UNITY BANCORP INC /NJ/ Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

UNITY BANCORP INC /NJ/ Management’s Discussion and Analysis of Financial Condition and
Results of Operations (form 10-Q)
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the 2021 consolidated audited
financial statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2021. When necessary,
reclassifications have been made to prior period data throughout the following
discussion and analysis for purposes of comparability. This Quarterly Report on
Form 10-Q contains certain "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, which may be identified by
the use of such words as "believe", "expect", "anticipate", "should", "planned",
"estimated" and "potential". Examples of forward looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of Unity Bancorp, Inc. that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, in addition to those items contained in the
Company's Annual Report on Form 10-K under Item IA-Risk Factors, as updated by
our subsequent filings with the Securities and Exchange Commission, the
following: changes in general, economic, and market conditions, legislative and
regulatory conditions, the development of an interest rate environment that
adversely affects Unity Bancorp, Inc.'s interest rate spread or other income
anticipated from operations and investments and the impact of the COVID-19
pandemic on our employees, operations and customers.

Overview


Unity Bancorp, Inc. (the "Parent Company") is a bank holding company
incorporated in New Jersey and registered under the Bank Holding Company Act of
1956, as amended. Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when
consolidated with the Parent Company, the "Company") is chartered by the New
Jersey Department of Banking and Insurance and commenced operations on
September 13, 1991. The Bank provides a full range of commercial and retail
banking services through the Internet and its twenty branch offices located in
Bergen, Hunterdon, Middlesex, 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 and loan
portfolios.

The Company has two other wholly-owned subsidiaries: Unity (NJ) Statutory Trust
II and Unity Risk Management, Inc. On July 24, 2006, the Trust issued $10.0
million of trust preferred securities to investors. These floating rate
securities are treated as subordinated debentures on the Company's financial
statements. However, they qualify as Tier I Capital for regulatory capital
compliance purposes, subject to certain limitations. Unity Risk Management, Inc.
is the Company's captive insurance company that insures risks to the Bank not
covered by the traditional commercial insurance market. The Company does not
consolidate the accounts and related activity of Unity (NJ) Statutory Trust II,
but it does consolidate the accounts of Unity Risk Management, Inc.

COVID-19


On March 13, 2020, the Coronavirus Disease ("COVID-19") pandemic was declared a
national emergency by the President of the United States. The spread of COVID-19
has negatively impacted the national and local economy, disrupted supply chains
and increased unemployment levels. In response to the initial COVID-19 pandemic,
many businesses were faced with restrictions in an effort to prioritize public
health. The initial temporary closure and gradual reopening of many businesses
and the mitigation policies adopted by Federal, state and local governments have
impacted many of the Company's customers.

The Company is committed to supporting its customers, employees and communities
during this difficult time and has adapted to the changing environment. We have
taken and continue taking steps to protect the health and safety of our
employees and to work with our customers experiencing economic consequences from
the epidemic. The Company worked with its loan customers to provide short term
payment deferrals and to waive certain fees. These accommodations are likely to
have a negative impact on the Company's results of operations during the
duration of the epidemic, and, depending on how quickly the businesses of our
customers rebound after the emergency, could lead to an increase in
nonperforming assets.

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The full impact of the pandemic remains unknown and continues to evolve. The
outbreak has had a significant adverse impact on certain industries the Company
serves, including retail, accommodations, and restaurants and food services.
Although the COVID-19 pandemic continues, many restrictions have been lifted as
vaccines are administered and people start to feel safer. It is still unknown
what changes in the behavior of customers, businesses and their employees will
result from the COVID-19 pandemic. While states have re-opened, certain
restrictions remain in place, which have impacted commercial activity. These
impacts may result in our customers' inability to meet their loan obligations to
us. In addition, the economic pressures and uncertainties related to the
COVID-19 pandemic have resulted in changes in consumer spending behaviors, which
may negatively impact the demand for loans and other services we offer. Because
of the significant uncertainties related to the ultimate duration of the
COVID-19 pandemic and its effects on our customers and prospects, and on the
local and national economy, there can be no assurances as to how the crisis may
ultimately affect the Company's loan portfolio, and business as a whole. The
extent of such impact will depend on future developments, which remain
uncertain. As such, the Company could be subject to certain risks, any of which
could have a material, adverse effect on our business, financial condition,
liquidity, and results of operations.

CARES Act


On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act was signed into law. It contained substantial tax and spending provisions
intended to address the impact of the COVID-19 pandemic. The CARES Act included
a range of other provisions designed to support the U.S. economy and mitigate
the impact of COVID-19 on financial institutions and their customers, including
through the authorization of various relief programs and measures that the U.S.
Department of the Treasury, the Small Business Administration, the Federal
Reserve Board ("FRB") and other federal banking agencies have implemented or may
implement.

The CARES Act provided assistance to small businesses through the establishment
of the Paycheck Protection Program ("PPP"). The PPP provided small businesses
with funds to pay up to 24 weeks of payroll costs, including certain benefits.
The funds were provided in the form of loans that would be fully or partially
forgiven when used for payroll costs, interest on mortgages, rent, and
utilities. The payments on these loans were deferred for up to six months. Loans
made after June 5, 2020, mature in five years, and loans made prior to June 5,
2020, mature in two years but can be extended to five years if the lender
agrees. Forgiveness of the PPP loans is based on the employer maintaining or
quickly rehiring employees and maintaining salary levels. Most small businesses
with 500 or fewer employees were eligible. Applications for the PPP loans
started on April 3, 2020 and the application period was extended to August 8,
2020, and then reopened pursuant to the terms of the Economic Aid Act discussed
below. As an existing SBA 7(a) lender, the Company opted to participate in the
program.

The Company approved 1,224 applications and provided funding of approximately
$143.0 million during the year ended December 31, 2020. The Company has $1.1
million of PPP loans originated under the CARES Act remaining on our balance
sheet as of March 31, 2022 and believes that the majority of these loans will be
forgiven by the SBA.

Economic Aid Act

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,
and Venues ("Economic Aid") Act was signed into law. It 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 Economic Aid
Act provided funding for a second round of PPP loans for small businesses and
nonprofits experiencing significant revenue losses, made programmatic
improvements to PPP, funded grants to shuttered venues, and enacted emergency
enhancements to other SBA lending programs.

The PPP allowed certain eligible borrowers that previously received a PPP loan
to apply for a Second Draw PPP Loan with the same general loan terms as their
First Draw PPP Loan, and for borrowers that did not initially receive a PPP loan
to apply for one. Most small businesses with 300 or fewer employees that could
demonstrate at least a 25% reduction in gross receipts between comparable
quarters in 2019 and 2020 were eligible. Applications for PPP loans under the
Economic Aid Act started on January 13, 2021 and were available until March 31,
2021. The Company participated in the re-opened PPP loan process.

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The Company approved 955 applications and provided funding of approximately
$101.0 million. As of March 31, 2022, the Company has $27.5 million of PPP loans
originated under the Economic Aid Act in its portfolio.

Deferrals


On March 22, 2020, the federal bank regulatory agencies issued an "Interagency
Statement on Loan Modifications and Reporting for Financial Institutions Working
with Customers Affected by the Coronavirus." This guidance encouraged financial
institutions to work prudently with borrowers that were unable to meet their
contractual obligations because of the effects of COVID-19. The guidance went on
to explain that, in consultation with the FASB staff, the federal bank
regulatory agencies concluded that short-term modifications made on a good faith
basis to borrowers who were current as of the implementation date of a relief
program were not TDRs. Section 4013 of the CARES Act also addressed COVID-19
related modifications and specified that COVID-19 related modifications on loans
that were current as of December 31, 2019, were not TDRs.

Beginning in March 2020, the Company proactively communicated with its customers
to address their financial needs. The Company worked closely with its customers
to educate and guide them on their options for financial assistance, including
disaster loans, the PPP and payment relief through deferrals and waived fees. As
a result of our proactive approach to provide financial assistance to our
customers, loans have been modified through payment deferrals and are not
categorized as TDRs, in accordance with regulatory guidance and the CARES Act.
The table below summarizes the loans that are in deferral as of March 31, 2022:

                                                                              Unpaid
                                                                            principal
                                                                            balance of                        % total
                                         Total loan     Unpaid principal    principal     Unpaid principal   deferrals
                                          portfolio     balance of full        only          balance of      to total
(In thousands)                             balance         deferrals        deferrals        deferrals         loans
SBA loans held for sale                 $      25,282   $              -   $          -   $              -        0.00 %
SBA loans held for investment                  33,048                  -   
          -                  -        0.00
SBA PPP loans                                  28,618                  -              -                  -        0.00
Commercial loans                              979,911              1,860              -              1,860        0.19
Residential mortgage loans                    427,165                  -              -                  -        0.00
Consumer loans                                 77,702                  -              -                  -        0.00
Residential construction loans                129,658                  -   
          -                  -        0.00
Total loans                             $   1,701,384   $          1,860   $          -   $          1,860        0.11 %



Consent Order

In July 2020, Unity Bank agreed to the issuance of a Consent Order by the
Federal Deposit Insurance Corporation ("FDIC") and agreed to an Acknowledgement
and Consent of the FDIC Consent Order with the Commissioner of Banking and
Insurance for the State of New Jersey. The Consent Order requires the Bank to
strengthen its Bank Secrecy Act ("BSA")/anti-money laundering ("AML") program,
and to address related matters. The Bank hired a consulting firm to assist
management in effectively addressing all matters pertaining to the order.
Although the Bank believes it is complying with all requirements of the Consent
Order, we can give no assurance that the FDIC and the NJDOBI will agree that the
Bank is fully complying or that the Bank will not incur material additional
expense in complying with the Consent Order.

Earnings Summary

Net income totaled $9.1 million, or $0.85 per diluted share for the quarter
ended March 31, 2022, compared to $8.5 million, or $0.80 per diluted share for
the same period a year ago. Return on average assets and average common equity
for the quarter were 1.80 percent and 17.64 percent, respectively, compared to
1.85 percent and 19.51 percent for the same period a year ago.

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First quarter highlights include:

? Net interest income increased 10.5 percent compared to the prior year’s quarter

due to commercial loan growth and residential construction loan growth.

? Net interest margin equaled 4.11 percent this quarter compared to 4.09 percent

in the prior years’ quarter.

? The Company released $178 thousand of its provision for loan losses for the

quarter ended March

31, 2022. The provision for loan losses decreased $678 thousand compared to the
prior year’s period due to an improved outlook on credit quality.

? Noninterest expense increased 6.2 percent compared to the prior year’s quarter,

primarily due to increased compensation expenses.

? The effective tax rate was 23.5 percent compared to 25.7 percent in the

prior year’s quarter.

The Company’s performance ratios may be found in the table below.

                                                              For the three months ended
                                                                      March 31,
                                                               2022                2021
Net income per common share - Basic (1)                    $       0.87        $       0.81
Net income per common share - Diluted (2)                  $       0.85        $       0.80
Return on average assets                                           1.80 %              1.85 %
Return on average equity (3)                                      17.64 %  
          19.51 %
Efficiency ratio (4)                                              45.86 %             45.74 %

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

(2) Defined as net income divided by the sum of the 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.

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 earning assets
and fees earned on loans, and interest paid on interest-bearing liabilities.
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 earning assets and the rates paid on interest-bearing
liabilities ("net interest spread") and the relative amounts of earning assets
and interest-bearing liabilities. The Company's net interest spread is affected
by regulatory, economic and competitive factors that influence interest rates,
loan demand, deposit flows and general levels of nonperforming assets.

During the three months ended March 31, 2022, tax-equivalent net interest income
amounted to $19.9 million, an increase of $1.9 million or 10.5 percent when
compared to the same period in 2021. The net interest margin increased 2 basis
points to 4.11 percent for the three months ended March 31, 2022, compared to
4.09 percent for the same period in 2021. The net interest spread was
3.98 percent for the first quarter of 2022, a 16 basis point increase compared
to the same period in 2021.

During the three months ended March 31, 2022, tax-equivalent interest income was
$21.1 million, an increase of $543 thousand or 2.6 percent when compared to the
same period in 2021. This increase was mainly driven by the increase in the
balance of securities residential construction loans.

Of the $543 thousand net increase in interest income on a tax-equivalent basis,

? $729 thousand is due to an increase in yields on the earning assets, partially

   offset by a $186 thousand decrease to average earning assets.


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The average volume of interest-earning assets increased $179.8 million to $2.0

billion for the first quarter of 2022 compared to $1.8 billion for the same

? period in 2021. This was due primarily to a $119.8 million increase in

interest-bearing deposits, $44.6 million increase in investment securities, and

a $17.1 million increase in average loans, primarily commercial and residential

construction.

The yield on total interest-earning assets decreased 31 basis points to

? 4.36 percent for the three months ended March 31, 2022 when compared to the

same period in 2021. The yield on the loan portfolio decreased 2 basis points

to 4.95 percent.



Total interest expense was $1.2 million for the three months ended
March 31, 2022, a decrease of $1.3 million or 52.5 percent compared to the same
period in 2021. This decrease was driven by the decreased rates on and volume of
time deposits and the decreased volume of borrowed funds and subordinated
debentures compared to a year ago:

Of the $1.3 million decrease in interest expense, $980 thousand was due to a

? decrease in the rates on interest-bearing liabilities, and $363 thousand was

due to decreased volume of average interest-bearing liabilities.

Interest-bearing liabilities averaged $1.3 billion for the first quarter of

? 2022, an increase of $75.6 million or 6.2 percent compared to the prior year’s

quarter.

The average cost of total interest-bearing liabilities decreased 47 basis

points to 0.38 percent. The cost of interest-bearing deposits decreased 48

? basis points to 0.32 percent for the first quarter of 2022 and the cost of

borrowed funds and subordinated debentures increased 21 basis points to

1.82 percent.

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 in 2022 and 2021.

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Consolidated Average Balance Sheets

(Dollar amounts in thousands, interest amounts and interest rates/yields on a
fully tax-equivalent basis)


                                                               For the 

three months ended

                                                 March 31, 2022                          March 31, 2021
                                        Average                                 Average
                                        Balance     Interest    Rate/Yield      Balance     Interest    Rate/Yield
ASSETS
Interest-earning assets:
Interest-bearing deposits             $   210,601   $      96         0.18 %  $    90,830   $      24         0.11 %
Federal Home Loan Bank ("FHLB")
stock                                       3,550          33         3.81          5,167          63         4.98
Securities:
Taxable                                    84,739         652         3.12         38,741         292         3.06
Tax-exempt                                    990           8         3.07          2,405          12         2.03
Total securities (A)                       85,729         660         3.12         41,146         304         3.00
Loans:
SBA loans                                  63,543         923         5.89         48,845         783         6.50
SBA PPP loans                              36,989         777         8.52        142,581       1,730         4.92
Commercial loans                          949,948      11,497         4.91        849,065      10,474         5.00
Residential mortgage loans                413,308       4,390         4.31        455,782       5,128         4.56
Consumer loans                             78,989         921         4.73         63,440         857         5.48
Residential construction loans            122,993       1,824         6.01         88,992       1,215         5.54
Total loans (B)                         1,665,770      20,332         4.95      1,648,705      20,187         4.97
Total interest-earning assets         $ 1,965,650   $  21,121         4.36 %  $ 1,785,848   $  20,578         4.67 %

Noninterest-earning assets:
Cash and due from banks                    23,679                                  23,781
Allowance for loan losses                (22,331)                                (23,308)
Other assets                               79,631                                  76,309
Total noninterest-earning assets           80,979                          
       76,782
Total assets                          $ 2,046,629                             $ 1,862,630

LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits      $   249,329   $     164         0.27
%  $   209,020   $     309         0.60 %
Savings deposits                          701,281         345         0.20        476,463         431         0.37
Time deposits                             288,155         480         0.68        438,250       1,463         1.35
Total interest-bearing deposits         1,238,765         989         0.32      1,123,733       2,203         0.80
Borrowed funds and subordinated
debentures                                 50,310         226         1.82 

89,699 355 1.61
Total interest-bearing liabilities $ 1,289,075 $ 1,215 0.38 % $ 1,213,432 $ 2,558 0.85 %


Noninterest-bearing liabilities:
Noninterest-bearing demand deposits       526,931                          
      455,146
Other liabilities                          21,217                                  17,418
Total noninterest-bearing
liabilities                               548,148                                 472,564
Total shareholders' equity                209,406                                 176,634
Total liabilities and shareholders'
equity                                $ 2,046,629                             $ 1,862,630

Net interest spread                                 $  19,906         3.98 %                $  18,020         3.82 %
Tax-equivalent basis adjustment                           (2)              
                      (2)
Net interest income                                 $  19,904                               $  18,018
Net interest margin                                                   4.11 %                                  4.09 %

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, as well as all applicable state rates.

(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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(A)


The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volume and rates over the
periods presented. Changes that are not solely due to volume or rate variances
have been allocated proportionally to both, based on their relative absolute
values. Amounts have been computed on a tax-equivalent basis, assuming a federal
income tax rate of 21 percent.

                                                      For the three months ended March 31, 2022 versus
                                                                       March 31, 2021
                                                            Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)               Volume                  Rate                Net
Interest income:
Interest-bearing deposits                         $              48       $           24       $         72
FHLB stock                                                     (17)                 (13)               (30)
Securities                                                      345                   11                356
Loans                                                         (562)                  707                145
Total interest income                             $           (186)       $          729       $        543
Interest expense:
Demand deposits                                   $              51       $        (196)       $      (145)
Savings deposits                                                159                (245)               (86)
Time deposits                                                 (402)                (581)              (983)
Total interest-bearing deposits                               (192)              (1,022)            (1,214)
Borrowed funds and subordinated debentures                    (171)                   42              (129)
Total interest expense                                        (363)                (980)            (1,343)
Net interest income - fully tax-equivalent        $             177       $        1,709       $      1,886
Decrease in tax-equivalent adjustment                                      
                              -
Net interest income                                                                            $      1,886

Provision for Loan Losses


During the three months ended March 31, 2022, the Bank released $178 thousand of
provision, compared to a provision of $500 thousand for the three months ended
March 31, 2021. The $678 thousand decrease in provision for loan losses was
primarily due to an improved outlook on credit quality.

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 three
months ended March 31, 2022 and 2021:

                                                            For the three months ended March 31,
(In thousands)                                                     2022                   2021
Branch fee income                                           $              275        $        295
Service and loan fee income                                                584                 625
Gain on sale of SBA loans held for sale, net                               852                 245
Gain on sale of mortgage loans, net                                       
521               1,750
BOLI income                                                                163                 129
Net security (losses) gains                                              (557)                 310
Other income                                                               401                 372
Total noninterest income                                    $            2,239        $      3,726


For the three months ended March 31, 2022, noninterest income decreased $1.5
million to $2.2 million, compared to the same period last year. The decrease was
primarily due to decreased gains on sales of mortgage loans and net security
losses.

Changes in our noninterest income for the three months ended March 31, 2022
compared to the prior year period reflect:

? Branch fee income decreased $20 thousand, primarily due to service charges on

deposit related accounts.

Service and loan fee income decreased $41 thousand primarily due to a decrease

? in prepayment penalties relating to loan payoff charges, mortgage application

fees, and SBA and Residential Mortgage servicing income.

SBA loan sales during the first quarter of 2022 totaled $6.8 million with a net

? gain of $852 thousand, compared to $2.2 million in sales with a net gain of

$245 thousand in the prior year’s quarter.

Mortgage loan sales were $27.0 million with a gain of 1.93% for the three

? months ended March 31, 2022, compared to $101.9 million with a gain of 1.73%

for prior year’s quarter.

Bank owned life insurance (“BOLI”) income increased $34 thousand in the three

? months ended in March 31, 2022, when compared to the same period in the prior

year.

Net security losses totaled $557 thousand during the first quarter of 2022,

compared to gains of $310 thousand in the prior year’s quarter. There were

? approximately $557 thousand in losses which resulted from decreases in the

market values of equity securities, compared to an increase of $267 thousand in

the prior year’s quarter.

Other income, which includes check card related income and miscellaneous

? service charges, increased $29 thousand for the three months ended March 31,

   2021, primarily due to an increase in card interchange fees.


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Noninterest Expense

The following table presents a breakdown of noninterest expense for the three
months ended March 31, 2022 and 2021:

                                                                For the three months ended
                                                                        March 31,
(In thousands)                                                 2022                 2021
Compensation and benefits                                  $      6,508       $           6,063
Occupancy                                                           775                     706
Processing and communications                                       752                     807
Furniture and equipment                                             576                     649
Professional services                                               447                     380
Deposit insurance                                                   269                     214
Director fees                                                       233                     208
Advertising                                                         225                     268
Other loan expenses                                                 135                     143
Loan collection & OREO expenses (recoveries)                         58    
               (49)
Other expenses                                                      432                     413
Total noninterest expense                                  $     10,410       $           9,802

Noninterest expense increased $608 thousand to $10.4 million for the three
months ended March 31, 2022, compared to $9.8 million in March 31, 2021,
primarily due to increased compensation expenses.

Changes in noninterest expense for the three months ended March 31, 2022 versus
2021 reflect:

Compensation and benefits expense, the largest component of noninterest

? expense, increased $445 thousand for the three months ended March 31, 2022,

when compared to 2021, primarily due to increased compensation expenses.

Occupancy expense increased $69 thousand in the three months ended March 31,

? 2022, when compared to 2021, primarily due to increased rent and depreciation

expenses.

? Processing and communications expense decreased $55 thousand when compared to

2021.

Furniture and equipment expense, which includes network and software

? maintenance, decreased $73 thousand for the three months ended March 31, 2022,

primarily due to decreases in software maintenance expenses.

Professional service fees increased $67 thousand for the three months ended

? March 31, 2022, when compared to 2021, primarily due to higher consulting

related expenses.

? Deposit Insurance increased $55 thousand in the three months ended March 31,

2022.

? Director fees increased $25 thousand in the three months ended March 31, 2022.

? Advertising expenses decreased $43 thousand in the three months ended March 31,

2022.

Other loan expenses, which consist of expenses such as appraisals, loan

? property tax expenses, and credit reports, decreased $8 thousand for the three

months ended March 31, 2022.

Loan collection and OREO costs increased $107 thousand in the three months

? ended March 31, 2022, primarily due to the increase in loan legal and SBA

Reimbursement expenses.

? Other expenses increased $19 thousand for the three months ended March 31,

   2022.


Income Tax Expense

For the quarter ended March 31, 2022, the Company reported income tax expense of
$2.8 million for an effective tax rate of 23.5 percent, compared to income tax
expense of $2.9 million and an effective tax rate of 25.7 percent for the prior
year's quarter.

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The bill,
effective January 1, 2018, imposed a temporary surtax on corporations earning
New Jersey allocated income in excess of $1 million at a rate of 2.5% for
tax years beginning on or after January 1, 2018 through December 31, 2019, and
at a rate of 1.5% for years beginning on

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or after January 1, 2020, through December 31, 2021. In addition, New Jersey
adopted mandatory unitary combined reporting for its Corporation Business Tax,
which became effective for periods on or after January 1, 2019.

On September 29, 2020, New Jersey's Assembly Bill 4721 was signed into law. The
bill, retroactively effective January 1, 2020, extends the 2.5% corporate income
surtax until December 31, 2023. If the federal corporate tax rate is increased
to a rate of at least 35% of taxable income, the surtax will be suspended.

For additional information on income taxes, see Note 4 to the Consolidated
Financial Statements.

Financial Condition at March 31, 2022


Total assets increased $34.0 million or 1.7 percent, to $2.1 billion at
March 31, 2022, when compared to year end 2021. This increase was primarily due
to increases of $52.1 million in net loans, mostly due to commercial and
residential mortgage loan growth, and $36.9 million in total securities,
partially offset by decreases of $57.1 million in cash and cash equivalents and
$17.8 million in SBA PPP loans due to loans being forgiven and paid off.

Total deposits increased $12.3 million, primarily due to increases of $13.3
million
in savings deposits and $12.8 million in noninterest-bearing demand
deposits, partially offset by a decrease of $10.5 million in time deposits and a
decrease of $3.3 million in interest-bearing demand deposits.


Total shareholders' equity increased $9.2 million over year end 2021, primarily
due to earnings, an increase in common stock and accumulated other comprehensive
income, partially offset by treasury stock purchases and dividends paid during
the three months ended March 31, 2022.

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

Securities Portfolio


The Company's securities portfolio consists of AFS debt securities, HTM
securities and equity investments. Management determines the appropriate
security classification of AFS and HTM at the time of purchase. The investment
securities portfolio is maintained for asset-liability management purposes, as
well as for liquidity and earnings purposes.

AFS debt securities are investments carried at fair value that may be sold in
response to changing market and interest rate conditions or for other business
purposes. Activity in this portfolio is undertaken primarily to manage liquidity
and interest rate risk, to take advantage of market conditions that create
economically attractive returns and as an additional source of earnings. AFS
debt securities consist primarily of obligations of state and political
subdivisions, mortgage-backed securities, asset backed securities, corporate and
other securities.

AFS debt securities totaled $77.9 million at March 31, 2022, an increase of
$21.4 million or 37.9 percent, compared to $56.5 million at December 31, 2021.
This net increase was the result of:

? $24.2 million in additions from the purchase of five CMO fixed rate, six asset

backed securities, and two agencies,

? $1.8 million in principal payments, maturities and called bonds,

$1.1 million depreciation in the market value of the portfolio. At

March 31, 2022, the portfolio had a net unrealized loss of $1.0 million

? compared to a net unrealized gain of $38 thousand at December 31, 2021. These

net unrealized losses are reflected net of tax in shareholder’s equity as

accumulated other comprehensive income, and,

? $20 thousand in net amortization.

The weighted average life of AFS debt securities, adjusted for prepayments,
amounted to 7.1 years and 6.9 years at March 31, 2022 and December 31, 2021,
respectively. The effective duration of AFS debt securities amounted to 1.7
years and 3.1 years at March 31, 2022 and December 31, 2021, respectively.


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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
primarily comprised of U.S. Government and obligations of state and political
subdivisions.

HTM securities were $30.4 million at March 31, 2022, an increase of $16.1
million
or 112.7 percent, compared to $14.3 million at December 31, 2021. This
net increase was the result of:

? $5.1 million in principal payments,

? $9 thousand in net amortization and,

? $18.7 million in addition from the purchase of six agency notes/ bonds and

three CMO fixed rate securities.



The weighted average life of HTM securities, adjusted for prepayments, amounted
to 16.4 years. As of March 31, 2022, the fair value of HTM securities was $28.9
million. The effective duration of HTM securities amounted to 9.1 years and 5.6
years at March 31, 2022 and December 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 $8.0 million at March 31, 2022, a decrease of $557
thousand
or 6.5%, compared to $8.6 million at December 31, 2021. This net
decrease is primarily due to market value adjustments throughout the year.

The average balance of taxable securities amounted to $84.7 million for the
three months ended March 31, 2022, compared to $38.7 million for the same period
in 2021. The average yield earned on taxable securities increased 6 basis
points, to 3.12 percent for the three months ended March 31, 2022, from 3.06
percent for the same period in the prior year. The average balance of tax-exempt
securities amounted to $990 thousand for the three months ended March 31, 2022,
compared to $2.4 million for the same period in 2021. The average yield earned
on tax-exempt securities increased 104 basis points, to 3.07 percent for the
three months ended March 31, 2022, from 2.03 percent for the same period in
2021.

Securities with a carrying value of $1.0 million and $1.2 million at
March 31, 2022 and December 31, 2021, respectively, were pledged to secure other
borrowings, to collateralize hedging instruments and for other purposes required
or permitted by law.

Approximately 52 percent of the total investment portfolio had a fixed rate of
interest at March 31, 2022.

See Note 7 to the accompanying Consolidated Financial Statements for more
information regarding Securities.

Loan Portfolio

The loan portfolio, which represents the Company's largest asset group, is a
significant source of both interest and fee income. The portfolio consists of
SBA, commercial, residential mortgage, consumer, and residential construction
loans. Each of these segments is subject to differing levels of credit and
interest rate risk.

Total loans increased $51.9 million or 3.1 percent to $1.7 billion at
March 31, 2022, compared to year end 2021. Commercial, residential mortgage and
residential construction loans increased $48.2 million, $17.8 million and $9.1
million respectively, partially offset by decreases of $17.8 million, $5.1
million and $242 thousand in SBA PPP, SBA and consumer loans, respectively.

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The following table sets forth the classification of loans by major category,
including unearned fees and deferred costs and excluding the allowance for loan
losses as of March 31, 2022 and December 31, 2021:

                                         March 31, 2022        December 31, 

2021

                                                     % of                    % of
(In thousands, except percentages)      Amount       total      Amount     

total

SBA loans held for investment $ 33,048 1.9 % $ 36,075

   2.2 %
SBA PPP loans                              28,618      1.7         46,450      2.8
Commercial loans                          979,911     57.6        931,726     56.5
Residential mortgage loans                427,165     25.1        409,355     24.8
Consumer loans                             77,702      4.6         77,944      4.7
Residential construction loans            129,658      7.6        120,525  

7.3

Total loans held for investment $ 1,676,102 98.5 % $ 1,622,075

  98.3 %
SBA loans held for sale                    25,282      1.5         27,373      1.7
Total loans                           $ 1,701,384    100.0 %  $ 1,649,448    100.0 %


Average loans increased $17.1 million or 1.0 percent to $1.7 billion for the
three months ended March 31, 2022 from $1.6 billion for the same period in 2021.
The increase in average loans was due to increases in average commercial,
residential construction and consumer loans, partially offset by decreases in
average SBA PPP, residential mortgage and SBA loans. The yield on the overall
loan portfolio decreased 2 basis points to 4.95 percent for the three months
ended March 31, 2022 when compared to the same period in the prior year.

SBA 7(a) loans, on which the SBA historically has provided guarantees of up to
90 percent of the principal balance, are considered a higher risk loan product
for the Company than its other loan products. These loans are made for the
purposes of providing working capital or financing the purchase of equipment,
inventory or commercial real estate. Generally, an SBA 7(a) loan has a
deficiency in its credit profile that would not allow the borrower to qualify
for a traditional commercial loan, which is why the SBA provides the guarantee.
The deficiency may be a higher loan to value ("LTV") ratio, lower debt service
coverage ("DSC") ratio or weak personal financial guarantees. In addition, many
SBA 7(a) loans are for startup businesses where there is no history or financial
information. Finally, many SBA borrowers do not have an ongoing and continuous
banking relationship with the Bank, but merely work with the Bank on a single
transaction. The guaranteed portion of the Company's SBA loans are generally
sold in the secondary market with the nonguaranteed portion held in the
portfolio as a loan held for investment.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted
to $25.3 million at March 31, 2022, a decrease of $2.1 million from $27.4
million at December 31, 2021.  SBA 7(a) loans held to maturity amounted to $33.0
million at March 31, 2022, a decrease of $3.0 million from $36.1 million at
December 31, 2021.  The yield on SBA loans, which are generally floating and
adjust quarterly to the Prime rate, was 5.89 percent for the three months ended
March 31, 2022, compared to 6.50 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. The carrying value of SBA loans held for sale represents the guaranteed
portion to be sold into the secondary market. The carrying value of SBA loans
held to maturity represents the unguaranteed portion, which is the Company's
portion of SBA loans originated, reduced by the guaranteed portion that is sold
into the secondary market. Approximately $90.5 million and $87.4 million in SBA
loans were sold but serviced by the Company at March 31, 2022 and
December 31, 2021, respectively, and are not included on the Company's balance
sheet. There is no relationship or correlation between the guarantee percentages
and the level of charge-offs and recoveries on the Company's SBA 7(a) loans.
Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan.
SBA loans are underwritten to the same credit standards irrespective of the
guarantee percentage.

The CARES Act provided assistance to small businesses through the establishment
of the PPP. The PPP provided small businesses with funds to pay up to 24 weeks
of payroll costs, including certain benefits. The funds are provided in the form
of loans that may be fully or partially forgiven when used for payroll costs,
interest on mortgages, rent, and

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utilities. The payments on these loans were deferred for up to six months. Loans
made after June 5, 2020, mature in five years, and loans made prior to June 5,
2020, mature in two years and can be extended to five years if the lender
agrees. Forgiveness of the PPP loans is based on the employer/borrower
maintaining or quickly rehiring employees and maintaining salary levels. Most
small businesses with 500 or fewer employees were eligible. Applications for the
PPP loans started on April 3, 2020 and the application period was extended
through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to
participate in the program. The application period was then reopened under the
provisions of the Economic Aid Act. Applications for PPP loans under the
Economic Aid Act started on January 13, 2021 and were available until March 31,
2021. These loans amounted to $28.6 million at March 31, 2022, a decrease of
$17.8 million from year end 2021.

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
$979.9 million at March 31, 2022, an increase of $48.2 million from year end
2021. The yield on commercial loans was 4.91 percent for the three months ended
March 31, 2022, compared to 5.00 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. Generally, the Company
has a 50 percent LTV ratio on SBA 504 program loans at origination.

Residential mortgage loans consist of loans secured by 1 to 4 family residential
properties. These loans amounted to $427.2 million at March 31, 2022, an
increase of $17.8 million from year end 2021. Sales of mortgage loans totaled
$27.0 million for the three months ended March 31, 2022. The yield on
residential mortgages was 4.31 percent for the three months ended
March 31, 2022, compared to 4.56 percent in the same period in 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 adjustable rate mortgages with
rates that exceed the rates on conventional fixed-rate mortgage loan products
but which are not considered high priced mortgages.

Consumer loans consist of home equity loans and loans for the purpose of
financing the purchase of consumer goods, home improvements, and other personal
needs, and are generally secured by the personal property being purchased. These
loans amounted to $77.7 million, a decrease of $242 thousand from year end 2021.
The yield on consumer loans was 4.73 percent for the three months ended
March 31, 2022, compared to 5.48 percent for the same period in 2021.

Residential construction loans consist of short-term loans for the purpose of
funding the costs of building a home. These loans amounted to $129.7 million, an
increase of $9.1 million from year end 2021. The yield on residential
construction loans was 6.01 percent for the three months ended March 31, 2022,
compared to 5.54 percent for the same period in 2021.

There are no concentrations of loans to any borrowers or group of borrowers
exceeding 10 percent of the total loan portfolio and no foreign loans in the
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 or debt service 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 designed to mitigate their additional inherent risk. Management does
not believe that these products create a concentration of credit risk in the
Company's loan portfolio. The Company does not have any option adjustable rate
mortgage loans.

The majority of the Company's loans are secured by real estate. Declines in the
market values of real estate in the Company's trade area impact the value of the
collateral securing its loans. This could lead to greater losses in the event of
defaults on loans secured by real estate. At March 31, 2022 approximately 93
percent of the Company's loan portfolio was secured by real estate compared to
92 percent at December 31, 2021.

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Troubled Debt Restructurings (“TDRs”)


TDRs occur when a creditor, for economic or legal reasons related to a debtor's
financial condition, grants a concession to the debtor that it would not
otherwise consider. These concessions typically include reductions in interest
rate, extending the maturity of a loan, or a combination of both. Deferrals
complying with the terms of the CARES Act and regulatory guidance (i.e.,
deferrals of up to six months to borrowers impacted by the COVID-19 pandemic,
where the borrower was current at either December 31, 2019 or prior to the
deferral being granted) are not considered TDR's. When the Company modifies a
loan, management evaluates for any possible impairment using either the
discounted cash flows method, where the value of the modified loan is based on
the present value of expected cash flows, discounted at the contractual interest
rate of the original loan agreement, or by using the fair value of the
collateral less selling costs. If management determines that the value of the
modified loan is less than the recorded investment in the loan, impairment is
recognized by segment or class of loan, as applicable, through an allowance
estimate or charge-off to the allowance. This process is used, regardless of
loan type, and for loans modified as TDRs that subsequently default on their
modified terms.

At March 31, 2022, there were five loans totaling $1.9 million that were
classified as TDRs and deemed impaired, compared to three loan totaling $1.0
million at December 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 March 31, 2022 and December 31, 2021:


                                   March 31, 2022                           

December 31, 2021

                     Performing      Nonperforming        Total       Performing      Nonperforming        Total
(In thousands)          TDRs              TDRs            TDRs           TDRs              TDRs            TDRs
Commercial real
estate              $      1,464    $              -    $   1,464    $        619    $              -    $     619
Home equity                  427                   -          427             427                   -          427
Commercial other              25                               25               -                                -
Total               $      1,916    $              -    $   1,916    $      1,046    $              -    $   1,046

Through March 31, 2022, TDRs consisted of principal reduction, interest only
periods and maturity extensions. The following table shows the types of
modifications done by date by class through March 31, 2022:

                                                         March 31, 2022
                                         Commercial       Home     Commercial
(In thousands)                          real estate      equity      Other         Total
Type of modification:
Principal reduction                     $      1,464    $      -     $       -    $ 1,464
Interest only with nominal principal               -         427           
25        452
Total TDRs                              $      1,464    $    427     $            $ 1,916


Asset Quality
Inherent in the lending function is credit risk, which is the possibility a
borrower may not perform in accordance with the contractual terms of their loan.
A borrower's inability to pay their obligations according to the contractual
terms can create the risk of past due loans and, ultimately, credit losses,
especially on collateral deficient loans. The Company minimizes its credit risk
by loan diversification and adhering to strict credit administration policies
and procedures. Due diligence on loans begins when we initiate contact regarding
a loan with a borrower. Documentation, including a borrower's credit history,
materials establishing the value and liquidity of potential collateral, the
purpose of the loan, the source of funds for repayment of the loan, and other
factors, are analyzed before a loan is submitted for approval.

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The loan portfolio is then subject to on-going internal reviews for credit
quality, as well as independent credit reviews by an outside firm.

The risk of loss is difficult to quantify and is subject to fluctuations in
collateral values, general economic conditions and other factors. In some cases,
these factors have also resulted in significant impairment to the value of loan
collateral. The Company values its collateral through the use of appraisals,
broker price opinions, and knowledge of its local market.

Nonperforming assets consist of nonperforming loans. Nonperforming loans consist
of loans that are not accruing interest (nonaccrual loans) as a result of
principal or interest being delinquent for a period of 90 days or more or when
the ability to collect principal and interest according to the contractual terms
is in doubt. When a loan is classified as nonaccrual, interest accruals
discontinue and all past due interest previously recognized as income is
reversed and charged against current period income. Generally, until the loan
becomes current, any payments received from the borrower are applied to
outstanding principal, until such time as management determines that the
financial condition of the borrower and other factors merit recognition of a
portion of such payments as interest income. Loans past due 90 days or more and
still accruing interest are not included in nonperforming loans. Loans past due
90 days or more and still accruing generally represent loans that are well
secured and in process of collection.

The following table sets forth information concerning nonperforming assets and
loans past due 90 days or more and still accruing interest at each of the
periods presented:


(In thousands, except percentages)               March 31, 2022      December 31, 2021     March 31, 2021
Nonperforming by category:
SBA loans held for investment                   $            537    $               510    $         1,560
Commercial loans                                           2,292                  2,582                952
Residential mortgage loans                                 2,999                  3,262              6,711
Consumer loans                                               200                    210                  -
Residential construction loans                             3,273                  3,122              2,565
Total nonperforming assets                      $          9,301    $             9,686    $        11,788
Past due 90 days or more and still accruing
interest:
Commercial loans                                $              -    $                 -    $             -
Residential mortgage loans                                   488                      -              2,145
Consumer loans                                                 -                      -                183
Residential construction loans                                 -                      -                212
Total past due 90 days or more and still
accruing interest                               $            488    $                 -    $         2,540
Nonperforming loans to total loans                          0.55 %                 0.59 %             0.71 %
Nonperforming loans and TDRs to total loans
(1)                                                         0.66                   0.65               0.77
Nonperforming assets to total loans                         0.55                   0.59               0.71
Nonperforming assets to total assets                        0.45           
       0.48               0.59
(1) Performing TDRs                                        1,917                  1,046              1,079


Nonperforming loans were $9.3 million at March 31, 2022, a $385
thousand decrease from $9.7 million at December 31, 2021. Since year end 2021,
nonperforming loans in the commercial, residential mortgage and consumer loan
segments decreased, partially offset by an increase in nonperforming residential
construction and SBA loans. In addition, there were $488 thousand of loans past
due 90 days or more and still accruing interest at March 31, 2022, compared to
none at December 31, 2021 and $2.5 million at March 31,2021.

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 $19.1 million
at March 31, 2022.

See Note 8 to the accompanying Consolidated Financial Statements for more
information regarding Asset Quality.


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Allowance for Loan Losses and Reserve for Unfunded Loan Commitments


Management reviews the level of the allowance for loan losses on a quarterly
basis. The standardized methodology used to assess the adequacy of the allowance
includes the allocation of specific and general reserves. Specific reserves are
made to individual impaired loans, which have been defined to include all
nonperforming loans and TDRs. The general reserve is set based upon a
representative average historical net charge-off rate adjusted for certain
environmental factors such as: delinquency and impairment trends, charge-off and
recovery trends, volume and loan term trends, risk and underwriting policy
trends, staffing and experience changes, national and local economic trends,
industry conditions and credit concentration changes.

When calculating the five-year historical net charge-off rate, the Company
weights the past three years more heavily. The Company believes using this
approach is more indicative of future charge-offs. All of the environmental
factors are ranked and assigned a basis points value based on the following
scale: low, low moderate, moderate, high moderate, and high risk. The factors
are evaluated separately for each type of loan. For example, commercial loans
are broken down further into commercial and industrial loans, commercial
mortgages, construction loans, etc. Each type of loan is risk weighted for each
environmental factor based on its individual characteristics.

According to the Company's policy, a loss ("charge-off") is to be recognized and
charged to the allowance for loan losses as soon as a loan is recognized as
uncollectable. All credits which are 90 days past due must be analyzed for the
Company's ability to collect on the credit. Once a loss is known to exist, the
charge-off approval process is immediately expedited.

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The allowance for loan losses totaled $22.2 million at March 31, 2022, compared
to $22.3 million at December 31, 2021, and $23.0 million at March 31, 2021, with
a resulting allowance to total loan ratio of 1.30 percent at March 31, 2022,
1.35 percent at December 31, 2021, and 1.38 percent at March 31, 2021. Net
recoveries (charge-offs) amounted to $44 thousand for the three months ended
March 31, 2022, compared to $640 thousand for the same period in 2021. Net
charge-offs to average loan ratios are shown in the table below for each major
loan category.

                                                           For the three months ended March 31,
(In thousands, except percentages)                             2022                     2021
Balance, beginning of period                            $           22,302       $           23,105
Provision for loan losses charged to expense                         (178) 
                    500
Less: Chargeoffs
SBA loans held for investment                                            -                      282
Commercial loans                                                         -                      373
Residential mortgage loans                                               -                        -
Consumer loans                                                           6                        1
Total chargeoffs                                                         6                      656
Add: Recoveries
SBA loans held for investment                                           22                       15
Commercial loans                                                        28                        1
Residential mortgage loans                                               -                        -
Total recoveries                                                        50                       16
Net recoveries (charge-offs)                                            44                    (640)
Balance, end of period                                  $           22,080       $           22,965
Selected loan quality ratios:
Net (charge-offs) recoveries to average loans:
SBA loans held for investment                                         0.09 %                 (0.57) %
Commercial loans                                                      0.01                   (0.18)
Residential mortgage loans                                               -                        -
Consumer loans                                                      (0.03)                   (0.01)
Total loans                                                              -                   (0.16)
Allowance to total loans                                              1.30                     1.38
Allowance to nonperforming loans                                    238.34 %                 194.82 %


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

Adjustments to the reserve are made through other expense and applied to the
reserve which is maintained in other liabilities. At March 31, 2022, a $439
thousand
commitment reserve was reported on the balance sheet as an “other
liability”, compared to a $400 thousand commitment reserve at December 31, 2021.

See Note 9 to the accompanying Consolidated Financial Statements for more
information regarding the Allowance for Loan 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.

Total deposits increased $12.3 million to $1.8 billion at March 31, 2022,
from year-end 2021. This increase in deposits was due to increases of $13.3
million
in savings deposits and $12.8 million in noninterest-bearing demand
deposits, partially offset by a decrease of $10.5 million in time deposits and
$3.3 million in interest-bearing demand deposits.


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The Company's deposit composition at March 31, 2022, consisted of 39.9 percent
savings deposits, 30.6 percent noninterest-bearing demand deposits, 15.9 percent
time deposits, and 13.6 percent interest-bearing demand deposits.

Borrowed Funds and Subordinated Debentures


Borrowed funds consist primarily of fixed rate advances from the Federal Home
Loan Bank of New York. These borrowings are used as a source of liquidity or to
fund asset growth not supported by deposit generation. Residential mortgages and
commercial loans collateralize the borrowings from the FHLB.

Borrowed funds and subordinated debentures totaled $50.3 million at
March 31, 2022 and December 31, 2021, respectively, and are broken down in the
following table:

(In thousands)                                              March 31, 2022      December 31, 2021
FHLB borrowings:
Fixed rate advances                                         $        40,000    $            40,000
Subordinated debentures                                              10,310                 10,310
Total borrowed funds and subordinated debentures            $        50,310
   $            50,310


FHLB Borrowings

At March 31, 2022 and December 31, 2021, the Company had $40.0 million in fixed
rate advances. The terms of this transaction are as follows:

? A $40.0 million FHLB borrowing with a maturity date of August 22, 2024, at a

fixed rate of 1.810%.

There were no FHLB overnight advances or adjustable rate advances as of
March 31, 2022 and December 31, 2021 respectively.

In March 2022, the FHLB issued a $105.0 million municipal deposit letter of
credit in the name of Unity Bank naming the New Jersey Department of Banking and
Insurance as beneficiary, to secure municipal deposits as required under New
Jersey law.

At March 31, 2022, the Company had $383.3 million of additional credit 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.

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, prior to maturity
but after July 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 2.548% at March 31, 2022 and 1.806% at
December 31, 2021.

Interest Rate Sensitivity

The principal objectives of the asset and liability management function 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 the Board approved guidelines. The
Company seeks to reduce the vulnerability of operations to changes in interest
rates, and actions in this regard are taken under the guidance of the
Asset/Liability Management

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Committee ("ALCO") of the Board of Directors. The ALCO reviews the maturities
and re-pricing of loans, investments, deposits and borrowings, cash flow needs,
current market conditions, and interest rate levels.

The Company utilizes Modified Duration of Equity and Economic Value of Portfolio
Equity ("EVPE") models to measure the impact of longer-term asset and liability
mismatches beyond two years. The modified duration of equity measures the
potential price risk of equity to changes in interest rates. A longer modified
duration of equity indicates a greater degree of risk to rising interest rates.
Because of balance sheet optionality, an EVPE analysis is also used to
dynamically model the present value of asset and liability cash flows with rate
shocks of 200 basis points. The economic value of equity is likely to be
different as interest rates change. Results falling outside prescribed ranges
require action by the ALCO. The Company's variance in the economic value of
equity, as a percentage of assets with rate shocks of 200 basis points at
March 31, 2022, is a decrease of 1.1 percent in a rising-rate environment and a
decrease of 4.3 percent in a falling-rate environment. The variances in the EVPE
at March 31, 2022 are within the Board-approved guidelines of +/- 20.0 percent.
In a falling rate environment with a rate shock of 200 basis points, benchmark
interest rates are assumed to have floors of 0.00%. At December 31, 2021, the
economic value of equity as a percentage of assets with rate shocks of 200 basis
points was an increase of 4.3 percent in a rising-rate environment and a
decrease of 12.3 percent in a falling-rate environment.

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. Our liquidity is monitored by management and
the Board of Directors, which reviews historical funding requirements, our
current liquidity position, sources and stability of funding, marketability of
assets, options for attracting additional funds, and anticipated future funding
needs, including the level of unfunded commitments. Our goal is to maintain
sufficient asset-based liquidity to cover potential funding requirements in
order to minimize our dependence on volatile and potentially unstable funding
markets.

The principal sources of funds at the Bank are deposits, scheduled amortization
and prepayments of investment and loan principal, sales and maturities of
investment securities, additional borrowings and funds provided by operations.
While scheduled loan payments and maturing investments are relatively
predictable sources of funds, deposit inflows and outflows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Consolidated Statement of Cash Flows provides detail on the
Company's sources and uses of cash, as well as an indication of the Company's
ability to maintain an adequate level of liquidity. At March 31, 2022, the
balance of cash and cash equivalents was $187.7 million, a decrease of $57.1
million from December 31, 2021. A discussion of the cash provided by and used in
operating, investing and financing activities follows.

Operating activities provided $7.6 million and $11.6 million of net cash for the
three months ended March 31, 2022 and 2021, respectively. The primary sources of
funds were net income from operations and adjustments to net income, such as the
proceeds from the sale of mortgage and SBA loans held for sale, partially offset
by originations of mortgage and SBA loans held for sale.

Investing activities used $76.4 million and $29.6 million in net cash for the
three months ended March 31, 2022 and 2021, respectively. Cash was primarily
used to purchase investment securites, and fund new loans.

Securities. The Consolidated Bank’s available for sale investment portfolio

amounted to $77.9 million and $56.5 million at March 31, 2022 and

? December 31, 2021, respectively. This excludes the Parent Company’s securities

discussed under the heading “Parent Company Liquidity” below. Projected cash

flows from securities based on current estimates over the next twelve months

are $9.6 million.

Loans. The SBA loans held for sale portfolio amounted to $25.3 million and

? $27.4 million at March 31, 2022 and December 31, 2021, respectively. Sales of

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


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Outstanding Commitments. The Company was committed to advance approximately

$438.7 million to its borrowers as of March 31, 2022, compared to $399.8

million at December 31, 2021. At March 31, 2022, $200.7 million of these

commitments expire within one year, compared to $170.1 million at

? December 31, 2021. The Company had $4.3 million in standby letters of credit at

March 31, 2022 and December 31, 2021, 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 used $11.7 million and $38.2 million in net cash for the
three months ended March 31, 2022 and 2021, primarily due an increase in the
Company's deposits.

Deposits. As of March 31, 2022, deposits included $251.3 million of New Jersey

Municipality deposits, as compared to $247.7 million at year end 2021. These

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 $236.7 million of

deposits from 15 municipalities with account balances in excess of

$5.0 million. The withdrawal of these deposits, in whole or in part, would not

   create a liquidity shortfall for the Company.


   Borrowed Funds. Total FHLB borrowings amounted to $40.0 million as of

March 31, 2022 and December 31, 2021. As a member of the Federal Home Loan Bank

? of New York, the Company can borrow additional funds based on the market value

of collateral pledged. At March 31, 2022, pledging provided an additional

$383.3 million in borrowing capacity from the FHLB.

Parent Company Liquidity

The Parent Company's cash needs are funded by dividends paid by and rental
payments on corporate headquarters from 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 March 31, 2022, the Parent Company had $2.4 million in cash and cash
equivalents and $4.7 million in investment securities valued at fair
market value, compared to $1.7 million and $5.0 million at December 31, 2021.

Regulatory Capital


On September 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 proposal, a
qualifying community banking organization ("QCBO") would be eligible to elect
the community bank leverage ratio framework, or continue to measure capital
under the existing Basel III requirements. The new rule, effective beginning
January 1, 2020, allowed qualifying community banking organizations 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 9.0%;

? Total consolidated assets of less than $10.0 billion;

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.

The numerator of the CBLR is Tier 1 capital, as calculated under the Basel III
rules. The denominator of the CBLR is the QCBO's average assets, calculated in
accordance with the QCBO's Call Report instructions less assets deducted from
Tier 1 capital.

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

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

        At March 31, 2022      At December 31, 2021
        Company      Bank      Company         Bank
CBLR       10.87 %   10.35 %       10.51 %      10.00 %

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

Shareholders’ Equity

Shareholders’ equity increased $9.2 million to $214.9 million at March 31, 2022
compared to $205.7 million at

December 31, 2021, primarily due to net income of $9.1 million. Other items
impacting shareholders’ equity

included $1.0 million in dividends paid on common stock, $813 thousand from the
issuance of common stock under employee benefit plans, and $286 thousand in
accumulated other comprehensive income net of tax. The issuance of common stock
under employee benefit plans includes nonqualified stock options and restricted
stock expense related entries, employee option exercises and the tax benefit of
options exercised.

Repurchase Plan

On February 4, 2021, the Company authorized the repurchase of up to 750 thousand
shares, or approximately 7.5 percent of its outstanding common stock. The new
plan took effect after the Company's prior share repurchase program was
completed and all authorized shares were repurchased on February 16, 2021. No
shares were repurchased during the three months ended March 31, 2022. Currently,
571 thousand shares are available for repurchase. The timing and amount of
additional purchases, if any, will depend upon a number of factors including the
Company's capital needs, the performance of its loan portfolio, the need for
additional provisions for loan losses and the market price of the Company's
stock. A total of 70 thousand shares were repurchased at an average price of
$19.29, during the same period in 2021.


Impact of Inflation and Changing Prices

The financial statements and notes thereto, presented elsewhere herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the operations. Unlike most industrial
companies, nearly all the Company's assets and liabilities are monetary. As a
result, interest rates have a greater impact on performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.

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