UNITY BANCORP INC /NJ/ – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations:
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company's results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report and statistical data presented in this document.
Overview
Unity Bancorp, Inc. (the "Parent Company") is a bank holding company incorporated inNew Jersey and is registered under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary,Unity Bank (the "Bank" or, when consolidated with the Parent Company, the "Company") is chartered by theNew Jersey Department of Banking and Insurance and commenced operations onSeptember 13, 1991 . The Bank provides a full range of commercial and retail banking services through the Internet and its nineteen branch offices located inBergen ,Hunterdon ,Middlesex ,Ocean ,Somerset ,Union andWarren counties inNew Jersey andNorthampton County inPennsylvania . 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 and
loan portfolios. Results of Operations Net income totaled$38.5 million , or$3.59 per diluted share for the year endedDecember 31, 2022 , compared to$36.1 million , or$3.43 per diluted share for the year endedDecember 31, 2021 .
Highlights for the year include:
? Net income before provision for income taxes increased 6.8 percent to
million from
Net interest income increased
? from
income resulting from commercial, residential mortgage and residential
construction loan growth.
? Net interest margin increased 24 basis points to 4.40 percent compared to 4.16
percent in the prior year.
Noninterest income was
? million in the prior year, primarily due to a decrease in the volume of
residential mortgage loan sales and net unrealized securities losses in the
current year.
Noninterest expense totaled
? compared to
increased compensation and benefits expenses.
? The effective tax rate increased to 25.2 percent compared to 25.0 percent in
the prior year.
Total gross loans increased
year. The increase was driven by a 47.8 percent increase in residential
? mortgage loans, a 35.6 percent increase in residential construction loans and a
27.5 percent increase in commercial loans. SBA PPP loans decreased 87.3 percent
or
Total deposits increased
? increase was primarily driven by interest-bearing demand deposits and time
deposits, partially offset by decreases in noninterest-bearing demand deposits
and savings.
Total securities increased
? The increase was primarily driven by purchases of debt securities classified as
available for sale and held to maturity in the current year.
? Total borrowed funds increased
year. The increase was due to loan demand.
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The Company's performance ratios for the past three years are listed in the
following table:
For the years ended December 31,
2022 2021 2020
Net income per common share - Basic (1)
$ 2.21 Net income per common share - Diluted (2)$ 3.59 $ 3.43 $ 2.19 Return on average assets 1.80 % 1.87 % 1.35 % Return on average equity (3) 17.28 % 19.16 %
14.20 % Efficiency ratio (4) 42.80 % 46.09 % 50.80 %
(1) Defined as net income divided by weighted average shares outstanding.
(2) Defined as net income divided by the sum of weighted average shares and the
potential dilutive impact of the exercise of outstanding options.
(3) Defined as net income divided by average shareholders' equity.
The efficiency ratio is a non-GAAP measure of operational performance. It is
(4) defined as noninterest expense divided by the sum of net interest income plus
noninterest income, less any gains or losses on securities.
COVID-19
The full impact of the Coronavirus Disease ("COVID-19") pandemic remains unknown
and continues to evolve. The outbreak has had a significant adverse impact on
certain industries the Company serves, including retail, accommodations,
restaurants and food services. It is unknown how long the adverse conditions
associated with the COVID-19 pandemic will last and what the complete financial
effect will be to the Bank. It is reasonably possible that estimates made in the
financial statements could be materially impacted in the near term as a result
of these conditions. The Company continues to monitor the impact closely,
including its impact on employees, customers, communities and results of
operations and the impact of other government or Federal Reserve actions.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided funding
for the SBA's Paycheck Protection Program (PPP) and established rules for
qualifying borrowers to receive loan forgiveness by the SBA under this program.
The Company approved 1,224 applications and provided funding of approximately
$143.0 million during the year ended December 31, 2020 . As of December 31, 2022 ,
the Company had no PPP loans originated under the CARES Act remaining on its
balance sheet.
The Economic Aid to Hard-Hit Small businesses, Nonprofits and Venues ("Economic
Aid") Act provided additional assistance to the hardest-hit small businesses,
nonprofits, and venues that were struggling to recover from the impact of the
COVID-19 Pandemic. The Company approved 955 applications and provided funding of
approximately $101.0 million under the Economic Aid Act. As of December 31,
2022 , the Company had $5.9 million of PPP loans originated under the Economic
Aid Act in its portfolio.
Additionally, in accordance with provisions set forth by the CARES Act and
regulatory guidance, the Company provided financial assistance through loan
payment deferrals and waived fees. The Company has no outstanding loans
remaining that would qualify for the payment deferral period as set forth by the
CARES Act and regulatory guidance.
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 and time
deposits, FHLB advances and other borrowings. Net interest income is determined
by the difference between the yields earned on interest-earning assets and the
rates paid on interest-bearing liabilities ("net interest spread") and the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Company's net interest spread is affected by regulatory, economic and
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competitive factors that influence interest rates, loan demand, deposit demand
and general levels of nonperforming assets.
2022 compared to 2021
During 2022, tax-equivalent net interest income amounted to$90.1 million , an increase of$13.1 million , or 17.0 percent, when compared to the same period in 2021. The net interest margin increased 24 basis points to 4.40 percent for the year endedDecember 31, 2022 , compared to 4.16 percent for the same period in 2021. The net interest spread was 4.15 percent for 2022, a 20 basis point increase compared to 3.95 for the same period in 2021. During 2022, tax-equivalent interest income was$100.7 million , an increase of$16.0 million , or 18.8 percent, when compared to the same period in the prior year. This increase was mainly driven by increases in the balance of average loans, the yield on loans, the balance of average securities and the yield on securities.
Of the
?
The average volume of interest-earning assets increased
billion for 2022 compared to
?
SBA PPP loans. The increase was complemented by a
investment securities, partially offset by a$47.9 million decrease in interest-bearing deposits.
The yield on total interest-earning assets increased 34 basis points to 4.92
? percent for the year ended
on the loan portfolio increased 12 basis points to 5.13 percent.
Total interest expense was$10.6 million in 2022, an increase of$2.9 million or 37.3 percent compared to 2021. This increase was primarily driven by the increased rates and volume of savings deposits and increased volume of borrowed funds and subordinated debentures:
Of the
? increased rates on interest-bearing liabilities while
the increased volume of average interest-bearing liabilities.
The average cost of interest-bearing liabilities increased 14 basis points to
? 0.77 percent in 2022 when compared to 2021. The cost of interest-bearing
deposits increased 1 basis point in 2022. The cost of borrowed funds and
subordinated debentures increased 129 basis points in 2022.
Interest-bearing liabilities averaged
? interest-bearing liabilities was primarily due to an increase in savings,
interest-bearing demand deposits and borrowed funds, partially offset by a decrease in time deposits. 2021 compared to 2020 During 2021, tax-equivalent net interest income amounted to$77.0 million , an increase of$12.6 million or 19.6 percent when compared to the same period in 2020. The net interest margin increased 31 basis points to 4.16 percent for the year endedDecember 31, 2021 compared to 3.85 percent for the same period in 2020. The net interest spread was 3.95 percent for 2021, a 47 basis point increase compared to the same period in 2020. During 2021, tax-equivalent interest income was$84.8 million , an increase of$5.9 million or 7.4 percent when compared to the same period in the prior year. This increase was mainly driven by the increase in the balance of average loans and the increase in the yield on loans, partially offset by a decrease in the balance of average securities and the decrease in the yield on securities.
Of the
? million was due to the increased volume of earning assets, partially offset by
a$259 thousand decrease in yields on average interest-earning assets. 23 Table of Contents
The average volume of interest-earning assets increased
billion for 2021 compared to
?
residential construction loans and a
sold and interest-bearing deposits, partially offset by a$10.4 million decrease in investment securities.
The yield on total interest-earning assets decreased 13 basis points to 4.58
? percent for the year ended
on the loan portfolio increased 5 basis points to 5.01 percent.
Total interest expense was
46.5 percent compared to 2020. This decrease was driven primarily by the
decreased rates on interest-bearing deposits:
Of the
? decreased rates on interest-bearing liabilities while
the decreased volume of average interest-bearing liabilities.
The average cost of interest-bearing liabilities decreased 60 basis points to
? 0.63 percent in 2021 when compared to 2020. The cost of interest-bearing
deposits decreased 61 basis points in 2021.
Interest-bearing liabilities averaged
? interest-bearing liabilities was primarily due to an increase in savings and
interest-bearing demand deposits offset by decreases in time deposits and
borrowed funds.
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Consolidated Average Balance Sheets
The following table reflects the components of net interest income, setting forth for the periods presented herein: (1) average assets, liabilities and shareholders' equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread and (5) net interest income/margin on average earning assets. Rates/yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 21 percent.
(Dollar amounts in thousands, interest amounts and interest rates/yields on a
fully tax-equivalent basis)
For the years ended December 31, 2022 2021
Average Average
balance Interest Rate/Yield balance Interest Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 95,427 $ 735 0.77 % $ 143,311 $ 194 0.14 %
Federal Home Loan Bank ("FHLB") stock 6,405 396
6.18 4,275 197 4.62 Securities: Taxable 121,314 4,754 3.92 43,847 1,298 2.96 Tax-exempt 1,461 58 3.99 1,587 39 2.45 Total securities (A) 122,775 4,812 3.92 45,434 1,337 2.94 Loans: SBA loans 65,197 4,303 6.60 53,279 3,252 6.10 SBA PPP loans 19,095 1,596 8.36 119,440 7,206 6.03 Commercial loans 1,040,624 53,820 5.10 887,525 44,167 4.98
Residential mortgage loans 484,923 22,395 4.62 430,466 19,227 4.47 Consumer loans 77,382 4,132 5.27 66,477 3,145 4.73 Residential construction loans 136,778 8,555 6.17 101,486 6,063 5.97 Total loans (B) 1,823,999 94,801 5.13 1,658,673 83,060 5.01 Total interest-earning assets$ 2,048,606 $ 100,744
4.92 %
Noninterest-earning assets: Cash and due from banks 23,100 23,862 Allowance for loan losses (22,920) (22,911) Other assets 87,930 77,105
Total noninterest-earning assets 88,110 78,056 Total assets$ 2,136,716
LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits$ 269,789 $ 1,384
0.51 %$ 227,750 $ 1,073 0.47 % Savings deposits 674,335 3,110 0.46 557,700 1,685 0.30 Time deposits 315,910 2,757 0.87 376,696 3,834 1.02
Total interest-bearing deposits 1,260,034 7,251 0.58 1,162,146 6,592 0.57 Borrowed funds and subordinated debentures 112,799 3,380 2.96 68,812 1,149 1.67 Total interest-bearing liabilities$ 1,372,833 $ 10,631
0.77 %
Noninterest-bearing liabilities: Noninterest-bearing demand deposits 518,244 493,213 Other liabilities 23,104 17,018 Total noninterest-bearing liabilities 541,348 510,231 Total shareholders' equity 222,535 188,560 Total liabilities and shareholders' equity$ 2,136,716
Net interest spread$ 90,113 4.15 %$ 77,047 3.95 % Tax-equivalent basis adjustment (5)
(8) Net interest income$ 90,108 $ 77,039 Net interest margin 4.40 % 4.16 %
Yields related to securities exempt from federal and state income taxes are
(A) stated on a fully tax-equivalent basis. They are reduced by the nondeductible
portion of interest expense, assuming a federal tax rate of 21 percent in
2022 and 2021.
(B) The loan averages are stated net of unearned income, and the averages include
loans on which the accrual of interest has been discontinued.
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Consolidated Average Balance Sheets (Continued)
(Dollar amounts in thousands, interest amounts and interest rates/yields on a
fully tax-equivalent basis)
For the years ended December 31, 2020
Average
balance Interest Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 68,507 $ 258 0.38 %
Federal Home Loan Bank ("FHLB") stock 6,145 331
5.39 Securities: Taxable 52,714 1,695 3.22 Tax-exempt 3,118 76 2.44 Total securities (A) 55,832 1,771 3.17 Loans: SBA loans 50,354 3,144 6.24 SBA PPP loans 93,733 3,120 3.33 Commercial loans 790,093 40,002 5.06 Residential mortgage loans 463,155 22,255 4.81 Consumer loans 70,009 3,502 5.00
Residential construction loans 76,729 4,547
5.93
Total loans (B) 1,544,073 76,570
4.96
Total interest-earning assets$ 1,674,557 $ 78,930
4.71 % Noninterest-earning assets: Cash and due from banks 22,571 Allowance for loan losses (19,812) Other assets 73,948 Total noninterest-earning assets 76,707 Total assets$ 1,751,264 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits$ 178,358 $ 1,344
0.75 % Savings deposits 438,996 2,463 0.56 Time deposits 448,688 8,784 1.96
Total interest-bearing deposits 1,066,042 12,591
1.18
Borrowed funds and subordinated debentures 112,264 1,889
1.68
Total interest-bearing liabilities$ 1,178,306 $ 14,480
1.23 %
Noninterest-bearing liabilities: Noninterest-bearing demand deposits 389,255 Other liabilities 17,163 Total noninterest-bearing liabilities 406,418 Total shareholders' equity 166,540
Total liabilities and shareholders' equity
Net interest spread$ 64,450 3.48 % Tax-equivalent basis adjustment (15) Net interest income$ 64,435 Net interest margin 3.85 %
Yields related to securities exempt from federal and state income taxes are
(A) stated on a fully tax-equivalent basis. They are reduced by the nondeductible
portion of interest expense, assuming a federal tax rate of 21 percent in
2020.
(B) The loan averages are stated net of unearned income, and the averages include
loans on which the accrual of interest has been discontinued.
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Table of Contents
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
years ended
2022 versus 2021 2021 versus 2020
Increase (decrease) due to change in: Increase (decrease) due to change in:
(In thousands on a
tax-equivalent basis) Volume Rate Net Volume Rate Net
Interest income:
Interest-bearing deposits $ (87) $ 628 $ 541 $ 167 $ (231) $ (64)
FHLB stock 118 81 199 (91) (43) (134)
Securities 2,917 558 3,475 (305) (129) (434)
Loans 6,205 5,536 11,741 6,346 144 6,490
Total interest income $ 9,153 $ 6,803 $
15,956
Interest expense:
Demand deposits
$ 213 $ 98 $
311 $ 310
Savings deposits
402 1,023 1,425 554 (1,332) (778) Time deposits (563) (514) (1,077) (1,241) (3,709) (4,950) Total interest-bearing deposits 52 607 659 (377) (5,622) (5,999) Borrowed funds and subordinated debentures 1,010 1,221 2,231 (729) (11) (740) Total interest expense 1,062 1,828 2,890 (1,106) (5,633) (6,739) Net interest income - fully tax-equivalent$ 8,091 $ 4,975 $ 13,066 $ 7,223 $ 5,374 $ 12,597 Decrease in tax-equivalent adjustment 3 7 Net interest income$ 13,069 $ 12,604
Provision for Loan Losses
The provision for loan losses totaled$4.2 million for 2022,$0.2 million in 2021 and$7.0 million in 2020. During 2020 the provision for loan losses was elevated due to uncertainty and the risk of loan defaults related to COVID-19. The provision for loan losses increased$4.0 million for the year ended 2022 primarily due to the sizeable increase in total loans, as well as management's view of current economic conditions. Each period's loan loss provision is the result of management's analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions "Financial Condition - Asset Quality" and "Financial Condition - Allowance for Loan Losses and Reserve for Unfunded Loan Commitments." The current provision is considered appropriate under management's assessment of the adequacy of the
allowance for loan losses.
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Noninterest Income
The following table shows the components of noninterest income for the past
three years:
For the years ended December 31,
(In thousands) 2022 2021 2020
Branch fee income $ 1,117 $ 1,130 $ 1,046
Service and loan fee income 2,433 2,757 1,742
Gain on sale of SBA loans held for sale, net 954 741 1,642
Gain on sale of mortgage loans, net 1,399 4,567 6,344
BOLI income 636 689 613
Net securities (losses) gains (1,313) 609 93
Other income 2,819 1,561 1,466
Total noninterest income $ 8,045 $ 12,054 $ 12,946
Noninterest income was $8.0 million for 2022, a $4.0 million decrease compared
to $12.1 million for 2021. This decrease was primarily due to decreased realized
gains on sales of mortgages and net unrealized securities losses. The decreased
realized gains on sales of mortgages was primarily due to an industry-wide trend
of decreased volume in conforming residential loan originations as interest
rates rose in 2022.
Noninterest income was $12.1 million for 2021, a $0.9 million decrease compared
to $12.9 million for 2020. This decrease was primarily due to decreased realized
gains on sales of mortgages and SBA loans held for sale.
Noninterest Expense
The following table presents a breakdown of noninterest expense for the past
three years:
For the years ended December 31,
(In thousands) 2022 2021 2020
Compensation and benefits
Processing and communications 2,848
3,050 3,155 Occupancy 2,963 2,661 2,543 Furniture and equipment 2,493 2,590 2,606 Professional services 1,401 1,437 1,144 Advertising 1,212 1,236 906 Other loan expenses 240 922 622 Deposit insurance 1,022 844 674 Director fees 916 811 774 Loan collection expenses 278 135 215 Other expenses 2,251 2,325 3,499 Total noninterest expense$ 42,573 $ 40,782 $ 39,262 Noninterest expense totaled$42.6 million for the year endedDecember 31, 2022 , an increase of$1.8 million when compared to$40.8 million in 2021. The majority of this increase is primarily attributable to increased compensation and benefits, reflecting ordinary course increases, as well as increased competition for employees. Noninterest expense totaled$40.8 million for the year endedDecember 31, 2021 , an increase of$1.5 million when compared to$39.3 million in 2020. The majority of this increase is primarily attributable to increased salary expenses and a one-time deferred compensation adjustment. 28 Table of Contents Income Tax Expense For 2022, the Company reported income tax expense of$13.0 million for an effective tax rate of 25.2%, compared to an income tax expense of$12.0 million and an effective tax rate of 25.0% in 2021 and an income tax expense of$7.5 million and an effective tax rate of 24.0% in 2020.
For additional information on income taxes, see Note 11 to the Consolidated
Financial Statements.
Financial Condition
Total assets increased$411.2 million or 20.2 percent, to$2.4 billion atDecember 31, 2022 , when compared to year end 2021. This increase was primarily due to increases of$457.1 million in gross loans, mostly due to commercial, residential mortgage and residential construction loan growth, partially offset by SBA PPP loans forgiven and paid off. Total assets also included an increase of$61.6 million in total securities, offset a decrease of$130.0 million in cash and cash equivalents. Total deposits increased$28.6 million , due to increases of$133.9 million in time deposits and$32.1 million in interest-bearing demand deposits, offset by a decrease of$102.3 million in savings deposits and$35.0 million in noninterest-bearing demand deposits. Borrowed funds increased$343.0 million to$383.0 million atDecember 31, 2022 .
Total shareholders' equity increased
earnings and an increase in common stock, offset by dividends paid and net
accumulated other comprehensive losses.
These fluctuations are discussed in further detail in the sections that follow.
Securities
The Company's securities portfolio consists of available for sale ("AFS") debt
securities, held to maturity ("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.
The following table provides the major components of AFS debt securities, HTM
debt securities and equity investments at their carrying value as of December
31, 2022 and December 31, 2021 :
(In thousands) December 31, 2022 December 31,
2021
Available for sale, at fair value: U.S. Government sponsored entities $ 16,305 $
-
State and political subdivisions 613
994
Residential mortgage-backed securities 15,475
9,749
Corporate and other securities 63,000
45,737
Total securities available for sale $ 95,393 $
56,480
Held to maturity, at amortized cost: U.S. Government sponsored entities $ 28,000 $
10,000
State and political subdivisions 1,115
-
Residential mortgage-backed securities 6,645
4,276
Total securities held to maturity $ 35,760 $
14,276
Equity Securites, at fair value: Total Equity Securites $ 9,793 $
8,566
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
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interest rate risk, to take advantage of market conditions that create
economically attractive returns and as an additional source of earnings. AFS
debt securities consist primarily of obligations of U.S. government sponsored
entities, state and political subdivisions, mortgage-backed securities and
corporate and other securities.
AFS debt securities totaled $95.4 million at December 31, 2022 , an increase of
$38.9 million or 68.9 percent, compared to $56.5 million at December 31, 2021 .
This net increase was the result of:
? Purchase of
?
? compared to a net unrealized gain of
net unrealized losses and gains are reflected net of tax in shareholders'
equity as accumulated other comprehensive income, and
?
The weighted average life of AFS debt securities, adjusted for prepayments,
amounted to 6.4 years and 6.9 years at
The effective duration of AFS debt securities amounted to 1.9 and 3.1 at
HTM securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is comprised of obligations of theU.S. Government and its agencies, obligations of state and political subdivisions and mortgage-backed securities. HTM debt securities totaled$35.8 million atDecember 31, 2022 , an increase of$21.5 million , or 150.5 percent, compared to$14.3 million atDecember 31, 2021 . The increase was due to:
? Purchases of
?
?
The weighted average life of HTM securities, adjusted for prepayments, amounted to 18.0 years and 14.0 years atDecember 31, 2022 andDecember 31, 2021 , respectively. As ofDecember 31, 2022 , the fair value of HTM securities was$28.6 million , compared to$14.2 million atDecember 31, 2021 . The effective duration of HTM securities amounted to 10.5 and 5.6 atDecember 31, 2022 andDecember 31, 2021 , 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 interest rate risk, 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") investments and the equity holdings of financial institutions. Equity securities totaled$9.8 million atDecember 31, 2022 , an increase of$1.2 million , or 14.3 percent, compared to$8.6 million atDecember 31, 2021 . This net increase was the result of:
? The purchase of
investments, and
?
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The following table provides the remaining contractual maturities and average
yields within the investment portfolios. The carrying value of securities at
December 31, 2022 is distributed by contractual maturity. Mortgage-backed
securities and other securities, which may have principal prepayment provisions,
are distributed based on contractual maturity. Expected maturities will differ
materially from contractual maturities as a result of early prepayments and
calls.
After one After five
through five through ten Total carrying
Within one year years years After ten years value
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(In thousands,
except
percentages)
Available for
sale at fair
value:
U.S. Government
sponsored
entities $ 488 2.11 % $ 15,817 3.62 % $ - - % $ - - % $ 16,305 3.58 %
State and
political
subdivisions 200 4.00 160 1.90 - - 253 2.75 613 2.94
Residential
mortgage-backed
securities 4 3.29 408 2.62 1,031 2.53 14,032 3.41 15,475 3.33
Corporate and
other
securities - - 12,432 7.70 13,871 5.13 36,697 6.49 63,000 6.43
Total debt
securities
available for
sale $ 692 2.66 % $ 28,817 5.36 % $ 14,902 4.95 % $ 50,982 5.62 % $ 95,393 5.42 %
Held to
maturity at
cost
U.S. Government
sponsored
entities - - % - - % 3,000 4.00 % 25,000 3.48 % 28,000 3.54 %
State and
political
subdivisions - - - - - - 1,115 5.19 1,115 5.19
Residential
mortgage-backed
securities - - - - - - 6,645 3.04 6,645 3.04
Total debt
securities held
for maturity $ - - % $ - - % $ 3,000 4.00 % $ 32,760 3.45 % $ 35,760 3.50 %
Equity
Securities at
fair value:
Total equity
securities $ - - % $ - - % $ - - % $ 9,793 N/A % $ 9,793 N/A %
Securities with a carrying value of
other borrowings, collateralize hedging instruments and for other purposes
required or permitted by law.
Approximately 63 percent of the total investment portfolio had a fixed rate of
interest at
For additional information on securities, see Note 2 to the Consolidated
Financial Statements.
Loans
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.
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Total loans were $2.1 billion at December 31, 2022 , an increase of $457.1
million or 27.7 percent when compared to year end 2021. Commercial, residential
mortgage, residential construction and SBA loans increased $255.8 million ,
$195.7 million , $42.9 million and $2.9 million , respectively, partially offset
by a decrease of $40.5 million in SBA PPP loans, reflecting forgiveness and
payoff of these loans.
The following table sets forth the classification of loans by major category,
including unearned fees, deferred costs and excluding the allowance for loan
losses as of December 31, 2022 and December 31, 2021 :
2022 2021
% of % of
(In thousands, except percentages) Amount total Amount
total
Ending balance: SBA loans held for investment$ 38,468 1.8 %$ 36,075
2.2 SBA PPP loans 5,908 0.3 46,450 2.8 Commercial loans 1,187,543 56.4 931,726 56.5 Residential mortgage loans 605,091 28.7 409,355 24.8 Consumer loans 78,164 3.7 77,944 4.7
Residential construction loans 163,457 7.8 120,525
7.3
Total loans held for investment 2,078,631 98.7 1,622,075
98.3 SBA loans held for sale 27,928 1.3 27,373 1.7 Total loans$ 2,106,559 100.0 %$ 1,649,448 100.0
Average loans increased$165.3 million or 10.0 percent from$1.7 billion in 2021, to$1.8 billion in 2022. The increase in average loans was due to increases in average commercial, residential mortgage, residential construction, SBA and consumer loans. The yield on the overall loan portfolio increased 12 basis points to 5.13 percent for the year endedDecember 31, 2022 , compared to 5.01 percent for the prior year. SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made to small businesses for the purposes of providing working capital and for financing the purchase of equipment, inventory or commercial real estate. Generally, an SBA 7(a) loan has a 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 start up businesses where there is no historical financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, and 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$27.9 million atDecember 31, 2022 , an increase of$555.0 thousand from$27.4 million atDecember 31, 2021 . SBA 7(a) loans held for investment amounted to$38.5 million atDecember 31, 2022 , an increase of$2.4 million from$36.1 million atDecember 31, 2021 . The yield on SBA 7(a) loans, which is generally floating and adjusts quarterly to the Prime Rate, was 6.60 percent for the year endedDecember 31, 2022 , compared to 6.10 percent in the prior year. 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$72.1 million and$87.4 million in SBA loans were sold but serviced by the Company atDecember 31, 2022 andDecember 31, 2021 , respectively, and are not included on the Company's balance sheet. There is no direct relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company's SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage. 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 32
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amounted to$1.2 billion atDecember 31, 2022 , an increase of$255.8 million from year end 2021. The yield on commercial loans was 5.10 percent for 2022, compared to 4.98 percent for the same period in 2021. The SBA 504 program, which consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property, is included in the Commercial loan portfolio. TheCommercial 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$605.1 million atDecember 31, 2022 , an increase of$195.7 million from year end 2021. Sales of mortgage loans totaled$74.4 million and$286.4 million for 2022 and 2021, respectively. Approximately$13.7 million and$18.8 million in residential loans were sold but serviced by the Company atDecember 31, 2022 andDecember 31, 2021 , respectively, and are not included on the Company's balance sheet. The yield on residential mortgages was 4.62 percent for 2022, compared to 4.47 percent for 2021. 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 fixed and adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but are not considered high priced mortgages. Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements and other personal needs, and are generally secured by the personal property. These loans amounted to$78.2 million atDecember 31, 2022 , an increase of$220.0 thousand fromDecember 31, 2021 . The yield on consumer loans was 5.27 percent for 2022, compared to 4.73 percent for 2021. Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to$163.5 million atDecember 31, 2022 , an increase of$42.9 million fromDecember 31, 2021 . The yield on residential construction loans was 6.17 percent for 2022, compared to 5.97 percent for 2021.
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 ratios, 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 that 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. AtDecember 31, 2022 , approximately 96 percent of the Company's loan portfolio was secured by real estate compared to 92 percent atDecember 31, 2021 . 33
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The following table shows the maturity distribution or repricing of the loan portfolio and the allocation of fixed and floating interest rates atDecember 31, 2022 : December 31, 2022 (In thousands) One year or less One to five years Five to fifteen years Over fifteen years Total SBA loans $ 57,269 $ 8,715 $ 124 $ 288$ 66,396 SBA PPP loans - 5,908 - - sd 5,908 Commercial loans SBA 504 loans 20,280 6,045 4,298 4,454 35,077 Commercial other 34,042 38,341 22,515 22,668 117,566 Commercial real estate 88,956 690,299 103,485 20,386 903,126
Commercial real estate construction 30,122
35,627 11,150 54,875 131,774 Residential mortgage loans 104,855 201,095 56,537 242,604 605,091 Consumer loans Home equity 55,457 1,273 9,389 2,191 68,310 Consumer other 8,532 601 627 94 9,854
Residential construction loans 103,353
60,104 - - 163,457 Total $ 502,866 $ 1,048,008 $ 208,125 $ 347,560$ 2,106,559
The following table shows the balance of loans and the allocation of variable,
hybrid and fixed interest rates based upon maturity or repricing date as of
December 31, 2022
Loan Type One year or less Over one year Total % of total
Fixed $ 129,612 $ 491,236 $ 620,848 29.5 %
Hybrid 74,177 764,976 839,153 39.8
Variable 299,077 347,481 646,558 30.7
$ 502,866 $ 1,603,693 $ 2,106,559 100.0 %
For additional information on loans, see Note 3 to the Consolidated Financial
Statements.
Troubled Debt Restructurings
AtDecember 31, 2022 , there were three loans totaling$1.4 million that were classified as TDRs, compared to three loans totaling$1.0 million atDecember 31, 2021 . Restructured loans that are placed in nonaccrual status may be removed after six months of contractual payments and the borrower showing the ability to service the debt going forward. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.
The following table presents a breakdown of performing and nonperforming TDRs by
class as of
December 31, 2022
Performing Nonperforming Total Performing Nonperforming Total
(In thousands) TDRs TDRs TDRs TDRs
TDRs TDRs Commercial real estate$ 1,412 $ -$ 1,412 $ 619 $ -$ 619 Home equity - - - 427 - 427 Commercial other 10 - 10 - - - Total$ 1,422 $ -$ 1,422 $ 1,046 $ -$ 1,046 34 Table of Contents The following table shows the types of modifications done by class throughDecember 31, 2022 : December 31, 2022 Commercial Commercial (In thousands) real estate other Total Type of modification: Principal reduction$ 1,412 $ 10$ 1,422 Total TDRs$ 1,412 $ 10$ 1,422
For additional information on TDRs, see Note 3 to the Consolidated Financial
Statements.
Asset Quality The following table sets forth information concerning nonperforming assets and loans past due 90 days or more and still accruing interest atDecember 31, 2022 andDecember 31, 2021 : (In thousands, except percentages) 2022
2021
Nonperforming by category: SBA loans held for investment (1)$ 690 $
510 Commercial loans 1,582 2,582 Residential mortgage loans 3,361 3,262 Consumer loans - 210
Residential construction loans 3,432
3,122 Total nonperforming loans$ 9,065 $ 9,686 Total nonperforming assets$ 9,065 $ 9,686 Past due 90 days or more and still accruing interest: Commercial loans - - Residential mortgage loans - - Consumer loans - -
Total past due 90 days or more and still accruing interest $ - $
-
Nonperforming loans to total loans 0.43 %
0.59
Nonperforming loans and TDRs to total loans (2) 0.50
0.65
Nonperforming assets to total assets 0.37
0.48
(1) Guaranteed SBA loans included above $ - $
59 (2) Performing TDRs 1,422 1,046
Nonperforming loans were
thousand
nonperforming loans in the commercial and consumer loan segments decreased,
partially offset by an increase in nonperforming residential construction, SBA
and residential mortgage loans. In addition, there were no loans past due
90 days or more and still accruing interest at
respectively.
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$14.7 million atDecember 31, 2022 , a decrease of$1.9 million from$16.6 million atDecember 31, 2021 .
For additional information on asset quality, see Note 3 to the Consolidated
Financial Statements.
Allowance for Loan Losses and Reserve for Unfunded Loan Commitments
The allowance for loan losses totaled
compared to
total loan ratios of 1.20 percent and 1.35 percent, respectively. Net
charge-offs amounted to
2021.
35
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The following table is a summary of the changes to the allowance for loan losses
for December 31, 2022 and 2021, including net charge-offs to average loan ratios
for each major loan category:
(In thousands, except percentages) 2022 2021
Balance, beginning of period $ 22,302 $ 23,105
Provision for loan losses charged to expense 4,159 181
Less: Charge-offs
SBA loans held for investment (59) (591)
Commercial loans (1,000) (551)
Consumer loans (398) (4)
Total charge-offs (1,457) (1,146)
Add: Recoveries
SBA loans held for investment 33 86
Commercial loans 109 34
Residential mortgage loans 3 42
Consumer loans 47 -
Total recoveries 192 162
Net charge-offs (1,265) (984)
Balance, end of period $ 25,196 $ 22,302
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans:
SBA loans held for investment 0.04 % 0.29 %
Commercial loans 0.09 0.06
Residential mortgage loans - (0.01)
Consumer loans 0.45 0.01
Total loans 0.07 0.06
Allowance to total loans 1.20 1.35
Allowance to nonperforming loans 277.95 % 230.25 % The following table sets forth, for each of the major lending categories, the amount of the allowance for loan losses allocated to each category and the percentage of total loans represented by such category, as ofDecember 31, 2022 and 2021. The allocated allowance is the total of identified specific and general reserves by loan category. The allocation is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio. 2022 2021 % of % of loans loans Reserve to total Reserve to total
(In thousands, except percentages) amount loans amount
loans Balance applicable to: SBA loans$ 875 3.4 %$ 1,074 6.7 % Commercial loans 15,252 56.4 15,053 56.5 Residential mortgage loans 5,450 28.7 4,114 24.8 Consumer loans 992 3.7 671 4.7
Residential construction loans 2,627 7.8 1,390
7.3 Total loans$ 25,196 100.0 %$ 22,302 100.0 %
See Note 4 to the accompanying Consolidated Financial Statements for more
information regarding the Allowance for Loan Losses and Reserve for Unfunded
Loan Commitments.
36
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Deposits
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.
The following table shows period-end deposits and the concentration of each
category of deposits for the past two years:
2022
2021
(In thousands, except percentages) Amount % of total Amount % of total Ending balance: Noninterest-bearing demand deposits$ 494,184 27.6 %$ 529,227 30.1 % Interest-bearing demand deposits 276,218 15.5
244,073 13.9 Savings deposits 591,826 33.1 694,161 39.4 Time deposits 425,300 23.8 291,420 16.6 Total deposits$ 1,787,528 100.0 %$ 1,758,881 100.0 % The following table details the maturity distribution of time deposits as ofDecember 31, 2022 and 2021: More than More than three six months Three months through More than months or through six twelve twelve (In thousands) less months months months Total AtDecember 31, 2022 : Less than$250,000 $ 134,611 $ 39,583 $ 35,208 $ 148,554 $ 357,956 $250,000 or more 3,528 19,787 16,509 27,520 67,344 AtDecember 31, 2021 : Less than$250,000 $ 67,614 $ 20,515 $ 43,126 $ 126,374 $ 257,629 $250,000 or more 3,191 2,248 13,686 14,666 33,791 Total deposits increased$28.6 million to$1.8 billion atDecember 31, 2022 . This increase in deposits was due to increases of$133.9 million in time deposits and$32.1 million in interest-bearing demand deposits, partially offset by a decrease of$102.3 million in savings deposits and$35.0 million in noninterest-bearing demand deposits. Further, brokered certificates of deposits, which are disclosed in time deposits above, increased$69.3 million , to$189.6 million atDecember 31, 2022 , compared to$120.3 million atDecember 31, 2021 . The Company's deposit composition atDecember 31, 2022 , consisted of 33.1 percent savings deposits, 27.6 percent noninterest-bearing demand deposits, 23.8 percent time deposits and 15.5 percent interest-bearing demand deposits. The change in the composition of the portfolio fromDecember 31, 2021 reflects a 45.9 percent increase in time deposits and a 13.2 percent increase in interest-bearing demand deposits, partially offset by a 14.7 percent decrease in savings deposits and a 6.6 percent decrease in noninterest-bearing demand deposits. 37 Table of Contents
The following table shows average deposits and the concentration of each
category of deposits for the past two years:
For the years
ended
2022
2021
(In thousands, except percentages) Amount % of total Amount % of total Average balance: Noninterest-bearing demand deposits$ 518,244 29.1 %$ 493,213 29.8 % Interest-bearing demand deposits 269,789 15.2
227,750 13.8 Savings deposits 674,335 37.9 557,700 33.6 Time deposits 315,910 17.8 376,696 22.8 Total deposits$ 1,778,278 100.0 %$ 1,655,359 100.0 %
For additional information on deposits, see Note 6 to the Consolidated Financial
Statements.
Borrowed Funds and Subordinated Debentures
As part of the Company's overall funding and liquidity management program, from time to time the Company borrows from theFederal Home Loan Bank of New York . Residential mortgages and commercial loans collateralize these borrowings.
Borrowed funds and subordinated debentures totaled
million
down in the following table:
(In thousands) December 31, 2022 December 31, 2021 FHLB borrowings: Non-overnight, fixed rate advances $ 180,000 $ 40,000 Overnight advances 203,000 - Subordinated debentures 10,310 10,310 Total borrowed funds and subordinated debentures $ 393,310 $ 50,310 InDecember 2022 , the FHLB issued a$140.0 million municipal deposits letter of credit in the name ofUnity Bank naming theNew Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required underNew Jersey law, compared to a letter of credit with a balance of$112.0 million as ofDecember 31, 2021 .
At
available at the FHLB. Pledging additional collateral in the form of 1 to 4
family residential mortgages, commercial loans and investment securities can
increase the line with the FHLB.
For the year ending
million
year was
Subordinated Debentures OnJuly 24, 2006 , Unity (NJ) Statutory Trust II, a statutory business trust and wholly-owned subsidiary ofUnity Bancorp, Inc. , issued$10.0 million of floating rate capital trust pass through securities to investors due onJuly 24, 2036 . The subordinated debentures are redeemable in whole or part, prior to maturity but afterJuly 24, 2011 . The floating interest rate on the subordinated debentures is three-month LIBOR plus 159 basis points and reprices quarterly. The floating interest rate was 6.319% atDecember 31, 2022 and 1.806% atDecember 31, 2021 . The Company is currently evaluating its LIBOR-based exposure for this instrument. Market Risk Market risk for the Company is primarily limited to interest rate risk, which is the impact that changes in interest rates would have on future earnings. The Company's Risk Management Committee ("RMC") manages this risk. The principal 38 Table of Contents objectives of RMC are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital and liquidity requirements and actively manage risk within Board-approved guidelines. The RMC reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions and interest rate levels.
The following table presents the Company's EVE and NII sensitivity exposure
related to an instantaneous and sustained parallel shift in market interest rate
of 100, 200 and 300 bps, which were all in compliance with Board approved
tolerances at
Estimated Estimated Increase/ (Decrease) in
EVE Estimated Estimated Increase/ (Decrease) In NII
EVE Amount Percent NII Amount Percent
+300$ 269,493 $ (61,049) (22.65) %$ 92,822 $ (8,275) (8.91) % +200 290,558 (39,984) (13.76) 95,567 (5,530) (5.79) +100 311,453 (19,089) (6.13) 98,280 (2,817) (2.87) 0 330,542 - - 101,097 - - -100 346,750 16,208 4.67 102,688 1,591 1.55 -200 352,944 22,402 6.35 101,927 830 0.81 -300 353,361 22,819 6.46 100,183 (914) (0.91)
+300$ 296,319 $ 15,883 5.36 %$ 82,332 $ 5,382 6.54 % +200 292,465 12,029 4.11 80,480 3,529 4.39 +100 285,859 5,423 1.90 78,437 1,486 1.89 0 280,436 - - 76,950 - - -100 264,768 (15,668) (5.92) 75,156 (1,794) (2.39) -200 245,959 (34,477) (14.02) 74,967 (1,984) (2.65) -300 243,063 (37,373) (15.38) 74,919 (2,031) (2.71) Liquidity Consolidated Bank 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. The Company's liquidity is monitored by management and the Board of Directors which reviews historical funding requirements, the current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds and anticipated future funding needs, including the level of unfunded commitments. The goal is to maintain sufficient asset-based liquidity to cover potential funding requirements in order to minimize dependence on volatile and potentially unstable funding markets. The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations. 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. As theConsolidated Bank comprises the majority of the assets of the Company, the Consolidated Statement of Cash Flows is indicative of theConsolidated Bank's activity. AtDecember 31, 2022 , the balance of cash and cash equivalents was$114.8 million , a decrease of$130.0 million fromDecember 31, 2021 . A discussion of the cash provided by and used in operating, investing and financing activities follows. Operating activities provided$42.7 million and$32.5 million in net cash for the years endedDecember 31, 2022 and 2021, respectively. The primary sources of funds were net income from operations and adjustments to net income, such as the provision for loan losses and depreciation and amortization. 39
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Investing activities used$541.3 million and$40.5 million in net cash for the years endedDecember 31, 2022 and 2021, respectively. Cash was primarily used to originate loans, purchase FHLB stock and other investment securities, partially offset by cash inflows from proceeds from the SBA forgiveness of PPP loans.
Securities.
? amounted to
discussed under the heading "Parent Company Liquidity" below.
Loans. The SBA loans held for sale portfolio amounted to
? of these loans provide an additional source of liquidity for the Company. As an
existing SBA 7(a) lender, the Company opted to participate in the PPP program.
Forgiveness of these loans provided
the year ended
Outstanding Commitments. The Company was committed to advance approximately
million at
million of these commitments expire within one year, compared to
? at
letters of credit at
which are included in the commitments amount noted above. The estimated fair
value of these guarantees is not significant. The Company believes it has the
necessary liquidity to honor all commitments. Many of these commitments will
expire and never be funded.
Financing activities provided$368.6 million and$33.5 million in net cash for the years endedDecember 31, 2022 and 2021, respectively, primarily due to the proceeds of new borrowings and an increase in the Company's deposits.
Deposits. As of
Government deposits, as compared to
deposits are generally short in duration and are very sensitive to price
? competition. The Company believes that the current level of these types of
deposits is appropriate. Included in the portfolio were
deposits from eighteen municipalities with account balances in excess of
million. The withdrawal of these deposits, in whole or in part, would not
create a liquidity shortfall for the Company.
Borrowed Funds. Total FHLB borrowings amounted to
million as of
? based on the market value of collateral pledged. At
provided an additional
addition, the Company can pledge additional collateral in the form of 1 to 4
family residential mortgages, commercial loans or investment securities to
increase this line with the FHLB.
Parent Company Liquidity
The Parent Company's cash needs are funded by dividends paid and rental payments on corporate headquarters by the Bank. Other than its investment in the Bank,Unity Risk Management Inc. , and Unity Statutory Trust II, the Parent Company does not actively engage in other transactions or business. Only expenses specifically for the benefit of the Parent Company are paid using its cash, which typically includes the payment of operating expenses, cash dividends on common stock and payments on trust preferred debt.
At
equivalents and
value, compared to
investment securities at
40
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Off-Balance Sheet Arrangements and Contractual Obligations
The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as ofDecember 31, 2022 : One year One to Three to Over five (In thousands) or less three years five years years Total Off-balance sheet arrangements: Standby letters of credit$ 4,009 $ 595 $ -$ 993 $ 5,597 Contractual obligations: Time deposits 138,139 59,370 51,717 176,074 425,300 Borrowed funds and subordinated debentures 343,000 40,000 - 10,310 393,310 Total off-balance sheet arrangements and contractual obligations$ 485,148 $ 99,965 $
51,717
Standby letters of credit represent guarantees of payment issued by the Bank on behalf of a client that is used as "payment 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. For additional information on time
deposits, see Note 8 to the Consolidated Financial Statements.
Borrowed funds and subordinated debentures include fixed and adjustable rate borrowings from theFederal Home Loan Bank and subordinated debentures. The borrowings have defined terms and under certain circumstances are callable at the option of the lender. For additional information on borrowed funds and subordinated debentures, see Note 7 to the Consolidated Financial Statements.
Capital Adequacy
A significant measure of the strength of a financial institution is its capital base. Shareholders' equity increased$33.5 million to$239.2 million atDecember 31, 2022 compared to$205.7 million atDecember 31, 2021 , primarily due to net income of$38.5 million . Other increases were due to$3.0 million from the issuance of common stock under employee benefit plans, net of tax. These increases were partially offset by (i)$42 thousand in treasury stock purchased at cost, (ii)$4.4 million in dividends paid on common stock, and (iii)$3.6 million in accumulated other comprehensive loss, net of tax.
For additional information on shareholders' equity, see Note 13 to the
Consolidated Financial Statements.
OnSeptember 17, 2019 , the federal banking agencies issued a final rule providing simplified capital requirements for certain community banking organizations (banks and holding companies) with less than$10 billion in total consolidated assets, implementing provisions of The Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA"). Under the rule, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework or continue to measure capital under the existingBasel III requirements. The new rule, effective beginningJanuary 1, 2020 , allowed qualifying community banking organizations ("QCBO") to opt into the new community bank leverage ratio ("CBLR") in their call report beginning in the first quarter of 2020.
A QCBO is defined as a bank, a savings association, a bank holding company or a
savings and loan holding company with:
? A leverage capital ratio of greater than 9%;
? Total consolidated assets of less than
Total off-balance sheet exposures (excluding derivatives other than credit
? derivatives and unconditionally cancelable commitments) of 25% or less of total
consolidated assets; and
? Total trading assets and trading liabilities of 5% or less of total
consolidated assets.
41
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The Bank has opted into the CBLR and is therefore not required to comply with
the Basel III capital requirements.
As of
10.45%.
At December 31, 2022 At December 31, 2021
Company Bank Company Bank
CBLR 10.88 % 10.34 % 10.51 % 10.00 %
For additional information on regulatory capital, see Note 13 to the
Consolidated Financial Statements.
Forward-Looking Statements
This report contains certain forward-looking statements, either expressed or implied, which are provided to assist the reader in understanding anticipated future financial performance. These statements involve certain risks, uncertainties, estimates and assumptions by management. Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to those listed under "Item 1A - Risk Factors" in this Annual Report; the impact of the COVID-19 pandemic, the overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in tax, accounting or regulatory practices and requirements; and technological changes. Although management has taken certain steps to mitigate the negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on future profitability.
Critical Accounting Policies and Estimates
New Authoritative Accounting Guidance
See Note 1 of the consolidated financial statements for a description of recent accounting pronouncements, including the dates of adoption and the anticipated effect on our results of operations and financial condition.
Allowance for Loan Losses and Unfunded Loan Commitments
The allowance for loan losses is maintained at a level management considers
adequate to provide for probable loan losses as of the balance sheet date. The
allowance is increased by provisions charged to expense and is reduced by net
charge-offs.
The level of the allowance is based on management's evaluation of probable
losses in the loan portfolio, after consideration of prevailing economic
conditions in the Company's market area, the volume and composition of the loan
portfolio and historical loan loss experience. The allowance for loan losses
consists of specific reserves for individually impaired credits and TDRs and
reserves for nonimpaired loans based on historical loss factors and reserves
based on general economic factors and other qualitative risk factors, such as
changes in delinquency trends, industry concentrations or local/national
economic trends. This risk assessment process is performed at least quarterly,
and, as adjustments become necessary, they are realized in the periods in which
they become known.
Although management attempts to maintain the allowance at a level deemed
adequate to provide for probable losses, future additions to the allowance may
be necessary based upon certain factors including changes in market conditions
and underlying collateral values. In addition, various regulatory agencies
periodically review the adequacy of the Company's allowance for loan losses.
These agencies may require the Company to make additional provisions based on
judgments about information available at the time of the examination.
The Company maintains an allowance for unfunded loan commitments that is
maintained at a level that management believes is adequate to absorb estimated
probable losses. Adjustments to the allowance are made through other expenses
and applied to the allowance which is maintained in other liabilities.
42
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For additional information on the allowance for loan losses and unfunded loan
commitments, see Note 4 to the Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If tax reform results in a decline in the corporate tax rates the Company would have to write-down its deferred tax asset. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits would be recognized in income tax expense on the income statement.
For additional information on income taxes, see Note 11 to the Consolidated
Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
For information regarding Quantitative and Qualitative Disclosures about Market
Risk, see Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market Risk."
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Table of Contents
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