deposits and borrowed funds and subordinated debentures and the increased balance of average borrowed funds and subordinated debentures and time deposits:

● Of the $37.9 million increase in interest expense, $26.7 million was due to increased rates on average interest-bearing liabilities, while $11.2 million was due to the increased volume of average interest-bearing liabilities.

This increase was primarily driven by the increases in the rate on time deposits, interest-bearing demand deposits and savings deposits and the increased balance of average time deposits, which were partially offset by a decrease in the rate paid on and the average balance of borrowed funds and subordinated debentures.

● Of the $8.6 million increase in interest expense, $11.1 million was due to increased rates on average interest-bearing deposits, while $6.5 million was due to the increased volume of average interest-bearing deposits, which was offset by a decrease of $6.7 million related to volume and $2.3 million related to rate for borrowed funds and subordinated debentures.

● The average cost of interest-bearing liabilities increased 47 basis points to 3.28 percent in 2024 when compared to 2023.

The cost of interest-bearing deposits increased 84 basis points in 2024.

The cost of borrowed funds and subordinated debentures increased 184 basis points in 2023.

The cost of borrowed funds and subordinated debentures decreased 90 basis points in 2024.

● Interest-bearing liabilities averaged $1.7 billion in 2024, an increase of $18.0 million, compared to 2023.

The increase in interest-bearing liabilities was primarily due to an increase in interest-bearing demand deposits, time deposits and borrowed funds and subordinated debentures, partially offset by a decrease in savings deposits.

The increase in interest-bearing liabilities was primarily due to an increase in time deposits and interest-bearing demand deposits, partially offset by a decrease in borrowed funds and subordinated debentures and brokered deposits.

The following table provides a 5 year look back at yield on interest-earning assets, cost of interest-bearing liabilities and net interest margin.

Consolidated Average Balance Sheets

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

(1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread and (5) net interest income/margin on average interest-earning assets.

interest-bearing liabilities, (4) net interest spread and (5) net interest income/margin on average interest-earning assets.

Rates/yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 21 percent.

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Savings deposits

Brokered deposits

Time deposits

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Savings deposits

Brokered deposits

Time deposits

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The provision for credit losses for loans totaled $2.4 million for 2024, compared to $1.8 million in 2023.

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.

The provision for credit losses for off-balance sheet exposures totaled $0.1 million for the years ended December 31, 2023 and 2022.

The provision for credit losses for AFS debt security impairment was $1.3 million for the year ended December 31, 2023, compared to none for the prior year.

The provision for credit losses for loans increased $0.6 million for the year ended 2024 primarily due to loan growth.

The provision for credit losses for off-balance sheet exposures totaled to $1 thousand for the year ended December 31, 2024, compared to $53 thousand at December 31, 2023.

The provision for credit losses for AFS debt securities was $1.5 million for the year ended December 31, 2024, compared to $1.3 million for the prior year.

The impairment was entirely attributable to one corporate senior debt security in the AFS portfolio.

The Company owns $5 million in par value of this position and the issuing company recently restated earnings and was unprofitable during the first three quarters of 2023.

Each period’s credit loss provision is the result of management’s analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio.

Additional information may be found under the captions “Financial Condition - Asset Quality” and “Financial Condition - Allowance for Credit Losses and Reserve for Unfunded Loan Commitments.” The current provision is considered appropriate under management’s assessment of the adequacy of the allowance for credit losses.

The Company owns $5 million in par value of this position and maintains it in nonaccrual status.

The net carrying value of the position was $2.0 million as of December 31, 2024.

Each period’s credit loss provision is the result of Management’s analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current and expected economic conditions and other internal and external factors impacting the risk within the loan portfolio.

Additional information may be found under the captions “Financial Condition - Asset Quality” and “Financial Condition - Allowance for Credit Losses and Reserve for Unfunded Loan Commitments.”

Noninterest Income

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Gain on sale of mortgage loans, net

Net securities gains (losses)

Net securities gains

Total noninterest income

Noninterest income was $8.5 million for 2024, a $0.4 million increase compared to $8.1 million for 2023.

This increase was primarily due to increased net unrealized gains on securities, gains on SBA loans held for sale and gains on sale of mortgage loans, net partially offset by decreased branch fee and service and loan fee income.

This increase was primarily due to increased net unrealized gains on securities, branch fee income and service and loan fee income, partially offset by a decrease in gain on sale of SBA loans and BOLI income.

Noninterest Expense

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Noninterest expense totaled $48.7 million for the year ended December 31, 2024, an increase of $1.7 million when compared to $47.0 million in 2023.

The majority of this increase is attributable to increased deposit insurance and compensation and benefits, reflecting ordinary increases, as well as increased staffing for new branches.

The majority of this increase is attributable to increased compensation and benefits, processing and communications and furniture and equipment expenses, partially offset by decreased deposit insurance expense.

Income Tax Expense

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Total assets increased $75.5 million, or 2.9 percent, to $2.7 billion at December 31, 2024, when compared to year end 2023.

This increase was primarily due to increases of $65.5 million in gross loans, mostly due to commercial and residential mortgage loan growth, partially offset by decreases in residential construction, consumer and SBA loans.

Total assets also included an increase of $80.0 million in cash and cash equivalents, offset by a decrease of $5.3 million in total securities.

Total deposits increased $136.6 million, due to increases of $155.7 million in time deposits, $45.1 million in brokered time deposits and $37.1 million in interest-bearing demand deposits, offset by a decrease of $26.7 million in savings deposits and $74.5 million in noninterest-bearing demand deposits.

This increase was primarily due to an increase of $88.6 million in gross loans, mostly due to commercial loan growth, partially offset by decreases in residential construction.

Total assets also included an increase of $9.3 million in securities, offset by a decrease of $14.3 million in total cash and cash equivalents.

Total deposits increased $176.2 million, or 9.2 percent, to $2.1 billion at December 31, 2024.

This increase was primarily due to increases of $202.2 million in time deposits, $21.2 million in noninterest-bearing demand deposits, $18.3 million in brokered deposits and $8.4 million in interest-bearing demand deposits, offset by a decrease of $73.9 million in savings deposits.

Borrowed funds decreased $135.9 million to $220.5 million at December 31, 2024.

Total shareholders’ equity increased $22.2 million over year end 2022, due to earnings and an increase in common stock, offset by dividends paid and share repurchases.

Total shareholders’ equity increased $34.2 million when compared to December 31, 2023, due to earnings and an increase in common stock, offset by dividends paid and share repurchases.

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

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Residential mortgage-backed securities

Asset backed securities

Corporate and other securities

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Total Equity Securities

AFS debt securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes.

AFS debt securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions, liquidity management purposes, or for other business purposes.

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

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

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

AFS debt securities totaled $91.8 million at December 31, 2023, a decrease of $3.6 million or 3.8 percent, compared to $95.4 million at December 31, 2022.

This net decrease was the result of:

● $4.3 million in principal payments, maturities and called bonds,

Government sponsored entities, state and political subdivisions, residential mortgage-backed securities, asset backed securities and corporate and other securities.

AFS debt securities totaled $93.9 million at December 31, 2024, an increase of $2.1 million or 2.3 percent, compared to $91.8 million at December 31, 2023.

This net increase was the result of:

● Purchases of $10.5 million,

● $1.0 million of appreciation in the market value of the portfolio.

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

● $1.3 million in allowance for credit losses and

● purchases of $0.7 million

● $7.8 million in principal payments, maturities and called bonds;

● $0.2 million of nonaccrual interest paid.

At December 31, 2024 the portfolio had $2.8 million in valuation allowance compared to $1.3 million at December 31, 2023

The provision for credit losses on AFS debt securities was $1.5 million at December 31, 2024.

The provision was entirely attributable to the same corporate debt security for which a partial provision was taken in the second quarter of 2024 and the fourth quarter of 2023.

The company owns $5 million in par of this position and maintains it in nonaccrual status.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 4.9 years and 5.6 years at December 31, 2024 and 2023, respectively.

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The portfolio is comprised of obligations of U.S.

Government sponsored entities, state and political subdivisions and mortgage-backed securities.

Government sponsored entities, state and political subdivisions and residential mortgage-backed securities.

HTM debt securities totaled $41.3 million at December 31, 2024, an increase of $5.2 million, or 14.3 percent, compared to $36.1 million at December 31, 2023.

The increase was due to:

● $0.2 million in principal accretion and

● Purchases of $5.0 million;

● $0.2 million in net accretion

The weighted average life of HTM debt securities, adjusted for prepayments, amounted to 14.3 years and 17.1 years at December 31, 2024 and 2023, respectively.

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

Equity securities totaled $7.8 million at December 31, 2023, a decrease of $2.0 million, or 20.3 percent, compared to $9.8 million at December 31, 2022.

This net decrease was the result of:

● $2.1 million in proceeds from sales, including $0.3 million of realized gains,

● $0.3 million of net unrealized losses and

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

Equity securities totaled $9.8 million at December 31, 2024, an increase of $2.0 million, or 26.2 percent, compared to $7.8 million at December 31, 2023.

This net increase was the result of:

● Purchases of $2.2 million,

● $0.5 million of net unrealized gains;

● $0.8 million in proceeds from sales, including $0.1 million of realized gains

The following table provides the remaining contractual maturities and average yields, calculated on a yield-to-maturity basis, within the investment portfolios.

The carrying value of securities at December 31, 2024 is distributed by contractual maturity.

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

Residential 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.

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Residential mortgage-backed securities

Asset backed securities

Corporate and other securities

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Total loans were $2.3 billion at December 31, 2024, an increase of $88.6 million or 4.1 percent when compared to year end 2023.

Commercial, residential mortgage and SBA loans held for investment increased $89.9 million, $26.4 million and $0.1 million, respectively, partially offset by decreases in residential construction, consumer and SBA PPP loans of $32.2 million, $5.5 million and $3.6 million, respectively.

The following table sets forth the classification of loans by major category, including unearned fees, deferred costs and excluding the allowance for credit losses as of December 31, 2023 and December 31, 2022:

Commercial and consumer loans increased $134.2 million and $4.0 million, respectively, partially offset by decreases in residential construction, SBA loans held for investment, SBA PPP and residential mortgage loans of $40.4 million, $1.7 million, $0.9 million and $0.6 million, respectively.

The average outstanding principal balance for the entire portfolio is $0.6 million as of December 31, 2024.

The following table sets forth the classification of loans by loan type, including unearned fees and deferred costs and excluding the allowance for credit losses as of December 31, 2024 and December 31, 2023:

In thousands, except percentages

Ending balance:

December 31, 2024

December 31, 2023

SBA loans held for sale

SBA loans held for investment

SBA PPP loans

Total SBA loans

Commercial loans

Commercial construction

Commercial & industrial

Commercial mortgage - owner occupied

Commercial mortgage - nonowner occupied

Total commercial loans

Residential mortgage loans

Consumer loans

Residential construction loans

Total loans held for investment

SBA loans held for sale

Average loans increased $329.2 million or 18.1 percent from $1.8 billion in 2022, to $2.2 billion in 2023.

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

The yield on the overall loan portfolio increased 105 basis points to 6.18 percent for the year ended December 31, 2023, compared to 5.13 percent for the prior year.

Consumer other

Total consumer loans

Residential construction

Total gross loans

Below is a table of the geographic loan allocation of the Bank’s Commercial loan portfolio at December 31, 2024:

Commercial loans

Commercial construction

Commercial & industrial

Commercial mortgage - owner occupied

Commercial mortgage - nonowner occupied

The following table presents the estimated weighted average loan-to-value ratio for the commercial mortgage portfolio as of December 31, 2024:

(In thousands, except percentages)

Loan-to-Value*

Commercial loans

Commercial mortgage - owner occupied

Commercial mortgage - nonowner occupied

Total commercial mortgage loans

* The above includes last known appraised value on real estate collateral only.

The table below shows the breakdown of industry of the commercial mortgage – owner occupied portfolio as of December 31, 2024.

(In thousands)

Commercial mortgage - owner occupied

Industry type:

Educational facilities

Food/Beverage services

Religious facilities

Total as of December 31, 2024

The Other category above is predominantly comprised of land, airports, automotive and gas station loans.

The table below shows the breakdown of industry of the commercial mortgage – nonowner occupied portfolio as of December 31, 2024.

(In thousands)

Commercial mortgage - nonowner occupied

Industry type:

Educational facilities

Total as of December 31, 2024

The Other category above is predominantly comprised of multi-family, land and automotive loans.

SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products.

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

These loans are made to small

businesses for the purposes of providing working capital and for financing the purchase of equipment, inventory or commercial real estate.

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

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SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $12.2 million at December 31, 2024, a decrease of $6.0 million from $18.2 million at December 31, 2023.

SBA 7(a) loans held for investment amounted to $38.6 million at December 31, 2023, an increase of $0.1 million from $38.5 million at December 31, 2022.

SBA 7(a) loans held for investment amounted to $36.9 million at December 31, 2024, a decrease of $1.7 million from $38.6 million at December 31, 2023.

The yield on SBA 7(a) loans, which is generally floating and adjusts quarterly to the Prime Rate, was 8.91 percent for the year ended December 31, 2024, compared to 8.88 percent in the prior year.

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There is no direct relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company’s SBA 7(a) loans.

Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan.

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

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

These loans amounted to $631.5 million at December 31, 2023, an increase of $26.4 million from year end 2022.

These loans amounted to $630.9 million at December 31, 2024, a decrease of $0.6 million from year end 2023.

Sales of mortgage loans totaled $65.3 million and $71.7 million for 2024 and 2023, respectively.

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

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements and other personal needs, and are generally secured by 1-4 family residences.

These loans amounted to $72.7 million at December 31, 2023, a decrease of $5.5 million from December 31, 2022.

These loans amounted to $76.7 million at December 31, 2024, an increase of $4.0 million from December 31, 2023.

The yield on consumer loans was 7.77 percent for 2024, compared to 7.55 percent for 2023.

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At December 31, 2024 and 2023, approximately 96 percent of the Company’s loan portfolio was secured by real estate.

The table below shows the balances of loans serviced for others as of December 31, 2024 and 2023:

(In thousands)

Ending balance:

SBA loans held for investment

Residential mortgage

Total loans serviced for others

The following table presents the maturity distribution of the loan portfolio at December 31, 2024:

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The following table presents the contractual maturities after one year for fixed and adjustable rate loans within each loan category at December 31, 2024:

(In thousands)

Loans Maturing After One Year

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(In thousands, except percentages)

Nonperforming by category (1):

Nonaccrual by category:

SBA loans held for investment

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Residential construction loans

Total nonperforming loans

Total nonperforming assets

Total nonaccrual loans

Debt securities available for sale, net of valuation allowance

Total nonaccrual assets

Past due 90 days or more and still accruing interest:

1 unchanged sentence

Total past due 90 days or more and still accruing interest

Nonperforming loans to total loans

Nonperforming assets to total assets

(1) Nonperforming loans include nonaccrual loans and loans that are over 90 days past due and still accruing interest.

Nonperforming loans were $19.2 million at December 31, 2023, a $10.1 million increase from $9.1 million at year end 2022.

Since year end 2022, nonperforming loans in the SBA held for investment, residential mortgage, commercial and consumer loan segments increased, partially offset by a decrease in nonperforming residential construction.

In addition, there was $0.9 million in loans past due 90 days or more and still accruing interest at December 31, 2023, compared to none at December 31, 2022.

Nonaccrual loans to total loans

Nonaccrual assets to total assets

Nonaccrual loans were $13.1 million at December 31, 2024, a $5.1 million decrease from $18.2 million at year end 2023.

Since year-end 2023, nonaccrual loans in the commercial and SBA held for investment loan segments increased, partially offset by a decrease in nonaccrual residential mortgage, residential construction and consumer loans.

In addition, there was $0.8 million in loans past due 90 days or more and still accruing interest at December 31, 2024, compared to $0.9 million at December 31, 2023.

The Company also monitors potential problem loans.

1 unchanged sentence

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

Potential problem loans totaled $15.1 million at December 31, 2023, an increase of $0.4 million from $14.7 million at December 31, 2022.

Potential problem loans totaled $14.6 million at December 31, 2024, a decrease of $0.5 million from $15.1 million at December 31, 2023.

Nonaccrual securities were $2.0 million at December 31, 2024, compared to none at December 31, 2023.

The Company owns $5 million in par of this position and moved the position into nonaccrual status during the third quarter of 2024.

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

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Allowance to total loans

Allowance to nonperforming loans

The following table sets forth, for each of the major lending categories, the amount of the allowance for credit losses allocated to each category and the percentage of total loans represented by such category as of December 31, 2023 and 2022.

The allocated allowance is the total of identified specific and general reserves by loan category.

Allowance to nonaccrual loans

The following table sets forth, for each of the major lending categories, the amount of reserve allocated to nonaccrual loans of each category and the amount of the allowance for credit losses allocated to each category and the percentage of total loans represented by such category as of December 31, 2024 and 2023.

The allocated allowance is the total of

identified specific and general reserves by loan category.

The allocation is not necessarily indicative of the categories in which future losses may occur.

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

Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified as Other liabilities.

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

Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified as Accrued expenses and other liabilities.

At December 31, 2024 and December 31, 2023, a $0.6 million commitment reserve was reported.

See Note 4 to the accompanying Consolidated Financial Statements for more information regarding the Allowance for Credit Losses and Reserve for Unfunded Loan Commitments.

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits, are the primary source of the Company’s funds.

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits, brokered deposits and time deposits, are the primary source of the Company’s funds.

The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships.

The Company continues to focus on establishing a comprehensive relationship with business borrowers, seeking deposits, as well as, lending relationships.

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

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

(In thousands, except percentages)

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Savings deposits

Brokered time deposits

Brokered deposits

Time deposits

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Total deposits increased $176.2 million to $2.1 billion at December 31, 2024.

This increase in deposits was due to increases of $155.7 million in time deposits, $45.1 million in brokered time deposits and $37.1 million in interest-bearing demand deposits, partially offset by a decrease of $26.7 million in savings deposits and $74.5 million in noninterest-bearing demand deposits.

The Company’s deposit composition at December 31, 2023, consisted of 29.4 percent savings deposits, 21.8 percent noninterest-bearing demand deposits, 22.1 percent time deposits, 10.4 brokered time deposits and 16.3 percent interest-bearing demand deposits.

The change in the composition of the portfolio from December 31, 2022 reflects a 57.5 percent increase in time deposits, 29.2 percent increase in brokered time deposits and a 13.4 percent increase in interest-bearing demand deposits, partially offset by a 4.5 percent decrease in savings deposits and a 15.1 percent decrease in noninterest-bearing demand deposits.

This increase in deposits was due to increases of $202.2 million in time deposits, $21.2 million in noninterest-bearing demand deposits, $18.3 million in brokered deposits and $8.4 million in interest-bearing demand deposits, partially offset by a decrease of $73.9 million in savings deposits.

The change in the composition of the portfolio from December 31, 2023 reflects a 47.4 percent increase in time deposits, 9.1 percent increase in brokered time deposits, 5.0 percent increase in noninterest-bearing demand deposits and a 2.7 percent increase in interest-bearing demand deposits, partially offset by a 13.1 percent decrease in savings deposits.

The Company’s brokered deposit portfolio contains time deposit type products, savings type products and interest-bearing demand deposit type products.

The Company’s deposit composition by deposit product type at December 31, 2024, consisted of 21.0 percent noninterest-bearing demand deposits, 16.8 percent interest-bearing demand deposits, 23.4 percent savings deposits and 38.8 percent time deposits.

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

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Savings deposits

Brokered time deposits

Brokered deposits

Time deposits

Total deposits

As of December 31, 2024, the Company's municipal deposits consisted of $374.8 million from New Jersey and $25.8 million from Pennsylvania which are collateralized by Municipal Letter of Credits (“MULOCs”) issued by the FHLB.

The following table represents uninsured/uncollateralized deposits broken out between consumer, business and municipal customers (excluding brokered deposits) as of December 31, 2024:

(In thousands)

At December 31, 2024:

Total deposits

Uninsured/uncollateralized deposits

As of December 31, 2024 and December 31, 2023, uninsured and uncollateralized deposits amounted to $412.2 million and $334.5 million respectively.

The following table presented uninsured time deposits by maturity date as of December 31, 2023:

This represented 19.6 percent of total deposits as of December, 31 2024 and 17.2 percent as of December 31, 2023.

The following table represents uninsured/uncollateralized time deposits by maturity date as of December 31, 2024:

(In thousands)

At December 31, 2024:

Uninsured time deposits

Uninsured/uncollateralized time deposits

For additional information on deposits, see Note 6 to the Consolidated Financial Statements.

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In December 2024, the FHLB issued a $180.0 million municipal deposits letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law, compared to a letter of credit with a balance of $142.0 million as of December 31, 2023.

In 2023, the FHLB issued an additional $25.0 million municipal deposits letter of credit in the name of Unity Bank naming certain townships in Pennsylvania as beneficiary, to secure municipal deposits as required under Pennsylvania law.

At December 31, 2023, the Company had $303.4 million of additional credit available at the FHLB.

During 2023, the Company pledged additional collateral to the FRB discount window.

At December 31, 2023, the Company had $219.9 million of additional credit available at the FRB.

In December 2024, FHLB issued an additional $28.0 million municipal deposits letter of credit in the name of Unity Bank naming certain townships in Pennsylvania as beneficiary, to secure municipal deposits as required under Pennsylvania law, compared to a letter of credit with a balance of $25.0 million as of December 31, 2023.

At December 31, 2024, the Company had $292.2 million of additional credit available at the FHLB and the Company had $245.9 million of additional credit available at the FRB.

Pledging additional collateral in the form of 1 to 4 family residential mortgages, commercial loans and investment securities can increase the lines with the FHLB and FRB.

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The subordinated debentures are redeemable in whole or part.

For 2023, the floating interest rate on the subordinated debentures is the three-month CME term Secured Overnight Financing Rate (“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.

For 2023 and 2024, the floating interest rate on the subordinated debentures is the three-month CME term Secured Overnight Financing Rate (“SOFR”) plus 262 basis points and reprices quarterly.

The floating interest rate was 6.189% at December 31, 2024 and 7.212% at December 31, 2023.

Market risk for the Company is primarily limited to interest rate risk, which is the impact that changes in interest rates would have on future earnings.

The Company’s Risk Management Committee (“RMC”) manages this risk.

The principal objectives of the RMC are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital and liquidity requirements and actively manage risk within Board-approved guidelines.

The RMC reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions and interest rate levels.

The Company’s Asset Liability Committee (“ALCO”) manages this risk.

The principal objectives of the ALCO are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital and liquidity requirements and actively manage risk within Board-approved guidelines.

The ALCO reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions and interest rate levels.

The following table presents the Company’s EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rate of 100, 200 and 300 bps, which were all in compliance with Board approved tolerances at December 31, 2024 and December 31, 2023:

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Liquidity measures the ability to satisfy current and future cash flow needs as they become due.

A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace.

A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and borrowings and to take advantage of interest rate opportunities in the marketplace.

The Company’s liquidity is monitored by management and the Board of Directors which reviews historical funding requirements, the current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds and anticipated future funding needs, including the level of unfunded commitments.

The goal is to maintain sufficient asset-based liquidity to cover potential funding requirements in order to minimize dependence on volatile and potentially unstable funding markets.

The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations.

The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan interest principal, sales and maturities of investment securities, additional borrowings and funds provided by operations.

While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit inflows and outflows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

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As the Consolidated Bank comprises the majority of the assets of the Company, the Consolidated Statement of Cash Flows is indicative of the Consolidated Bank’s activity.

At December 31, 2023, the balance of cash and cash equivalents was $194.8 million, an increase of $80.0 million from December 31, 2022.

At December 31, 2024, the balance of cash and cash equivalents was $180.4 million, a decrease of $14.3 million from December 31, 2023.

A discussion of the cash provided by and used in operating, investing and financing activities follows.

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Investing activities used $92.8 million and $57.8 million in net cash for the years ended December 31, 2024 and 2023, respectively.

Cash was primarily used to originate loans, partially offset by cash inflows from investment securities.

Cash was primarily used to originate loans and purchase securities, partially offset by cash inflows from investment securities and loans.

● Securities.

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

● Outstanding Commitments .

● Outstanding Commitments and Lines of Credit .

The Company was committed to advance approximately $322.3 million to its borrowers as of December 31, 2024, compared to $312.5 million at December 31, 2023.

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Many of these commitments will expire and never be funded.

Financing activities provided $90.9 million and $368.6 million in net cash for the years ended December 31, 2023 and 2022, respectively, primarily due to an increase in the Company’s deposits.

Financing activities provided $30.5 million and $90.9 million in net cash for the years ended December 31, 2024 and 2023, respectively, primarily due to an increase in the Company’s deposits, partially offset by a decrease in the Company’s borrowed funds.

As of December 31, 2024, deposits included $400.6 million of Government deposits, as compared to $346.3 million at year end 2023.

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

Included in the portfolio were $314.4 million of deposits from seventeen municipalities with account balances in excess of $5.0 million.

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

Within this portfolio the average deposit size was $7.7 million as of December 31, 2024.

● Borrowed Funds .

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As a member of the Federal Home Loan Bank of New York, the Company can borrow additional funds based on the market value of collateral pledged.

At December 31, 2023, pledging provided an additional $537.4 million in borrowing potential from the FHLB, FRB and other sources.

In addition, the Company can pledge additional collateral in the form of 1 to 4 family residential mortgages, commercial loans or investment securities to increase these lines with the FHLB and FRB.

At December 31, 2024, pledging provided an additional $292.2 million in borrowing potential from the FHLB, $245.9 million from the FRB and $20.0 million from other sources.

In addition, the Company can pledge additional collateral in the form of 1 to 4 family residential mortgages, consumer loans, commercial loans or investment securities to increase these lines with the FHLB and FRB.

As of December 31, 2024, total available funding plus cash on hand represented 182.5% of uninsured or uncollateralized deposits.

Off-Balance-Sheet Arrangements and Contractual Obligations

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The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the borrower.

As of December 31, 2023, the Bank had $256.3 million in unused lines of credit and $50.6 million in outstanding commitments to borrowers.

As of December 31, 2024, the Bank had

$239.3 million in unused lines of credit and $77.5 million in outstanding commitments to borrowers.

As of December 31, 2023, the Bank had $256.3 million in unused lines of credit and $50.6 million in outstanding commitments to borrowers.

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Contractual obligations:

Time deposits

Time deposits (including brokered time deposits)

Borrowed funds and subordinated debentures

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Shareholders’ equity increased $34.2 million to $295.6 million at December 31, 2024, compared to $261.4 million at December 31, 2023, primarily due to net income of $41.5 million.

Other increases were due to $523 thousand in other comprehensive income and $3.0 million from the issuance of common stock under employee benefit plans, net of tax.

Other increases were due to $0.6 million in other comprehensive income and $3.3 million from the issuance of common stock under employee benefit plans, net of tax.

These increases were partially offset by $6.2 million in treasury stock purchased at cost and $5.0 million in dividends paid on common stock.

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As of December 31, 2024, Unity Bank exceeded all capital requirements of the federal banking regulators and was considered well capitalized.

The following table presents information regarding the Bank’s regulatory capital levels at December 31, 2023 and December 31, 2022.

Effective December 31, 2023, the Bank opted out of the CBLR:

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

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

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the adequacy of the allowance for credit losses;

significant changes in tax, accounting or regulatory practices and requirements;

changes in tax, accounting or regulatory practices and requirements;

and technological changes.

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See Note 1 of the Consolidated Financial Statements for a description of recent accounting pronouncements, including the dates of adoption and the anticipated effect on our results of operations and financial condition.

Allowance for Credit Losses and Unfunded Loan Commitments

Allowance for Credit Losses on Loans and Valuation Allowance on AFS Debt Securities

Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326):

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The Financial Accounting Standards Board (“FASB”) issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new current expected credit loss (“CECL”) model.

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

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

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

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The reserve for unfunded credit commitments is recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheet.

These increases in reserves were recorded through retained earnings and was $0.6 million, net of tax.

These increases in reserves were recorded through retained earnings and were $0.6 million, net of tax.

For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis.

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In making this assessment, the Company considers the extent to which fair value is less than amortized cost and adverse conditions related to the security, among other factors.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost.

Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.

If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and a valuation allowance is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost.

Any impairment that has not been recorded through a valuation allowance is recognized in other comprehensive income, net of tax.

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

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Additionally, the Company noted the adoption of CECL had no significant impact on regulatory capital ratios of the Company and/or the Bank.

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

The Company accounts for income taxes according to the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date.

If tax reform results in a decline in the corporate tax rates the Company would have to write-down its deferred tax asset.

Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized.

Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.

The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.

Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

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

For additional information on income taxes, see Note 11 to the Consolidated Financial Statements.

For additional information on the valuation allowance on AFS debt securities, see Note 2 to the Consolidated Financial Statements.

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

Quantitative and Qualitative Disclosures About Market Risk:

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

What changed 10-K

Item 7. Management’s Discussion and Analysis