UNITY BANCORP INC /NJ/ (UNTY) FY 2023 MD&A

Item 7.    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 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 financial 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 twenty-one branch offices located in Bergen, Hunterdon, Middlesex, Morris, Ocean, Somerset, Union and Warren counties in New Jersey and Northampton County in Pennsylvania. These services include the acceptance of demand, savings and time deposits and the extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits. The Bank has multiple subsidiaries used to hold part of its investment, other real estate owned and loan portfolios.

Results of Operations

Net income totaled $39.7 million, or $3.84 per diluted share for the year ended December 31, 2023, compared to $38.5 million, or $3.59 per diluted share for the year ended December 31, 2022.

24

Table of Contents

Highlights for the year include:

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

​

​

​

​

​

25

Table of Contents

Net Interest Income

The primary source of the Company’s operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and net fees earned on loans, versus interest paid on interest-bearing liabilities. Interest-earning assets include loans to individuals and businesses, investment securities and interest-earning deposits. Interest-bearing liabilities include interest-bearing demand, savings and time deposits, FHLB advances and other borrowings.

2023 compared to 2022

During 2023, tax-equivalent net interest income amounted to $95.0 million, an increase of $4.9 million, or 5.4 percent, when compared to the same period in 2022. The net interest margin decreased 34 basis points to 4.06 percent for the year ended December 31, 2023, compared to 4.40 percent for the same period in 2022. The net interest spread was 3.32 percent for 2023, an 83 basis point decrease compared to 4.15 for the same period in 2022.

During 2023, tax-equivalent interest income was $143.5 million, an increase of $42.8 million, or 42.4 percent, when compared to the same period in the prior year. This increase was mainly driven by increases in the yield on loans, the balance of average loans, the yield securities and the yield on interest-bearing deposits.

Total interest expense was $48.5 million in 2023, an increase of $37.9 million or 356.2 percent compared to 2022. This increase was primarily driven by the increases in the rate paid on time deposits, savings deposits and borrowed funds and subordinated debentures and the increased balance of average borrowed funds and subordinated debentures and time deposits:

​

26

Table of Contents

Consolidated Average Balance Sheets

The following table reflects the components of net interest income, setting forth for the periods presented herein: (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread and (5) net interest income/margin on average interest-earning assets. 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)

​

27

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.

​

​

Provision for Credit Losses

The provision for credit losses for loans totaled $1.8 million for 2023, compared to $4.2 million in 2022. The provision for credit losses for loans decreased $2.4 million for the year ended 2023 primarily due to slower loan growth, as well as management's view of current economic conditions.

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

The provision for credit losses for AFS debt security impairment was $1.3 million for the year ended December 31, 2023, compared to none for the prior year. The impairment was entirely attributable to one corporate senior debt security in the AFS portfolio. The Company owns $5 million in par value of this position and the issuing company recently restated earnings and was unprofitable during the first three quarters of 2023.

Each period’s credit loss provision is the result of management’s analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions “Financial Condition - Asset Quality” and “Financial Condition - Allowance for Credit Losses and Reserve for Unfunded Loan Commitments.”  The current provision is considered appropriate under management’s assessment of the adequacy of the allowance for credit losses.

28

Table of Contents

Noninterest Income

The following table shows the components of noninterest income for the past two years:

​

Noninterest income was $8.1 million for 2023, a $0.1 million increase compared to $8.0 million for 2022. This increase was primarily due to increased net unrealized gains on securities, gains on SBA loans held for sale and gains on sale of mortgage loans, net  partially offset by decreased branch fee and service and loan fee income.

Noninterest Expense

The following table shows the components of noninterest expense for the past two years:

​

Noninterest expense totaled $47.0 million for the year ended December 31, 2023, an increase of $4.5 million when compared to $42.5 million in 2022. The majority of this increase is attributable to increased deposit insurance and compensation and benefits, reflecting ordinary increases, as well as increased staffing for new branches.

Income Tax Expense

For 2023, the Company reported income tax expense of $13.3 million for an effective tax rate of 25.1%, compared to an income tax expense of $13.0 million and an effective tax rate of 25.2% in 2022.

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

​

​

29

Table of Contents

Financial Condition

Total assets increased $133.6 million or 5.5 percent, to $2.6 billion at December 31, 2023, when compared to year end 2022. This increase was primarily due to increases of $65.5 million in gross loans, mostly due to commercial and residential mortgage loan growth, partially offset by decreases in residential construction, consumer and SBA loans. Total assets also included an increase of $80.0 million in cash and cash equivalents, offset by a decrease of $5.3 million in total securities.

​

Total deposits increased $136.6 million, due to increases of $155.7 million in time deposits, $45.1 million in brokered time deposits and $37.1 million in interest-bearing demand deposits, offset by a decrease of $26.7 million in savings deposits and $74.5 million in noninterest-bearing demand deposits. Borrowed funds decreased $26.6 million to $356.4 million at December 31, 2023.

​

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

​

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, 2023 and December 31, 2022:

​

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

​

30

Table of Contents

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

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 5.6 years and 6.4 years at December 31, 2023 and 2022, respectively. The effective duration of AFS debt securities amounted to 1.7 and 1.9 years at December 31, 2023 and 2022, respectively.

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 comprised of obligations of U.S. Government sponsored entities, state and political subdivisions and mortgage-backed securities.

HTM debt securities totaled $36.1 million at December 31, 2023, an increase of $0.3 million, or 1.0 percent, compared to $35.8 million at December 31, 2022. The increase was due to:

​

The weighted average life of HTM debt securities, adjusted for prepayments, amounted to 17.1 years and 18.0 years at December 31, 2023 and 2022, respectively. As of December 31, 2023, the fair value of HTM debt securities was $29.7 million, compared to $28.6 million at December 31, 2022. The effective duration of HTM debt securities amounted to 10.9 and 10.5 years at December 31, 2023 and 2022, 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 $7.8 million at December 31, 2023, a decrease of $2.0 million, or 20.3 percent, compared to $9.8 million at December 31, 2022. This net decrease was the result of:

​

​

​

​

​

​

​

31

Table of Contents

The following table provides the remaining contractual maturities and average yields, calculated on a yield-to-maturity basis, within the investment portfolios. The carrying value of securities at December 31, 2023 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.

​

​

Securities with a carrying value of $9.7 million and $0.8 million at December 31, 2023 and December 31, 2022, respectively, were pledged to secure other borrowings and for other purposes required or permitted by law. There were no securities encumbered at December 31, 2023 and December 31, 2022.

Approximately 66 percent and 63 percent of the total investment portfolio had a fixed rate of interest at December 31, 2023 and December 31, 2022, respectively.

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.

​

32

Table of Contents

Total loans were $2.2 billion at December 31, 2023, an increase of $65.5 million or 3.1 percent when compared to year end 2022. Commercial, residential mortgage and SBA loans held for investment increased $89.9 million, $26.4 million and $0.1 million, respectively, partially offset by decreases in residential construction, consumer and SBA PPP loans of $32.2 million, $5.5 million and $3.6 million, respectively.

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

​

Average loans increased $329.2 million or 18.1 percent from $1.8 billion in 2022, to $2.2 billion in 2023. The increase in average loans was due to increases in average commercial, residential mortgage and residential construction. The yield on the overall loan portfolio increased 105 basis points to 6.18 percent for the year ended December 31, 2023, compared to 5.13 percent for the prior year.

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 lower quality credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. These loans may have a higher loan to value (“LTV”) ratio, lower debt service coverage (“DSC”) ratio and/or weak personal financial guarantees. In addition, many SBA 7(a) loans are for startup 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 $18.2 million at December 31, 2023, a decrease of $9.7 million from $27.9 million at December 31, 2022. SBA 7(a) loans held for investment amounted to $38.6 million at December 31, 2023, an increase of $0.1 million from $38.5 million at December 31, 2022. The yield on SBA 7(a) loans, which is generally floating and adjusts quarterly to the Prime Rate, was 8.88 percent for the year ended December 31, 2023, compared to 6.60 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 $75.6 million and $72.1 million in SBA loans were sold but serviced by the Company at December 31, 2023 and December 31, 2022, 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.

​

33

Table of Contents

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 December 31, 2023, an increase of $89.9 million from year end 2022. The yield on commercial loans was 6.20 percent for 2023, compared to 5.10 percent for the same period in 2022. 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. 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 $631.5 million at December 31, 2023, an increase of $26.4 million from year end 2022. Sales of mortgage loans totaled $71.7 million and $74.4 million for 2023 and 2022, respectively. Approximately $23.4 million and $13.7 million in residential loans were sold but serviced by the Company at December 31, 2023 and December 31, 2022, respectively, and are not included on the Company’s balance sheet. The yield on residential mortgages was 5.48 percent for 2023, compared to 4.62 percent for 2022. 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 typically not considered high priced mortgages.

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements and other personal needs, and are generally secured by 1-4 family residences. These loans amounted to $72.7 million at December 31, 2023, a decrease of $5.5 million from December 31, 2022. The yield on consumer loans was 7.65 percent for 2023, compared to 5.27 percent for 2022.

Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to $131.3 million at December 31, 2023, a decrease of $32.2 million from December 31, 2022. The yield on residential construction loans was 7.09 percent for 2023, compared to 6.17 percent for 2022.

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

34

Table of Contents

The following table presents the maturity distribution of the loan portfolio at December 31, 2023:

​

The following table presents the contractual maturities after one year for fixed and adjustable rate loans within each loan category at December 31, 2023:

​

​

​

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

​

35

Table of Contents

Asset Quality

The following table sets forth information concerning nonperforming assets and loans past due 90 days or more and still accruing interest at December 31, 2023 and December 31, 2022:

​

Nonperforming loans were $19.2 million at December 31, 2023, a $10.1 million increase from $9.1 million at year end 2022. Since year end 2022, nonperforming loans in the SBA held for investment, residential mortgage, commercial and consumer loan segments increased, partially offset by a decrease in nonperforming residential construction. In addition, there was $0.9 million in loans past due 90 days or more and still accruing interest at December 31, 2023, compared to none at December 31, 2022.

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

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

Allowance for Credit Losses and Reserve for Unfunded Loan Commitments

The allowance for credit losses totaled $25.9 million at December 31, 2023, compared to $25.2 million at December 31, 2022, with resulting allowance to total loan ratios of 1.19 percent and 1.20 percent, respectively. Net charge-offs amounted to $2.0 million for 2023, compared to $1.3 million for 2022.

36

Table of Contents

The following table is a summary of the changes to the allowance for credit losses for December 31, 2023 and 2022, including net charge-offs to average loan ratios for each major loan category:

​

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

​

​

37

Table of Contents

​

The Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated expected losses. Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified as Other liabilities. At December 31, 2023, a $0.6 million commitment reserve was reported, compared to a $0.5 million commitment reserve at December 31, 2022.

​

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

Deposits

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:

​

The following table details the maturity distribution of time deposits as of December 31, 2023 and 2022:

​

​

​

Total deposits increased $136.6 million to $1.9 billion at December 31, 2023. This increase in deposits was due to increases of $155.7 million in time deposits, $45.1 million in brokered time deposits and $37.1 million in interest-bearing demand deposits, partially offset by a decrease of $26.7 million in savings deposits and $74.5 million in noninterest-bearing demand deposits.

The Company’s deposit composition at December 31, 2023, consisted of 29.4 percent savings deposits, 21.8 percent noninterest-bearing demand deposits, 22.1 percent time deposits, 10.4 brokered time deposits and 16.3 percent interest-bearing demand deposits. The change in the composition of the portfolio from December 31, 2022 reflects a 57.5 percent increase in time deposits, 29.2 percent increase in brokered time deposits and a 13.4 percent increase in interest-bearing demand deposits, partially offset by a 4.5 percent decrease in savings deposits and a 15.1 percent decrease in noninterest-bearing demand deposits.

38

Table of Contents

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

​

As of December 31, 2023 and December 31, 2022, uninsured and uncollateralized deposits amounted to $334.5 million and $376.6 million, respectively. The following table presented uninsured time deposits by maturity date as of December 31, 2023:

​

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 the Federal Home Loan Bank of New York. Residential mortgages and commercial real estate loans collateralize these borrowings.

Borrowed funds and subordinated debentures totaled $366.7 million and $393.3 million at December 31, 2023 and December 31, 2022, respectively, and are broken down in the following table:

​

In December 2023, the FHLB issued a $142.0 million municipal deposits letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law, compared to a letter of credit with a balance of $140.0 million as of December 31, 2022. In 2023, the FHLB issued an additional $25.0 million municipal deposits letter of credit in the name of Unity Bank naming certain townships in Pennsylvania as beneficiary, to secure municipal deposits as required under Pennsylvania law.

​

39

Table of Contents

At December 31, 2023, the Company had $303.4 million of additional credit available at the FHLB. During 2023, the Company pledged additional collateral to the FRB discount window. At December 31, 2023, the Company had $219.9 million of additional credit available at the FRB. Pledging additional collateral in the form of 1 to 4 family residential mortgages, commercial loans and investment securities can increase the lines with the FHLB and FRB.

For the year ending December 31, 2023, average FHLB borrowings were $294.1 million with a weighted average cost of 4.73%. The maximum borrowing during the year was $423.0 million.

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. For 2023, the floating interest rate on the subordinated debentures is the three-month CME term Secured Overnight Financing Rate (“SOFR”) plus 262 basis points and reprices quarterly. For 2022, the floating interest rate on the subordinated debentures was three-month LIBOR plus 159 basis points and repriced quarterly. The floating interest rate was 7.212% at December 31, 2023 and 6.319% at December 31, 2022.

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 December 31, 2023 and December 31, 2022:

​

​

​

40

Table of Contents

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 the Consolidated Bank comprises the majority of the assets of the Company, the Consolidated Statement of Cash Flows is indicative of the Consolidated Bank’s activity. At December 31, 2023, the balance of cash and cash equivalents was $194.8 million, an increase of $80.0 million from December 31, 2022. A discussion of the cash provided by and used in operating, investing and financing activities follows.

Operating activities provided $46.3 million and $42.7 million in net cash for the years ended December 31, 2023 and 2022, respectively The primary sources of funds were net income from operations and adjustments to net income, such as the provision for credit losses and depreciation and amortization.

Investing activities used $57.2 million and $541.3 million in net cash for the years ended December 31, 2023 and 2022, respectively. Cash was primarily used to originate loans, partially offset by cash inflows from investment securities.

​

41

Table of Contents

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

​

Off-Balance-Sheet Arrangements and Contractual Obligations

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These transactions may involve elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

​

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the borrower. As of December 31, 2023, the Bank had $256.3 million in unused lines of credit and $50.6 million in outstanding commitments to borrowers. As of December 31, 2022, the Bank had $395.7 million in unused lines of credit and $113.5 million in outstanding commitments to borrowers.

​

The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as of December 31, 2023:

​

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.

42

Table of Contents

Time deposits have stated maturity dates. For additional information on time deposits, see Note 6 to the Consolidated Financial Statements.

Borrowed funds and subordinated debentures include fixed 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. 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 $22.2 million to $261.4 million at December 31, 2023, compared to $239.2 million at December 31, 2022, primarily due to net income of $39.7 million. Other increases were due to $523 thousand in other comprehensive income and $3.0 million from the issuance of common stock under employee benefit plans, net of tax. These increases were partially offset by $15.7 million in treasury stock purchased at cost and $4.7 million in dividends paid on common stock.

For additional information on shareholders’ equity, see Note 10 to the Consolidated Financial Statements.

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 December 31, 2023, Unity Bank exceeded all capital requirements of the federal banking regulators and was considered well capitalized.

The following table presents information regarding the Bank’s regulatory capital levels at December 31, 2023 and December 31, 2022. Effective December 31, 2023, the Bank opted out of the CBLR:

​

43

Table of Contents

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 overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for credit 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 Credit Losses and Unfunded Loan Commitments

Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” amends the accounting guidance on the impairment of financial instruments. The Financial Accounting Standards Board (“FASB”) issued an amendment to replace the incurred loss impairment methodology under prior accounting guidance with a new current expected credit loss (“CECL”) model.  Under the new guidance, the Company is required to measure expected credit losses by utilizing forward-looking information to assess its allowance for credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost, including loans and held to maturity debt securities. CECL also applies to certain off-balance sheet exposures.

​

The Company adopted ASU 2016-13 on January 1, 2023, using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company established a governance structure to implement the CECL accounting guidance and has developed a methodology and set of models to be used upon adoption. At adoption, the Company recorded an $0.8 million increase to its allowance for credit losses, related to loans. Further, the Company increased its reserve for unfunded credit commitments by $0.1 million. The reserve for unfunded credit commitments is recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheet. These increases in reserves were recorded through retained earnings and was $0.6 million, net of tax.

​

For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost and adverse conditions related to the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax.

​

44

Table of Contents

The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies for available for sale and held to maturity debt securities. These securities are either explicitly or implicitly guaranteed by the U.S. Government, are highly rated by major agencies and have a long history of no credit losses.

​

For other assets within the scope of the new CECL accounting guidance, such as other held to maturity debt securities and other receivables, management noted the impact from adoption to be inconsequential. Additionally, the Company noted the adoption of CECL had no significant impact on regulatory capital ratios of the Company and/or the Bank.

​

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

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 for a change in tax rates is recognized in income in the period that includes the enactment date. If tax reform results in a decline in the corporate tax rates the Company would have to write-down its deferred tax asset.

Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits would be recognized in income tax expense on the income statement.

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

​