Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission File Number 1-12431
Unity Bancorp, Inc.
(Exact name of registrant as specified in its charter)
New Jersey
22-3282551
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
64 Old Highway 22, Clinton, NJ
08809
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (800) 618-2265
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock
UNTY
NASDAQ
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ◻
Accelerated filer ⌧
Nonaccelerated filer ◻
Smaller reporting company ☒
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act: Yes ☐ No ⌧
The number of shares outstanding of each of the registrant’s classes of common equity stock, as of April 30, 2024 common stock, no par value: 10,039,119 shares outstanding.
the three months ended September 30, 2023 and 2022
Page #
PART I
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1
Consolidated Financial Statements (Unaudited)
3
Consolidated Balance Sheets at March 31, 2024 and December 31, 2023
Consolidated Statements of Income for the three months ended March 31, 2024 and 2023
4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2024 and 2023
5
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2024 and 2023
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023
7
Notes to the Consolidated Financial Statements
8
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
52
ITEM 4
Controls and Procedures
PART II
OTHER INFORMATION
53
Legal Proceedings
ITEM 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
ITEM 5
Other Information
ITEM 6
Exhibits
54
EXHIBIT INDEX
55
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
SIGNATURES
56
2
PART I CONSOLIDATED FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
(Unaudited)
(In thousands)
March 31, 2024
December 31, 2023
ASSETS
Cash and due from banks
$
20,619
20,668
Interest-bearing deposits
162,367
174,108
Cash and cash equivalents
182,986
194,776
Securities:
Debt securities available for sale, at market value
94,682
91,765
Debt securities held to maturity, at amortized cost
36,089
36,122
Equity securities, at market value
7,931
7,802
Total securities
138,702
135,689
Loans:
SBA loans held for sale
18,439
18,242
SBA loans held for investment
39,009
38,584
SBA PPP loans
2,168
2,318
Commercial loans
1,291,319
1,277,460
Residential mortgage loans
627,464
631,506
Consumer loans
72,275
72,676
Residential construction loans
123,783
131,277
Total loans
2,174,457
2,172,063
Allowance for credit losses
(26,080)
(25,854)
Net loans
2,148,377
2,146,209
Premises and equipment, net
19,281
19,567
Bank owned life insurance ("BOLI")
25,295
25,230
Deferred tax assets, net
12,681
12,552
Federal Home Loan Bank ("FHLB") stock
15,896
18,435
Accrued interest receivable
13,165
13,582
Goodwill
1,516
Prepaid expenses and other assets
10,189
10,951
Total assets
2,568,088
2,578,507
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand
395,520
419,636
Interest-bearing demand
325,174
312,208
Savings
504,210
497,491
Brokered deposits
235,755
268,408
Time deposits
500,611
426,397
Total deposits
1,961,270
1,924,140
Borrowed funds
299,397
356,438
Subordinated debentures
10,310
Accrued interest payable
1,551
1,924
Accrued expenses and other liabilities
28,799
24,265
Total liabilities
2,301,327
2,317,077
Shareholders’ equity:
101,676
100,426
Retained earnings
199,380
191,108
Treasury stock
(31,443)
(27,367)
Accumulated other comprehensive loss
(2,852)
(2,737)
Total shareholders’ equity
266,761
261,430
Total liabilities and shareholders’ equity
Shares issued
11,555
11,424
Shares outstanding
10,044
10,063
Treasury shares
1,511
1,361
The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.
Consolidated Statements of Income
For the three months ended March 31,
(In thousands, except per share amounts)
2024
2023
INTEREST INCOME
420
333
FHLB stock
280
331
Taxable
1,849
1,739
Tax-exempt
18
19
1,867
1,758
SBA loans
1,333
1,404
77
20,830
17,401
9,219
8,109
1,402
1,354
2,578
2,586
35,370
30,931
Total interest income
37,937
33,353
INTEREST EXPENSE
Interest-bearing demand deposits
1,710
965
Savings deposits
3,144
1,554
2,295
1,562
4,699
1,563
Borrowed funds and subordinated debentures
2,248
3,799
Total interest expense
14,096
9,443
Net interest income
23,841
23,910
Provision for credit losses, loans
641
108
Provision for credit losses, off-balance sheet
—
Net interest income after provision for credit losses
23,198
23,802
NONINTEREST INCOME
Branch fee income
243
235
Service and loan fee income
457
503
Gain on sale of SBA loans held for sale, net
238
309
Gain on sale of mortgage loans, net
320
244
BOLI income
65
80
Net security gains (losses)
(322)
Other income
341
368
Total noninterest income
1,718
1,417
NONINTEREST EXPENSE
Compensation and benefits
7,357
7,090
Processing and communications
906
804
Occupancy
798
770
Furniture and equipment
684
689
Professional services
436
427
Advertising
400
260
Loan related expenses
384
175
Deposit insurance
339
348
Director fees
247
217
Other expenses
581
648
Total noninterest expense
12,132
11,428
Income before provision for income taxes
12,784
13,791
Provision for income taxes
3,198
3,504
Net income
9,586
10,287
Net income per common share – Basic
0.95
0.98
Net income per common share – Diluted
0.93
0.96
Weighted average common shares outstanding – Basic
10,127
10,538
Weighted average common shares outstanding – Diluted
10,276
10,686
Consolidated Statements of Comprehensive Income
For the three months ended
March 31, 2023
Income tax
Before tax
expense
Net of tax
amount
(benefit)
Other comprehensive (loss) income before reclassifications
Debt securities available for sale:
Unrealized holding losses (gains) on securities arising during the period
(44)
(10)
(34)
359
93
266
Less: reclassification adjustment for losses on securities included in net income
Total unrealized losses on securities available for sale
Net unrealized (losses) gains from cash flow hedges:
Unrealized holding losses on cash flow hedges arising during the period
(351)
(100)
(251)
(433)
(92)
(341)
Less: reclassification adjustment for gains on cash flow hedges included in net income
(238)
(68)
(170)
(198)
(42)
(156)
Total unrealized losses on cash flow hedges
(113)
(32)
(81)
(235)
(50)
(185)
Total other comprehensive (loss) income
(157)
(115)
124
43
81
Total comprehensive income
12,627
3,156
9,471
13,915
3,547
10,368
Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended March 31, 2024 and 2023
Accumulated
other
Total
Common Stock
Retained
Treasury
comprehensive
shareholders’
Shares
Amount
earnings
stock
loss
equity
Balance, December 31, 2023
A
Other comprehensive loss, net of tax
Dividends on common stock ($0.13 per share)
(1,314)
(1,261)
Share-based compensation (1)
129
1,197
Treasury stock purchased, at cost
(150)
(4,076)
Balance, March 31, 2024
(loss) income
aa
Balance, December 31, 2022
10,584
97,204
156,958
(11,675)
(3,260)
239,227
Other comprehensive income, net of tax
Dividends on common stock ($0.12 per share)
46
(1,215)
Effect of adopting Accounting Standards Update ("ASU") No. 2016-13 ("CECL")
(649)
44
947
(338)
(8,219)
Balance, March 31, 2023
10,292
98,197
165,335
(19,894)
(3,179)
240,459
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of purchase premiums and discounts on securities
34
36
Depreciation and amortization (accretion)
554
(738)
PPP deferred fees and costs
(3)
Deferred income tax (benefit) expense
(87)
91
Net realized security gains
(21)
(222)
Stock compensation expense
476
417
Valuation writedowns on OREO
113
(320)
(244)
(309)
(65)
(80)
Net change in other assets and liabilities
5,205
4,359
Net cash provided by operating activities
15,762
13,750
INVESTING ACTIVITIES
Purchases of equity securities
(166)
(126)
Purchases of securities available for sale
(4,000)
Proceeds from redemption of FHLB stock, at cost, net
2,539
376
Maturities and principal payments on securities held to maturity
100
Maturities and principal payments on securities available for sale
1,041
1,639
Proceeds from sales of equity securities
1,269
Net decrease in SBA PPP loans
153
3,431
Net increase in loans
(2,705)
(26,339)
Purchases of premises and equipment
(78)
(195)
Net cash used in investing activities
(3,025)
(19,945)
FINANCING ACTIVITIES
Net increase in deposits
37,130
36,393
Repayments of short-term borrowings
(61,400)
(14,000)
Proceeds from long-term borrowings
5,000
Proceeds from exercise of stock options
721
530
Dividends on common stock
Purchase of treasury stock, including exise tax accrual
Net cash (used in) provided by financing activities
(24,527)
18,489
(Decrease) increase in cash and cash equivalents
(11,790)
12,294
Cash and cash equivalents, beginning of year
114,793
Cash and cash equivalents, end of period
127,087
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid
14,469
9,202
Income taxes paid
250
3,557
Noncash activities:
Establishment of lease liability and right-of-use asset
Capitalization of servicing rights
76
159
Transfer of loans to OREO
288
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 1. Significant Accounting Policies
The accompanying Consolidated Financial Statements include the accounts of Unity Bancorp, Inc. (the "Parent Company") and its wholly-owned subsidiary, Unity Bank (the "Bank" or when consolidated with the Parent Company, the "Company"). The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings or shareholders’ equity. The financial information has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and has not been audited. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Amounts requiring the use of significant estimates include the allowance for credit losses, valuation of servicing assets, the valuation of securities and the determination of impairment for securities and fair value disclosures. Management believes that the allowance for credit losses is adequate. While management uses available information to recognize credit losses, future additions to the allowance for credit losses may be necessary based on changes in economic conditions and the general credit quality of the loan portfolio.
The interim unaudited Consolidated Financial Statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”) and consist of normal recurring adjustments, that in the opinion of management, are necessary for the fair presentation of interim results. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results which may be expected for the entire year. As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc., and its consolidated subsidiary, Unity Bank, depending on the context. Certain information and financial disclosures required by U.S. GAAP have been condensed or omitted from interim reporting pursuant to SEC rules. Interim financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Risks and Uncertainties
Overall, the markets and customers serviced by the Company may be significantly impacted by 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.
Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the current high interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. The Company believes the sources of liquidity presented in the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements are sufficient to meet its needs as of the balance sheet date.
An unexpected influx of withdrawals of deposits could adversely impact the Company's ability to rely on organic deposits to primarily fund its operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources may include proceeds from Federal Home Loan Bank advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits.
Such reliance on secondary funding sources could increase the Company's overall cost of funding and thereby reduce net income. While the Company believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures or other investments, or liquidating assets.
New Accounting Guidance adopted in 2024
Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” requires public entities to disclose detailed information about a reportable segment’s expenses on both an annual and interim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The amendments in ASU 2023-07 should be applied retrospectively to all periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company adopted ASU 2023-07 effective January 1, 2024, noting no material impact.
NOTE 2. Litigation
The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. In the best judgment of management, based upon consultation with counsel, the consolidated financial position and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.
NOTE 3. Net Income per Share
Basic net income per common share is calculated as net income divided by the weighted average common shares outstanding during the reporting period. Common shares include vested and unvested restricted shares.
Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the treasury stock method.
The following is a reconciliation of the calculation of basic and diluted income per share:
Weighted average common shares outstanding - Basic
Plus: Potential dilutive common stock equivalents
149
148
Weighted average common shares outstanding - Diluted
Net income per common share - Basic
Net income per common share - Diluted
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive
9
NOTE 4. Other Comprehensive (Loss) Income
The following tables show the changes in other comprehensive (loss) income for the three months ended March 31, 2024 and 2023, net of tax:
For the three months ended March 31, 2024
Net unrealized
losses on
gains (losses) from
securities
cash flow hedges
Balance, beginning of period
(3,408)
671
Other comprehensive loss before reclassifications
(285)
Less amounts reclassified from accumulated other comprehensive loss
Period change
Balance, end of period
(3,442)
590
For the three months ended March 31, 2023
gains (losses)
(losses) gains on
from cash flow
hedges
(4,381)
1,121
Other comprehensive income (loss) before reclassifications
(75)
(4,115)
936
NOTE 5. Fair Value
Fair Value Measurement
The Company follows Financial Accounting Standards Board (“FASB”) ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value 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:
10
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
Fair Value on a Recurring Basis
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:
Debt Securities Available for Sale
The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).
As of March 31, 2024, the fair value of the Company’s AFS debt securities portfolio was $94.7 million. Most of the Company’s AFS debt securities were classified as Level 2 assets at March 31, 2024. The valuation of AFS debt 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. It includes third-party model pricing, defined as valuing securities based upon their relationship with other benchmark securities.
Included in the Company’s AFS debt securities are select corporate bonds which are classified as Level 3 assets at March 31, 2024. The valuation of these corporate bonds is determined using broker quotes or third-party vendor prices that are not adjusted by management. 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.
11
The following table presents a reconciliation of the Level 3 AFS debt securities measured at fair value on a recurring basis for the three months ended March 31, 2024 and 2023:
Collateralized Debt Obligations
Balance of Recurring Level 3 assets at January 1
7,979
4,675
Activity
Losses in other comprehensive income
(165)
Balance of recurring Level 3 assets at March 31
4,510
Equity Securities with Readily Determinable Fair Values
The fair value of equity securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).
As of March 31, 2024, the fair value of the Company’s equity securities portfolio was $7.9 million.
All of the Company’s equity securities were classified as Level 1 assets at March 31, 2024.
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).
The Company’s derivative instruments are classified as Level 2 assets, as the readily observable market inputs to these models are validated to external sources, such as industry pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data.
There were no material changes in the inputs or methodologies used to determine fair value during the period ended March 31, 2024, as compared to the periods ended December 31, 2023 and March 31, 2023.
12
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023:
Fair Value Measurements at March 31, 2024
Quoted Prices in
Assets/Liabilities
Active Markets
Significant Other
Significant
Measured at Fair
for Identical
Observable
Unobservable
Value
Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Measured on a recurring basis:
Assets:
U.S. Government sponsored entities
15,264
State and political subdivisions
350
Residential mortgage-backed securities
13,532
Corporate and other securities
65,536
57,557
Total debt securities available for sale
86,703
Equity securities with readily determinable fair values
Total equity securities
Interest rate swap agreements
805
Total swap agreements
Fair value Measurements at December 31, 2023
16,033
360
14,077
61,295
53,316
83,786
918
There were no liabilities measured on a recurring basis as of March 31, 2024 or December 31, 2023.
13
Fair Value on a Nonrecurring Basis
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):
Quoted Prices
in Active
Other
Markets for
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Measured on a non-recurring basis:
Financial assets:
Collateral-dependent loans
8,083
Fair Value Measurements at December 31, 2023
4,755
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:
Collateral-Dependent Loans
Fair value is determined based on the fair value of the collateral and is measured for impairment based upon a third-party appraisal. 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 six months of contractual payments and/or demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.
The valuation allowance for individually evaluated loans is included in the allowance for credit losses in the Consolidated Balance Sheets. At March 31, 2024, the valuation allowance for individually evaluated loans was $1.1 million, compared to $1.0 million at December 31, 2023.
14
Fair Value of Financial Instruments
FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option. These estimated fair values as of March 31, 2024 and December 31, 2023 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis is discussed above.
The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:
Securities
The fair value of securities is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).
SBA Loans Held for Sale
The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.
Loans
The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed loans.
Deposit Liabilities
The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e. carrying value). The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.
Borrowed Funds and Subordinated Debentures
The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.
15
The table below presents the carrying amount and estimated fair values of the Company’s financial instruments presented as of March 31, 2024 and December 31, 2023:
Carrying
Level 1
Level 2
Level 3
Debt securities held to maturity
29,138
19,383
Loans, net of allowance for credit losses
2,129,938
2,018,402
Financial liabilities:
Deposits
1,952,706
309,707
308,640
29,656
19,175
2,127,967
2,027,084
1,915,022
366,748
365,879
Limitations
Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.
16
NOTE 6. Securities
This table provides the major components of debt securities available for sale ("AFS") and held to maturity (“HTM”) at amortized cost and estimated fair value at March 31, 2024 and December 31, 2023:
Gross
Allowance
Amortized
unrealized
for credit
Estimated
cost
gains
losses
fair value
Available for sale:
15,749
(485)
379
(29)
15,184
29
(1,681)
69,203
(2,634)
(1,283)
100,515
279
(4,829)
Held to maturity:
28,000
(4,656)
23,344
1,187
75
1,262
6,902
(2,370)
4,532
Total debt securities held to maturity
(7,026)
16,490
(457)
388
(28)
15,473
30
(1,426)
65,203
251
(2,876)
97,554
281
(4,787)
(4,419)
23,581
1,272
90
1,362
6,850
(2,137)
4,713
(6,556)
17
For three months ended March 31, 2024 and 2023 there was no provision for credit loss on AFS debt securities.
The contractual maturities of available for sale and held for maturity debt securities at March 31, 2024 are set forth in the following table. Maturities may differ from contractual maturities in residential mortgage-backed securities because the mortgages underlying the securities may be prepaid without any penalties. Therefore, residential mortgage-backed securities are not included in the maturity categories in the following summary.
Fair
Cost
Due in one year
749
747
Due after one year through five years
33,780
31,358
Due after five years through ten years
13,289
11,558
Due after ten years
37,513
37,487
3,000
2,897
26,187
21,709
Actual maturities of available for sale and held to maturity debt securities may differ from those presented above since certain obligations provide the issuer the right to call or prepay the obligation prior to scheduled maturitiy without penalty.
The fair value of debt securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023 are as follows:
Less than 12 months
12 months and greater
Unrealized
(2)
14,517
(483)
13,415
4,696
(1,054)
33,526
(1,580)
38,222
5,443
(1,056)
61,808
(3,773)
67,251
27,876
13,949
54,827
Total temporarily impaired AFS securities
85,169
Total temporarily impaired HTM securities
28,294
Unrealized losses in each of the categories presented in the tables above were primarily driven by market interest rate fluctuations. Residential mortgage-backed securities are guaranteed by either Ginnie Mae, Freddie Mac or Fannie Mae.
The Company is using the practical expedient to exclude accrued interest receivable from credit loss measurement. At March 31, 2024, there was $1.5 million of accrued interest on securities. At December 31, 2023, there was $1.5 million of accrued interest on securities.
Realized Gains and Losses on Debt Securities
Net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were no realized gains or losses on available for sale securities during the three months ended March 31, 2024 and 2023. There were no realized gains or losses for held to maturity debt securities during the three months ended March 31, 2024 and 2023.
Equity Securities
Included in this category are Community Reinvestment Act ("CRA") investments and the Company’s current other equity holdings of financial institutions. Equity securities are defined to include (a) preferred, common and other ownership interests in entities including partnerships, joint ventures and limited liability companies and (b) rights to acquire or dispose of ownership interests in entities at fixed or determinable prices.
The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2024 and 2023:
Net unrealized gains (losses) occurring during the period on equity securities
33
(544)
Net gains recognized during the period on equity securities sold during the period
21
222
Gains (losses) recognized during the reporting period on equity securities
NOTE 7. Loans
The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for credit losses as of March 31, 2024 and December 31, 2023:
SBA 504 loans
38,128
33,669
Commercial & industrial
133,409
128,402
Commercial real estate
977,437
986,230
Commercial real estate construction
142,345
129,159
Home equity
67,448
67,037
Consumer other
4,827
5,639
Total loans held for investment
2,156,018
2,153,821
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. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows:
SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, 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.
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.
20
Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.
Residential Mortgage, Consumer and Residential Construction Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans and residential construction lines. The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral, loan to collateral value, credit history and Company relationship with the borrower.
Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when the Company initiates contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan and other factors, are analyzed before a loan is submitted for approval. The commercial loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm.
The Company’s extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company’s loans. This policy and the underlying procedures are reviewed and approved by the Board of Directors on a regular basis.
Credit Ratings
The Company places all SBA, commercial and residential construction loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.
The Company uses the following regulatory definitions for criticized and classified risk ratings:
Pass: 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. These performing loans are termed “Pass”.
Special Mention: These loans have a potential weakness that deserves management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Loss: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Once a borrower is deemed incapable of repayment of unsecured debt, the loan is termed a “Loss” and charged off immediately, subject to government guarantee.
For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.
Nonaccrual and Past Due Loans
Nonaccrual loans consist of loans that are not accruing interest as a result of principal or interest being in default, typically 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. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions and knowledge of its local market.
The following tables set forth an aging analysis of past due and nonaccrual loans as of March 31, 2024 and December 31, 2023:
90+ days
30‑59 days
60‑89 days
and still
Total past
past due
accruing
Nonaccrual
due
Current
169
275
138
3,542
4,124
34,885
321
112
433
132,976
4,324
2,303
7,011
970,426
12,178
7,440
19,618
607,846
366
67,082
38
4,737
434
3,127
3,561
120,222
Total loans held for investment, excluding SBA PPP
17,478
697
16,890
35,203
2,118,647
2,153,850
508
17,931
Total loans, excluding SBA PPP
17,986
35,711
2,136,578
2,172,289
22
551
185
3,444
4,180
34,404
78
283
649
127,753
1,732
1,665
3,397
982,833
8,719
1,378
946
10,326
21,369
610,137
381
395
66,642
28
83
5,556
2,580
2,141
4,721
126,556
13,912
1,696
18,240
34,794
2,116,709
2,151,503
2,134,951
2,169,745
The Company is using the practical expedient to exclude accrued interest receivable from credit loss measurement. At March 31, 2024, there was $11.3 million of accrued interest on loans.At December 31, 2023, there was $11.7 million of accrued interest on loans.
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.
23
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 March 31, 2024 and December 31, 2023:
Unpaid
Allowance for
principal
Recorded
Credit Losses
balance
investment
Allocated
With no related allowance:
2,401
2,323
2,727
1,755
Total commercial loans
3,706
3,700
382
365
547
Total individually evaluated loans with no related allowance
9,763
8,690
With an allowance:
1,482
1,357
718
699
548
225
660
337
3,772
3,740
300
1
116
Total individually evaluated loans with a related allowance
9,252
8,338
1,136
Total individually evaluated loans:
3,883
3,680
3,426
4,144
2,415
7,478
383
Total individually evaluated loans
19,015
17,028
24
2,264
2,186
2,734
1,607
7,146
7,121
390
Total consumer loans
2,757
15,291
13,443
1,383
1,258
638
209
58
847
4,182
4,151
306
6,412
5,750
995
3,647
2,943
3,581
1,948
11,328
11,272
21,703
19,193
25
The following tables show the internal loan classification risk by loan portfolio classification by origination year as of March 31, 2024 and December 31, 2023, respectively:
Term Loans
Amortized Cost Basis by Origination Year, March 31, 2024
2022
2021
2020
2019 and Earlier
Revolving Loans Amortized Cost Basis
Risk Rating:
Pass
964
1,878
5,241
4,843
5,778
13,240
-
31,944
Special Mention
1,836
356
510
170
2,872
Substandard
1,256
176
575
4,193
Total SBA loans held for investment
8,333
7,385
6,464
13,985
Total SBA PPP loans
14,828
152,337
336,287
180,893
126,845
365,085
103,292
1,279,567
490
1,464
6,431
8,780
137
2,826
2,972
336,777
182,494
126,854
374,342
103,687
Current-period gross writeoffs
98
Performing
23,064
85,980
249,423
70,123
48,833
142,601
620,024
Nonperforming
2,382
259
3,134
Total residential mortgage loans
251,088
72,505
49,092
145,735
693
2,973
4,400
3,035
644
11,255
48,908
71,908
109
257
367
753
11,256
49,165
49
70
Residential construction
6,595
34,782
64,368
12,511
1,418
119,674
982
4,109
Total residential construction loans
15,091
1,965
277
46,144
277,950
664,966
282,678
185,128
546,300
152,852
26
Amortized Cost Basis by Origination Year, December 31, 2023
2019
2018 and Earlier
1,938
5,339
4,723
6,083
2,634
10,996
31,713
1,765
31
2,662
190
577
4,209
8,360
7,265
6,783
11,604
213
139,622
343,755
181,419
128,165
101,274
271,469
96,988
1,262,692
1,815
1,570
7,423
11,203
59
3,204
3,565
183,293
128,179
103,132
282,096
97,383
150
252
752
102,892
253,919
72,586
51,999
30,482
109,302
621,180
2,964
2,714
1,054
945
2,649
256,883
75,300
53,053
31,427
111,951
68
3,428
4,777
3,681
670
2,481
7,507
49,751
72,295
125
256
795
7,763
552
578
28,827
72,257
25,395
491
748
129,136
1,594
2,342
600
1,000
276,707
686,032
297,252
190,775
140,165
415,756
147,134
27
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 creditlosses 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) during the twelve months ended March 31, 2024:
Principal
Payment
Term
Forgiveness
Delay
Extension
99
813
2,619
2,309
2,718
3,122
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 twelve months ended March 31, 2024 had a payment default during the period and all loans were current as of March 31, 2024.
NOTE 8. 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 credit losses, the Company has segmented the loans in its portfolio by loan type. Loans are segmented into the following pools: 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 four classes: commercial real estate, commercial real estate construction, commercial & industrial and SBA 504. Consumer loans are divided into two classes as follows: home equity and other.
The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are 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. These environmental factors include reasonable and supportable forecasts. 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: low, low moderate, moderate, high moderate and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.
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. Once a loss is known to exist, the charge-off approval process is immediately expedited. This charge-off policy is followed for all loan types.
The following tables detail the activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2024 and 2023:
SBA
Residential
Held for Investment
Commercial
Consumer
construction
1,221
15,876
6,529
1,022
1,206
25,854
Charge-offs
(98)
(70)
(277)
(445)
Recoveries
Net recoveries (charge-offs)
(86)
(60)
(415)
(Credit to) provision for credit losses charged to expense
(20)
397
(135)
(40)
439
1,209
16,187
6,394
922
1,368
26,080
875
15,254
5,450
990
2,627
25,196
163
171
101
(120)
(233)
271
Net (charge-offs) recoveries
(108)
50
Provision for (credit to) credit losses charged to expense
178
(395)
1,103
15,301
6,135
1,020
2,642
26,201
The following tables present loans and their related allowance for credit losses, by portfolio segment, as of March 31, 2024 and December 31, 2023:
Allowance for credit losses ending balance:
Individually evaluated
Collectively evaluated
827
15,850
6,094
921
1,252
24,944
Loan ending balances:
37,497
1,288,904
71,909
120,656
2,138,990
41,177
873
15,535
6,223
24,859
37,458
1,275,512
620,234
72,288
2,134,628
40,902
Reserve for Unfunded Loan Commitments
In addition to the allowance for credit losses, the Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses. At March 31, 2024 and December 31, 2023, a $0.6 million commitment reserve was reported on the balance sheet as “Accrued expenses and other liabilities” and reported on the income statement as “Provision for credit losses, off-balance sheet”.
NOTE 9. Derivative Financial Instruments and Hedging Activities
Derivative Financial Instruments
The Company has derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s Balance Sheet as “Prepaid expenses and other assets” or “Accrued expenses and other liabilities”.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to any derivative agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.
Derivative instruments are generally either negotiated via over the counter (“OTC”) contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.
Risk Management Policies – Hedging Instruments
The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company evaluates the effectiveness of entering into any derivative agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.
Interest Rate Risk Management – Cash Flow Hedging Instruments
The Company has variable rate debt as a source of funds for use in the Company’s lending and investment activities and for other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore hedges its variable-rate interest payments. To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.
A summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at March 31, 2024 and December 31, 2023, respectively is as follows:
(In thousands, except percentages and years)
Notional amount
20,000
Fair value
Weighted average pay rate
0.83
%
Weighted average receive rate
5.62
5.27
Weighted average maturity in years
0.94
1.57
Number of contracts
32
During the three months ended March 31, 2024, the Company received variable rate Secured Overnight Financing Rate ("SOFR") payments from and paid fixed rates in accordance with its interest rate swap agreements. At March 31, 2024, the unrealized gain relating to interest rate swaps was recorded as a derivative asset and is included in “Prepaid expenses and other assets” on the Company’s Balance Sheet. Changes in the fair value of the interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. The following table presents the net gains and losses recorded in other comprehensive income and the consolidated financial statements relating to the cash flow derivative instruments at March 31, 2024 and 2023, respectively:
Loss recognized in OCI
Gross of tax
Gain reclassified from AOCI into net income
198
156
NOTE 10. Employee Benefit Plans
Stock Option Plans
The Company has maintained option plans and maintains an equity incentive plan, which allow for the grant of options to officers, employees and members of the Board of Directors. Grants of options under the Company’s plans generally vest over 3 years and must be exercised within 10 years of the date of grant. Transactions under the Company’s plans for the three months ended March 31, 2024 are summarized in the following table:
Weighted
average
remaining
Aggregate
exercise
contractual
intrinsic
price
life in years
value
Outstanding at December 31, 2023
471,132
17.92
4.9
5,500,080
Options granted
Options exercised
(59,100)
15.47
Options forfeited
Options expired
Outstanding at March 31, 2024
412,032
18.27
4.8
3,845,636
Exercisable at March 31, 2024
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 March 31, 2024, 281,500 options and 345,850 shares of restricted stock have been awarded from the plans. In addition, 16,162 unvested options and 17,187 unvested shares of restricted stock were cancelled and returned to the plans leaving 405,999 shares available for future grants.
The fair values of the options granted are estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the three months ended March 31, 2024 or 2023.
Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options. The following table presents information about options exercised during the three months ended March 31, 2024 and 2023:
Number of options exercised
59,100
37,201
Total intrinsic value of options exercised
764,901
241,904
Cash received from options exercised
412,791
753,894
Tax deduction realized from options
215,014
72,777
The following table summarizes information about stock options outstanding and exercisable at March 31, 2024:
Options outstanding
Options exercisable
Weighted average
Options
remaining contractual
Range of exercise prices
outstanding
life (in years)
exercise price
exercisable
$8.31-11.87
58,000
1.6
9.63
11.88-15.44
9,000
2.7
14.60
15.45-19.01
128,932
5.5
17.58
19.02-22.57
216,100
5.3
21.14
FASB ASC Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options and the related income tax benefit for the three months ended March 31, 2024 and 2023 are detailed in the following table:
Compensation expense
85
Income tax benefit
As of March 31, 2024, unrecognized compensation costs related to nonvested share-based stock option compensation arrangements granted under the Company’s plans was $0, due to all options being fully vested.
Restricted Stock Awards
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 generally vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. The following table summarizes nonvested restricted stock activity for the three months ended March 31, 2024:
Average grant
date fair value
Nonvested restricted stock at December 31, 2023
164,634
24.46
Granted
77,950
28.84
Cancelled
(1,937)
27.55
Vested
(32,875)
24.43
Nonvested restricted stock at March 31, 2024
207,772
26.08
Restricted stock awards granted during the three months ended March 31, 2024 and 2023 were as follows:
Number of shares granted
18,000
Average grant date fair value
27.33
Compensation expense related to restricted stock for the three months ended March 31, 2024 and 2023 is detailed in the following table:
444
332
As of March 31, 2024, there was approximately $4.9 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s equity plans. That cost is expected to be recognized over a weighted average period of 3.0 years.
NOTE 11. Regulatory Capital
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 of 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 risk weighted capital ratio of 6%; and (iv) a total risk weighted 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 risk weighted capital ratio of 8.5%; and (iii) a total risk weighted 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.
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The following table shows information regarding the Company’s and the Bank’s regulatory capital levels at March 31, 2024 and at December 31, 2023.
Actual
Required for CapitalAdequacy Purposes
To be Well CapitalizedUnder PromptCorrective ActionRegulations *
Ratio
(Dollars in thousands)
As of March 31, 2024
Total risk-based capital (to risk-weighted assets)
Consolidated
303,846
14.63
166,101
8.00
207,627
10.00
Bank
295,499
14.36
164,659
205,824
Common equity tier 1 (to risk-weighted assets)
267,884
12.90
93,432
4.50
134,957
6.50
269,759
13.11
92,621
133,786
Tier 1 capital (to risk-weighted assets)
277,884
13.38
124,576
6.00
123,495
Tier 1 capital (to average total assets)
11.39
97,580
4.00
121,975
5.00
11.10
121,504
As of December 31, 2023
298,293
14.43
165,370
206,712
287,206
14.02
163,911
204,889
262,454
12.70
93,020
134,363
261,584
12.76
92,200
133,178
272,454
13.18
124,027
122,934
11.14
97,800
122,250
10.74
97,355
121,693
*Prompt Corrective Action requirements only apply to the Bank.
NOTE 12. Subsequent Events
The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements.
ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2023 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”. Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company’s Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent filings with the Securities and Exchange Commission, the following: changes in general, economic and market conditions, including the impact of inflation, legislative and regulatory conditions and the development of an interest rate environment that adversely affects Unity Bancorp, Inc.’s interest rate spread or other income anticipated from operations and investments and the impact of the COVID-19 pandemic on our employees, operations and customers.
Overview
Unity Bancorp, Inc. (the “Parent Company”) is a bank holding company incorporated in New Jersey and registered under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank” or, when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through online banking platforms and its robust branch network located throughout 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 has multiple subsidiaries used to hold part of its investment, other real estate owned and loan portfolios.
Earnings Summary
Net income totaled $9.6 million, or $0.93 per diluted share for the quarter ended March 31, 2024, compared to $10.3 million, or $0.96 per diluted share for the same period in 2023. Return on average assets and average common equity for the quarter were 1.58 percent and 14.49 percent, respectively, compared to 1.72 percent and 17.14 percent for the same period in 2023.
First quarter highlights include:
The Company’s performance ratios may be found in the table below.
Net income per common share - Basic (1)
Net income per common share - Diluted (2)
Return on average assets
1.58
1.72
Return on average equity (3)
14.49
17.14
Efficiency ratio (4)
47.57
44.56
Equity to assets ratio (5)
10.39
9.71
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 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, brokered and time deposits, FHLB advances and other borrowings.
During the quarter ended March 31, 2024, tax-equivalent net interest income amounted to $23.8 million, a decrease of $0.1 million or 0.3 percent when compared to the same period in 2023. The net interest margin decreased 10 basis points to 4.09 percent for the three months ended March 31, 2024, compared to 4.19 percent for the same period in 2023.
During the three months ended March 31, 2024, tax-equivalent interest income was $38.0 million, an increase of $4.6 million or 13.7 percent when compared to the same period in 2023. This increase was mainly driven by the increases in the yield on securities, the balance of average loans and the yield on loans.
Total interest expense was $14.1 million for the three months ended March 31, 2024, an increase of $4.7 million or 49.3 percent compared to the same period in 2023. This increase was driven by the increased rates and volume of time deposits, increased rates on savings deposits, increased rates and volume for demand deposits and increased rates and volume of brokered deposits, partially offset by a decline in volume of savings deposits and decreased rates and volume of borrowed funds and subordinated debentures.
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Consolidated Average Balance Sheets
(Dollar amounts in thousands, interest amounts and interest rates/yields on a fully tax-equivalent basis, assuming a federal tax rate of 21 percent.)
Average
Balance
Interest
Rate/Yield
Interest-earning assets:
30,685
5.50
32,778
4.12
11,000
10.23
16,776
7.99
134,874
5.48
138,379
5.03
1,658
4.47
1,753
4.49
Total securities (A)
136,532
5.47
140,132
1,759
5.02
58,120
9.17
66,625
8.43
2,215
1.38
4,243
7.26
1,281,600
6.43
1,199,577
5.80
625,451
5.90
614,936
70,250
7.90
77,121
7.02
129,720
7.86
163,821
6.31
Total loans (B)
2,167,356
6.46
2,126,323
5.82
Total interest-earning assets
2,345,573
6.51
2,316,009
33,354
5.84
Noninterest-earning assets:
23,220
22,738
(26,059)
(25,778)
Other assets
94,001
111,104
Total noninterest-earning assets
91,162
108,064
2,436,735
2,424,073
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
324,829
2.12
286,172
1.37
503,071
2.51
536,021
1.18
243,592
3.79
236,724
2.68
465,166
4.06
286,354
2.21
Total interest-bearing deposits
1,536,658
11,848
3.10
1,345,271
5,644
1.70
201,335
4.41
342,398
4.44
Total interest-bearing liabilities
1,737,993
3.26
1,687,669
2.27
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits
403,847
468,407
Other liabilities
28,747
24,541
Total noninterest-bearing liabilities
432,594
492,948
Total shareholders' equity
266,148
243,456
Total liabilities and shareholders' equity
Net interest spread
3.25
23,911
3.57
Tax-equivalent basis adjustment
(1)
Net interest margin
4.09
4.19
40
(A) Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis, assuming a federal tax rate of 21 percent.
(B) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.
The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volume and rates over the periods presented. Changes that are not solely due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Amounts have been computed on a tax-equivalent basis, assuming a federal income tax rate of 21 percent.
For the three months ended March 31, 2024 versus March 31, 2023
Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)
Volume
Rate
Net
Interest income:
(23)
110
87
(132)
(51)
(47)
154
107
565
3,874
4,439
363
4,219
4,582
Interest expense:
Demand deposits
147
598
745
(102)
1,692
1,590
48
685
733
1,340
1,796
3,136
1,433
4,771
6,204
(1,526)
(25)
(1,551)
(93)
4,746
4,653
Net interest income - fully tax-equivalent
456
(527)
(71)
Increase in tax-equivalent adjustment
(69)
Provision for Credit Losses
The provision for credit losses for loans was $0.6 million during the three months ended March 31, 2024, compared to $0.1 million for the same period in 2023. The increase of $0.5 million was primarily driven by increases in the general and specific reserve calculations.
The provision for credit losses for off-balance sheet exposures totaled $2.0 thousand for the three months ended March 31, 2024, compared to none for the same period in 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 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.” The current provision is considered appropriate under management’s assessment of the adequacy of the allowance for credit losses.
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Income Tax Expense
For the quarter ended March 31, 2024, the Company reported income tax expense of $3.2 million for an effective tax rate of 25.0 percent, compared to income tax expense of $3.5 million and an effective tax rate of 25.4 percent for the prior year’s quarter.
Financial Condition at March 31, 2024
Total assets decreased $10.4 million or 0.4 percent, to $2.6 billion at March 31, 2024, when compared to year end 2023. This decrease was primarily due to decreases of $11.8 million in cash and cash equivalents and $2.5 million in FHLB stock, partially offset by increases of $3.0 million in securities and $2.4 million in gross loans, driven by commercial loan growth.
Total shareholders’ equity increased $5.3 million, when compared to year end 2023, due to earnings and an increase in common stock, partially offset by the repurchase of shares and dividends paid during the three months ended March 31, 2024.
These fluctuations are discussed in further detail in the paragraphs that follow.
Securities Portfolio
The Company’s securities portfolio consists of AFS debt securities, HTM debt securities and equity investments. Management determines the appropriate security classification of AFS and HTM at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.
AFS debt securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. AFS debt securities consist primarily of obligations of U.S. Government, state and political subdivisions, mortgage-backed securities and corporate and other securities.
AFS debt securities totaled $94.7 million at March 31, 2024, an increase of $2.9 million or 3.2 percent, compared to $91.8 million at December 31, 2023. This net increase was the result of:
The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 5.4 years and 5.6 years at March 31, 2024 and December 31, 2023, respectively. The effective duration of AFS debt securities amounted to 1.7 years at March 31, 2024 and December 31, 2023.
HTM debt securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is primarily comprised of obligations of U.S. Government, state and political subdivisions and mortgage-backed securities.
HTM debt securities were $36.1 million at March 31, 2024, a decrease of $33 thousand or 0.1 percent, compared to $36.1 million at December 31, 2023.
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The weighted average life of HTM securities, adjusted for prepayments, amounted to 16.9 years and 17.1 years at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023, the fair value of HTM securities was $29.1 million and $29.7 million, respectively. The effective duration of HTM securities amounted to 10.6 years and 10.9 years at March 31, 2024 and December 31, 2023, respectively.
Equity securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. Equity securities consist of Community Reinvestment Act ("CRA") mutual fund investments and the equity holdings of other financial institutions.
Equity securities totaled $7.9 million at March 31, 2024, an increase of $0.1 million or 1.7 percent, compared to $7.8 million at December 31, 2023.
Securities with a carrying value of $9.6 million and $9.7 million at March 31, 2024 and December 31, 2023, respectively, were held at the FHLB or FRB and were pledged for borrowing purposes; however, all securities were unencumbered by borrowings at March 31, 2024 and December 31, 2023.
Approximately 65 percent of the total debt security investment portfolio had a fixed rate of interest at March 31, 2024.
See Note 6 to the accompanying Consolidated Financial Statements for more information regarding Securities.
Loan Portfolio
The loan portfolio, which represents the Company’s largest asset group, is a significant source of both interest and fee income. The portfolio consists of SBA, commercial, residential mortgage, consumer and residential construction loans. Each of these segments is subject to differing levels of credit and interest rate risk.
Total loans increased $2.4 million or 0.1 percent to $2.2 billion at March 31, 2024, compared to year end 2023. Commercial and SBA held for investment loans increased $13.9 million and $0.4 million, respectively, partially offset by decreases of $7.5 million, $4.0 million, $0.4 million and $0.2 million in residential construction, residential mortgage, consumer and SBA PPP loans, respectively.
Average loans increased $41.0 million or 1.9 percent to $2.2 billion the three months ended March 31, 2024 from $2.1 billion for the same period in 2023. The increase in average loans was due to increases in average commercial and residential mortgage, partially offset by decreases in average SBA, SBA PPP, consumer and residential construction loans. The yield on the overall loan portfolio increased 64 basis points to 6.46 percent for the three months ended March 31, 2024 when compared to the same period in the prior year.
SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made for the purposes of providing working capital or financing the purchase of equipment, inventory or commercial real estate. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. The deficiency may be a higher loan to value (“LTV”) ratio, lower debt service coverage (“DSC”) ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for startup businesses where there is no history or financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portion of the Company’s SBA loans may be sold in the secondary market.
SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $18.4 million at March 31, 2024, an increase of $0.2 million from $18.2 million at December 31, 2023. SBA 7(a) loans held for investment amounted to $39.0 million at March 31, 2024, an increase of $0.4 million from $38.6 million at December 31, 2023. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was 9.17 percent for the three months ended March 31, 2024, compared to 8.43 percent for the same period in the prior year. The Company sold $2.4 million of SBA loans during the three months ended March 31, 2024.
The guarantee rates on SBA 7(a) loans range from 50 percent to 90 percent, with the majority of the portfolio having a guarantee rate of 75 percent at origination. The guarantee rates are determined by the SBA and can vary from year to year depending on government funding and the goals of the SBA program. Approximately $77.2 million and $75.6 million in SBA loans were sold but serviced by the Company at March 31, 2024 and December 31, 2023, respectively, and are not included on the Company’s balance sheet. There is no relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company’s SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.
Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $1.3 billion at March 31, 2024, an increase of $13.9 million from year end 2023. The yield on commercial loans was 6.43 percent for the three months ended March 31, 2024, compared to 5.80 percent for the same period in 2023. SBA 504 program loans, which consist of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property, are included in the Commercial loan portfolio. The commercial real estate sub-category includes both owner occupied and non-owner occupied commercial real estate related loans.
Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amounted to $627.5 million at March 31, 2024, a decrease of $4.0 million from year end 2023. Sales of conforming mortgage loans totaled $12.2 million for the three months ended March 31, 2024, compared to sales of $16.1 million in the prior year period. The yield on residential mortgages was 5.90 percent for the three months ended March 31, 2024, compared to 5.27 percent for the same period in 2023. Residential mortgage loans maintained in portfolio are generally to individuals that do not qualify for conventional financing. In extending credit to this category of borrowers, the Bank considers other mitigating factors such as credit history, equity and liquid reserves of the borrower. As a result, the residential mortgage loan portfolio of the Bank includes adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but which are not considered high priced mortgages.
Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements and other personal needs, and are generally secured by 1 to 4 family residences. These loans amounted to $72.3 million, a decrease of $0.4 million from year end 2023. The yield on consumer loans was 7.90 percent for the three months ended March 31, 2024, compared to 7.02 percent for the same period in 2023.
Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to $123.8 million at March 31, 2024, a decrease of $7.5 million from year end 2023. The yield on residential construction loans was 7.86 percent for the three months ended March 31, 2024, compared to 6.31 percent for the same period in 2023.
There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio.
In the normal course of business, the Company may originate loan products whose terms could give rise to additional credit risk. Interest-only loans, loans with high LTV, construction loans with payments made from interest reserves and multiple loans supported by the same collateral (e.g. home equity loans) are examples of such products. However, these products are not material to the Company’s financial position and are closely managed via credit controls designed to mitigate their additional inherent risk. Management does not believe that these products create a concentration of credit risk in the Company’s loan portfolio. The Company does not have any option adjustable rate mortgage loans.
The majority of the Company’s loans are secured by real estate. Declines in the market values of real estate in the Company’s trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. At March 31, 2024 and December 31, 2023, approximately 96 percent of the Company’s loan portfolio was secured by real estate.
The following table sets forth the classification of loans by loan type, including unearned fees, deferred costs and excluding the allowance for credit losses as of March 31, 2024 and December 31, 2023:
In thousands, except percentages
SBA Loans
0.8%
1.8%
SBA PPP
0.1%
Total SBA Loans
59,616
2.7%
59,144
Commercial Loans
Commercial Construction
6.5%
6.0%
SBA 504
1.6%
Commercial & Industrial
6.1%
5.9%
Commercial Mortgage - Owner Occupied
512,616
23.6%
502,397
23.1%
Commercial Mortgage - Nonowner Occupied
412,325
19.0%
424,490
19.5%
52,496
2.4%
59,343
Total Commercial Loans
59.4%
58.8%
Residential Mortgage loans
28.9%
29.1%
Consumer Loans
3.1%
3.0%
0.2%
0.3%
Total Consumer Loans
3.3%
Residential Construction
5.7%
Total Gross Loans
100.0%
For additional information on loans, see Note 7 to the Consolidated Financial Statements.
Asset Quality
Nonperforming loans, including loans more than 90 days delinquent and still accruing, were $17.0 million at March 31, 2024, a $2.2 million decrease from $19.2 million at December 31, 2023 and a $2.5 million increase from $14.5 million at March 31, 2023, respectively. Since year end 2023, nonperforming loans in the residential mortgage and consumer segment decreased, offset by an increase in nonperforming SBA, commercial and residential construction loans. In addition, there were $138 thousand in loans past due 90 days or more and still accruing interest at March 31, 2024, compared to $946 thousand at December 31, 2023 and none at March 31, 2023. Further, there was no other real estate owned at March 31, 2024 or December 31, 2023 and $176 thousand in other real estate owned at March 31, 2023.
The Company also monitors potential problem loans. Potential problem loans are those loans where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are categorized by their non-passing risk rating and performing loan status. Potential problem loans totaled $12.8 million at March 31, 2024.
See Note 7 to the accompanying Consolidated Financial Statements for more information regarding Asset Quality.
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Allowance for Credit Losses and Reserve for Unfunded Loan Commitments
The allowance for credit losses totaled $26.1 million at March 31, 2024, compared to $25.9 million at December 31, 2023 and $26.2 million at March 31, 2023, with a resulting allowance to total loan ratio of 1.20 percent at March 31, 2024, 1.19 percent at December 31, 2023 and 1.23 at March 31, 2023. Net charge-offs amounted to $415 thousand for the three months ended March 31, 2024, compared to net recoveries of $50 thousand for the same period in 2023.
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 March 31, 2024 and December 31, 2023, the commitment reserve totaled $0.6 million.
See Note 8 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. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing a comprehensive relationship with business borrowers, seeking deposits as well as lending relationships.
Total deposits increased $37.1 million to $2.0 billion at March 31, 2024 from year-end 2023. This increase was due to increases of $74.2 million in time deposits, $13.0 million in interest-bearing demand deposits and $6.7 million in savings deposits, partially offset by a decrease of $32.7 million in brokered deposits and $24.1 million in noninterest-bearing demand deposits. The change in the composition of the portfolio from December 31, 2023 reflects a 17.4 percent increase in time deposits, 4.2 percent increase in interest-bearing demand deposits, and a 1.4 percent increase in savings deposits, partially offset by a 12.2 percent decrease in brokered deposits and a 5.7 percent decrease in noninterest-bearing demand deposits.
As of March 31, 2024, 17.2 percent of total deposits were uninsured or uncollateralized. The Company’s deposit composition as of March 31, 2024, consisted of 20.2 percent in noninterest-bearing demand deposits, 16.6 percent in interest-bearing demand deposits, 28.8 percent in savings deposits and 34.4 percent in time deposits.
As part of the Company’s overall funding and liquidity management program, from time to time the Company borrows from the Federal Home Loan Bank of New York. Residential mortgages and commercial loans collateralize these borrowings.
Borrowed funds and subordinated debentures totaled $309.7 million and $366.7 million at March 31, 2024 and December 31, 2023, respectively, and are broken down in the following table:
FHLB borrowings:
Non-overnight, fixed rate advances
53,797
109,438
Overnight advances
215,600
217,000
Puttable advances
30,000
Total borrowed funds and subordinated debentures
In March 2024, the FHLB issued a $165.0 million municipal deposit letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law. The FHLB issued an additional $25.0 million municipal deposit 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 March 31, 2024, the Company held $183.0 million of cash and cash equivalents. Further, the Company maintained approximately $546.0 million of funding available from various funding sources, including the FHLB, FRB Discount Window and other lines of credit. Additionally, the Company can pledge securities for further borrowing capacity. Total available funding plus cash on hand represented 215.6% of uninsured or uncollateralized deposits.
For the three months ended March 31, 2024, average FHLB Borrowings were $191.0 million with a weighted average cost of 4.35%.
Subordinated Debentures
On July 24, 2006, Unity (NJ) Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is the daily compounded SOFR rate with a 0.262 percent spread. The floating interest rate was 7.172 percent at March 31, 2024 and 7.212 percent at December 31, 2023.
47
Market Risk
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 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 March 31, 2024 and December 31, 2023:
Estimated Increase/ (Decrease) in EVE
Estimated 12 mo. Increase/ (Decrease) In NII
(In thousands, except percentages)
EVE
Percent
NII
+300
213,785
(56,042)
(20.77)
89,741
(8,617)
(8.76)
+200
234,739
(35,088)
(13.00)
92,641
(5,717)
(5.81)
+100
253,460
(16,367)
(6.07)
95,467
(2,891)
(2.94)
0
269,827
98,358
-100
281,736
11,909
100,482
2,124
2.16
-200
287,421
17,594
6.52
101,927
3,569
3.63
-300
287,929
18,102
6.71
102,883
4,525
4.60
215,239
(53,748)
(19.98)
91,747
(7,977)
(8.00)
235,749
(33,238)
(12.36)
94,405
(5,319)
(5.33)
254,242
(14,745)
(5.48)
96,984
(2,740)
(2.75)
268,987
99,724
273,517
4,530
1.68
101,391
1,667
1.67
286,813
17,826
6.63
102,987
3,263
3.27
281,661
12,674
4.71
102,858
3.14
Liquidity, Off Balance Sheet Arrangements and Contractual Obligations
The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as of March 31, 2024:
One year
One to
Three to
Over five
or less
three years
five years
years
Off-balance sheet arrangements:
Standby letters of credit
3,718
920
907
5,575
Contractual obligations:
Time deposits and brokered time deposits
589,484
73,792
12,425
675,809
260,038
35,000
Total off-balance sheet arrangements and contractual obligations
853,240
78,181
48,345
11,325
991,091
Standby letters of credit represent guarantees of payment issued by the Bank on behalf of a client that is used as “payments of last resort” should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are typically short-term in duration, maturing in one year or less.
Time deposits have stated maturity dates and include brokered time deposits.
Borrowed funds and subordinated debentures include fixed and adjustable rate borrowings from the Federal Home Loan Bank and subordinated debentures. The borrowings have defined terms and under certain circumstances are callable at the option of the lender.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Our liquidity is monitored by management and the Board of Directors, which reviews historical funding requirements, our current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient asset-based liquidity to cover potential funding requirements in order to minimize our dependence on volatile and potentially unstable funding markets.
The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit inflows and outflows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Consolidated Statement of Cash Flows provides detail on the Company’s sources and uses of cash, as well as an indication of the Company’s ability to maintain an adequate level of liquidity. At March 31, 2024, the balance of cash and cash equivalents was $183.0 million, a decrease of $11.8 million from December 31, 2023. A discussion of the cash provided by and used in operating, investing and financing activities follows.
Operating activities provided $15.8 million and $13.6 million of net cash for the three months ended March 31, 2024 and 2023, respectively. The primary sources of funds were net income from operations and adjustments to net income, such as stock compensation expense and the net change in other assets and liabilities.
Investing activities used $3.0 million and $19.9 million in net cash for the three months ended March 31, 2024 and 2023, respectively. Cash was primarily used to fund new loans and purchase securities.
Financing activities used $24.5 million and provided $18.5 million in net cash for the three months ended March 31, 2024 and 2023, primarily due to net increase in deposits, offset by repayments of short-term borrowings.
Regulatory Capital
Consistent with our goal to operate as a sound and profitable financial organization, Unity Bancorp and Unity Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As of March 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 Company’s consolidated capital levels, as well as, the Bank’s regulatory capital levels at March 31, 2024 and December 31, 2023.
To be Well CapitalizedUnder PromptCorrective ActionRegulations*
51
Shareholders’ Equity
Repurchase Plan
On April 27, 2023, the Board authorized a new repurchase plan of up to 500 thousand shares, or approximately 5.0% of the Company’s outstanding common stock. A total 149,997 shares were repurchased at a weighted average price of $27.14 during the three months ended March 31, 2024. As of March 31, 2024, 264 thousand shares are available for repurchase. The timing and amount of additional purchases, if any, will depend upon a number of factors including the Company’s capital needs, the performance of its loan portfolio, the need for additional provisions for credit losses and the market price of the Company’s stock.
Total Number of
Maximum Number
Shares Purchased
of Shares that may
Number of
as Part of Publicly
yet be Purchased
Price Paid
Announced Plans
Under the Plans
Period
Purchased
per Share
or Programs
January 1, 2024 through January 31, 2024
413,747
February 1, 2024 through February 29, 2024
28,709
26.86
385,038
March 1, 2024 through March 31, 2024
121,288
27.20
263,750
Impact of Inflation and Changing Prices
The financial statements and notes thereto, presented elsewhere herein have been prepared in accordance with U.S.GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
During the three months ended March 31, 2024, there have been no significant changes in the Company’s assessment of market risk as reported in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. (See Interest Rate Sensitivity in Management’s Discussion and Analysis herein.)
ITEM 4 Controls and Procedures
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition, or the results of the operation of the Company.
ITEM 1A Risk Factors
Information regarding this item as of March 31, 2024 appears under the heading, “Risk Factors” within the Company’s Form 10-K for the year ended December 31, 2023.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
See the discussion under the heading “Shareholders Equity - Repurchase Plan” under Item 2 “Management’s Discussion and Analysis of Financial Condition and results of Operations.”
ITEM 3 Defaults upon Senior Securities – None
ITEM 4 Mine Safety Disclosures - N/A
ITEM 5 Other Information – None
ITEM 6 Exhibits
(a) Exhibits
Description
Certification of Chief Executive Officer Pursuant to Rule 13a 14(a) or Rule 15d 14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Pursuant to Rule 13a 14(a) or Rule 15d 14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a 14(b) or Rule 15d 14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
QUARTERLY REPORT ON FORM 10-Q
Exhibit No.
31.1
Exhibit 31.1-Certification of James A. Hughes. Required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Exhibit 31.2-Certification of George Boyan. Required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Exhibit 32.1-Certification of James A. Hughes and George Boyan. Required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
**101.INS
Inline XBRL Instance Document
**101.SCH
Inline XBRL Taxonomy Extension Schema Document
**101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
**101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
**101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
**101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
**104
Cover Page Interactive Data File (formatted as Inline XBRL and contained as Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNITY BANCORP, INC.
Dated:
May 08, 2024
/s/ George Boyan
George Boyan
Executive Vice President and Chief Financial Officer