UNITY BANCORP INC /NJ/ - FORM 10-K

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - UNITY BANCORP INC /NJ/	a123119exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - UNITY BANCORP INC /NJ/	a123119exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - UNITY BANCORP INC /NJ/	a123119exhibit311.htm
EX-23.1 - EXHIBIT 23.1 - UNITY BANCORP INC /NJ/	a123119exhibit231.htm
EX-21 - EXHIBIT 21 - UNITY BANCORP INC /NJ/	a123119exhibit21.htm
EX-4.VI - EXHIBIT 4.VI - UNITY BANCORP INC /NJ/	a123119exhibit4vi.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ________

Commission file number 1-12431

Unity Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)



New Jersey	22-3282551
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

64 Old Highway 22, Clinton, NJ	08809
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code (908) 730-7630

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	UNTY	NASDAQ

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒

Non-accelerated filer ☐ Smaller reporting company ☒

Emerging Growth Company ☐

If an emerging growth company, indicate by checkmark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act

Yes ☐ No ☒

As of June 30, 2019, the aggregate market value of the registrant’s Common Stock, no par value per share, held by non-affiliates of the registrant was $177,801,701 and 7,832,674 shares of the Common Stock were outstanding to non-affiliates. As of February 28, 2020, 10,886,274 shares of the registrant’s Common Stock were outstanding.

Documents incorporated by reference:


•	Portions of Unity Bancorp’s Proxy Statement for the Annual Meeting of Shareholders to be filed no later than 120 days from December 31, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Index to Form 10-K



Description of Financial Data		Page
Part I
Item 1.	Business
	a) General	1
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Mine Safety Disclosures	13
Item 4A.	Executive Officers of the Registrant	14

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	15
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	97
Item 9A.	Controls and Procedures	97
Item 9B.	Other Information – None	99

Part III
Item 10.	Directors, Executive Officers and Corporate Governance; Compliance with Section 16(a) of the Exchange Act	100
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions and Director Independence	100
Item 14.	Principal Accountant Fees and Services	101

Part IV
Item 15.	Exhibits and Financial Statement Schedules	101
Item 16.	Form 10-K Summary	103
	Signatures	104

PART I

Item 1. Business:

a)General

Unity Bancorp, Inc., ("we", "us", "our", the "Company" or "Registrant"), is a bank holding company incorporated under the laws of the State of New Jersey to serve as a holding company for Unity Bank (the “Bank”). The Company has also elected to become a financial holding company pursuant to regulations of the Board of Governors of the Federal Reserve system (the "FRB"). The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank. Pursuant to the New Jersey Banking Act of 1948 (the "Banking Act"), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on December 1, 1994. The primary activity of the Company is ownership and supervision of the Bank. The Company also owns 100% of the common equity of Unity (NJ) Statutory Trust II. The trust has issued $10.3 million of preferred securities to investors. The Company serves as a holding company for its wholly-owned subsidiary, Unity Risk Management, Inc. Unity Risk Management, Inc. is a captive insurance company that insures risks to the Bank and the Company not covered by the traditional commercial insurance market.

The Bank received its charter from the New Jersey Department of Banking and Insurance on September 13, 1991 and opened for business on September 16, 1991. The Bank is a full-service commercial bank, providing a wide range of business and consumer financial services through its main office in Clinton, New Jersey and sixteen additional New Jersey branches located in Edison, Emerson, Flemington, Highland Park, Linden, Middlesex, North Plainfield, Phillipsburg, Scotch Plains, Somerset, Somerville, South Plainfield, Ramsey, Union, Washington and Whitehouse. In addition, the Bank has two Pennsylvania branches located in Bethlehem and Forks Township. The Bank's primary service area encompasses the Route 22/Route 78 corridors between the Bethlehem, Pennsylvania office and its Linden, New Jersey branch, as well as Bergen County, New Jersey.

The principal executive offices of the Company are located at 64 Old Highway 22, Clinton, New Jersey 08809, and the telephone number is (800) 618-2265. The Company’s website address is www.unitybank.com.

Business of the Company

The Company's primary business is ownership and supervision of the Bank. The Company, through the Bank, conducts a traditional and community-oriented commercial banking business and offers services, including personal and business checking accounts, time deposits, money market accounts and regular savings accounts. The Company structures its specific services and charges in a manner designed to attract the business of the small and medium sized business and professional community, as well as that of individuals residing, working and shopping in its service area. The Company engages in a wide range of lending activities and offers commercial, Small Business Administration (“SBA”), consumer, mortgage, home equity and personal loans.

Service Areas

The Company's primary service area is defined as the neighborhoods served by the Bank's offices. The Bank's main office, located in Clinton, NJ, in combination with its Flemington and Whitehouse offices, serves the greater area of Hunterdon County. The Bank's North Plainfield, Somerset and Somerville offices serve those communities located in the northern, eastern and central parts of Somerset County and the southernmost communities of Union County. The Bank's Scotch Plains, Linden, and Union offices serve the majority of the communities in Union County and the southwestern communities of Essex County. The offices in Middlesex, South Plainfield, Highland Park, and Edison extend the Company's service area into Middlesex County. The Bank’s Phillipsburg and Washington offices serve Warren County. The Bank's Emerson and Ramsey offices serve Bergen County. The Bank’s Forks Township and Bethlehem offices serve Northampton County, Pennsylvania.

Competition

The Company is located in an extremely competitive area. The Company's service area is also serviced by national banks, major regional banks, large thrift institutions and a variety of credit unions. In addition, since passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”), securities firms and insurance companies have been allowed to acquire or form financial institutions, thereby increasing competition in the financial services market. Most of the Company's competitors have substantially more capital, and therefore greater lending limits than the Company. The Company's competitors generally have established positions in the service area and have greater resources than the Company with which to pay for advertising, physical facilities, personnel and interest on deposited funds. The Company relies on the competitive pricing of its loans, deposits and other services, as well as its ability to provide local decision-making and personal service in order to compete with these larger institutions.

Employees

At December 31, 2019, the Company employed 197 full-time and 12 part-time employees. None of the Company's employees are represented by any collective bargaining units. The Company believes that its relations with its employees are good.

SUPERVISION AND REGULATION

General Supervision and Regulation

Bank holding companies and banks are extensively regulated under both federal and state law, and these laws are subject to change. As an example, in the summer of 2010, Congress passed, and the President signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) (discussed below). These laws and regulations are intended to protect depositors, not stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank. Management of the Company is unable to predict, at this time, the impact of future changes to laws and regulations.

General Bank Holding Company Regulation

General: As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the "BHCA"), the Company is subject to the regulation and supervision of the FRB. The Company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. Under the BHCA, the Company's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the FRB determines to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In addition, as a financial holding company, the Company may engage in a broader scope of activities. See "Financial Holding Company Status".

The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to; (i) acquire all or substantially all of the assets of any other bank; (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank's voting shares); or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any acquisition, merger or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers.

The BHCA also generally prohibits a bank holding company, with certain limited exceptions, from; (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company; or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefits to the public such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.

The BHCA was substantially amended through the Modernization Act. The Modernization Act permits bank holding companies and banks, which meet certain capital, management and Community Reinvestment Act standards, to engage in a broader range of non-banking activities. In addition, bank holding companies, which elect to become financial holding companies, may engage in certain banking and non-banking activities without prior FRB approval. Finally, the Modernization Act imposes certain privacy requirements on all financial institutions and their treatment of consumer information. The Company has elected to become a financial holding company. See "Financial Holding Company Status" below.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the Federal Deposit Insurance Corporation (the “FDIC”) Deposit Insurance Fund in the event the depository institution becomes in danger of default. Under regulations of the FRB, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Capital Adequacy Guidelines

In December 2010 and January 2011, the Basel Committee on Banking Supervision (the “Basel Committee”) published the final reforms on capital and liquidity generally referred to as “Basel III.” In July 2013, the FRB, the FDIC and the Comptroller of the Currency adopted final rules (the “New Rules”), which implement certain provisions of Basel III and the Dodd-Frank Act. The New Rules replaced the existing general risk-based capital rules of the various banking agencies with a single, integrated regulatory capital framework. The New Rules require higher capital cushions and more stringent criteria for what qualifies as regulatory capital. The New Rules were effective for the Bank and the Company on January 1, 2015.

Under the New Rules, the Company and the Bank are required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets:

•Common Equity Tier 1 Capital Ratio of 4.5% (the “CET1”);

•Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and

•Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%.

In addition, the Company and the Bank are subject to a leverage ratio of 4% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).

The New Rules also require a “capital conservation buffer.” As of January 1 2019, the Company and the Bank are required to maintain a 2.5% capital conservation buffer, which is composed entirely of CET1, on top of the minimum risk-weighted asset ratios described above, resulting in the following minimum capital ratios:

•CET1 of 7%;

•Tier 1 Capital Ratio of 8.5%; and

•Total Capital Ratio of 10.5%.

The purpose of the capital conservation buffer is to absorb losses during periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio above the minimum set forth above but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

The New Rules provide for several deductions from and adjustments to CET1. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Under the New Rules, banking organizations such as the Company and the Bank may make a one-time permanent election regarding the treatment of accumulated other comprehensive income items in determining regulatory capital ratios. Effective as of January 1, 2015, the Company and the Bank elected to exclude accumulated other comprehensive income items for purposes of determining regulatory capital.

While the New Rules generally require the phase-out of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The New Rules prescribe a standardized approach for calculating risk-weighted assets. Depending on the nature of the assets, the risk categories generally range from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and result in higher risk weights for a variety of asset categories. In addition, the New Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

Consistent with the Dodd-Frank Act, the New Rules adopt alternatives to credit ratings for calculating the risk-weighting for certain assets.

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which an insured depository institution such as the Bank would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and providing for certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.”

The New Rules also revised the regulations implementing these provisions of FDICIA, to change the capital levels applicable to each designation. Under the New Rules, an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, (iv) has a common equity Tier 1 capital ratio of at least 6.5 percent, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 4.0 percent, (iv) has a common equity Tier 1 capital ratio of at least 4.5 percent, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a Tier 1 leverage ratio of less than 4.0 percent, or (iv) has a common equity Tier 1 capital ratio of less than 4.5 percent. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a Tier 1 leverage ratio of less than 3.0 percent, or (iv) has a common equity Tier 1 capital ratio of less 3.0 percent. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating.

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 would be eligible to elect the community bank leverage ratio framework, or continue to measure capital under the existing Basel III requirements set forth in the New Rules. The new rule takes effect January 1, 2020,and qualifying community banking organizations may elect to opt into the new community bank leverage ratio (“CBLR”) in their call report for the first quarter of 2020.

A qualifying community banking organization (“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.

A QCBO opting into the CBLR must maintain a CBLR of 9.0%, subject to a two quarter grace period to come back into compliance, provided that the QCBO maintains a leverage ratio of more than 8.0% during the grace period. A QCBO failing to satisfy these requirements must comply with the Basel III requirements as implemented by the New Rules. The numerator of the CBLR is Tier 1 capital, as calculated under present rules. The denominator of the CBLR is the QCBO’s average assets, calculated in accordance with the QCBO’s Call Report instructions and less assets deducted from Tier 1 capital.

General Bank Regulation

As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the New Jersey Department of Banking and Insurance (the “Department”). As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the Department affect

virtually all activities of the Bank, including the minimum level of capital that the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters.

Insurance of Deposits: The Dodd-Frank Act has caused significant changes in the FDIC’s insurance of deposit accounts. Among other things, the Dodd-Frank Act permanently increased the FDIC deposit insurance limit to $250 thousand per depositor.

On February 7, 2011 the FDIC announced the approval of the assessment system mandated by the Dodd-Frank Act. Dodd-Frank required that the base on which deposit insurance assessments are charged be revised from one based on domestic deposits to one based on assets. The FDIC’s rule to base the assessment on average total consolidated assets minus average tangible equity instead of domestic deposits lowered assessments for many community banks with less than $10 billion in assets and reduced the Company’s costs.

Dividend Rights: Under the Banking Act, a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank's surplus. Unless and until the Company develops other lines of business, payments of dividends from the Bank will remain the Company’s primary source of income and the primary source of funds for dividend payments to the shareholders of the Company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of insured depository institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations. The Dodd-Frank Act, among other things:


•	capped debit card interchange fees for institutions with $10 billion in assets or more at $0.21 plus 5 basis points times the transaction amount, a substantially lower rate than the average rate in effect prior to adoption of the Dodd-Frank Act;


•	provided for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the Deposit Insurance Fund ("DIF") from 1.15% to 1.35% and changes the basis for determining FDIC premiums from deposits to assets;


•	permanently increased the deposit insurance coverage to $250 thousand and allowed depository institutions to pay interest on checking accounts;


•	created a new Consumer Financial Protection Bureau (“CFPB”) that has rulemaking authority for a wide range of consumer financial protection laws that apply to all banks and has broad authority to enforce these laws;


•	provided for new disclosure and other requirements relating to executive compensation and corporate governance;


•	changed standards for Federal preemption of state laws related to federally-chartered institutions and their subsidiaries;

•

provided mortgage reform provisions regarding a customer’s ability to repay, restricting variable rate lending by requiring the ability to repay to be determined for variable rate loans by using the maximum rate that will apply during the first five years of a variable rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions; and


•	created a financial stability oversight council that will recommend to the FRB increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

The Dodd-Frank Act also imposes new obligations on originators of residential mortgage loans, such as the Bank. Among other things, the Dodd-Frank Act requires originators to make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the mortgage may be unenforceable. The Dodd-Frank Act contains an exception from this ability-to-repay rule for “Qualified Mortgages”. The CFPB has established specific underwriting criteria for a loan to qualify as a Qualified Mortgage. The criteria generally exclude loans that (1) are interest-only, (2) have excessive upfront points or fees, or (3) have negative amortization features, balloon payments, or terms in excess of 30 years. The underwriting criteria also impose a maximum debt to income ratio of 43%, based upon documented and verifiable information. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting the failure of the originator to establish the consumer’s ability to repay. However, a consumer may assert the lender’s failure to comply with the ability-to-repay rule for all residential mortgage loans other than Qualified Mortgages, and may challenge whether a loan in fact qualified as a Qualified Mortgage.

Although the majority of residential mortgages historically originated by the Bank would be considered Qualified Mortgages, the Bank has and may continue to make residential mortgage loans that would not qualify. As a result of such rules, the Bank might experience increased compliance costs, loan losses, litigation related expenses and delays in taking title to real estate collateral, if these loans do not perform and borrowers challenge whether the Bank satisfied the ability-to-repay rule upon originating the loan.

The requirements of the Dodd-Frank Act and other regulatory reforms continue to be implemented. It is difficult to predict at this time what specific impact certain provisions and yet-to-be-finalized rules and regulations will have on us, including any regulations promulgated by the CFPB. Financial reform legislation and rules could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of regulatory reforms, including the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

Financial Holding Company Status

The Company has elected to become a financial holding company. Financial holding companies may engage in a broader scope of activities than a bank holding company. In addition, financial holding companies may undertake certain activities without prior FRB approval.

A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "Financial in nature" activities include:

•securities underwriting, dealing and market making;

•sponsoring, mutual funds and investment companies;

•insurance underwriting and insurance agency activities;

•merchant banking; and


•	activities that the FRB determines to be financial in nature or incidental to a financial activity or which is complementary to a financial activity and does not pose a safety and soundness risk.

A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.

A financial holding company generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.

If any subsidiary bank of a financial holding company ceases to be "well-capitalized" or "well-managed" and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding company receives a rating under the CRA of less than "satisfactory", then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to "satisfactory" or better.

Item 1A. Risk Factors:

Our business, financial condition, results of operations and the trading price of our securities can be materially and adversely affected by many events and conditions including the following:

We have been and may continue to be adversely affected by national financial markets and economic conditions, as well as local conditions.

Our business and results of operations are affected by the financial markets and general economic conditions in the United States, including factors such as the level and volatility of interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, investor confidence and the strength of the U.S. economy. The deterioration of any of these conditions can adversely affect our securities and loan portfolios, our level of charge-offs and provision for credit losses, our capital levels, liquidity and our results of operations.

In addition, we are affected by the economic conditions within our New Jersey and Pennsylvania trade areas. Unlike larger banks that are more geographically diversified, we provide banking and financial services primarily to customers in the seven counties in the New Jersey market and one county in Pennsylvania in which we have branches, so any decline in the economy of New Jersey or eastern Pennsylvania could have an adverse impact on us.

Our loans, the ability of borrowers to repay these loans, and the value of collateral securing these loans are impacted by economic conditions. Our financial results, the credit quality of our existing loan portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest rates, adverse employment conditions and the monetary and fiscal policies of the federal government. We cannot assure you that positive trends or developments discussed in this annual report will continue or that negative trends or developments will not have a significant adverse effect on us.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.

A significant portion of our loan portfolio is secured by real estate. As of December 31, 2019, approximately 94 percent of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. Weakness in the real estate market in our primary market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. Any future declines in home prices in the New Jersey and Pennsylvania markets we serve also may result in increases in delinquencies and losses in our loan portfolios. Stress in the real estate market, combined with any weakness in economic conditions and any future elevated unemployment levels could drive losses beyond that which is provided for in our allowance for loan losses. In that event, our earnings could be adversely affected.

There is a risk that the SBA will not honor their guarantee.

The Company has historically been a participant in various SBA lending programs which guarantee up to 90% of the principal on the underlying loan. There is a risk that the SBA will not honor its guarantee if a loan is not underwritten and administered to SBA guidelines. The Company follows the underwriting guidelines of the SBA; however our ability to manage this will depend on our ability to continue to attract, hire and retain skilled employees who have knowledge of the SBA program.

There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.

The risk of nonpayment (or deferred or delayed payment) of loans is inherent in commercial banking. Such nonpayment, or delayed or deferred payment of loans to the Company, if they occur, may have a material adverse effect on our earnings and overall financial condition. Additionally, in compliance with applicable banking laws and regulations, the Company maintains an allowance for loan losses created through charges against earnings. As of December 31, 2019, the Company’s allowance for loan losses was $16.4 million, or 1.15 percent of our total loan portfolio and 290.23 percent of our nonperforming loans. The Company’s marketing focus on small to medium size businesses may result in the assumption by the Company of certain lending risks that are different from or greater than those which would apply to loans made to larger companies. We seek to minimize our credit risk exposure through credit controls, which include evaluation of potential borrowers’ available collateral, liquidity and cash flow. However, there can be no assurance that such procedures will actually reduce loan losses.

Our allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and nonperformance. Our allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses could materially and adversely affect the results of our operations. Risks within the loan portfolio are analyzed on a continuous basis by management and, periodically, by an independent loan review function and by the Audit Committee. A risk system, consisting of multiple-grading categories, is utilized as an analytical tool to assess risk and the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrowers, past and expected loan loss experience and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly and, as adjustments become necessary, they are realized in the periods in which they become known. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. State and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses and may require an increase in our allowance for loan losses. Although we believe that our allowance for loan losses is adequate to cover probable and reasonably estimated losses, we cannot assure you that we will not further increase the allowance for loan losses or that our regulators will not require us to increase this allowance. Either of these occurrences could adversely affect our earnings.

We are subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Net interest income, the difference between interest earned on our interest-earning assets and interest paid on interest-bearing liabilities, represents a significant portion of our earnings. Both increases and decreases in the interest rate environment may reduce our profits. Interest rates are subject to factors which are beyond our control, including general economic conditions, competition and policies of various governmental and regulatory agencies, such as the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investment securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, including the held to maturity and available for sale securities portfolios, and (iii) the average duration of our interest-earning assets. This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indexes underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk).

The banking business is subject to significant government regulations.

We are subject to extensive governmental supervision, regulation and control. These laws and regulations are subject to change, and may require substantial modifications to our operations or may cause us to incur substantial additional compliance costs. These laws and regulations are designed to protect depositors and the public, but not our shareholders. In addition, future legislation and government policy could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the subject of future modification. Our management cannot predict what effect any such future modifications will have on our operations. In addition, the primary focus of Federal and state banking regulation is the protection of depositors and not the shareholders of the regulated institutions.

For example, the Dodd-Frank Act has resulted in substantial new compliance costs, and may restrict certain sources of revenue. The Dodd-Frank Act was signed into law on July 21, 2011. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole, or on our business, results of operations and financial condition. The Dodd-Frank Act, among other things:


•	capped debit card interchange fees for institutions with $10 billion in assets or more at $0.21 plus 5 basis points times the transaction amount, a substantially lower rate than the average rate in effect prior to adoption of the Dodd-Frank Act;


•	provided for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases the minimum reserve ratio for the DIF from 1.15% to 1.35% and changes the basis for determining FDIC premiums from deposits to assets;


•	permanently increased the deposit insurance coverage to $250 thousand and allowed depository institutions to pay interest on checking accounts;


•	created a new CFPB that has rule making authority for a wide range of consumer financial protection laws that apply to all banks and has broad authority to enforce these laws;


•	provided for new disclosure and other requirements relating to executive compensation and corporate governance;


•	changed standards for Federal preemption of state laws related to federally-chartered institutions and their subsidiaries;

•


•	created a financial stability oversight council that will recommend to the FRB increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

In addition, in order to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, on July 9, 2013, the FRB approved, as an interim final rule, the regulatory capital requirements for U.S. bank holding companies, such as us, substantially similar to final rules issued by the FDIC and the Office of the Comptroller of the Currency. These new requirements are likely to increase our capital requirements in future periods. See “Supervisions and Regulation – Capital Adequacy Guidelines.”

These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.

Our management is actively reviewing the provisions of the Dodd-Frank Act and Basel III, many of which are to be phased-in over the next several years, and assessing the probable impact on our operations. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time.

We are subject to changes in accounting policies or accounting standards.

Understanding our accounting policies is fundamental to understanding our financial results. Some of these policies require the use of estimates and assumptions that may affect the value of assets or liabilities and financial results. We have identified our accounting policies regarding the allowance for loan losses, security valuations and impairments, goodwill and income taxes to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

From time to time, the FASB and the SEC change their guidance governing the form and content of our external financial statements. In addition, accounting standard setters and those who interpret U.S. generally accepted accounting principles (“U.S. GAAP”), such as the FASB, SEC, banking regulators and our outside auditors, may change or even reverse their previous interpretations or positions on how these standards should be applied. Such changes are expected to continue. Changes in U.S. GAAP and changes in current interpretations are beyond our control, can be hard to predict and could materially impact how we report our financial results and condition. In certain cases, we could be required to apply a new or revised guidance retroactively or apply existing guidance differently (also retroactively) which may result in our restating prior period financial statements for material amounts. Additionally, significant changes to U.S. GAAP may require costly technology changes, additional training and personnel, and other expenses that will negatively impact our results of operations.

Declines in value may adversely impact the investment portfolio.

As of December 31, 2019, we had approximately $64.3 million and $2.3 million in available for sale and equity investment securities, respectively. We may be required to record impairment charges in earnings related to credit losses on our investment securities if they suffer a decline in value that is considered other-than-temporary. Additionally, (a) if we intend to sell a security or (b) it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, we will be required to recognize an other-than-temporary impairment charge in the statement of income equal to the full amount of the decline in fair value below amortized cost. Factors, including lack of liquidity, absence of reliable pricing information, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio and may result in other-than-temporary impairment on our investment securities in future periods.

Liquidity risk.

Liquidity risk is the potential that we will be unable to meet our obligations as they come due because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures.

Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to persistent weakness, or downturn, in the economy or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not necessarily specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

We are in competition with many other banks, including larger commercial banks which have greater resources than us.

The banking industry within the State of New Jersey is highly competitive. The Company’s principal market area is also served by branch offices of large commercial banks and thrift institutions. In addition, the Gramm-Leach-Bliley Financial Modernization Act permits other financial entities, such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing competition. A number of our competitors have substantially greater resources than we do to expend upon advertising and marketing, and their substantially greater capitalization enables them to make much larger loans. Our success depends a great deal upon our judgment that large and mid-size financial institutions do not adequately serve small businesses in our principal market area and upon our ability to compete favorably for such customers. In addition to competition from larger institutions, we also face competition for individuals and small businesses from small community banks seeking to compete as “hometown” institutions. Most of these smaller institutions have focused their marketing efforts on the smaller end of the small business market we serve.

The Company has also been active in competing for New Jersey governmental and municipal deposits. At December 31, 2019, the Company held approximately $123.3 million in governmental and municipal deposits. The governor of New Jersey has proposed that the state form and own a bank in which governmental and municipal entities would deposit their excess funds, with the state owned bank then financing small businesses and municipal projects in New Jersey. Although this proposal is in the very early stages and no legislation has been introduced in the state legislature, should this proposal be adopted and a state owned bank formed, it could impede the Company's ability to attract and retain governmental and municipal deposits, thereby impairing the Company's liquidity.

Future offerings of common stock may adversely affect the market price of our stock.

In the future, if our or the Bank’s capital ratios fall below the prevailing regulatory required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of common stock or preferred stock. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both.

We cannot predict how changes in technology will impact our business.

The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

•telecommunications;

•data processing;

•automation;

•Internet-based banking;

•Tele-banking; and

•debit cards/smart cards

Our ability to compete successfully in the future will depend on whether we can anticipate and respond to technological changes. To develop these and other new technologies, we will likely have to make additional capital investments. Although we continually invest in new technology, we cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future.

The Company’s information systems may experience an interruption or breach in security.

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer-relationship management, general ledger, deposit, loan and other systems.

We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as us) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. We maintain a system of comprehensive policies and a control framework designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure or internal controls, (ii) changes in the vendor’s financial condition, (iii) changes in the vendor’s support for existing products and services and (iv) changes in the vendor’s strategic focus. In addition we maintain cyber liability insurance to mitigate against any loss incurred.

While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur; or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny or expose the Company to civil litigation and possible financial liability; any of which could have a material adverse effect on the Company’s financial condition and results of operations.

Our business strategy could be adversely affected if we are not able to attract and retain skilled employees and manage our expenses.

We expect to continue to experience growth in the scope of our operations and, correspondingly, in the number of our employees and customers. We may not be able to successfully manage our business as a result of the strain on our management and operations that may result from this growth. Our ability to manage this growth will depend upon our ability to continue to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Hurricanes and other weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. In addition, these weather events may result in a decline in value or destruction of properties securing our loans and an increase in delinquencies, foreclosures and loan losses.

The Company may be adversely affected by changes in U.S. tax laws.

Changes in tax laws contained in the Tax Cuts and Jobs Act ("Tax Act"), enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.

The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes, such as New Jersey. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in the provision for loan losses, which would reduce profitability and could have a material adverse effect on the Company’s business, financial condition and results of operations.

New Jersey legislative changes may increase our tax expense.

In connection with adopting the 2019 fiscal year budget, the New Jersey legislature adopted, and the Governor signed, legislation that will increase our state income tax liability and could increase our overall tax expense. The legislation imposes 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 1.5% for tax years beginning on or after January 1, 2020 through December 31, 2021. The legislation also requires combined filing for members of an affiliated group for tax years beginning on or after January 1, 2019, changing New Jersey’s current status as a separate return state, and limits the deductibility of dividends received. These changes are not temporary.

Reforms to and uncertainty regarding LIBOR may adversely affect the business.

In 2017, a committee of private-market derivative participants and their regulators convened by the Federal Reserve, the Alternative Reference Rates Committee, or “ARRC”, was created to identify an alternative reference interest rate to replace LIBOR. The ARRC announced Secured Overnight Financing Rate, or “SOFR”, a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as its preferred alternative to LIBOR. The Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Subsequently, the Federal Reserve Bank announced final plans for the production of SOFR, which resulted in the commencement of its published rates by the Federal Reserve Bank of New York on April 2, 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance of LIBOR may adversely affect the value of and return on the Company’s financial assets and liabilities that are based on or are linked to LIBOR, the Company’s results of operations or financial condition. In addition, these reforms may also require extensive changes to the contracts that govern these LIBOR based products, as well as the Company’s systems and processes.

LIBOR is used as a reference rate for many of our transactions, which means it is the base on which relevant interest rates are determined. Transactions include those in which we lend and borrow money, and enter into derivatives to manage our or our customers’ risk. Risks related to transitioning instruments to a new reference rate or to how LIBOR is calculated and its availability include impacts on the yield on loans or securities held by us, amounts paid on securities we have issued, or amounts received and paid on derivative instruments we have entered into. The value of loans, securities, or derivative instruments tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited.

While we expect LIBOR to continue to be available in substantially its current form until the end of 2021 or shortly before that, it is possible that LIBOR quotes will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. These risks may also be increased due to the shorter time for preparing for the transition.

Item 1B. Unresolved Staff Comments: None

Item 2. Properties:

The Company presently conducts its business through its main office located at 64 Old Highway 22, Clinton, New Jersey, and its nineteen branch offices. The Company is currently leasing additional back office space in Clinton, New Jersey, in a building adjacent to its main office. The Company’s facilities are adequate to meet its needs.

The following table sets forth certain information regarding the Company’s properties from which it conducts business as of December 31, 2019.



Location	Leased or Owned	Date Leased or Acquired	Lease Expiration	2019 Annual Rental Fee
North Plainfield, NJ	Owned	1991	—	—
Linden, NJ	Owned	1997	—	—
Whitehouse, NJ	Owned	1998	—	—
Union, NJ	Leased	2019	2020	18,750
Scotch Plains, NJ	Owned	2004	—	—
Flemington, NJ	Owned	2005	—	—
Forks Township, PA	Leased	2006	2021	62,677
Middlesex, NJ	Owned	2007	—	—
Somerset, NJ	Leased	2012	2023	128,895
Washington, NJ	Owned	2012	—	—
Highland Park, NJ	Owned	2013	—	—
South Plainfield, NJ	Owned	2013	—	—
Edison, NJ	Owned	2013	—	—
Clinton, NJ	Owned	2016	—	—
Somerville, NJ	Owned	2016	—	—
Emerson, NJ	Owned	2016	—	—
Ramsey, NJ	Leased	2017	2021	60,987
Phillipsburg, NJ	Leased	2017	2022	60,000
Clinton, NJ	Leased	2018	2020	27,600
Bethlehem, PA	Leased	2018	2028	76,719

Item 3. Legal Proceedings:

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition, or operating results of the Company.

Item 4. Mine Safety Disclosures: N/A

Item 4A. Executive Officers of the Registrant:

The following table sets forth certain information as of December 31, 2019, regarding each executive officer of the Company who is not also a director.



Name, Age and Position	Officer Since	Principal Occupation During Past Five Years
John Kauchak, 66, Chief Operating Officer and Executive Vice President of the Company and Bank	2002	Previously, Mr. Kauchak was the head of Deposit Operations for Unity Bank from 1996 to 2002.
Alan J. Bedner, 48, Chief Financial Officer and Executive Vice President of the Company and Bank	2003 *	Previously, Mr. Bedner was Controller for Unity Bank from 2001 to 2003.
Janice Bolomey, 51, Chief Administrative Officer and Executive Vice President of the Company and Bank	2013	Previously, Ms. Bolomey was Director of Sales for Unity Bank from 2002 to 2013.
Laureen S. Cook, 51, Interim Principal Accounting and Financial Officer and Senior Vice President of the Company and Bank	2020 *	Previously, Ms. Cook was Controller for Unity Bank from 2004 to present.

* Mr. Bedner resigned on January 24, 2020.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:

(a)Market Information

The Company’s Common Stock is quoted on the NASDAQ Global Market under the symbol “UNTY.”

(b) Repurchase Plan

On July 16, 2019, the Company authorized the repurchase of up to 525 thousand shares, or approximately 5 percent of its outstanding common stock. The amount and timing of purchases is dependent upon a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alternate uses of funds. The new plan replaces the Company's prior share repurchase program, which has since been terminated. There were no shares repurchased for the years ended December 31, 2019, 2018 and 2017.

Item 6. Selected Financial Data:

The following selected financial data should be read in conjunction with the Company's consolidated financial statements and notes presented herein in response to Item 8 of this Annual Report.

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, this Annual Report on Form 10-K contains certain non-GAAP financial measures. The Company believes that providing these non-GAAP financial measures provides investors with information useful in understanding the Company’s financial performance, performance trends, and financial position. While the Company uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative to measurements required by GAAP. The following table provides a reconciliation of certain GAAP financial measures to non-GAAP financial measures.



	For the year ended December 31, 2017
(In thousands, except percentages)	GAAP			Tax Act Adjustment			Non-GAAP
Federal and state income tax expense	$	9,540		$	(1,733	)	$	7,807
Net income	$	12,893		$	1,733		$	14,626
Basic earnings per share	$	1.22		$	0.16		$	1.38
Diluted earnings per share	$	1.20		$	0.16		$	1.36
Return on average assets	1.02		%	0.13		%	1.15		%
Return on average equity	11.47		%	1.55		%	13.02		%
Effective tax rate	42.50		%	(7.70		)%	34.80		%

The reconciling items between the GAAP and non-GAAP financial measures above include the impact of the Tax Act in 2017. On December 22, 2017, the Tax Act was signed, which lowered the corporate tax rate from 35% to 21%. This adjustment resulted in a $1.7 million increase in income tax expense and is reflected in our tax provision on the income statement. The Company believes the financial results are more comparable excluding the impact of the revaluation of the net deferred tax asset.

Basic earnings per share is calculated by dividing net income by average outstanding shares and diluted earnings per share is calculated by dividing net income by diluted average outstanding shares. The one-time net tax expense of $1.7 million in 2017 was included in determining income for both the GAAP basic earnings per share and the GAAP diluted earnings per share. Conversely, the one-time net tax expense of $1.7 million in 2017 was excluded in determining income for both the non-GAAP basic earnings per share and the non-GAAP diluted earnings per share. Average outstanding shares 10,558,000 were used in the GAAP and non-GAAP basic earnings per share. Diluted average outstanding shares of 10,749,000 were used in the GAAP and non-GAAP diluted earnings per share.

The return on average assets ratio is calculated by dividing net income by average assets and the return on average equity ratio is calculated by dividing net income by average equity. The one-time net tax expense of $1.7 million in 2017 was included in determining income for

both the GAAP return on average assets and the GAAP return on average equity. Conversely, the one-time net tax expense of $1.7 million was excluded in determining income for both the non-GAAP return on average assets and the non-GAAP return on average equity. Average assets of $1.3 billion were used in the GAAP and non-GAAP return on average assets ratios. Average equity of $113.0 million were used in the GAAP and non-GAAP return on average equity ratios.

The effective tax rate is calculated by dividing federal and state income tax expense by income before income taxes. The non-GAAP effective tax rate uses the non-GAAP federal and state income tax expense of $7.8 million for calculating the rate.

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 for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this

analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under

Item 8 of this report, and statistical data presented in this document.

Overview

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

Results of Operations

Net income totaled $23.7 million, or $2.14 per diluted share for the year ended December 31, 2019, compared to $21.9 million, or $2.01 per diluted share for the year ended December 31, 2018.

Highlights for the year include:


•	Net income before tax increased 11.0 percent to $30.3 million from $27.3 million in the prior year.


•	Net interest income increased $3.8 million or 7.2 percent to $57.6 million from $53.7 million in the prior year, primarily due to strong loan growth.


•	Net interest margin decreased 2 basis points to 3.95 percent compared to 3.97 percent in the prior year due to recent interest rate cuts by the Board of Governors of the Federal Reserve System.


•	Noninterest income was $9.5 million, a $508 thousand increase compared to $9.0 million in the prior year. This increase was primarily due to market fluctuations on our equity securities, increased gains on the sale of securities and increased mortgage gains.


•	Noninterest expense totaled $34.7 million, an increase of $1.3 million when compared to $33.4 million in the prior year. The increase was primarily due to increased compensation and mortgage commissions paid on a higher origination volume.


•	The effective tax rate increased to 22.0 percent compared to 19.7 percent in the prior year due to recent New Jersey tax legislation changes.


•	A 9.3 percent increase in total loans driven by a 15.8 percent increase in consumer loans, a 10.2 percent increase in commercial loans and a 7.3 percent increase in residential mortgages loans.


•	A 3.5 percent increase in total deposits with a 13.2 percent increase in time deposits and a 3.6 percent increase in noninterest-bearing deposits.

The Company's performance ratios for the past three years are listed in the following table:



	For the years ended December 31,
	2019			2018			2017
Net income per common share - Basic (1)	$	2.18		$	2.04		$	1.22
Net income per common share - Diluted (2)	$	2.14		$	2.01		$	1.20
Return on average assets	1.54		%	1.53		%	1.02		%
Return on average equity (3)	15.86		%	17.10		%	11.47		%
Efficiency ratio (4)	52.00		%	53.07		%	55.57		%


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


(2)	Defined as net income divided by the sum of weighted average shares and the potential dilutive impact of the exercise of outstanding options.


(3)	Defined as net income divided by average shareholders' equity.


(4)	The efficiency ratio is a non-GAAP measure of operational performance. It is defined as noninterest expense divided by the sum of net interest income plus noninterest income less any gains or losses on securities.

Net income presented above includes the impact of the Tax Act in 2017, which lowered the corporate tax rate from 35% to 21%. For additional information on the impact of the Tax Act and the Company's non-GAAP performance ratios, see the "Non-GAAP Financial Measures" section in "Item 6. Selected Financial Data."

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, interest-earning deposits and federal funds sold. Interest-bearing liabilities include interest-bearing checking, savings and time deposits, Federal Home Loan Bank ("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.

2019 compared to 2018

Tax-equivalent net interest income amounted to $57.6 million in 2019, an increase of $3.8 million from $53.8 million in 2018. The Company’s net interest margin decreased 2 basis points to 3.95 percent in 2019, compared to 3.97 percent in 2018. The net interest spread was 3.54 percent, a decrease of 11 basis points from 3.65 percent in 2018.

During 2019, tax-equivalent interest income was $75.7 million, an increase of $8.4 million or 12.5 percent when compared to 2018. This increase was driven primarily by the increase in the average volume of loans:


•	Of the $8.4 million increase in interest income on a tax-equivalent basis, $5.2 million of the increase was due primarily to the increased volume of earning assets and $3.2 million of the increase was due to an increase in yields on average interest-earning assets.


•	The yield on interest-earning assets increased 21 basis points to 5.18 percent in 2019 when compared to 2018.

•

The average volume of interest-earning assets increased $105.3 million to $1.5 billion in 2019 compared to $1.4 billion in 2018. This was due primarily to a $105.4 million increase in average loans, primarily residential mortgage, commercial and consumer loans, and a $2.6 million increase in average federal funds, interest-bearing deposits and repos, partially offset by a $2.0 million decrease in average investment securities.

Total interest expense was $18.1 million in 2019, an increase of $4.5 million or 33.6 percent compared to 2018. This increase was driven by the increased rates on interest-bearing deposits and volume of time deposits, partially offset by a decrease in the average volume of borrowed funds and subordinated debentures compared to a year ago:


•	Of the $4.5 million increase in interest expense, $3.0 million was due to increased rates on interest-bearing liabilities and $1.6 million was due to an increase in the volume of average interest-bearing liabilities.


•	The average cost of interest-bearing liabilities increased 32 basis points to 1.64 percent in 2019 when compared to 2018. The cost of interest-bearing deposits and borrowed funds and subordinated debentures increased 36 basis points and 14 basis points, respectively, in 2019.


•	Interest-bearing liabilities averaged $1.1 billion in 2019, an increase of $72.1 million or 7.0 percent, compared to 2018. The increase in interest-bearing liabilities was primarily due to an increase in average time deposits.

2018 compared to 2017

Tax-equivalent net interest income amounted to $53.8 million in 2018, an increase of $7.9 million from $45.9 million in 2017. The Company's net interest margin increased 14 basis points to 3.97 percent in 2018, compared to 3.83 percent in 2017. The net interest spread was 3.65 percent, an increase of 8 basis points from 3.57 percent in 2017. This was due to strong loan growth and the rising interest rate environment.

During 2018, tax-equivalent interest income was $67.3 million, an increase of $11.9 million or 21.5 percent when compared to

2017. This increase was driven primarily by the increase in the average volume of loans:


•	Of the $11.9 million increase in interest income on a tax-equivalent basis, $8.8 million of the increase was due primarily to the increased volume of earning assets and $3.1 million of the increase was due to an increase in yields on average interest earning assets due to the rising interest rate environment.


•	The yield on interest-earning assets increased 36 basis points to 4.97 percent in 2018 when compared to 2017.

•

The average volume of interest-earning assets increased $153.9 million to $1.4 billion in 2018 compared to $1.2 billion in 2017. This was due primarily to a $189.2 million increase in average loans, primarily commercial, residential mortgage and consumer loans, partially offset by a $29.4 million decrease in average federal funds, interest-bearing deposits and repos and a $6.5 million decrease in average investment securities.

Total interest expense was $13.5 million in 2018, an increase of $4.1 million or 43.0 percent compared to 2017. This increase was driven by the increased rates on interest-bearing deposits and volume of time deposits, partially offset by decreased rates on borrowed funds and subordinated debentures compared to a year ago:


•	Of the $4.1 million increase in interest expense, $2.3 million was due to increased rates on interest-bearing liabilities and $1.7 million was due to an increase in the volume of average interest-bearing liabilities.


•	The average cost of interest-bearing liabilities increased 28 basis points to 1.32 percent in 2018 when compared to 2017. While the cost of interest-bearing deposits increased 37 basis points to 1.23 percent in 2018, the cost of borrowed funds and subordinated debentures decreased 15 basis points to 1.89 percent.


•	Interest-bearing liabilities averaged $1.0 billion in 2018, an increase of $118.1 million or 12.9 percent, compared to 2017. The increase in interest-bearing liabilities was primarily due to an increase in average time deposits.

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 2019 and 2018 and 35 percent in prior years.

Consolidated Average Balance Sheets

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



For the years ended December 31,	2019								2018
	Average balance			Interest			Rate/Yield		Average balance			Interest			Rate/Yield
ASSETS
Interest-earning assets:
Federal funds sold, interest-bearing deposits and repos	$	43,305		$	906		2.09	%	$	40,700		$	773		1.90	%
Federal Home Loan Bank ("FHLB") stock	6,066			385			6.35		6,786			462			6.81
Securities:
Taxable	59,459			1,926			3.24		60,734			1,907			3.14
Tax-exempt	4,394			129			2.94		5,104			145			2.84
Total securities (A)	63,853			2,055			3.22		65,838			2,052			3.12
Loans, net of unearned discount:
SBA loans	48,686			3,780			7.76		60,321			4,338			7.19
Commercial loans	715,301			37,577			5.25		668,144			33,886			5.07
Residential mortgage loans	449,003			22,483			5.01		396,731			18,837			4.75
Consumer loans	133,918			8,487			6.34		116,311			6,943			5.97
Total loans (B)	1,346,908			72,327			5.37		1,241,507			64,004			5.16
Total interest-earning assets	$	1,460,132		$	75,673		5.18	%	$	1,354,831		$	67,291		4.97	%

Noninterest-earning assets:
Cash and due from banks	25,761								24,598
Allowance for loan losses	(16,058		)						(14,640		)
Other assets	69,987								65,770
Total noninterest-earning assets	79,690								75,728
Total assets	$	1,539,822							$	1,430,559

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	182,540		$	1,795		0.98	%	$	177,022		$	1,202		0.68	%
Savings deposits	397,122			4,497			1.13		404,613			3,871			0.96
Time deposits	409,406			9,460			2.31		314,224			5,903			1.88
Total interest-bearing deposits	989,068			15,752			1.59		895,859			10,976			1.23
Borrowed funds and subordinated debentures	113,511			2,303			2.03		134,664			2,540			1.89
Total interest-bearing liabilities	$	1,102,579		$	18,055		1.64	%	$	1,030,523		$	13,516		1.32	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	273,338								261,976
Other liabilities	14,755								9,903
Total noninterest-bearing liabilities	288,093								271,879
Total shareholders' equity	149,150								128,157
Total liabilities and shareholders' equity	$	1,539,822							$	1,430,559

Net interest spread				$	57,618		3.54	%				$	53,775		3.65	%
Tax-equivalent basis adjustment				(25		)						(28		)
Net interest income				$	57,593							$	53,747
Net interest margin							3.95	%							3.97	%


(A)	Yields related to securities exempt from federal and state income taxes are 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 2019 and 2018 and 35 percent in prior years and 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.



2017									2016									2015
Average balance			Interest				Rate/Yield		Average balance			Interest				Rate/Yield		Average balance			Interest				Rate/Yield


$	70,139		$	851			1.21	%	$	71,265		$	214			0.30	%	$	34,883		$	39			0.11	%
6,230			370				5.94		5,241			245				4.67		3,695			155				4.19

66,107			2,029				3.07		61,053			1,698				2.78		62,937			1,459				2.32
6,225			240				3.86		7,649			307				4.01		11,739			421				3.59
72,332			2,269				3.14		68,702			2,005				2.92		74,676			1,880				2.52

59,293			3,805				6.42		56,834			3,181				5.60		50,997			2,693				5.28
571,001			28,150				4.93		510,614			25,256				4.95		459,068			22,771				4.96
319,074			14,650				4.59		273,612			12,205				4.46		246,278			11,048				4.49
102,898			5,296				5.15		84,222			4,021				4.77		69,580			3,202				4.60
1,052,266			51,901				4.93		925,282			44,663				4.83		825,923			39,714				4.81
$	1,200,967		$	55,391		41,788	4.61	%	$	1,070,490		$	47,127		41,788	4.40	%	$	939,177		$	41,788		41,788	4.45	%


23,321									24,409									25,952
(13,033		)							(12,841		)							(12,638		)
58,481									50,103									43,742
68,769									61,671									57,056
$	1,269,736								$	1,132,161								$	996,233



$	159,642		$	665			0.42	%	$	133,212		$	537			0.40	%	$	126,876		$	438			0.35	%
397,250			2,738				0.69		328,486			1,742				0.53		290,848			1,088				0.37
219,847			3,278				1.49		261,225			3,670				1.40		240,132			3,160				1.32
776,739			6,681				0.86		722,923			5,949				0.82		657,856			4,686				0.71
135,730			2,772				2.04		114,853			2,818				2.45		87,652			2,974				3.39
$	912,469		$	9,453			1.04	%	$	837,776		$	8,767			1.04	%	$	745,508		$	7,660			1.03	%


237,207									199,554									172,172
7,090									8,895									4,611
244,297									208,449									176,783
112,970									85,936									73,942
$	1,269,736								$	1,132,161								$	996,233

			$	45,938			3.57	%				$	38,360			3.36	%				$	34,128			3.42	%
			(81		)							(103		)							(137		)
			$	45,857								$	38,257								$	33,991
							3.83	%								3.58	%								3.63	%

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 in 2019 and 2018 and 35 percent in 2017.



	For the years ended December 31,
	2019 versus 2018									2018 versus 2017
	Increase (decrease) due to change in:									Increase (decrease) due to change in:
(In thousands on a tax-equivalent basis)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Federal funds sold, interest-bearing deposits and repos	$	52		$	81		$	133		$	(443	)	$	365		$	(78	)
Federal Home Loan Bank stock	(47		)	(30		)	(77		)	35			57			92
Securities	(62		)	65			3			(206		)	(11		)	(217		)
Net loans	5,245			3,078			8,323			9,386			2,717			12,103
Total interest income	$	5,188		$	3,194		$	8,382		$	8,772		$	3,128		$	11,900
Interest expense:
Demand deposits	$	40		$	553		$	593		$	80		$	457		$	537
Savings deposits	(71		)	697			626			51			1,082			1,133
Time deposits	2,027			1,530			3,557			1,631			994			2,625
Total interest-bearing deposits	1,996			2,780			4,776			1,762			2,533			4,295
Borrowed funds and subordinated debentures	(419		)	182			(237		)	(23		)	(209		)	(232		)
Total interest expense	1,577			2,962			4,539			1,739			2,324			4,063
Net interest income - fully tax-equivalent	$	3,611		$	232		$	3,843		$	7,033		$	804		$	7,837
Increase in tax-equivalent adjustment							3									53
Net interest income							$	3,846								$	7,890

Provision for Loan Losses

The provision for loan losses totaled $2.1 million for 2019, $2.1 million in 2018 and $1.7 million in 2017. 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 Unfunded Loan Commitments.” The current provision is considered appropriate based upon management’s assessment of the adequacy of the allowance for loan losses.

Noninterest Income

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



	For the years ended December 31,
(In thousands)	2019		2018			2017
Branch fee income	$	1,502	$	1,519		$	1,384
Service and loan fee income	1,965		2,130			2,100
Gain on sale of SBA loans held for sale, net	909		1,680			1,617
Gain on sale of mortgage loans, net	2,090		1,719			1,530
BOLI income	588		975			469
Net security gains (losses)	373		(199		)	62
Gain on sale of premises and equipment	766		—			—
Other income	1,346		1,207			1,108
Total noninterest income	$	9,539	$	9,031		$	8,270

2019 compared to 2018

Noninterest income was $9.5 million for 2019, a $508 thousand increase compared to $9.0 million for 2018. This increase was primarily due to market fluctuations on our equity securities and increased gains on sales of mortgages.

Changes in noninterest income reflect:


•	Branch fee income decreased $17 thousand to $1.5 million when compared to 2018.


•	Service and loan fee income, which consists of prepayment fees, application fees and servicing fees, decreased $165 thousand in 2019.


•	Net gains on the sale of SBA loans decreased $771 thousand to $909 thousand in 2019 due to a decrease in the volume of SBA loans sales. In 2019, $14.9 million in SBA loans were sold compared to $22.3 million in the prior year. The Company elected not to sell SBA loans during the third quarter of 2019.


•	During the year, $120.2 million in residential mortgage loans were sold at a gain of $2.1 million compared to $80.7 million in loans sold at a gain of $1.7 million during the prior year.


•	BOLI income decreased $387 thousand from prior year, primarily due to a $291 thousand death benefit in the third quarter of 2018.


•	Net security gains totaled $373 thousand in 2019 compared to losses of $199 thousand in 2018. Approximately $321 thousand of these gains resulted from an increase in the market value of equity securities, compared to a decrease of $195 thousand in 2018. Gains on sales of securities totaled $52 thousand in 2019, compared to losses of $4 thousand in 2018.


•	Gain on sale of premises and equipment totaled $766 thousand in 2019 versus none in 2018. The increase was primarily due to the $768 thousand gain on the sale of our Union, NJ branch building in September 2019.


•	Other income, which includes check card related income and miscellaneous service charges totaled $1.3 million and $1.2 million in 2019 and 2018, respectively.

2018 compared to 2017

Noninterest income was $9.0 million for 2018, a $761 thousand increase compared to $8.3 million for 2017. This increase was primarily due to increased BOLI income and gains on sales of mortgages.

Changes in noninterest income reflect:


•	Branch fee income increased $135 thousand in 2018 from the prior year primarily due to increased check printing income and higher levels of service charges from commercial checking accounts.


•	Service and loan fee income, which consists of prepayment fees, applications fees and servicing fees, increased $30 thousand in 2018.


•	Net gains on the sale of SBA loans increased $63 thousand to $1.7 million in 2018 due to an increase in the volume of SBA loans sales. In 2018, $22.3 million in SBA loans were sold compared to $19.4 million in the prior year. SBA loan sales in 2018 averaged a lower bid rate compared to 2017, which resulted in lower gains per sale.


•	During 2018, $80.7 million in residential mortgage loans were sold at a gain of $1.7 million compared to $82.1 million in loans sold at a gain of $1.5 million during the prior year. The increased gain was a result of portfolio sales of $13.3 million in 2018 versus $3.5 million in 2017.


•	BOLI income increased $506 thousand in 2018 from the prior year, primarily due to a $291 thousand death benefit in the third quarter of 2018, and the increase in income related to the purchase of a $10.0 million Separate Account BOLI policy during the third quarter of 2017.


•	There were net losses on the sales of securities totaling $4 thousand in 2018 compared to gains of $62 thousand in 2017. Due to the adoption of ASU 2016-01 in January of 2018, there was an unrealized loss of $195 thousand recognized during the year resulting from a decrease in the market value of equity securities.


•	Other income, which includes check card related income and miscellaneous service charges, totaled $1.2 million and $1.1 million in 2018 and 2017, respectively. The increase was primarily due to increases in Visa check card interchange fees and wire transfer fees.

Noninterest Expense

The following table presents a breakdown of noninterest expense for the past three years:



	For the years ended December 31,
(In thousands)	2019		2018			2017
Compensation and benefits	$	20,666	$	20,119		$	17,117
Occupancy	2,650		2,739			2,381
Processing and communications	2,924		2,788			2,551
Furniture and equipment	2,894		2,348			2,079
Professional services	1,061		934			1,022
Loan collection and OREO expenses (recoveries)	41		(361		)	463
Other loan expenses	272		208			186
Deposit insurance	301		782			546
Advertising	1,358		1,411			1,179
Director fees	673		671			637
Other expenses	1,877		1,782			1,883
Total noninterest expense	$	34,717	$	33,421		$	30,044

2019 compared to 2018

Noninterest expense totaled $34.7 million for the year ended December 31, 2019, an increase of $1.3 million when compared to $33.4 million in 2018. The majority of this increase is attributed to increased compensation and mortgage commissions paid on a higher origination volume and the continued investment in our technology infrastructure through software upgrades.

Changes in noninterest expense reflect:


•	Compensation and benefits expense, the largest component of noninterest expense, increased $547 thousand for the year ended December 31, 2019, when compared to 2018. The yearly increase is primarily due to increased salary expenses and year end bonuses paid to employees.


•	Occupancy expense decreased $89 thousand in 2019 when compared to 2018.


•	Processing and communications increased $136 thousand for the year ended December 31, 2019 when compared to 2018, primarily due to increased electronic banking expenses.


•	Furniture and equipment expense increased $546 thousand in 2019, due to investment in software and equipment to remain efficient, secure and competitive technologically.


•	Professional service fees increased $127 thousand in 2019, primarily due to higher consulting expenses.


•	Loan collection and OREO expenses increased $402 thousand in 2019, primarily due to a $317 thousand settlement related to an OREO property in the third quarter of 2018.


•	Other loan expenses, which consist of expenses such as appraisals, filings and credit reports, increased $64 thousand in 2019, when compared to 2018.


•	Deposit insurance expense decreased $481 thousand in 2019 when compared to 2018 primarily due to an FDIC assessment credit of $279 thousand during the second half of 2019.


•	Advertising expenses decreased $53 thousand for the year ended December 31, 2019, versus 2018.


•	Director fees remained relatively flat in 2019 when compared to 2018.


•	Other expenses increased $95 thousand in 2019, primarily due to higher officer and employee expenses.

2018 compared to 2017

Noninterest expense totaled $33.4 million for the year ended December 31, 2018, an increase of $3.4 million when compared to $30.0 million in 2017. The majority of this increase is attributed to expansion costs from two additional branches and increased headcount which resulted in higher compensation, benefits, occupancy and equipment expenses.

Changes in noninterest expense reflect:


•	Compensation and benefits expense, the largest component of noninterest expense, increased $3.0 million for the year ended

December 31, 2018, when compared to 2017. Expenses have risen as we expanded our branch network, lending and support staff. This additional headcount has resulted in higher salary, commission and benefit expense. In addition, benefits expense for 2018 included a $1.1 million supplemental executive retirement plan expense.


•	Occupancy expense increased $358 thousand in 2018 primarily due to the addition of branches in Ramsey, New Jersey, and in Bethlehem, Pennsylvania.


•	Processing and communications increased $237 thousand for the year ended December 31, 2018 when compared to 2017, primarily due to increased bank services from the addition of new branches.


•	Furniture and equipment expense increased $269 thousand in 2018, due to investment in our technology infrastructure through network and software upgrades that will improve our efficiency and keep our data secure.


•	Professional service fees decreased $88 thousand in 2018, primarily due to lower consulting expenses, partially offset by increased loan review, legal, external audit and tax expenses.


•	Loan collection and OREO expenses decreased $824 thousand in 2018, primarily due to a $317 thousand recovery on an OREO property in 2018, compared to a loss of $253 thousand on a sale in 2017.


•	Other loan expenses, which consist of expenses such as appraisals, filings and credit reports, increased $22 thousand in 2018, when compared to 2017.


•	Deposit insurance expense increased $236 thousand in 2018 when compared to 2017 due to asset growth.


•	Advertising expenses increased $232 thousand for the year ended December 31, 2018 in support of our retail and lending sales as well as branch expansions and retail promotions.


•	Director fees increased $34 thousand in 2018 when compared to 2017.


•	Other expenses decreased $101 thousand in 2018, primarily due to a decreased provision for commitments.

Income Tax Expense

For 2019, the Company reported income tax expense of $6.7 million for an effective tax rate of 22.0%, compared to an income tax expense of $5.4 million and an effective tax rate of 19.7% in 2018 and an income tax expense of $9.5 million and an effective tax rate of 42.5% in 2017.

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

On December 22, 2017, the "Tax Cuts and Jobs Act" (TCJA) was signed into law, lowering the corporate tax rate from 35% to 21% starting in 2018. The new plan resulted in significant tax benefits.

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Financial Condition

Total assets increased $139.8 million or 8.9 percent, to $1.7 billion at December 31, 2019, compared to $1.6 billion at December 31, 2018. This increase was primarily due to increases of $120.0 million in net loans, with strong commercial, residential and consumer loan growth.

Total deposits increased $42.4 million, primarily due to increases of $47.2 million in time deposits and $9.6 million in noninterest-bearing demand deposits, partially offset by a decrease of $9.5 million in interest-bearing demand deposits and $4.9 million in saving deposits. Borrowed funds increased by $73.0 million to $283.0 million at December 31, 2019 primarily due to a new $40.0 million fixed rate advance and an increase of $33.0 million in overnight borrowings.

Total shareholders’ equity increased $22.2 million from year end 2018, primarily due to net income from operations, less dividends paid on our common stock. Net income was $23.7 million for the year ended December 31, 2019, an increase of $1.7 million from the prior year. Other changes in shareholders’ equity included stock-based transactions of $1.5 million and an other comprehensive gain net of tax of $311 thousand, offset by common stock dividends of $3.3 million paid in 2019.

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

Securities

The Company’s securities portfolio consists of available for sale (“AFS”), held to maturity (“HTM”) and equity investments. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.

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

AFS debt securities totaled $64.3 million at December 31, 2019, an increase of $17.6 million or 37.6 percent, compared to $46.7 million at December 31, 2018. This net increase was the result of:


•	$14.2 million from the transfer of the Company's HTM portfolio to AFS,


•	$13.1 million from the purchase of six corporate bonds and one mortgage-backed security,


•	$1.4 million of appreciation in the market value of the portfolio. At December 31, 2019, the portfolio had a net unrealized gain of $392 thousand compared to a net unrealized loss of $1.0 million at December 31, 2018. These net unrealized gains and losses are reflected net of tax in shareholders’ equity as accumulated other comprehensive income, partially offset by


•	$5.4 million in principal payments, maturities and called bonds,


•	$5.6 million in sales net of realized gains, which consisted of two commercial mortgage-backed securities and two agency securities, and


•	$169 thousand in net amortization.

The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 4.9 years and 6.2 years at December 31, 2019 and 2018, respectively.

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

In 2019, the Company elected to transfer its HTM securities to its AFS debt securities portfolio. At December 31, 2018, HTM securities totaled $14.9 million.

The weighted average life of HTM securities, adjusted for prepayments, amounted to 5.4 years at December 31, 2018. As of December 31, 2018, the fair value of HTM securities was $14.8 million.

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. These securities were transferred from available for sale and reclassified into equity securities on the balance sheet as a result of the adoption of ASU 2016-01 in January 2018.

Equity securities totaled $2.3 million at December 31, 2019, an increase of $145 thousand or 6.7 percent, compared to $2.1 million at December 31, 2018. This net increase was the result of:


•	$321 thousand in market value adjustments throughout the year, partially offset by


•	$181 thousand in sales net of realized gains from the sale of one community bank holding.

The average balance of taxable securities amounted to $59.5 million in 2019 compared to $60.7 million in 2018. The average yield earned on taxable securities increased 10 basis points to 3.24 percent in 2019, from 3.14 percent in 2018. The average balance of tax-exempt securities amounted to $4.4 million in 2019 compared to $5.1 million in 2018. The average yield earned on tax-exempt securities increased 10 basis points to 2.94 percent in 2019, from 2.84 percent in 2018.

Securities with a carrying value of $4.0 million and $4.3 million at December 31, 2019 and December 31, 2018, respectively, were pledged to secure Government deposits, secure other borrowings, collateralize hedging instruments and for other purposes required or permitted by law.

Approximately 64 percent of the total investment portfolio had a fixed rate of interest at December 31, 2019, compared to 80 percent in 2018.

For additional information on securities, see Note 3 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 and consumer loans. Each of these segments is subject to differing levels of credit and interest rate risk.

Total loans increased $121.0 million or 9.3 percent to $1.4 billion at December 31, 2019, compared to $1.3 billion at year end 2018. Commercial loans, residential mortgages and consumer loans increased $70.9 million, $31.7 million, and $19.6 million, respectively, partially offset by a decrease of $1.2 million in SBA loans.

The following table sets forth the classification of loans by major category, including unearned fees, deferred costs and excluding the allowance for loan losses at December 31^st for the past five years:



	2019				2018				2017				2016				2015
(In thousands, except percentages)	Amount		% of total		Amount		% of total		Amount		% of total		Amount		% of total		Amount		% of total
Ending balance:
SBA loans held for investment	$	35,767	2.5	%	$	39,333	3.0	%	$	43,999	3.8	%	$	42,492	4.4	%	$	39,393	4.4	%
Commercial loans	765,032		53.7		694,102		53.2		628,865		53.7		535,515		55.0		494,871		55.6
Residential mortgage loans	467,706		32.8		436,056		33.4		365,145		31.2		289,093		29.7		264,523		29.8
Consumer loans	143,524		10.1		123,904		9.5		109,855		9.4		91,541		9.4		77,057		8.7
Total loans held for investment	1,412,029		99.1		1,293,395		99.1		1,147,864		98.1		958,641		98.5		875,844		98.5
SBA loans held for sale	13,529		0.9		11,171		0.9		22,810		1.9		14,773		1.5		13,114		1.5
Total loans	$	1,425,558	100.0	%	$	1,304,566	100.0	%	$	1,170,674	100.0	%	$	973,414	100.0	%	$	888,958	100.0	%

Average loans increased $105.4 million or 8.5 percent from $1.2 billion in 2018, to $1.3 billion in 2019. The increase in average loans was due to increases in residential mortgages, commercial loans and consumer loans, partially offset by a decrease in SBA 7(a) loans. The yield on the overall loan portfolio increased 21 basis points to 5.37 percent for the year ended December 31, 2019, compared to 5.16 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 for the purposes of providing working capital, financing the purchase of equipment, inventory or commercial real estate. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. The deficiency may be a higher loan to value (“LTV”) ratio, lower debt service coverage (“DSC”) ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start up businesses where there is no historical financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $13.5 million at December 31, 2019, an increase of $2.4 million from $11.2 million at December 31, 2018. SBA 7(a) loans held for investment amounted to $35.8 million at December 31, 2019, a decrease of $3.6 million from $39.3 million at December 31, 2018. The yield on SBA 7(a) loans, which is generally floating and adjusts quarterly to the Prime Rate, was 7.76 percent for the year ended December 31, 2019, compared to 7.19 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 for investment 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

$93.6 million and $101.1 million in SBA loans were sold but serviced by the Company at December 31, 2019 and December 31, 2018, respectively, and are not included on the Company’s balance sheet. There is no direct relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company’s SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.

Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $765.0 million at December 31, 2019, an increase of $70.9 million from year end 2018. The yield on commercial loans was 5.25 percent for 2019, compared to 5.07 percent for the same period in 2018. 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 $467.7 million at December 31, 2019, an increase of $31.7 million from year end 2018. Sales of mortgage loans totaled $120.2 million for 2019. Approximately $10.6 million of the loans sold were from portfolio, with the remainder consisting of new production. Approximately $36.9 million and $42.5 million in residential loans were sold but serviced by the Company at December 31, 2019 and December 31, 2018, respectively, and are not included on the Company’s balance sheet. The yield on residential mortgages was 5.01 percent for 2019, compared to 4.75 percent for 2018. Residential mortgage loans maintained in portfolio are generally to individuals that do not qualify for conventional financing. In extending credit to this category of borrowers, the Bank considers other mitigating factors such as credit history, equity and liquid reserves of the borrower. As a result, the residential mortgage loan portfolio of the Bank includes fixed and adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but are not considered high priced mortgages.

Consumer loans consist of home equity loans, construction 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 $143.5 million at December 31, 2019, an increase of $19.6 million from December 31, 2018. The yield on consumer loans was 6.34 percent for 2019, compared to 5.97 percent for 2018.

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 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 following table shows the maturity distribution or repricing of the loan portfolio and the allocation of fixed and floating interest rates at December 31, 2019:



	December 31, 2019
(In thousands)	One year or less		One to five years		Over five years		Total
SBA loans	$	45,956	$	3,030	$	310	$	49,296
Commercial loans
SBA 504 loans	12,055		13,675		996		26,726
Commercial other	26,356		45,919		39,739		112,014
Commercial real estate	67,306		410,573		100,764		578,643
Commercial real estate construction	5,771		22,509		19,369		47,649
Total	$	157,444	$	495,706	$	161,178	$	814,328
Amount of loans with maturities or repricing dates greater than one year:
Fixed interest rates							$	196,977
Floating or adjustable interest rates							459,907
Total							$	656,884

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

Troubled Debt Restructurings

Troubled debt restructurings (“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, other modifications of payment terms, or a combination of modifications. When the Company modifies a loan, management evaluates the loan 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 December 31, 2019, there was one loan totaling $705 thousand that was classified as a TDR and deemed impaired, compared to one such loan totaling $745 thousand at December 31, 2018. The TDR was a commercial real estate loan which was modified in 2017 to reduce the principal balance. The loan remains in accrual status since it continues to perform in accordance with the restructured terms. 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.

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

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. 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 and OREO. 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 December 31^st for the past five years:



(In thousands, except percentages)	2019			2018			2017			2016			2015
Nonperforming by category:
SBA loans held for investment (1)	$	1,164		$	1,560		$	632		$	1,168		$	1,764
Commercial loans	529			1,076			68			939			2,682
Residential mortgage loans	3,936			4,211			1,669			2,672			2,224
Consumer loans	20			26			625			2,458			590
Total nonperforming loans (2)	$	5,649		$	6,873		$	2,994		$	7,237		$	7,260
OREO	1,723			56			426			1,050			1,591
Total nonperforming assets	$	7,372		$	6,929		$	3,420		$	8,287		$	8,851
Past due 90 days or more and still accruing interest:
Commercial loans	—			—			60			—			—
Residential mortgage loans	930			98			—			—			—
Total past due 90 days or more and still accruing interest	$	930		$	98		$	60		$	—		$	—
Nonperforming loans to total loans	0.40		%	0.53		%	0.26		%	0.74		%	0.82		%
Nonperforming loans and TDRs to total loans (3)	0.45			0.58			0.32			0.74			1.16
Nonperforming assets to total loans and OREO	0.52			0.53			0.29			0.85			0.99
Nonperforming assets to total assets	0.43			0.44			0.23			0.70			0.82
(1) Guaranteed SBA loans included above	$	59		$	89		$	27		$	60		$	288
(2) Nonperforming TDRs included above	—			—			—			153			293
(3) Performing TDRs	705			745			786			—			3,015

Nonperforming loans were $5.6 million at December 31, 2019, a $1.2 million decrease from $6.9 million at year end 2018. Since year end 2018, nonperforming loans in the commercial, SBA, residential and consumer segments decreased. Included in nonperforming loans at December 31, 2019 are approximately $59 thousand of loans guaranteed by the SBA, compared to $89 thousand at December 31, 2018. In addition, there were $930 thousand in loans past due 90 days or more and still accruing interest at December 31, 2019, compared to $98 thousand at December 31, 2018.

OREO properties totaled $1.7 million at December 31, 2019, an increase of $1.7 million from $56 thousand at year end 2018. During 2019, the Company took title to four new properties valued at $1.7 million that resulted in a charge to the allowance of $175 thousand.

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 not included in nonperforming loans as they continue to perform. Potential problem loans totaled $7.4 million at December 31, 2019, an increase of $2.9 million from $4.5 million at December 31, 2018. The increase is due to the addition of fourteen loans totaling $7.2 million offset by the deletion of six loans totaling $5.5 million.

For additional information on asset quality, see Note 4 to the Consolidated Financial Statements.

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 as it believes they are 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.

The allowance for loan losses totaled $16.4 million at December 31, 2019, compared to $15.5 million at December 31, 2018, with resulting allowance to total loan ratios of 1.15 percent and 1.19 percent, respectively. Net charge-offs amounted to $1.2 million for 2019, compared to $118 thousand for 2018. The following table is a summary of the changes to the allowance for loan losses for the past five years, including net charge-offs to average loan ratios for each major loan category:



	For the years ended December 31,
(In thousands, except percentages)	2019			2018			2017			2016			2015
Balance, beginning of year	$	15,488		$	13,556		$	12,579		$	12,759		$	12,551
Provision charged to expense	2,100			2,050			1,650			1,220			500
Charge-offs:
SBA loans held for investment	535			354			293			557			370
Commercial loans	501			10			227			775			898
Residential mortgage loans	205			—			55			101			50
Consumer loans	1			22			336			30			130
Total charge-offs	1,242			386			911			1,463			1,448
Recoveries:
SBA loans held for investment	23			72			121			33			54
Commercial loans	16			30			102			29			1,052
Residential mortgage loans	—			13			12			—			49
Consumer loans	10			153			3			1			1
Total recoveries	49			268			238			63			1,156
Total net charge-offs	1,193			118			673			1,400			292
Balance, end of year	$	16,395		$	15,488		$	13,556		$	12,579		$	12,759
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans:
SBA loans held for investment	1.05		%	0.47		%	0.29		%	0.92		%	0.62		%
Commercial loans	0.07			—			0.02			0.15			(0.04		)
Residential mortgage loans	0.05			—			0.01			0.04			—
Consumer loans	(0.01		)	(0.11		)	0.32			0.03			0.19
Total loans	0.09			0.01			0.06			0.15			0.04
Allowance to total loans	1.15			1.19			1.16			1.29			1.44
Allowance to nonperforming loans	290.23		%	225.35		%	452.77		%	173.82		%	175.74		%

The following table sets forth, for each of the major lending categories, the amount of the allowance for loan losses allocated to each category and the percentage of total loans represented by such category, as of December 31^st of the past five years. 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.



	2019				2018				2017				2016				2015
(In thousands, except percentages)	Reserve amount		% of loans to total loans		Reserve amount		% of loans to total loans		Reserve amount		% of loans to total loans		Reserve amount		% of loans to total loans		Reserve amount		% of loans to total loans
Balance applicable to:
SBA loans held for investment	$	1,079	2.5	%	$	1,655	3.0	%	$	1,471	3.8	%	$	1,576	4.4	%	$	1,961	4.4	%
Commercial loans	9,722		53.7		8,705		53.2		7,825		53.7		7,302		55.0		7,050		55.6
Residential mortgage loans	4,254		32.8		3,900		33.4		3,130		31.2		2,593		29.7		2,769		29.8
Consumer loans	1,340		10.1		1,228		9.5		1,130		9.4		925		9.4		817		8.7
Unallocated	—		—		—		—		—		—		183		—		162		—
Total loans held for investment	16,395		99.1		15,488		99.1		13,556		98.1		12,579		98.5		12,759		98.5
SBA loans held for sale	—		0.9		—		0.9		—		1.9		—		1.5		—		1.5
Total loans	$	16,395	100.0	%	$	15,488	100.0	%	$	13,556	100.0	%	$	12,579	100.0	%	$	12,759	100.0	%

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 December 31, 2019, a $273 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $290 thousand commitment reserve at December 31, 2018.

For additional information on the allowance for loan losses and reserve for unfunded loan commitments, see Note 5 to the Consolidated Financial Statements.

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 three years:



	2019				2018				2017
(In thousands, except percentages)	Amount		% of total		Amount		% of total		Amount		% of total
Ending balance:
Noninterest-bearing demand deposits	$	279,793	22.4	%	$	270,152	22.4	%	$	256,119	24.6	%
Interest-bearing demand deposits	176,335		14.1		185,792		15.4		164,997		15.8
Savings deposits	389,795		31.2		394,727		32.6		396,557		38.0
Time deposits	404,191		32.3		357,016		29.6		225,464		21.6
Total deposits	$	1,250,114	100.0	%	$	1,207,687	100.0	%	$	1,043,137	100.0	%

Total deposits increased $42.4 million to $1.3 billion at December 31, 2019, from $1.2 billion at December 31, 2018. This increase in deposits was due to increases of $47.2 million and $9.6 million in time deposits and noninterest-bearing demand deposits, respectively, partially offset by decreases of $9.5 million and $4.9 million in interest-bearing demand deposits and savings deposits, repectively.

The Company’s deposit composition at December 31, 2019, consisted of 32.3 percent time deposits, 31.2 percent savings deposits, 22.4 percent noninterest-bearing demand deposits and 14.1 percent interest-bearing demand deposits. The change in the composition of the portfolio from December 31, 2018 reflects a 2.7 percent increase in time deposits, offset by a 1.4 percent decrease in savings deposits and a 1.3 percent decrease in interest-bearing demand deposits.

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



	For the years ended December 31,
	2019				2018				2017
(In thousands, except percentages)	Amount		% of total		Amount		% of total		Amount		% of total
Average balance:
Noninterest-bearing demand deposits	$	273,338	21.7	%	$	261,976	22.6	%	$	237,207	21.6	%
Interest-bearing demand deposits	182,540		14.5		177,022		15.3		159,642		14.4
Savings deposits	397,122		31.4		404,613		35.0		397,250		35.7
Time deposits	409,406		32.4		314,224		27.1		219,847		28.3
Total deposits	$	1,262,406	100.0	%	$	1,157,835	100.0	%	$	1,013,946	100.0	%

For additional information on deposits, see Note 8 to the Consolidated Financial Statements.

Borrowed Funds and Subordinated Debentures

Borrowed funds consist or previously consisted primarily of adjustable and 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 $293.3 million and $220.3 million at December 31, 2019 and December 31, 2018, respectively, and are broken down in the following table:



(In thousands)	December 31, 2019		December 31, 2018
FHLB borrowings:
Fixed rate advances	$	40,000	$	—
Adjustable rate advances	50,000		50,000
Overnight advances	193,000		160,000
Subordinated debentures	10,310		10,310
Total borrowed funds and subordinated debentures	$	293,310	$	220,310

Borrowed funds increased $73.0 million from prior year-end due to a $40.0 million increase in FHLB fixed rate advances and a $33.0 million increase in FHLB overnight borrowings during the year ended December 31, 2019.

FHLB Borrowings

At December 31, 2019, the Company had $40.0 million in fixed rate advances, compared to no advances at December 31, 2018. The terms of this transaction are as follows:


•	A $40.0 million FHLB borrowing with a maturity date of August 22, 2024, at a rate of 1.810%.

At December 31, 2019 and December 31, 2018, the $50.0 million FHLB adjustable rate ("ARC") advances consisted of two $20.0 million advances and one $10.0 million advance. These ARC advances roll over every six months. The Company has opted to hedge rates in a fluctuating rate environment. Each ARC advance has a swap instrument which modifies the borrowing to a 5 year fixed rate borrowing. The terms of these transactions are as follows:


•	A $20.0 million ARC FHLB borrowing with a maturity date of January 6. 2020, at a rate of 3 month LIBOR plus 0.150%. The swap instrument modifies the borrowing to a 5 year fixed rate borrowing at 1.198% and matures on July 5, 2021.


•	A $10.0 million ARC FHLB borrowing with a maturity date of February 18, 2020, at a rate of 3 month LIBOR plus 0.140%. The swap instrument modifies the borrowing to a 5 year fixed rate borrowing at 1.243% that matures on February 16, 2021.


•	A $20.0 million ARC FHLB borrowing with a maturity date of June 9, 2020, at a rate of 3 month LIBOR plus 0.025%. The swap instrument modifies the borrowing to a 5 year fixed rate borrowing at 1.755% and matures on December 7, 2020.

At December 31, 2019, there were FHLB overnight borrowings of $193.0 million at a rate of 1.810%, compared to $160.0 million at a rate of 2.600% at December 31, 2018.

In December 2019, the FHLB issued a $12.0 million municipal deposit letter of credit in the name of Unity Bank naming the NJ Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law.

At December 31, 2019, the Company had $219.7 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 the Parent Company, 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 3.518% at December 31, 2019 and 4.414% at December 31, 2018. At December 31, 2018, the subordinated debentures had a swap instrument which modified the borrowing to a 3 year fixed rate at 2.475%. The swap instrument matured on February 16, 2019. A new swap instrument was implemented on July 5, 2019, which modified the borrowing to a 3 year fixed rate at 3.435%.

For additional information on borrowed funds and subordinated debentures, see Note 9 to the Consolidated Financial Statements.

Market Risk

Based on the Company’s business, the two largest risks facing the Company are market risk and credit 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 RMC are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity requirements, and actively manage risk within Board-approved guidelines. The RMC reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.

The Company uses various techniques to evaluate risk levels on both a short and long-term basis. One of the monitoring tools is the “gap” ratio. A gap ratio, as a percentage of assets, is calculated to determine the maturity and repricing mismatch between interest rate-sensitive assets and interest rate-sensitive liabilities. A gap is considered positive when the amount of interest rate-sensitive assets repricing exceeds the amount of interest rate-sensitive liabilities repricing in a designated time period. A positive gap should result in higher net interest income with rising interest rates, as the amount of the assets repricing exceeds the amount of liabilities repricing. Conversely, a gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets, and lower rates should result in higher net interest income.

Repricing of mortgage-related securities is shown by contractual amortization and estimated prepayments based on the most recent 3-month constant prepayment rate. Callable agency securities are shown based upon their option-adjusted spread modified duration date (“OAS”), rather than the next call date or maturity date. The OAS date considers the coupon on the security, the time to the next call date, the maturity date, market volatility and current rate levels. Fixed rate loans are allocated based on expected amortization.

The following table sets forth the gap ratio at December 31, 2019. Assumptions regarding the repricing characteristics of certain assets and liabilities are critical in determining the projected level of rate sensitivity. Certain savings and interest checking accounts are less sensitive to market interest rate changes than other interest-bearing sources of funds. Core deposits such as interest-bearing demand, savings and money market deposits are allocated based on their expected repricing in relation to changes in market interest rates.



(In thousands, except percentages)	Under six months			Six months through one year			More than one year through three years			More than three years through five years			More than five years through ten years			More than ten years and not repricing			Total
Assets:
Cash and due from banks	$	—		$	—		$	—		$	—		$	—		$	21,106		$	21,106
Federal funds sold, interest-bearing deposits and repos	135,195			—			1,715			—			—			—			136,910
Federal Home Loan Bank stock	—			—			—			—			—			14,184			14,184
Securities	15,888			5,500			23,567			8,507			7,118			5,984			66,564
Loans	419,808			165,359			438,337			282,343			72,659			47,052			1,425,558
Allowance for loan losses	—			—			—			—			—			(16,395		)	(16,395		)
Other assets	—			—			—			—			—			71,015			71,015
Total assets	$	570,891		$	170,859		$	463,619		$	290,850		$	79,777		$	142,946		$	1,718,942
Liabilities and shareholders' equity:
Noninterest-bearing demand deposits	$	—		$	—		$	—		$	—		$	—		$	279,793		$	279,793
Savings and interest-bearing demand deposits	268,857			—			79,310			108,453			109,510			—			566,130
Time deposits	104,428			131,782			159,946			7,667			368			—			404,191
Borrowed funds and subordinated debentures	193,000			20,000			40,000			40,000			—			310			293,310
Other liabilities	—			—			—			—			—			14,809			14,809
Shareholders' equity	—			—			—			—			—			160,709			160,709
Total liabilities and shareholders' equity	$	566,285		$	151,782		$	279,256		$	156,120		$	109,878		$	455,621		$	1,718,942
Gap	4,606			19,077			184,363			134,730			(30,101		)	(312,675		)
Cumulative gap	4,606			23,683			208,046			342,776			312,675			—
Cumulative gap to total assets	0.3		%	1.4		%	12.1		%	19.9		%	18.2		%	—

At December 31, 2019, there was a six-month asset-sensitive gap of $4.6 million and a one-year asset-sensitive gap of $23.7 million, as compared to a six-month liability-sensitive gap of $39.2 million and a one-year asset-sensitive gap of $37.7 million at December 31, 2018. The six-month and one-year cumulative gap to total assets ratios were within the Board-approved guidelines of +/- 20 percent.

Other models are also used in conjunction with the static gap table, which is not able to capture the risk of changing spread relationships over time, the effects of projected growth in the balance sheet or dynamic decisions such as the modification of investment maturities as a rate environment unfolds. For these reasons, a simulation model is used, where numerous interest rate scenarios and balance sheets are combined to produce a range of potential income results. Net interest income is managed within guideline ranges for interest rates rising or falling by 200 basis points. Results outside of guidelines require action by the RMC to correct the imbalance. Simulations are typically created over a 12 to 24 month time horizon. At December 31, 2019, these simulations show that with a 200 basis point rate increase over a 12 month period, net interest income would increase by approximately $522 thousand, or 0.9 percent. A 200 basis point rate decline over a 12 month period would decrease net interest income by approximately $1.8 million or 2.9 percent. These variances in net interest income are within the Board-approved guidelines of +/- 10 percent.

Finally, to measure the impact of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models. 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 RMC. The Company’s variance in the economic value of equity with rate shocks of 200 basis points is a decline of 1.8 percent in a rising rate environment and a decrease of 1.9 percent in a falling rate environment at December 31, 2019. At December 31, 2018, the Company’s variance in the economic value of equity with rate shocks of 200 basis points is a decline of 6.0 percent in a rising rate environment and a decrease of 2.9 percent in a falling rate environment. The variance in the EVPE at December 31, 2019 and 2018 were within the Board-approved guidelines in place at the time of +/- 20 percent.

Liquidity

Consolidated Bank Liquidity

Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank’s liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. The Company’s liquidity is monitored by management and the Board of Directors through the RMC, 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, this Consolidated Statement of Cash Flows is indicative of the Consolidated Bank’s activity. At December 31, 2019, the balance of cash and cash equivalents was $158.0 million, an increase of $12.5 million from December 31, 2018. A discussion of the cash provided by and used in operating, investing and financing activities follows.

Operating activities provided $33.2 million and $38.6 million in net cash for the years ended December 31, 2019 and 2018. 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 $133.1 million and $140.7 million in net cash for the years ended December 31, 2019 and 2018, respectively. Cash was primarily used to fund new loans, purchase FHLB stock and securities, partially offset by cash inflows from proceeds from the redemption of FHLB stock.


•	Securities. The Consolidated Bank’s available for sale investment portfolio amounted to $64.3 million and $46.7 million at December 31, 2019 and December 31, 2018, respectively. This excludes the Parent Company’s securities discussed under the heading “Parent Company Liquidity” below. Projected cash flows from securities over the next twelve months are $14.2 million.


•	Loans. The SBA loans held for sale portfolio amounted to $13.5 million and $11.2 million at December 31, 2019 and December 31, 2018, respectively. Sales of these loans provide an additional source of liquidity for the Company.

•

Outstanding Commitments. The Company was committed to advance approximately $272.8 million to its borrowers as of December 31, 2019, compared to $289.9 million at December 31, 2018. At December 31, 2019, $119.2 million of these commitments expire within one year, compared to $161.1 million at December 31, 2018. The Company had $4.8 million and $5.7 million in standby letters of credit at December 31, 2019 and December 31, 2018, respectively, which are included in the commitments amount noted above. The estimated fair value of these guarantees is not significant. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded.

Financing activities provided $112.4 million and $97.3 million in net cash for the years ended December 31, 2019 and 2018, respectively, primarily due to an increase in the Company’s borrowings and deposits, partially offset by the Company’s repayment of borrowings.

•

Deposits. As of December 31, 2019, deposits included $123.3 million of Government deposits, as compared to $121.9 million at year end 2018. 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 $92.7 million of deposits from eight 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 $283.0 million and $210.0 million as of December 31, 2019 and 2018, respectively. As a member of the Federal Home Loan Bank of New York, the Company can borrow additional funds based on the market value of collateral pledged. At December 31, 2019, pledging provided an additional $219.7 million in borrowing potential from the FHLB. In addition, the Company can pledge additional collateral in the form of 1 to 4 family residential mortgages, commercial loans or investment securities to increase this line with the FHLB.

Parent Company Liquidity

The Parent Company’s cash needs are funded by dividends paid and rental payments on corporate headquarters by the Bank. Other than its investment in the Bank, Unity Risk Management Inc., and Unity Statutory Trust II, the Parent Company does not actively engage in other transactions or business. Only expenses specifically for the benefit of the Parent Company are paid using its cash, which typically includes the payment of operating expenses, cash dividends on common stock and payments on trust preferred debt.

At December 31, 2019, the Parent Company had $2.3 million in cash and cash equivalents and $1.4 million in investment securities valued at fair market value, compared to $1.2 million in cash and cash equivalents and $1.2 million in investment securities at December 31, 2018.

Off-Balance Sheet Arrangements and Contractual Obligations

The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as of December 31, 2019:



(In thousands)	One year or less		One to three years		Three to five years		Over five years		Total
Off-balance sheet arrangements:
Standby letters of credit	$	4,025	$	—	$	—	$	799	$	4,824
Contractual obligations:
Time deposits	236,210		159,946		7,667		368		404,191
Borrowed funds and subordinated debentures	243,000		—		40,000		10,310		293,310
Purchase obligations	2,062		4,124		2,234		—		8,420
Total off-balance sheet arrangements and contractual obligations	$	485,297	$	164,070	$	49,901	$	11,477	$	710,745

Standby letters of credit represent guarantees of payment issued by the Bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are typically short-term in duration, maturing in one year or less.

Time deposits have stated maturity dates. For additional information on time deposits, see Note 8 to the Consolidated Financial Statements.

Borrowed funds and subordinated debentures include adjustable rate borrowings from the Federal Home Loan Bank and subordinated debentures. The borrowings have defined terms and under certain circumstances are callable at the option of the lender. For additional information on borrowed funds and subordinated debentures, see Note 9 to the Consolidated Financial Statements.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing and ATM service agreements.

Capital Adequacy

A significant measure of the strength of a financial institution is its capital base. Shareholders’ equity increased $22.2 million to $160.7 million at December 31, 2019 compared to $138.5 million at December 31, 2018, primarily due to net income of $23.7 million. Other items impacting shareholders’ equity included $3.3 million in dividends paid on common stock, $1.5 million from the issuance of common stock under employee benefit plans and $311 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.

For additional information on shareholders’ equity, see Note 13 to the Consolidated Financial Statements.

Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, preferred stock and hybrid instruments which do not qualify as tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Bank to maintain certain capital as a percent of assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-weighted assets). A bank is required to maintain, at a minimum, tier 1 capital as a percentage of risk-weighted assets of 4 percent and combined tier 1 and tier 2 capital as a percentage of risk-weighted assets of 8 percent. In addition, banks are required to meet a leverage capital requirement, which measures tier 1 capital against average assets. Banks which are highly rated and not experiencing significant growth are required to maintain a leverage ratio of 4 percent while all other banks are expected to maintain a leverage ratio 1 to 2 percentage points higher. Finally, the Bank is required to maintain a ratio of common equity tier 1 capital, consisting solely of common equity, to risk-weighted assets of at least 4.5%. Under the FRB's small bank holding company policy, bank holding companies with less than $3.0 billion in consolidated assets, like the Parent Company, are not subject to consolidated capital requirements.

The following table summarizes the Company’s and the Bank’s regulatory capital ratios at December 31, 2019 and 2018, as well as the minimum regulatory capital ratios required for the Bank to be deemed “well-capitalized.”



	At December 31, 2019				Required for capital adequacy purposes effective				To be well-capitalized under prompt corrective action regulations
	Company		Bank		January 1, 2019				Bank
Leverage ratio	10.59	%	10.15	%	4.00	%			5.00	%
CET1	11.59	%	11.81	%	7.00	%	(1	)	6.50	%
Tier I risk-based capital ratio	12.32	%	11.81	%	8.50	%	(1	)	8.00	%
Total risk-based capital ratio	13.06	%	12.58	%	10.50	%	(1	)	10.00	%



	At December 31, 2018				Required for capital adequacy purposes effective				To be well-capitalized under prompt corrective action regulations
	Company		Bank		January 1, 2018				Bank
Leverage ratio	9.90	%	9.52	%	4.000	%			5.00	%
CET1	11.40	%	11.80	%	6.375	%	(2	)	6.50	%
Tier I risk-based capital ratio	12.24	%	11.80	%	7.875	%	(2	)	8.00	%
Total risk-based capital ratio	13.49	%	13.05	%	9.875	%	(2	)	10.00	%

(1) Includes 2.5% capital conservation buffer.
(2) Includes 1.875% capital conservation buffer.

For additional information on regulatory capital, see Note 18 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 loan losses; competition; significant changes in tax, accounting or regulatory practices and requirements; and technological changes. Although management has taken certain steps to mitigate the negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on future profitability.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2019, contains a summary of the Company’s significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the other-than-temporary impairment on securities, servicing assets, allowance for loan losses, and income taxes involve a higher degree of complexity and require management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. These critical policies are periodically reviewed with the Audit Committee and the Board of Directors.

Other-Than-Temporary Impairment

The Company has a process in place to identify debt securities that could potentially incur credit impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the security will be required to be sold before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the ability and intent to hold the security for a forecasted period of time that allows for the recovery in value.

Management assesses its intent to sell or whether it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired with no intent to sell and no requirement to sell prior to recovery of its amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. For debt securities where management has the intent to sell, the amount of the impairment is reflected in earnings as realized losses.

The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

For additional information on other-than-temporary impairment, see Note 3 to the Consolidated Financial Statements.

Servicing Assets

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.

For additional information on servicing assets, see Note 4 to the Consolidated Financial Statements.

Allowance for Loan Losses and Unfunded Loan Commitments

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio, and historical loan loss experience. The allowance for loan losses consists of specific reserves for individually impaired credits and TDRs and reserves for nonimpaired loans based on historical loss factors and reserves based on general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses. These agencies may require the Company to make additional provisions based on judgments about information available at the time of the examination.

The Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the allowance are made through other expenses and applied to the allowance which is maintained in other liabilities.

For additional information on the allowance for loan losses and unfunded loan commitments, see Note 5 to the Consolidated Financial Statements.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If tax reform results in a decline in the corporate tax rates the Company would have to write-down its deferred tax asset.

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

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

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk:

For information regarding Quantitative and Qualitative Disclosures about Market Risk, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk."

Item 8. Financial Statements and Supplementary Data:

Consolidated Balance Sheets



(In thousands)	December 31, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	21,106		$	20,028
Federal funds sold, interest-bearing deposits and repos	136,910			125,487
Cash and cash equivalents	158,016			145,515
Securities:
Debt securities available for sale (amortized cost of $63,883 and $47,762 in 2019 and 2018, respectively)	64,275			46,713
Securities held to maturity (fair value of $0 and $14,802 in 2019 and 2018, respectively)	—			14,875
Equity securities with readily determinable fair values (amortized cost of $2,218 and $2,394 in 2019 and 2018, respectively)	2,289			2,144
Total securities	66,564			63,732
Loans:
SBA loans held for sale	13,529			11,171
SBA loans held for investment	35,767			39,333
Commercial loans	765,032			694,102
Residential mortgage loans	467,706			436,056
Consumer loans	143,524			123,904
Total loans	1,425,558			1,304,566
Allowance for loan losses	(16,395		)	(15,488		)
Net loans	1,409,163			1,289,078
Premises and equipment, net	21,315			23,371
Bank owned life insurance ("BOLI")	26,323			24,710
Deferred tax assets, net	5,559			5,350
Federal Home Loan Bank ("FHLB") stock	14,184			10,795
Accrued interest receivable	6,984			6,399
Other real estate owned ("OREO")	1,723			56
Goodwill	1,516			1,516
Prepaid expenses and other assets	7,595			8,635
Total assets	$	1,718,942		$	1,579,157
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand	$	279,793		$	270,152
Interest-bearing demand	176,335			185,792
Savings	389,795			394,727
Time, under $100,000	195,446			184,022
Time, $100,000 to $250,000	126,192			116,147
Time, $250,000 and over	82,553			56,847
Total deposits	1,250,114			1,207,687
Borrowed funds	283,000			210,000
Subordinated debentures	10,310			10,310
Accrued interest payable	455			406
Accrued expenses and other liabilities	14,354			12,266
Total liabilities	1,558,233			1,440,669
Shareholders' equity:
Common stock, no par value, 12,500 shares authorized, 10,881 shares issued and outstanding in 2019; 10,780 shares issued and outstanding in 2018	90,113			88,484
Retained earnings	70,442			50,161
Accumulated other comprehensive income (loss)	154			(157		)
Total shareholders' equity	160,709			138,488
Total liabilities and shareholders' equity	$	1,718,942		$	1,579,157

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Income



	For the years ended December 31,
(In thousands, except per share amounts)	2019		2018			2017
INTEREST INCOME
Federal funds sold, interest-bearing deposits and repos	$	906	$	773		$	851
FHLB stock	385		462			370
Securities:
Taxable	1,926		1,907			2,029
Tax-exempt	104		117			159
Total securities	2,030		2,024			2,188
Loans:
SBA loans	3,780		4,338			3,805
Commercial loans	37,577		33,886			28,150
Residential mortgage loans	22,483		18,837			14,650
Consumer loans	8,487		6,943			5,296
Total loans	72,327		64,004			51,901
Total interest income	75,648		67,263			55,310
INTEREST EXPENSE
Interest-bearing demand deposits	1,795		1,202			665
Savings deposits	4,497		3,871			2,738
Time deposits	9,460		5,903			3,278
Borrowed funds and subordinated debentures	2,303		2,540			2,772
Total interest expense	18,055		13,516			9,453
Net interest income	57,593		53,747			45,857
Provision for loan losses	2,100		2,050			1,650
Net interest income after provision for loan losses	55,493		51,697			44,207
NONINTEREST INCOME
Branch fee income	1,502		1,519			1,384
Service and loan fee income	1,965		2,130			2,100
Gain on sale of SBA loans held for sale, net	909		1,680			1,617
Gain on sale of mortgage loans, net	2,090		1,719			1,530
BOLI income	588		975			469
Net security gains (losses)	373		(199		)	62
Gain on sale of premises and equipment	766		—			—
Other income	1,346		1,207			1,108
Total noninterest income	9,539		9,031			8,270
NONINTEREST EXPENSE
Compensation and benefits	20,666		20,119			17,117
Occupancy	2,650		2,739			2,381
Processing and communications	2,924		2,788			2,551
Furniture and equipment	2,894		2,348			2,079
Professional services	1,061		934			1,022
Loan collection and OREO expenses (recoveries)	41		(361		)	463
Other loan expenses	272		208			186
Deposit insurance	301		782			546
Advertising	1,358		1,411			1,179
Director fees	673		671			637
Other expenses	1,877		1,782			1,883
Total noninterest expense	34,717		33,421			30,044
Income before provision for income taxes	30,315		27,307			22,433
Provision for income taxes	6,662		5,388			9,540
Net income	$	23,653	$	21,919		$	12,893
Net income per common share - Basic	$	2.18	$	2.04		$	1.22
Net income per common share - Diluted	$	2.14	$	2.01		$	1.20
Weighted average common shares outstanding - Basic	10,845		10,726			10,558
Weighted average common shares outstanding - Diluted	11,029		10,916			10,749

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Comprehensive Income



	For the year ended December 31, 2019
(In thousands)	Before tax amount			Income tax expense (benefit)			Net of tax amount
Net income	$	30,315		$	6,662		$	23,653
Other comprehensive income
Investment securities available for sale:
Unrealized holding gains on securities arising during the period	1,814			482			1,332
Less: reclassification adjustment for gains on securities included in net income	373			78			295
Total unrealized gains on securities available for sale	1,441			404			1,037
Adjustments related to defined benefit plan:
Amortization (accretion) of prior service cost	83			(53		)	136
Total adjustments related to defined benefit plan	83			(53		)	136
Net unrealized losses from cash flow hedges:
Unrealized holding losses on cash flow hedges arising during the period	(1,195		)	(333		)	(862		)
Total unrealized losses on cash flow hedges	(1,195		)	(333		)	(862		)
Total other comprehensive income	329			18			311
Total comprehensive income	$	30,644		$	6,680		$	23,964



	For the year ended December 31, 2018
(In thousands)	Before tax amount			Income tax expense (benefit)			Net of tax amount
Net income	$	27,307		$	5,388		$	21,919
Other comprehensive loss
Investment securities available for sale:
Unrealized holding losses on securities arising during the period	(756		)	(225		)	(531		)
Less: reclassification adjustment for losses on securities included in net income	(183		)	(38		)	(145		)
Total unrealized losses on securities available for sale	(573		)	(187		)	(386		)
Adjustments related to defined benefit plan:
Amortization (accretion) of prior service cost	83			173			(90		)
Total adjustments related to defined benefit plan	83			173			(90		)
Net unrealized gains from cash flow hedges:
Unrealized holding gains (losses) on cash flow hedges arising during the period	25			(123		)	148
Total unrealized gains (losses) on cash flow hedges	25			(123		)	148
Total other comprehensive loss	(465		)	(137		)	(328		)
Total comprehensive income	$	26,842		$	5,251		$	21,591



	For the year ended December 31, 2017
(In thousands)	Before tax amount			Income tax expense (benefit)			Net of tax amount
Net income	$	22,433		$	9,540		$	12,893
Other comprehensive income
Investment securities available for sale:
Unrealized holding losses on securities arising during the period	(152		)	(18		)	(134		)
Less: reclassification adjustment for gains on securities included in net income	62			22			40
Total unrealized losses on securities available for sale	(214		)	(40		)	(174		)
Adjustments related to defined benefit plan:
Amortization of prior service cost	83			33			50
Total adjustments related to defined benefit plan	83			33			50
Net unrealized gains from cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period	204			34			170
Total unrealized gains on cash flow hedges	204			34			170
Total other comprehensive income	73			27			46
Total comprehensive income	$	22,506		$	9,567		$	12,939

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Changes in Shareholders’ Equity



	Common stock			Retained earnings (2)			Accumulated other comprehensive income (loss)			Total Shareholders' equity
(In thousands, except per share amounts)	Shares	Amount		Retained earnings (2)			Accumulated other comprehensive income (loss)			Total Shareholders' equity
Balance, December 31, 2016	10,477	$	85,383	$	20,748		$	160		$	106,291
Net income				12,893						12,893
Other comprehensive income, net of tax							46			46
Dividends on common stock ($0.23 per share)		144		(2,524		)				(2,380		)
Common stock issued and related tax effects (1)	138	1,255								1,255
Balance, December 31, 2017	10,615	86,782		31,117			206			118,105
Net income				21,919						21,919
Other comprehensive loss, net of tax							(328		)	(328		)
Dividends on common stock ($0.27 per share)		107		(2,910		)				(2,802		)
Common stock issued and related tax effects (1)	165	1,595								1,595
Retained earnings impact due to adoption of ASU 2016-01 (3)				(40		)	40			—
Tax rate adjustment to AOCI (4)				75			(75		)	—
Balance, December 31, 2018	10,780	88,484		50,161			(157		)	138,488
Net income				23,653						23,653
Other comprehensive income, net of tax							311			311
Dividends on common stock ($0.31 per share)		117		(3,372		)				(3,255		)
Common stock issued and related tax effects (1)	101	1,512								1,512
Balance, December 31, 2019	10,881	$	90,113	$	70,442		$	154		$	160,709

(1) Includes the issuance of common stock under employee benefit plans, which includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

(2) 2017 includes the impact of implementing ASU 2016-09, “Compensation - Stock Compensation (Topic 718),” which resulted in a cumulative-effect adjustment of $498 thousand to retained earnings.

(3) As a result of ASU 2016-01, "Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", the Company reclassed $40 thousand of gains (losses) on available for sale equity securities sitting in accumulated other comprehensive income to retained earnings.

(4) As a result of ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", the Company reclassed $75 thousand from accumulated other comprehensive income to retained earnings.

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Consolidated Statements of Cash Flows



	For the twelve months ended December 31,
(In thousands)	2019			2018			2017
OPERATING ACTIVITIES:
Net income	$	23,653		$	21,919		$	12,893
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,100			2,050			1,650
Net amortization of purchase premiums and discounts on securities	189			220			290
Depreciation and amortization	1,619			1,937			1,238
Deferred income tax (benefit) expense	(299		)	(1,262		)	1,546
Net security (gains) losses	(52		)	4			(62		)
Stock compensation expense	1,271			1,053			746
(Gain) loss on sale of OREO	(16		)	(169		)	245
Valuation writedowns on OREO	—			—			151
Gain on sale of mortgage loans held for sale, net	(2,143		)	(1,390		)	(1,699		)
Gain on sale of SBA loans held for sale, net	(909		)	(1,680		)	(1,617		)
Origination of mortgage loans held for sale	(120,173		)	(80,729		)	(82,088		)
Origination of SBA loans held for sale	(10,246		)	(9,510		)	(24,394		)
Proceeds from sale of mortgage loans held for sale, net	122,316			82,119			83,787
Proceeds from sale of SBA loans held for sale, net	15,768			23,939			20,998
BOLI income	(588		)	(975		)	(469		)
Gain on sale of premises and equipment	(766		)	—			—
Net change in other assets and liabilities	1,480			1,064			1,234
Net cash provided by operating activities	33,204			38,590			14,449
INVESTING ACTIVITIES
Purchases of securities held to maturity	—			—			(163		)
Purchase of equity securities	—			(1,133		)	—
Purchases of securities available for sale	(13,084		)	(579		)	(29,382		)
Purchases of FHLB stock, at cost	(90,644		)	(72,115		)	(17,408		)
Maturities and principal payments on securities held to maturity	633			1,393			4,278
Maturities and principal payments on securities available for sale	5,441			5,396			13,220
Proceeds from sales of securities held to maturity	—			—			529
Proceeds from sales of equity securities	198			—			—
Proceeds from sales of securities available for sale	5,606			—			2,777
Proceeds from redemption of FHLB stock	87,255			74,183			10,583
Proceeds from sale of OREO	269			440			1,034
Net increase in loans	(128,876		)	(147,223		)	(193,592		)
Proceeds from BOLI	—			492			—
Purchase of BOLI	(1,025		)	—			(10,000		)
Proceeds from sale of premises and equipment	1,821			—			—
Purchases of premises and equipment	(709		)	(1,507		)	(1,509		)
Net cash used in investing activities	(133,115		)	(140,653		)	(219,633		)
FINANCING ACTIVITIES
Net increase in deposits	42,427			164,550			97,414
Proceeds from new borrowings	283,000			210,000			220,000
Repayments of borrowings	(210,000		)	(275,000		)	(66,000		)
Proceeds from exercise of stock options	453			576			509
Market value of shares withheld to cover employee tax liability	(213		)	—			—
Dividends on common stock	(3,255		)	(2,802		)	(2,380		)



Net cash provided by financing activities	112,412		97,324			249,543
Increase (decrease) in cash and cash equivalents	12,501		(4,739		)	44,359
Cash and cash equivalents, beginning of year	145,515		150,254			105,895
Cash and cash equivalents, end of year	$	158,016	$	145,515		$	150,254
SUPPLEMENTAL DISCLOSURES
Cash:
Interest paid	$	18,006	$	13,546		$	9,447
Income taxes paid	8,222		5,941			7,002
Noncash investing activities:
Transfer of securities held to maturity to available for sale	14,221		—			—
Establishment of lease liability and right-of-use asset	3,234		—			—
Transfer of SBA loans held for sale to held to maturity	—		—			13
Capitalization of servicing rights	643		938			172
Transfer of loans to OREO	2,151		127			872

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Overview

The accompanying Consolidated Financial Statements include the accounts of Unity Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiary, Unity Bank (the “Bank” or when consolidated with the Parent Company, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Unity Bancorp, Inc. 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, the Bank, is chartered by the New Jersey Department of Banking and Insurance. The Bank provides a full range of commercial and retail banking services through nineteen branch offices located in Bergen, Hunterdon, Middlesex, 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.

Unity Bank has nine wholly-owned subsidiaries: Unity Investment Services, Inc., AJB Residential Realty Enterprises, Inc., AJB Commercial Realty, Inc., MKCD Commercial, Inc., JAH Commercial, Inc., UB Commercial LLC, ASBC Holdings LLC, Unity Property Holdings 1, Inc., and Unity Property Holdings 2, Inc. Unity Investment Services, Inc. is used to hold and administer part of the Bank’s investment portfolio. The other subsidiaries hold, administer and maintain the Bank’s other real estate owned (“OREO”) properties. Unity Investment Services, Inc. has one subsidiary, Unity Delaware Investment 2, Inc., which has one subsidiary, Unity NJ REIT, Inc. Unity NJ REIT, Inc. was formed in 2013 to hold loans.

The Company has two wholly-owned subsidiaries: Unity (NJ) Statutory Trust II and Unity Risk Management, Inc. For additional information on Unity (NJ) Statutory Trust II, see Note 9 to the Consolidated Financial Statements. Unity Risk Management, Inc. is the Company's captive insurance company that insures risks to the Bank not insured by the traditional commercial insurance market.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts requiring the use of significant estimates include the allowance for loan losses, valuation of deferred tax and servicing assets, the carrying value of loans held for sale and other real estate owned, the valuation of securities and the determination of other-than-temporary impairment for securities and fair value disclosures. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing deposits.

Securities

The Company classifies its securities into three categories, available for sale, held to maturity and equity investments.

Securities that are classified as available for sale are stated at fair value. Unrealized gains and losses on securities available for sale are generally excluded from results of operations and are reported as other comprehensive income, a separate component of shareholders' equity, net of taxes. Securities classified as available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risks or for asset/liability management purposes. The cost of securities sold is determined on a specific identification basis. Gains and losses on sales of securities are recognized in the Consolidated Statements of Income on the date of sale.

Securities are classified as held to maturity based on management’s intent and ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts using the level yield method.

If transfers between the available for sale and held to maturity portfolios occur, they are accounted for at fair value and unrealized holding gains and losses are accounted for at the date of transfer. For securities transferred to available for sale from held to maturity, unrealized gains or losses as of the date of the transfer are recognized in other comprehensive income (loss), a separate component of shareholders’ equity. For securities transferred into the held to maturity portfolio from the available for sale portfolio, unrealized gains or losses as of the date of transfer continue to be reported in other comprehensive income (loss), and are amortized over the remaining life of the security as an adjustment to its yield, consistent with amortization of the premium or accretion of the discount.

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. These securities were transferred from available for sale and reclassified into equity securities on the balance sheet as a result of the adoption of ASU 2016-01 in January 2018. Periodic net gains and losses on equity investments are recognized in the income statement as realized gains and losses.

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

Other-Than-Temporary Impairment

The Company has a process in place to identify debt securities that could potentially incur credit impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, the intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.

For debt securities that are considered other-than-temporarily impaired where management has no intent to sell and the Company has no requirement to sell prior to recovery of its amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income. For debt securities where management has the intent to sell, the amount of the impairment is reflected in earnings as realized losses.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Loans

Loans Held for Sale

Loans held for sale represent the guaranteed portion of SBA loans and are reflected at the lower of aggregate cost or market value. The Company originates loans to customers under an SBA program that historically has provided for SBA guarantees of up to 90 percent of each loan. The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio. The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

For additional information on servicing assets, see Note 4 to the Consolidated Financial Statements.

Loans Held for Investment

Loans held for investment are stated at the unpaid principal balance, net of unearned discounts and deferred loan origination fees and costs. In accordance with the level yield method, loan origination fees, net of direct loan origination costs, are deferred and recognized over the estimated life of the related loans as an adjustment to the loan yield. Interest is credited to operations primarily based upon the principal balance outstanding.

Loans are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Nonperforming loans consist of loans that are not accruing interest 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 (nonaccrual loans). When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest.

Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet. Loans qualify for charge-off when, after thorough analysis, all possible sources of repayment are insufficient. These include: 1) potential future cash flows, 2) value of collateral, and/or 3) strength of co-makers and guarantors. All unsecured loans are charged off upon the establishment of the loan’s nonaccrual status. Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off. All loan charge-offs are approved by the Board of Directors.

Troubled debt restructurings ("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. Interest income on accruing TDRs is credited to operations primarily based upon the principal amount outstanding, as stated in the paragraphs above.

The Company evaluates its loans for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company has defined impaired loans to be all TDRs and nonperforming loans. Impairment is evaluated in total for smaller-balance loans of a similar nature (consumer and residential mortgage loans), and on an individual basis for all other loans. Impairment of a loan is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or as a practical expedient, based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral-dependent. If the value of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge to the provision for loan losses.

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

Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio, and historical loan loss experience. The allowance for loan losses consists of specific reserves for individually impaired credits and TDRs, reserves for nonimpaired loans based on historical loss factors adjusted for general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

The Company maintains a reserve for unfunded loan commitments at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the reserve are made through other expenses and applied to the reserve which is classified as other liabilities.

For additional information on the allowance for loan losses and reserve for unfunded loan commitments, see Note 5 to the Consolidated Financial Statements.

Premises and Equipment, net

Land is carried at cost. All other fixed assets are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The useful life of buildings is not to exceed 30 years; furniture and fixtures is generally 10 years or less, and equipment is 3 to 5 years. Leasehold improvements are depreciated over the life of the underlying lease.

For additional information on premises and equipment, see Note 6 to the Consolidated Financial Statements.

Bank Owned Life Insurance

The Company purchased life insurance policies on certain members of management. Bank owned life insurance is recorded at its cash surrender value or the amount that can be realized.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost. Management reviews the stock for impairment based on the ultimate recoverability of the cost basis in the stock. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. Management considers such criteria as the significance of the decline in net assets, if any, of the FHLB, the length of time this situation has persisted, commitments by the FHLB to make payments required by law or regulation, the impact of legislative and regulatory changes on the customer base of the FHLB and the liquidity position of the FHLB.

Accrued Interest Receivable

Accrued interest receivable consists of amounts earned on investments and loans. The Company recognizes accrued interest receivable as it is earned.

Other Real Estate Owned

Other real estate owned is recorded at the fair value, less estimated costs to sell at the date of acquisition, with a charge to the allowance for loan losses for any excess of the loan carrying value over such amount. Subsequently, OREO is carried at the lower of cost or fair value, as determined by current appraisals. Certain costs that increase the value or extend the useful life in preparing properties for sale are capitalized to the extent that the appraisal amount exceeds the carry value, and expenses of holding foreclosed properties are charged to operations as incurred.

Goodwill

The Company accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other,” which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Based on a qualitative assessment, management determined that the Company’s recorded goodwill totaling $1.5 million, which resulted from the 2005 acquisition of its Phillipsburg, New Jersey branch, is not impaired as of December 31, 2019.

Appraisals

The Company requires current real estate appraisals on all loans that become OREO or in-substance foreclosure, loans that are classified substandard, doubtful or loss, or loans that are over $100,000 and nonperforming. Prior to each balance sheet date, the Company values impaired collateral-dependent loans and OREO based upon a third party appraisal, broker's price opinion, drive by appraisal, automated valuation model, updated market evaluation, or a combination of these methods. The amount is discounted for the decline in market real estate values (for original appraisals), for any known damage or repair costs, and for selling and closing costs. The amount of the discount is dependent upon the method used to determine the original value. The original appraisal is generally used when a loan is first determined to be impaired. When applying the discount, the Company takes into consideration when the appraisal was performed, the collateral’s location, the type of collateral, any known damage to the property and the type of business. Subsequent to entering impaired status and the Company determining that there is a collateral shortfall, the Company will generally, depending on the type of collateral, order a third party appraisal, broker's price opinion, automated valuation model or updated market evaluation. Subsequent to receiving the third party results, the Company will discount the value 6 to 10 percent for selling and closing costs.

Derivative Instruments and Hedging Activities

We use financial derivatives as part of our overall asset and liability risk management process to help manage exposure to market risk inherent in our business activities. The Company's derivative instruments currently consist of cash flow hedges.

We recognize all derivative instruments at fair value as either Other assets or Other liabilities on the Consolidated Balance Sheet and the related cash flows in the Operating Activities section of the Consolidated Statement of Cash Flows.

For cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows), the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings as non-interest income.

For additional information on derivative instruments and hedging activities, see Note 9 to the Consolidated Financial Statements.

Income Taxes

The Company follows Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return. ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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.

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

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Net Income Per Share

Basic net income per common share is calculated as net income available to common shareholders divided by the weighted average common shares outstanding during the reporting period.

Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method. However, when a net loss rather than net income is recognized, diluted earnings per share equals basic earnings per share.

For additional information on net income per share, see Note 17 to the Consolidated Financial Statements.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation,” which requires recognition of compensation expense related to stock-based compensation awards over the period during which an employee is required to provide service for the award. Compensation expense is equal to the fair value of the award, net of estimated forfeitures, and is recognized over the vesting period of such awards.

For additional information on the Company’s stock-based compensation, see Note 19 to the Consolidated Financial Statements.

Fair Value

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which provides a framework for measuring fair value under generally accepted accounting principles.

For additional information on the fair value of the Company’s financial instruments, see Note 20 to the Consolidated Financial Statements.

Other Comprehensive Income

Other comprehensive income consists of the change in unrealized gains (losses) on SERP, securities available for sale and swap related items that were reported as a component of shareholders’ equity, net of tax.

For additional information on other comprehensive income, see Note 12 to the Consolidated Financial Statements.

Advertising

The Company expenses the costs of advertising in the period incurred.

Dividend Restrictions

Banking regulations require maintaining certain capital levels that may limit the dividends paid by the Bank to the holding company or by the holding company to the shareholders.

Operating Segments

While management monitors the revenue streams of its various products and services, operating results and financial performance are evaluated on a company-wide basis. The Company’s management uses consolidated results to make operating and strategic decisions. Accordingly, there is only one reportable segment.

Recent Accounting Pronouncements

ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 was issued to replace the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. For public business entities, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019.

In May 2019, FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief." ASU 2019-05 was issued to address concerns with the adoption of ASU 2016-13. ASU 2019-05 gives entities the ability to irrevocable elect the fair value option in Subtopic 825-10 for certain existing financial assets upon transition to ASU 2016-03. Financial assets that are eligible for this fair value election are those that qualify under Subtopic 825-10 and are within the scope of Subtopic 326-10, "Financial Instruments - Credit Losses - Measured at Amortized Costs." An exception to this is held-to-maturity debt securities, which do not qualify for this transition election. The effective date for the amendment is the same as the effective date in ASU 2016-03. In November 2019, FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates." ASU 2019-10 was issued to defer the effective dates for certain guidance in its Accounting Standard Codification ("ASC") for certain entities. The amendments in this update amend the mandatory effective dates for ASC 326, "Financial Instruments - Credit Losses", for entities eligible to be smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2022, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

In November 2019, FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses." ASU 2019-11 was issued to address issues raise by stakeholders during the implementation of ASU 2016-13. ASU 2019-11 provides transition relief when adjusting the effective interest rate for troubled debt restructurings ("TDRs") that exist as of the adoption date, extends the disclosure relief in ASU 2019-04 to disclose accrued interest receivable balances separately from the amortized cost basis to addtional disclosures involving amortized cost basis, and provides clarification regarding application of the guidance in paragraph 326-20-35-6 for financial assets secured by collateral maintenance provisions that provides a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of a financial asset and the fair value of collateral securing the financial asset as of the reporting date. The effective date and transition requirements for the amendment are the same as the effective date and transition requirements in ASU 2016-13.

ASU 2017-04, "Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 was issued in an effort to simplify accounting in a new standard. The amendments in this update require that an entity perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment states that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. For public business entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performing on testing dates after January 1, 2017. In November 2019, FASB issued ASU 2019-10, "Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates." ASU 2019-10 was issued to defer the effective dates for certain guidance in its Accounting Standard Codification ("ASC") for certain entities. The amendments in this update amend the mandatory effective date for the elimination of Step 2 from the goodwill impairment test. The amendment maintains the Board's intentional alignment of the mandatory effective dates for Goodwill with those for Credit Losses. For entities eligible to be smaller reporting companies, as defined by the SEC, ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2022. The Company does not expect this ASU to have a material impact on the Company's consolidated financial statements since the fair values of our reporting units were not lower than their respective carrying amounts at the time of our goodwill impairment analysis for 2019.

ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and removes the exception to the interim period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies the accounting for income taxes by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax, that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill originally was recognized, and that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. For public business entities, ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020.

Revenue Recognition

ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, which are presented in our income statements as components of non-interest income are as follows:

•

Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity- or transaction based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied.


•	Other non-interest income primarily includes items such as letter of credit fees, bank owned life insurance income, dividends on FHLB and FRB stock and other general operating income, none of which are subject to the requirements of ASC 606.

Subsequent Events

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

2. Restrictions on Cash

Federal law requires depository institutions to hold reserves in the form of vault cash or, if vault cash is insufficient, in the form of a deposit maintained with a Federal Reserve Bank. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the FRB’s Regulation D to an institution's reservable liabilities. As of December 31, 2019 and December 31, 2018, the Company required $25.5 million and $23.1 million of additional reserves to meet its reserve requirements.

In addition, the Company’s contract with its current electronic funds transfer (“EFT”) provider requires a predetermined balance be maintained in a settlement account controlled by the provider equal to the Company’s average daily net settlement position multiplied by four days. The required balance was $156 thousand as of December 31, 2019 and 2018. This balance can be adjusted periodically to reflect actual transaction volume and seasonal factors.

As of December 31, 2019, Unity Risk Management, Inc. had a total cash balance of $1.9 million, compared to $1.7 million at December 31, 2018.

3. Securities

This table provides the major components of debt securities available for sale (“AFS”), held to maturity (“HTM”) and equity securities with readily determinable fair values ("equity securities") at amortized cost and estimated fair value at December 31, 2019 and December 31, 2018:



	December 31, 2019									December 31, 2018
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Available for sale:
U.S. Government sponsored entities	$	5,751	$	4	$	(2	)	$	5,753	$	5,758	$	—	$	(116	)	$	5,642
State and political subdivisions	4,992		174		(12		)	5,154		4,614		4		(120		)	4,498
Residential mortgage-backed securities	27,698		372		(106		)	27,964		27,159		74		(620		)	26,613
Corporate and other securities	25,442		230		(268		)	25,404		10,231		123		(394		)	9,960
Total debt securities available for sale	$	63,883	$	780	$	(388	)	$	64,275	$	47,762	$	201	$	(1,250	)	$	46,713
Held to maturity:
U.S. Government sponsored entities	$	—	$	—	$	—		$	—	$	2,527	$	—	$	(94	)	$	2,433
State and political subdivisions	—		—		—			—		951		110		—			1,061
Residential mortgage-backed securities	—		—		—			—		3,312		17		(52		)	3,277
Commercial mortgage-backed securities	—		—		—			—		3,570		—		(138		)	3,432
Corporate and other securities	—		—		—			—		4,515		84		—			4,599
Total securities held to maturity	$	—	$	—	$	—		$	—	$	14,875	$	211	$	(284	)	$	14,802
Equity securities:
Total equity securities	$	2,218	$	142	$	(71	)	$	2,289	$	2,394	$	—	$	(250	)	$	2,144

This table provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at December 31, 2019 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.



	Within one year				After one through five years				After five through ten years				After ten years				Total carrying value
(In thousands, except percentages)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale at fair value:
U.S. Government sponsored entities	$	1,752	1.75	%	$	4,001	1.83	%	$	—	—	%	$	—	—	%	$	5,753	1.81	%
State and political subdivisions	195		3.80		601		3.92		3,345		3.41		1,013		2.74		5,154		3.35
Residential mortgage-backed securities	3		4.79		375		2.33		2,475		2.47		25,111		2.75		27,964		2.72
Corporate and other securities	—		—		3,816		3.34		16,354		4.84		5,234		5.07		25,404		4.66
Total debt securities available for sale	$	1,950	1.96	%	$	8,793	2.65	%	$	22,174	4.36	%	$	31,358	3.13	%	$	64,275	3.46	%
Equity securities at fair value:
Total equity securities	$	—	—	%	$	—	—	%	$	—	—	%	$	2,289	2.21	%	$	2,289	2.21	%

The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2019 and December 31, 2018 are as follows:



	December 31, 2019
		Less than 12 months					12 months and greater					Total
(In thousands, except number in a loss position)	Total number in a loss position	Estimated fair value		Unrealized loss			Estimated fair value		Unrealized loss			Estimated fair value		Unrealized loss
Available for sale:
U.S. Government sponsored entities	1	$	—	$	—		$	1,995	$	(2	)	$	1,995	$	(2	)
State and political subdivisions	1	—		—			1,013		(12		)	1,013		(12		)
Residential mortgage-backed securities	10	3,707		(27		)	4,996		(79		)	8,703		(106		)
Corporate and other securities	6	3,366		(13		)	3,735		(255		)	7,101		(268		)
Total temporarily impaired securities	18	$	7,073	$	(40	)	$	11,739	$	(348	)	$	18,812	$	(388	)



	December 31, 2018
		Less than 12 months					12 months and greater					Total
(In thousands, except number in a loss position)	Total number in a loss position	Estimated fair value		Unrealized loss			Estimated fair value		Unrealized loss			Estimated fair value		Unrealized loss
Available for sale:
U.S. Government sponsored entities	5	$	—	$	—		$	5,642	$	(116	)	$	5,642	$	(116	)
State and political subdivisions	4	—		—			3,129		(120		)	3,129		(120		)
Residential mortgage-backed securities	31	4,445		(23		)	20,480		(597		)	24,925		(620		)
Corporate and other securities	5	971		(30		)	5,787		(364		)	6,758		(394		)
Total temporarily impaired securities	45	$	5,416	$	(53	)	$	35,038	$	(1,197	)	$	40,454	$	(1,250	)
Held to maturity:
U.S. Government sponsored entities	2	$	—	$	—		$	2,434	$	(94	)	$	2,434	$	(94	)
Residential mortgage-backed securities	5	1,277		(15		)	821		(37		)	2,098		(52		)
Commercial mortgage-backed securities	2	—		—			3,432		(138		)	3,432		(138		)
Total temporarily impaired securities	9	$	1,277	$	(15	)	$	6,687	$	(269	)	$	7,964	$	(284	)

Unrealized Losses

The unrealized losses in each of the categories presented in the tables above are discussed in the paragraphs that follow:

U.S. government sponsored entities and state and political subdivision securities: The unrealized losses on investments in these types of securities were caused by the increase in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than temporarily impaired as of December 31, 2019. There was no other-than-temporary impairment on these securities at December 31, 2018.

Residential and commercial mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by increases in interest rate spreads or the increase in interest rates at the long end of the Treasury curve. The majority of contractual cash flows of these securities are guaranteed by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of December 31, 2019 or December 31, 2018.

Corporate and other securities: Included in this category are corporate and other debt securities. The unrealized losses on corporate and other debt securities were due to widening credit spreads. The Company evaluated the prospects of the issuers and forecasted a recovery period; and as a result determined it did not consider these investments to be other-than-temporarily impaired as of December 31, 2019 or December 31, 2018. The contractual terms do not allow the securities to be settled at a price less than the par value. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis, which may be at maturity, the Company did not consider these securities to be other-than-temporarily impaired as of December 31, 2019 or December 31, 2018.

Realized Gains and Losses

Gross realized gains and losses on securities for the past three years are detailed in the table below:



	For the years ended December 31,
(In thousands)	2019		2018			2017
Available for sale:
Realized gains	$	35	$	—		$	89
Realized losses	—		(4		)	(61		)
Total debt securities available for sale	35		(4		)	28
Held to maturity:
Realized gains	—		—			38
Realized losses	—		—			(4		)
Total securities held to maturity	—		—			34
Net gains (losses) on sales of securities	$	35	$	(4	)	$	62

The net realized gains are included in noninterest income in the Consolidated Statements of Income as net security gains. There were$35 thousand of gross realized gains in 2019, compared to no gross realized gains in 2018 and gross realized gains of $127 thousand in 2017. There were no gross realized losses in 2019, compared to gross realized losses of $4 thousand in 2018 and $65 thousand in 2017.


•	The net gain during 2019 is attributed to the sale of two commercial mortgage-backed securities with a total book value of $3.5 million and resulting gains of $64 thousand offset by the sale of two agency securities with a total book value of $2.1 million and resulting losses of $29 thousand.


•	The net loss during 2018 is attributed to the partial call of one tax-exempt municipal security with a book value of $174 thousand which resulted in a loss of $4 thousand.


•	The net gains during 2017 are attributed to the sale of three mortgage-backed securities with a total book value of $1.2 million and resulting gains of $71 thousand, the sale of one taxable security with a book value of $529 thousand and resulting

gains of $38 thousand, the call of two asset-backed securities totaling $3.5 million in book value, resulting in gains of $3 thousand, and the call of four municipal tax-exempt securities with a total book value of $500 thousand and resulting gains of $15 thousand, partially offset by the sale of two mortgage-backed securities with book values of $1.6 million which resulted in a loss of $58 thousand, and the call of two corporate bonds with a book value of $3.0 million and resulting losses of $7 thousand.

Equity Securities

Included in this category are Community Reinvestment Act ("CRA") investments and the equity holdings of financial institutions. Equity securities are defined to include (a) preferred, common and other ownership interests in entities including partnerships, joint ventures and limited liability companies and (b) rights to acquire or dispose of ownership interest in entities at fixed or determinable prices.

The company follows ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities," which aims to simplify accounting for financial instruments and to converge the guidance between U.S. GAAP and IFRS. ASU 2016-01 also includes guidance on how entities account for equity investments, present and disclose financial instruments, and measure the valuation allowance on deferred tax assets related to available-for-sale debt securities. The guidance in ASU 2016-01 requires an entity to disaggregate the net gains and losses on the equity investments recognized in the income statement during a reporting period into realized and unrealized gains and losses. As a result, equity securities are no longer carried at fair value through other comprehensive income ("OCI") or by applying the cost method to those equity securities that do not have readily determinable values. Equity securities are generally required to be measured at fair value with market value adjustments being reflected in net income. The Company adopted this standard as of January 1, 2018.

The following is a summary of the gains and losses recognized in net income on equity securities for the past two years:



	For the year ended December 31,
(In thousands)	2019		2018
Net gains (losses) recognized during the period on equity securities	$	321	$	(195	)
Net gains recognized on equity securities sold during the period	17		—
Net gains (losses) recognized during the reporting period on equity securities still held at the reporting date	$	338	$	(195	)

Pledged Securities

Securities with a carrying value of $4.0 million and $4.3 million at December 31, 2019 and December 31, 2018, respectively, were pledged to secure Government deposits, secure other borrowings and for other purposes required or permitted by law.

4. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses for the past two years:



(In thousands)	December 31, 2019		December 31, 2018
SBA loans held for investment	$	35,767	$	39,333
Commercial loans
SBA 504 loans	26,726		29,155
Commercial other	112,014		104,587
Commercial real estate	578,643		510,370
Commercial real estate construction	47,649		49,990
Residential mortgage loans	467,706		436,056
Consumer loans
Home equity	69,589		59,887
Consumer other	73,935		64,017
Total loans held for investment	$	1,412,029	$	1,293,395
SBA loans held for sale	13,529		11,171
Total loans	$	1,425,558	$	1,304,566

Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company's different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses' major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination.

Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including principally residential real estate, home equity lines and loans and consumer construction lines. The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when the Company initiates contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval. The loan portfolio is then subject to on-going internal reviews for credit quality, as well as independent credit reviews by an outside firm.

The Company's extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company's loans. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings

For SBA 7(a), and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating. The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

Pass: Risk ratings of 1 through 6 are used for loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments. These performing loans are termed “Pass”.

Special Mention: Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s collateral and position. While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated. As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification. Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in start up or deteriorating industries, or borrowers with a poor market share in an average industry. "Special Mention" loans may include an element of asset quality, financial flexibility, or below average management. Management and ownership may have limited depth or experience. Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Substandard: Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”. A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt. The loan is inadequately protected by the current paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Partial charge-offs are likely.

Loss: Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss”, and charged-off immediately. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be affected in the future.

For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being 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. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2019:



	December 31, 2019
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	34,202	$	1,115	$	450	$	35,767
Commercial loans
SBA 504 loans	24,878		1,808		40		26,726
Commercial other	107,220		3,361		1,433		112,014
Commercial real estate	576,326		758		1,559		578,643
Commercial real estate construction	47,649		—		—		47,649
Total commercial loans	756,073		5,927		3,032		765,032
Total SBA and commercial loans	$	790,275	$	7,042	$	3,482	$	800,799
	Residential mortgage & Consumer loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	463,770	$	3,936	$	467,706
Consumer loans
Home equity			69,589		—		69,589
Consumer other			73,915		20		73,935
Total consumer loans			143,504		20		143,524
Total residential mortgage and consumer loans			$	607,274	$	3,956	$	611,230

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2018:



	December 31, 2018
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	37,198	$	601	$	1,534	$	39,333
Commercial loans
SBA 504 loans	28,105		—		1,050		29,155
Commercial other	103,806		322		459		104,587
Commercial real estate	504,022		2,879		3,469		510,370
Commercial real estate construction	49,990		—		—		49,990
Total commercial loans	685,923		3,201		4,978		694,102
Total SBA and commercial loans	$	723,121	$	3,802	$	6,512	$	733,435
	Residential mortgage & Consumer loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	431,845	$	4,211	$	436,056
Consumer loans
Home equity			59,861		26		59,887
Consumer other			64,017		—		64,017
Total consumer loans			123,878		26		123,904
Total residential mortgage and consumer loans			$	555,723	$	4,237	$	559,960

Nonperforming and Past Due 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. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well secured and in process of collection. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market.

The following tables set forth an aging analysis of past due and nonaccrual loans as of December 31, 2019 and December 31, 2018:



	December 31, 2019
(In thousands)	30-59 days past due		60-89 days past due		90+ days and still accruing		Nonaccrual (1)		Total past due		Current		Total loans
SBA loans held for investment	$	1,048	$	—	$	—	$	1,164	$	2,212	$	33,555	$	35,767
Commercial loans
SBA 504 loans	—		1,808		—		—		1,808		24,918		26,726
Commercial other	71		—		—		316		387		111,627		112,014
Commercial real estate	215		—		—		213		428		578,215		578,643
Commercial real estate construction	—		—		—		—		—		47,649		47,649
Residential mortgage loans	4,383		1,676		930		3,936		10,925		456,781		467,706
Consumer loans
Home equity	1,446		178		—		—		1,624		67,965		69,589
Consumer other	—		113		—		20		133		73,802		73,935
Total loans held for investment	$	7,163	$	3,775	$	930	$	5,649	$	17,517	$	1,394,512	$	1,412,029
SBA loans held for sale	—		—		—		—		—		13,529		13,529
Total loans	$	7,163	$	3,775	$	930	$	5,649	$	17,517	$	1,408,041	$	1,425,558


(1)	At December 31, 2019, nonaccrual loans included $59 thousand of loans guaranteed by the SBA.



	December 31, 2018
(In thousands)	30-59 days past due		60-89 days past due		90+ days and still accruing		Nonaccrual (1)		Total past due		Current		Total loans
SBA loans held for investment	$	—	$	—	$	—	$	1,560	$	1,560	$	37,773	$	39,333
Commercial loans
SBA 504 loans	—		—		—		—		—		29,155		29,155
Commercial other	—		—		—		30		30		104,557		104,587
Commercial real estate	301		—		—		1,046		1,347		509,023		510,370
Commercial real estate construction	—		—		—		—		—		49,990		49,990
Residential mortgage loans	3,801		1,204		98		4,211		9,314		426,742		436,056
Consumer loans
Home equity	396		—		—		26		422		59,465		59,887
Consumer other	300		—		—		—		300		63,717		64,017
Total loans held for investment	$	4,798	$	1,204	$	98	$	6,873	$	12,973	$	1,280,422	$	1,293,395
SBA loans held for sale	—		—		—		—		—		11,171		11,171
Total loans	$	4,798	$	1,204	$	98	$	6,873	$	12,973	$	1,291,593	$	1,304,566


(1)	At December 31, 2018, nonaccrual loans included $89 thousand of loans guaranteed by the SBA.

Impaired Loans

The Company has defined impaired loans to be all nonperforming loans and troubled debt restructurings. Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract.

The following tables provide detail on the Company’s loans individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2019 and December 31, 2018:



	December 31, 2019
(In thousands)	Unpaid principal balance		Recorded investment		Specific reserves
With no related allowance:
SBA loans held for investment (1)	$	1,224	$	1,064	$	—
Commercial loans
Commercial real estate	213		213		—
Total commercial loans	213		213		—
Total impaired loans with no related allowance	1,437		1,277		—
With an allowance:
SBA loans held for investment (1)	157		41		41
Commercial loans
Commercial other	816		316		316
Commercial real estate	705		705		57
Total commercial loans	1,521		1,021		373
Total impaired loans with a related allowance	1,678		1,062		414
Total individually evaluated impaired loans:
SBA loans held for investment (1)	1,381		1,105		41
Commercial loans
Commercial other	816		316		316
Commercial real estate	918		918		57
Total commercial loans	1,734		1,234		373
Total individually evaluated impaired loans	$	3,115	$	2,339	$	414


(1)	Balances are reduced by amount guaranteed by the SBA of $59 thousand at December 31, 2019.



	December 31, 2018
(In thousands)	Unpaid principal balance		Recorded investment		Specific reserves
With no related allowance:
SBA loans held for investment (1)	$	359	$	353	$	—
Commercial loans
Commercial real estate	1,046		1,046		—
Total commercial loans	1,046		1,046		—
Total impaired loans with no related allowance	1,405		1,399		—
With an allowance:
SBA loans held for investment (1)	1,257		1,118		540
Commercial loans
Commercial other	30		30		30
Commercial real estate	745		745		97
Total commercial loans	775		775		127
Total impaired loans with a related allowance	2,032		1,893		667
Total individually evaluated impaired loans:
SBA loans held for investment (1)	1,616		1,471		540
Commercial loans
Commercial other	30		30		30
Commercial real estate	1,791		1,791		97
Total commercial loans	1,821		1,821		127
Total individually evaluated impaired loans	$	3,437	$	3,292	$	667


(1)	Balances are reduced by amount guaranteed by the SBA of $89 thousand at December 31, 2018.

The following table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the years ended December 31, 2019, 2018 and 2017. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, therefore no interest income is recognized. The interest recognized on impaired loans noted below represents accruing troubled debt restructurings only and nominal amounts of income recognized on a cash basis for well-collateralized impaired loans.



	For the years ended December 31,
	2019				2018				2017
(In thousands)	Average recorded investment		Interest income recognized on impaired loans		Average recorded investment		Interest income recognized on impaired loans		Average recorded investment		Interest income recognized on impaired loans
SBA loans held for investment (1)	$	679	$	17	$	1,063	$	3	$	668	$	47
Commercial loans
SBA 504 loans	—		—		—		—		82		—
Commercial other	264		6		12		—		25		—
Commercial real estate	1,258		36		2,092		100		685		43
Total	$	2,201	$	59	$	3,167	$	103	$	1,460	$	90


(1)	Balances are reduced by the average amount guaranteed by the SBA of $124 thousand, $85 thousand and $318 thousand for years ended December 31, 2019, 2018 and 2017, respectively.

Troubled Debt Restructurings

The Company's loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”). 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, unless it results in a delay in payment that is insignificant. These concessions typically include reductions in interest rate, extending the maturity of a loan, other modifications of payment terms, or a combination of modifications. 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 the loan is collateral-dependent. 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.

The company had one performing TDR with a balance of $705 thousand and $745 thousand as of December 31, 2019 and December 31, 2018, respectively, which was included in the impaired loan numbers as of such dates. At December 31, 2019, and December 31, 2018, there were specific reserves on the performing TDR of $57 thousand and $97 thousand, respectively. The loan remains in accrual status since it continues to perform in accordance with the restructured terms.

To date, the Company’s TDRs consisted of interest rate reductions, interest only periods, principal balance reductions, and maturity extensions. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the years ended December 31, 2019 or 2018. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

Other Loan Information

Servicing Assets:

Loans sold to others and serviced by the Company are not included in the accompanying Consolidated Balance Sheets. The total amount of such loans serviced, but owned by third party investors, amounted to approximately $130.6 million and $143.7 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the carrying value, which approximates fair value, of servicing assets was $2.0 million and $2.4 million, respectively, and is included in Other Assets. The fair value of SBA servicing assets was determined using a discount rate of 15%, constant prepayment speeds ranging from 15% to 18%, and interest strip multiples ranging from 2.08% to 3.80%, depending on each individual credit. The fair value of mortgage servicing assets was determined using a discount rate of 12% and the present value of excess servicing over 7 years. A summary of the changes in the related servicing assets for the past three years follows:



	For the years ended December 31,
(In thousands)	2019			2018			2017
Balance, beginning of year	$	2,375		$	1,800		$	2,086
Servicing assets capitalized	643			939			172
Amortization of expense	(992		)	(364		)	(458		)
Balance, end of year	$	2,026		$	2,375		$	1,800

In addition, the Company had a $1.3 million and $1.5 million discount related to the retained portion of the unsold SBA loans at December 31, 2019 and 2018, respectively.

Officer and Director Loans:

In the ordinary course of business, the Company may extend credit to officers, directors or their associates. These loans are subject to the Company’s normal lending policy. An analysis of such loans, all of which are current as to principal and interest payments, is as follows:



(In thousands)	December 31, 2019			December 31, 2018
Balance, beginning of year	$	22,429		$	33,109
New loans and advances	73			4,083
Loan repayments	(4,661		)	(14,763		)
Balance, end of year	$	17,841		$	22,429

Loan Portfolio Collateral:

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, 2019, and December 31, 2018 approximately 94% of the Company’s loan portfolio was secured by real estate.

5. Allowance for Loan Losses and Reserve for Unfunded Loan Commitments

Allowance for Loan Losses

The Company has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. At a minimum, the adequacy of the allowance for loan losses is reviewed by management on a quarterly basis. For purposes of determining the allowance for loan losses, the Company has segmented the loans in its portfolio by loan type. Loans are segmented into the following pools: SBA 7(a), commercial, residential mortgages, and consumer loans. Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan. Commercial loans are divided into the following five classes: commercial real estate, commercial real estate construction, unsecured business line of credit, commercial other, and SBA 504. Consumer loans are divided into two classes as follows: home equity and other.

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans and troubled debt restructurings (see Note 1 for additional information on this term). The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and recovery trends, changes in the volume of restructured loans, volume and loan term trends, changes in risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes. Within the five-year historical net charge-off rate, the Company weights the past three years more because it believes they are more indicative of future losses. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

•

For SBA 7(a) and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower's industry and future prospects. It also incorporates analysis of the type of collateral and the relative loan to value ratio.

•

For residential mortgage and consumer loans, the estimate of loss is based on pools of loans with similar characteristics. Factors such as credit score, delinquency status and type of collateral are evaluated. Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

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. This charge-off policy is followed for all loan types.

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. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in methodologies for estimating allocated and general reserves in the portfolio.

The following tables detail the activity in the allowance for loan losses by portfolio segment for the past three years:



	For the year ended December 31, 2019
(In thousands)	SBA held for investment			Commercial			Residential			Consumer			Unallocated		Total
Balance, beginning of period	$	1,655		$	8,705		$	3,900		$	1,228		$	—	$	15,488
Charge-offs	(535		)	(501		)	(205		)	(1		)			(1,242		)
Recoveries	23			16			—			10					49
Net (charge-offs) recoveries	(512		)	(485		)	(205		)	9			—		(1,193		)
Provision (credit) for loan losses charged to expense	(64		)	1,502			559			103			—		2,100
Balance, end of period	$	1,079		$	9,722		$	4,254		$	1,340		$	—	$	16,395



	For the year ended December 31, 2018
(In thousands)	SBA held for investment			Commercial			Residential		Consumer			Unallocated		Total
Balance, beginning of period	$	1,471		$	7,825		$	3,130	$	1,130		$	—	$	13,556
Charge-offs	(354		)	(10		)	—		(22		)	—		(386		)
Recoveries	72			30			13		153			—		268
Net (charge-offs) recoveries	(282		)	20			13		131			—		(118		)
Provision (credit) for loan losses charged to expense	466			860			757		(33		)	—		2,050
Balance, end of period	$	1,655		$	8,705		$	3,900	$	1,228		$	—	$	15,488



	For the year ended December 31, 2017
(In thousands)	SBA held for investment			Commercial			Residential			Consumer			Unallocated			Total
Balance, beginning of period	$	1,576		$	7,302		$	2,593		$	925		$	183		$	12,579
Charge-offs	(293		)	(227		)	(55		)	(336		)	—			(911		)
Recoveries	121			102			12			3			—			238
Net charge-offs	(172		)	(125		)	(43		)	(333		)	—			(673		)
Provision (credit) for loan losses charged to expense	67			648			580			538			(183		)	1,650
Balance, end of period	$	1,471		$	7,825		$	3,130		$	1,130		$	—		$	13,556

The following tables present loans and their related allowance for loan losses, by portfolio segment, as of December 31^st for the past two years:



	December 31, 2019
(In thousands)	SBA held for investment		Commercial		Residential		Consumer		Total
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	41	$	373	$	—	$	—	$	414
Collectively evaluated for impairment	1,038		9,349		4,254		1,340		15,981
Total	$	1,079	$	9,722	$	4,254	$	1,340	$	16,395
Loan ending balances:
Individually evaluated for impairment	$	1,105	$	1,234	$	—	$	—	$	2,339
Collectively evaluated for impairment	34,662		763,798		467,706		143,524		1,409,690
Total	$	35,767	$	765,032	$	467,706	$	143,524	$	1,412,029



	December 31, 2018
(In thousands)	SBA held for investment		Commercial		Residential		Consumer		Total
Allowance for loan losses ending balance:
Individually evaluated for impairment	$	540	$	127	$	—	$	—	$	667
Collectively evaluated for impairment	1,115		8,578		3,900		1,228		14,821
Total	$	1,655	$	8,705	$	3,900	$	1,228	$	15,488
Loan ending balances:
Individually evaluated for impairment	$	1,471	$	1,821	$	—	$	—	$	3,292
Collectively evaluated for impairment	37,862		692,281		436,056		123,904		1,290,103
Total	$	39,333	$	694,102	$	436,056	$	123,904	$	1,293,395

Changes in Methodology:

The Company did not make any changes to its allowance for loan losses methodology in the current period.

Reserve for Unfunded Loan Commitments

In addition to the allowance for loan losses, the Company maintains a reserve for unfunded loan commitments 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 classified as other liabilities. At December 31, 2019, a $273 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $290 thousand commitment reserve at December 31, 2018. There were no losses on unfunded loan commitments during 2019 or 2018.

6. Premises and Equipment

The detail of premises and equipment as of December 31^st for the past two years is as follows:



(In thousands)	December 31, 2019			December 31, 2018
Land and buildings	$	23,466		$	25,214
Furniture, fixtures and equipment	11,164			10,778
Leasehold improvements	2,376			2,385
Gross premises and equipment	37,006			38,377
Less: Accumulated depreciation	(15,691		)	(15,006		)
Net premises and equipment	$	21,315		$	23,371

Amounts charged to noninterest expense for depreciation of premises and equipment amounted to $1.7 million and $1.6 million in 2019 and 2018, respectively.

7. Other Assets

The detail of other assets as of December 31^st for the past two years is as follows:



(In thousands)	December 31, 2019		December 31, 2018
Right-of-use assets	$	2,792	$	—
Servicing assets:
SBA servicing asset	920		1,024
Mortgage servicing asset	1,106		1,351
Prepaid expenses	969		1,061
Prepaid insurance	733		1,755
Unrealized gains on interest rate swap agreements	261		1,432
Net receivable due from SBA	127		151
Other	687		1,861
Total other assets	$	7,595	$	8,635

8. Deposits

The following table details the maturity distribution of time deposits as of December 31^st for the past two years:



(In thousands)	Three months or less		More than three months through six months		More than six months through twelve months		More than twelve months		Total
At December 31, 2019:
Less than $100,000	$	40,789	$	14,207	$	59,338	$	81,112	$	195,446
$100,000 or more	31,799		17,633		72,444		86,869		208,745
At December 31, 2018:
Less than $100,000	$	16,758	$	23,851	$	42,365	$	101,048	$	184,022
$100,000 or more	35,085		34,674		28,717		74,518		172,994

The following table presents the expected maturities of time deposits over the next five years:



(In thousands)	2020		2021		2022		2023		2024		Thereafter		Total
Balance maturing	$	236,210	$	142,731	$	17,215	$	3,890	$	3,777	$	368	$	404,191

Time deposits with balances of $250 thousand or more totaled $82.6 million and $56.8 million at December 31, 2019 and 2018, respectively.

9. Borrowed Funds and Subordinated Debentures

The following table presents the period-end and average balances of borrowed funds and subordinated debentures for the past three years with resultant rates:



	2019				2018				2017
(In thousands)	Amount		Rate		Amount		Rate		Amount		Rate
FHLB borrowings and repurchase agreements:
At December 31,	$	283,000	1.74	%	$	210,000	2.31	%	$	260,000	1.59	%
Year-to-date average	103,201		1.85		121,970		1.78		110,420		1.75
Maximum outstanding	283,000				238,000				260,000
Repurchase agreements:
At December 31,	$	—	—	%	$	—	—	%	$	15,000	3.67	%
Year-to-date average	—		—		2,384		3.67		15,000		3.67
Maximum outstanding	—				15,000				15,000
Subordinated debentures:
At December 31,	$	10,310	3.33	%	$	10,310	2.40	%	$	10,310	2.40	%
Year-to-date average	10,310		3.50		10,310		2.40		10,310		2.40
Maximum outstanding	10,310				10,310				10,310

The following table presents the expected maturities of borrowed funds and subordinated debentures over the next five years:



(In thousands)	2020		2021		2022		2023		2024		Thereafter		Total
FHLB borrowings	$	243,000	$	—	$	—	$	—	$	40,000	$	—	$	283,000
Subordinated debentures	—		—		—		—		—		10,310		10,310
Total borrowings	$	283,000	$	—	$	—	$	—	$	40,000	$	10,310	$	293,310

FHLB Borrowings

FHLB borrowings at December 31, 2019 included a $193.0 million overnight line of credit advance, compared to $160.0 million at December 31, 2018. FHLB borrowings at December 31, 2019 also consisted of one $40.0 million fixed rate advance, two $20.0 million advances, and one $10.0 million advance. Comparatively, FHLB borrowings at December 31, 2018 consisted of two $20.0 million advances and one $10.0 million advance. The terms of these transactions at year end 2019 are as follows:


•	A $193.0 million FHLB overnight line of credit advance issued on December 31, 2019 was at a rate of 1.810% and was repaid on January 2, 2020.


•	A $20.0 million FHLB advance that was issued on December 9, 2019 and has an adjustable interest rate equal to 3 month LIBOR plus 0.025% that matures on June 9, 2020. This borrowing was swapped to a 5 year fixed rate borrowing at 1.755%.


•	A $40.0 million FHLB advance that was issued on August 22, 2019 and has a fixed interest rate at 1.810% that matures on August 22, 2024.


•	A $10.0 million FHLB advance that was issued on August 16, 2019 and has an adjustable interest rate equal to 3 month LIBOR plus 0.140% that matured on February 18, 2020. This borrowing was swapped to a 5 year fixed rate borrowing at 1.243%.


•	A $20.0 million FHLB advance that was issued on July 5, 2019 and has an adjustable interest rate equal to 3 month LIBOR plus 0.150% that matured on January 6, 2020. This borrowing was swapped to a 5 year fixed rate borrowing at 1.198%.

Subordinated Debentures

At December 31, 2019 and 2018, the Company was a party in the following subordinated debenture transactions:

•

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 the three-month LIBOR plus 159 basis points and reprices quarterly. The floating interest rate was 3.518% at December 31, 2019 and 4.414% at December 31, 2018. At December 31, 2018, the subordinated debentures had a swap instrument which modified the borrowing to a 3 year fixed rate borrowing at 2.475%. The swap instrument matured on February 16, 2019. A new swap instrument was implemented on July 5, 2019, which modifies the borrowing to a 3 year fixed rate at 3.435%.


•	In connection with the formation of the statutory business trust, the trust also issued $465 thousand of common equity securities to the Company, which together with the proceeds stated above were used to purchase the subordinated debentures, under the same terms and conditions. At December 31, 2019 and 2018, $310 thousand of the common equity securities remained.

The capital securities in the above transaction have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital. Under the terms of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these securities will continue to qualify as Tier 1 capital as the Company has less than $10 billion in assets. In accordance with FASB ASC Topic 810, “Consolidation,” the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust II because it is not the primary beneficiary. The additional capital from this transaction was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to the Bank.

The Company has the ability to defer interest payments on the subordinated debentures for up to 5 years without being in default. Due to the redemption provisions of these securities, the expected maturity could differ from the contractual maturity.

Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments

The Company has a stand alone derivative financial instrument in the form of an interest rate swap agreement, which derives its value from underlying interest rates. This transaction involves both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative is based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s balance sheet as other assets or other liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to this agreement. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

Derivative instruments are generally either negotiated OTC contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.

Risk Management Policies – Hedging Instruments

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company evaluates the effectiveness of entering into any derivative agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

Interest Rate Risk Management – Cash Flow Hedging Instruments

The Company has FHLB Adjustable Rate Credit (“ARC”) variable rate debt as a source of funds for use in the Company’s lending and investment activities and for other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore hedges its variable-rate interest payments. To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.

The Company had interest rate swaps designated as cash flow hedging instruments with a notional amount of $60.0 million at December 31, 2019 and 2018, respectively. On February 16, 2019, a $10.0 million swap instrument matured, resulting in a reduction in fair value of $27 thousand. On July 5, 2019, the Company entered into a new swap agreement with a notional value of $10.0 million. A summary of the Company's outstanding interest rate swap agreements used to hedge variable rate debt at December 31, 2019 and 2018, respectively is as follows:



(In thousands, except percentages, years and contracts)	2019			2018
Notional amount	$	60,000		$	60,000
Fair value	238			1,433
Weighted average pay rate	1.42		%	1.26		%
Weighted average receive rate	2.19		%	1.88		%
Weighted average maturity in years	1.25			2.36
Number of contracts	4			4

During the twelve months ended December 31, 2019 and 2018, the Company received variable rate LIBOR payments from and paid fixed rates in accordance with its interest rate swap agreements. At December 31, 2019 and 2018, the unrealized gains relating to interest rate swaps are recorded as a derivative asset and are included in Prepaid expenses and other assets in the Company's Balance Sheet, and the unrealized losses are recorded as a derivative liability and are included in Accrued expenses and other liabilities. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income (loss). The following table presents the net (losses) gains recorded in other comprehensive income and the consolidated financial statements relating to the cash flow derivative instruments at December 31, 2019 and 2018, respectively:



	For the years ended December 31,
(In thousands)	2019			2018
(Decrease) increase in the fair value of interest rate swaps	$	(1,195	)	$	25

10. Leases and Commitments

Leases

The Company follows ASU 2016-02, "Leases (Topic 842)," which revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. ASU 2016-02 requires that a lessee recognize the assets and liabilities on its balance sheet that arise from all leases with a term greater than 12 months. The core principle requires the lessee to recognize a liability to make lease payments and a "right-of-use" asset. The Company adopted this standard as of January 1, 2019. In accordance with ASU 2018-01, we have elected to apply ASU 2016-02 as of the beginning of the period of adoption and will not restate comparative periods. Financial results for reporting periods beginning on or after January 1, 2019 are presented under the new guidance (Topic 842), while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance (Topic 840).

Operating leases in which we are the lessee are recorded as right-of-use ("ROU") assets and lease liabilities and are included in Prepaid expenses and other assets and Accrued expenses and other liabilities, respectively, on our Consolidated Balance Sheets. We do not currently have any finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate. The incremental borrowing rate was calculated for each lease by taking a variable rate FHLB ARC product (based on Libor plus a spread) and then swapping it to a fixed rate borrowing by adding a fixed mid swap rate for the desired term. The borrowing rate for each lease is unique based on the lease term. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in Occupancy expense in the Consolidated Statements of Income.

Our leases relate primarily to bank branches, office space and equipment with remaining lease terms of generally 1 to 10 years. Certain lease arrangements contain extension options which typically range from 1 to 5 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term.

Certain real estate leases have lease payments that adjust based on annual changes in the Consumer Price Index ("CPI"). The leases that are dependent upon CPI are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability.

As of December 31, 2019, operating lease ROU assets and operating lease liabilities were $2.8 million, respectively.

The table below summarizes our net lease cost:



(In thousands)	For the year ended December 31, 2019
Operating lease cost	$	589
Net lease cost	$	589

The table below summarizes the cash and non-cash activities associated with our leases:



(In thousands)	For the year ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	557
ROU assets obtained in exchange for new operating lease liabilities	$	3,295

The table below summarizes other information related to our operating leases:



(In thousands, except percentages and years)	December 31, 2019
Weighted average remaining lease term in years	6.76
Weighted average discount rate	5.47		%
Operating lease right-of-use assets	$	2,792

The table below summarizes the maturity of remaining lease liabilities:



(In thousands)	December 31, 2019
2020	$	558
2021	530
2022	478
2023	413
2024	366
2025 and thereafter	1,045
Total lease payments	$	3,390
Less: Interest	(566		)
Present value of lease liabilities	$	2,824

As of December 31, 2019, the Corporation had not entered into any material leases that have not yet commenced.

Commitments to Borrowers

Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon the request of the borrower. The Company was committed to advance approximately $272.8 million to its borrowers as of December 31, 2019, compared to $289.9 million at December 31, 2018. At December 31, 2019, $119.2 million of these commitments expire within one year, compared to $181.9 million a year earlier. At December 31, 2019, the Company had $4.8 million in standby letters of credit compared to $5.7 million at December 31, 2018. The estimated fair value of these guarantees is not significant. The Company believes it has the necessary liquidity to honor all commitments.

Litigation

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. In the best judgment of management, based upon consultation with counsel, the consolidated financial position and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.

11. Other Liabilities

The detail of other liabilities as of December 31^st for the past two years is as follows:



(In thousands)	December 31, 2019		December 31, 2018
Accrued expenses	$	7,372	$	5,018
Lease liabilities	2,824		—
Deferred compensation	1,804		1,332
Loan expense advances	993		1,160
Reserve for commitments	273		290
Other liabilities	1,088		4,466
Total other liabilities	$	14,354	$	12,266

12. Accumulated Other Comprehensive Income (Loss)

The following table shows the changes in other comprehensive income (loss) for the past three years:



	For the year ended December 31, 2019
(In thousands)	Net unrealized (losses) gains on securities			Adjustments related to defined benefit plan			Net unrealized gains (losses) from cash flow hedges			Accumulated other comprehensive (loss) income
Balance, beginning of period	$	(721	)	$	(431	)	$	1,030		$	(122	)
Other comprehensive income (loss) before reclassifications	1,332			—			(862		)	470
Less amounts reclassified from accumulated other comprehensive income (loss)	295			(136		)	—			159
Period change	1,037			136			(862		)	311
Balance, end of period	$	316		$	(295	)	$	168		$	189



	For the year ended December 31, 2018
(In thousands)	Net unrealized losses on securities			Adjustments related to defined benefit plan			Net unrealized gains from cash flow hedges		Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(335	)	$	(341	)	$	882	$	206
Other comprehensive (loss) income before reclassifications	(531		)	—			148		(383		)
Less amounts reclassified from accumulated other comprehensive (loss) income	(145		)	90			—		(55		)
Period change	(386		)	(90		)	148		(328		)
Balance, end of period (1)	$	(721	)	$	(431	)	$	1,030	$	(122	)

(1) AOCI does not reflect the net reclassification of $35 thousand to Retained Earnings as a result of ASU 2016-01, "Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" & ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income".



	For the year ended December 31, 2017
(In thousands)	Net unrealized (losses) gains on securities			Adjustments related to defined benefit plan			Net unrealized gains from cash flow hedges		Accumulated other comprehensive income (loss)
Balance, beginning of period	$	(161	)	$	(391	)	$	712	$	160
Other comprehensive (loss) income before reclassifications	(134		)	—			170		36
Less amounts reclassified from accumulated other comprehensive income (loss)	40			(50		)	—		(10		)
Period change	(174		)	50			170		46
Balance, end of period	$	(335	)	$	(341	)	$	882	$	206

13. Shareholders’ Equity

Shareholders’ equity increased $22.2 million to $160.7 million at December 31, 2019 compared to $138.5 million at December 31, 2018, primarily due to net income of $23.7 million. Other items impacting shareholders’ equity included $3.3 million in dividends paid on common stock, $1.5 million from the issuance of common stock under employee benefit plans and $311 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

14. Other Income

The components of other income for the past three years are as follows:



	For the years ended December 31,
(In thousands)	2019		2018		2017
ATM and check card fees	$	832	$	760	$	721
Wire transfer fees	170		134		104
Safe deposit box fees	90		91		92
Other	254		222		191
Total other income	$	1,346	$	1,207	$	1,108

15. Other Expenses

The components of other expenses for the past three years are as follows:



	For the years ended December 31,
(In thousands)	2019		2018		2017
Travel, entertainment, training and recruiting	$	871	$	806	$	761
Insurance	325		336		347
Stationery and supplies	214		228		249
Retail losses	86		60		37
Other	381		352		489
Total other expenses	$	1,877	$	1,782	$	1,883

16. Income Taxes

On December 22, 2017 the Tax Act was signed into law, lowering the corporate federal income tax rate from 35% to 21%, which provided a significant tax benefit in 2019 and in 2018 and will continue to do so in subsequent years. However, net income for 2017 was adversely impacted because ASC 740, Income Taxes, required the Company to remeasure its deferred income tax balances as of the enactment date to reflect a rate of 21%. This remeasurement resulted in a $1.7 million increase in income tax expense and is included in the line "Federal - deferred provision" in the table below.

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The bill, effective January 1, 2018, imposes a temporary surtax on corporations earning New Jersey allocated taxable income in excess of $1 million at a rate of 2.5 percent for tax years beginning on or after January 1, 2018, through December 31, 2019, and at 1.5 percent for tax years beginning on or after January 1, 2020, through December 31, 2021. In addition, effective for periods on or after January 1, 2019, New Jersey requires mandatory unitary combined reporting of certain affiliates for its Corporation Business Tax.

The components of the provision for income taxes for the past three years are as follows:



	For the years ended December 31,
(In thousands)	2019			2018			2017
Federal - current provision	$	5,478		$	5,507		$	7,003
Federal - deferred (benefit) provision	(285		)	(799		)	1,702
Total federal provision	5,193			4,708			8,705
State - current provision	1,483			1,143			991
State - deferred (benefit)	(14		)	(463		)	(156		)
Total state provision	1,469			680			835
Total provision for income taxes	$	6,662		$	5,388		$	9,540

Reconciliation between the reported income tax provision and the amount computed by multiplying income before taxes by the statutory Federal income tax rate for the past three years is as follows:



	For the years ended December 31,
(In thousands, except percentages)	2019			2018			2017
Federal income tax provision at statutory rate	$	6,366		$	5,734		$	7,852
Increases (Decreases) resulting from:
Stock option and restricted stock	(185		)	(434		)	(428		)
Bank owned life insurance	(123		)	(205		)	(164		)
Tax-exempt interest	(22		)	(25		)	(56		)
Meals and entertainment	19			19			22
Captive insurance premium	(209		)	(200		)	(295		)
State income taxes, net of federal income tax effect	1,161			538			543
Impact of rate change on deferred tax assets	—			—			1,733
Other, net	(345		)	(39		)	333
Provision for income taxes	$	6,662		$	5,388		$	9,540
Effective tax rate	22.0		%	19.7		%	42.5		%

Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The components of the net deferred tax asset at December 31, 2019 and 2018 are as follows:



(In thousands)	December 31, 2019			December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	4,605		$	4,476
SERP	1,006			790
Stock-based compensation	719			561
Deferred compensation	533			385
Net unrealized security losses	—			292
Depreciation	159			231
State net operating loss	140			214
EVP retirement plan	133			130
Commitment reserve	77			84
Other	212			238
Gross deferred tax assets	7,584			7,401
Valuation allowance	(140		)	(214		)
Total deferred tax assets	7,444			7,187
Deferred tax liabilities:
Deferred loan costs	451			414
Goodwill	400			382
Prepaid insurance	354			324
Deferred servicing fees	311			243
Net unrealized security gains	111			—
Bond accretion	73			72
Interest rate swaps	69			402
Other	116			—
Total deferred tax liabilities	1,885			1,837
Net deferred tax asset	$	5,559		$	5,350

The Company computes deferred income taxes under the asset and liability method. Deferred income taxes are recognized for tax consequences of “temporary differences” by applying enacted statutory tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions subject to reduction of the asset by a valuation allowance.

The Company had a $140 thousand and $214 thousand valuation allowance for deferred tax assets related to its state net operating loss carry-forward deferred tax asset at December 31, 2019 and 2018, respectively. The Company’s state net operating loss carry-forwards totaled approximately $2.0 million and $3.0 million at December 31, 2019 and 2018, respectively, and expire between 2030 and 2037.

Included as a component of deferred tax assets is an income tax expense (benefit) related to unrealized gains (losses) on securities available for sale, a supplemental retirement plan (SERP) and interest rate swaps. The after-tax component of each of these is included in other comprehensive income (loss) in shareholders’ equity. The after-tax component related to securities available for sale was an unrealized gain (loss) of $280 thousand and $(757) thousand for 2019 and 2018, respectively. The after-tax component related to the SERP was an unrealized loss of $295 thousand for 2019, compared to $431 thousand (in 2018. The after-tax component related to the interest rate swaps was an unrealized gain of $168 thousand for 2019, compared to an unrealized gain of $1.0 million in the prior year.

The Company follows FASB ASC Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return. ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes. The Company did not recognize or accrue any interest or penalties related to income taxes during the years ended December 31, 2019 and 2018. The Company does not have an accrual for uncertain tax positions as of December 31, 2019 or 2018, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2016 and thereafter are subject to future examination by tax authorities.

17. Net Income per Share

The following is a reconciliation of the calculation of basic and diluted net income per share for the past three years:



	For the years ended December 31,
(In thousands, except per share amounts)	2019		2018		2017
Net income	$	23,653	$	21,919	$	12,893
Weighted average common shares outstanding - Basic	10,845		10,726		10,558
Plus: Potential dilutive common stock equivalents	184		190		191
Weighted average common shares outstanding - Diluted	11,029		10,916		10,749
Net income per common share - Basic	$	2.18	$	2.04	$	1.22
Net income per common share - Diluted	2.14		2.01		1.20
Stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive	243		109		71

18. Regulatory Capital

A significant measure of the strength of a financial institution is its capital base. Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, subject to limitations, certain qualifying long-term debt, preferred stock and hybrid instruments, which do not qualify for tier 1 capital. The Bank is currently subject to various regulatory capital requirements administered by the FDIC. Quantitative measures of capital adequacy include the leverage ratio (tier 1 capital as a percentage of tangible assets), tier 1 risk-based capital ratio (tier 1 capital as a percent of risk-weighted assets), total risk-based capital ratio (total risk-based capital as a percent of total risk-weighted assets), and common equity tier 1 capital ratio.

Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Bank to maintain certain capital as a percentage of assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-weighted assets). Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action applicable to banks, the Bank must meet specific capital guidelines. Prompt corrective action provisions are not applicable to bank holding companies. Under the Federal Reserve's small bank holding company policy, holding companies with less than $3.0 billion in consolidated assets, like the Parent Company, are exempt from the FRB's consolidated capital requirements.

In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III, which constitutes a set of capital reform measures designed to strengthen the regulation, supervision and risk management of banking organizations worldwide. In order to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, the FDIC approved, as an interim final rule in July 2013, the regulatory capital requirements substantially similar to final rules issued by the Board of Governors of the Federal Reserve System (“Federal Reserve”) for U.S. state nonmember banks and the Office of the Comptroller of the Currency for national banks.

The interim final rule included new risk-based capital and leverage ratios that were phased-in from 2015 to 2019 for most state nonmember banks. The rule includes a new common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Total risk-based capital requirements. The interim final rule also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and requires a minimum leverage ratio of 4.0%. The required minimum ratio of total capital to risk-weighted assets remained 8.0%. The new risk-based capital requirements (except for the capital conservation buffer) became effective for the Bank on January 1, 2015.

The new rules also included a one-time opportunity to opt-out of the changes to treatment of accumulated other comprehensive income (“AOCI”) components. By making the election to opt-out, the institution may continue treating AOCI items in a manner consistent with risk-based capital rules in place prior to January 2015. The Bank and the Company have made the election to opt out of the treatment of AOCI on the appropriate March 31, 2015 filings.

The following table summarizes the Company's and the Bank's regulatory capital ratios at December 31, 2019 and December 31, 2018, as well as the minimum regulatory capital ratios required for the Bank to be deemed "well-capitalized".



	At December 31, 2019				Required for capital adequacy purposes effective				To be well-capitalized under prompt corrective action regulations
	Company		Bank		January 1, 2019				Bank
Leverage ratio	10.59	%	10.15	%	4.00	%			5.00	%
CET1	11.59	%	11.81	%	7.00	%	(1	)	6.50	%
Tier I risk-based capital ratio	12.32	%	11.81	%	8.50	%	(1	)	8.00	%
Total risk-based capital ratio	13.06	%	12.58	%	10.50	%	(1	)	10.00	%



	At December 31, 2018				Required for capital adequacy purposes effective				To be well-capitalized under prompt corrective action regulations
	Company		Bank		January 1, 2018				Bank
Leverage ratio	9.90	%	9.52	%	4.000	%			5.00	%
CET1	11.40	%	11.80	%	6.375	%	(2	)	6.50	%
Tier I risk-based capital ratio	12.24	%	11.80	%	7.875	%	(2	)	8.00	%
Total risk-based capital ratio	13.49	%	13.05	%	9.875	%	(2	)	10.00	%

(1) Includes 2.5% capital conservation buffer.
(2) Includes 1.875% capital conservation buffer.

At December 31, 2019 and 2018, Unity Bank is “well-capitalized” under the applicable regulatory capital adequacy guidelines.

19. Employee Benefit Plans

Stock Option Plans

The Company has incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors. Grants under the Company's incentive and nonqualified option plans generally vest over 3 years and must be exercised within 10 years of the date of grant. Transactions under the Company’s stock option plans for 2019, 2018 and 2017 are summarized in the following table:



	Shares		Weighted average exercise price		Weighted average remaining contractual life in years	Aggregate intrinsic value
Outstanding at December 31, 2016	552,759		$	7.26	5.7	$	4,663,432
Options granted	47,100		16.37
Options exercised	(94,679	)	6.19
Options forfeited	—		—
Options expired	(607	)	11.48
Outstanding at December 31, 2017	504,573		$	8.31	5.7	$	5,772,843
Options granted	203,000		20.15
Options exercised	(115,962	)	4.97
Options forfeited	(7,433	)	15.47
Options expired	—		—
Outstanding at December 31, 2018	584,178		$	13.00	7.1	$	4,574,680
Options granted	96,000		21.31
Options exercised	(60,534	)	7.49
Options forfeited	(5,333	)	19.38
Options expired	—		—
Outstanding at December 31, 2019	614,311		$	14.78	6.9	$	4,783,402
Exercisable at December 31, 2019	372,794		$	11.16	5.6	$	4,254,086

On April 25, 2019, The Company adopted the 2019 Equity Compensation Plan providing for grants of up to 500,000 shares to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and deferred stock. The Plan replaced all previously approved and established equity plans then currently in effect. As of December 31, 2019, 41,000 options and 15,900 shares of restricted stock have been awarded from the plan leaving 443,100 shares available for future grants.

The fair values of the options granted during 2019, 2018 and 2017 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:



	For the years ended December 31,
	2019			2018			2017
Number of options granted	96,000			203,000			47,100
Weighted average exercise price	$	21.31		$	20.15		$	16.37
Weighted average fair value of options	$	6.20		$	6.04		$	4.64
Expected life in years (1)	8.23			7.17			6.57
Expected volatility (2)	27.05		%	26.60		%	28.12		%
Risk-free interest rate (3)	2.21		%	2.61		%	2.18		%
Dividend yield (4)	1.37		%	1.23		%	1.15		%


(1)	The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding.


(2)	The expected volatility of the Company’s stock price was based on the historical volatility over the period commensurate with the expected life of the options.


(3)	The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of grant.


(4)	The expected dividend yield is the projected annual yield based on the grant date stock price.

Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options. The following table presents information about options exercised during 2019, 2018 and 2017:



	For the years ended December 31,
	2019		2018		2017
Number of options exercised	60,534		115,962		94,679
Total intrinsic value of options exercised	$	792,446	$	1,949,853	$	1,073,474
Cash received from options exercised	453,326		576,119		509,047
Tax deduction realized from options exercised	238,407		548,104		438,514

The following table summarizes information about stock options outstanding and exercisable at December 31, 2019:



	Options outstanding				Options exercisable
Range of exercise prices	Options outstanding	Weighted average remaining contractual life (in years)	Weighted average exercise price		Options exercisable	Weighted average exercise price
$0.00 - $6.00	61,761	2.7	$	5.60	61,761	$	5.60
$6.01 - $12.00	193,517	5.2	8.70		193,517	8.70
$12.01 - $18.00	67,533	7.1	15.78		52,336	15.60
$18.01 - $24.00	291,500	8.8	20.54		65,180	20.16
Total	614,311	6.9	$	14.78	372,794	$	11.16

FASB ASC Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options and the related income tax benefit for the years ended December 31, 2019, 2018 and 2017 are detailed in the following table:



	For the years ended December 31,
	2019		2018		2017
Compensation expense	$	606,626	$	478,733	$	283,823
Income tax benefit	175,315		134,572		115,942

As of December 31, 2019, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $1.1 million. That cost is expected to be recognized over a weighted average period of 2.0 years.

Restricted Stock Awards

Restricted stock is issued under the stock bonus program to reward employees and directors and to retain them by distributing stock over a period of time. Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. The following table summarizes nonvested restricted stock activity for the year ended December 31, 2019:



	Shares		Average grant date fair value
Nonvested restricted stock at December 31, 2018	105,312		$	16.55
Granted	46,050		20.84
Canceled	(1,557	)	16.78
Vested	(41,065	)	14.40
Nonvested restricted stock at December 31, 2019	108,740		$	19.18

Restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017 were as follows:



	For the years ended December 31,
	2019		2018		2017
Number of shares granted	46,050		47,550		38,400
Average grant date fair value	$	20.84	$	20.77	$	16.36

Compensation expense related to the restricted stock for the years ended December 31, 2019, 2018 and 2017 is detailed in the following table:



	For the years ended December 31,
	2019		2018		2017
Compensation expense	$	664,484	$	574,236	$	462,470
Income tax benefit	192,036		161,418		188,919

As of December 31, 2019, there was approximately $1.6 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s stock incentive plans. That cost is expected to be recognized over a weighted average period of 2.7 years.

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 80 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $648 thousand, $601 thousand and $492 thousand to the Plan in 2019, 2018 and 2017, respectively.

Deferred Fee Plan

The Company has a deferred fee plan for Directors and executive management. Directors of the Company have the option to elect to defer up to 100 percent of their respective retainer and Board of Director fees, and each member of executive management has the option to elect to defer 100 percent of their year end cash bonuses. Director and executive deferred fees totaled $379 thousand in 2019, $297 thousand in 2018 and $149 thousand in 2017, and the interest paid on deferred balances totaled $107 thousand in 2019, $67 thousand in 2018 and $44 thousand in 2017. The fees distributed on the deferred balances totaled $14 thousand in 2019 and 2018 and $8 thousand in 2017.

Benefit Plans

In addition to the 401(k) savings plan which covers substantially all employees, in 2015 the Company established an unfunded supplemental defined benefit plan to provide additional retirement benefits for the President and Chief Executive Officer (“CEO”) and certain key executives.

On June 4, 2015, the Company approved the Supplemental Executive Retirement Plan (“SERP”) pursuant to which the President and CEO is entitled to receive certain supplemental nonqualified retirement benefits. The Retirement Benefit shall be an amount equal to sixty percent (60%) of the average of the Executive's base salary for the thirty-six (36) months immediately preceding executive's separation from service after age 66, adjusted annually thereafter by two percent (2%). The total benefit is to be made payable in fifteen annual installments. The future payments are estimated to total $6.6 million. A discount rate of four percent (4%) was used to calculate the present value of the benefit obligation.

The President and CEO commenced vesting to this retirement benefit on January 1, 2014, and it will vest an additional three percent (3%) each year until fully vested on January 1, 2024. In the event that the President and CEO’s separation from service from the Company were to occur prior to full vesting, the President and CEO would be entitled to and shall be paid the vested portion of the retirement benefit calculated as of the date of separation from service. Notwithstanding the foregoing, upon a Change in Control, and provided that within 6 months following the Change in Control the President and CEO is involuntarily terminated for reasons other than “cause” or the President and CEO resigns for “good reason”, as such is defined in the SERP, or the President and CEO voluntarily terminates his employment after being offered continued employment in a position that is not a “Comparable Position”, as such is also defined in the SERP, the President and CEO shall become one hundred percent (100%) vested in the full retirement benefit.

No contributions or payments have been made for the year 2019, 2018 or 2017. The following table summarizes the components of the net periodic pension cost of the defined benefit plan recognized during the years ended December 31, 2019, 2018 and 2017:



	For the years ended December 31,
(In thousands)	2019		2018		2017
Service cost (1)	$	689	$	1,460	$	121
Interest cost	135		101		43
Amortization of prior service cost	83		83		83
Net periodic benefit cost	$	907	$	1,644	$	247

(1) On September 27, 2018, the Company approved a change in calculation of the Retirement Benefit resulting in an additional $1.1 million in current expense.

The following table summarizes the changes in benefit obligations of the defined benefit plan recognized during the years ended December 31, 2019, 2018 and 2017:



	For the years ended December 31,
(In thousands)	2019		2018		2017
Benefit obligation, beginning of year	$	2,747	$	1,187	$	1,023
Service cost (1)	689		1,460		121
Interest cost	135		101		43
Benefit obligation, end of year	$	3,571	$	2,747	$	1,187

(1) On September 27, 2018, the Company approved a change in calculation of the Retirement Benefit resulting in an additional $1.1 million in current expense.

On October 22, 2015, the Company entered into an Executive Incentive Retirement Plan (the “Plan”) with key executive officers. The Plan has an effective date of January 1, 2015.

The Plan is an unfunded, nonqualified deferred compensation plan. For any Plan Year, a guaranteed annual Deferral Award percentage of seven and one half percent (7.5%) of the participant’s annual base salary shall be credited to each Participant’s Deferred Benefit Account. A discretionary annual Deferral Award equal to seven and one half percent (7.5%) of the participant’s annual base salary may be credited to the Participant’s account in addition to the guaranteed Deferral Award, if the Bank exceeds the benchmarks set forth in the Annual Executive Bonus Matrix. The total Deferral Award shall never exceed fifteen percent

(15%) of the participant's base salary for any given Plan Year. Each Participant shall be one hundred percent (100%) vested in all Deferral Awards as of the date they are awarded.

As of December 31, 2019, the Company had total expenses of $115 thousand, compared to $88 thousand in 2018 and $90 thousand in 2017. The Plan is reflected on the Company’s balance sheet as accrued expenses.

Certain members of management are also enrolled in a split-dollar life insurance plan with a post retirement death benefit of $250 thousand. Total expenses related to this plan were $5 thousand, $18 thousand and $5 thousand in 2019, 2018 and 2017, respectively.

20. Fair Value

Fair Value Measurement

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs


•	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.


•	Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs


•	Quoted prices for similar assets or liabilities in active markets.


•	Quoted prices for identical or similar assets or liabilities in inactive markets.


•	Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”


•	Generally, this includes U.S. Government and sponsored entity mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3 Inputs


•	Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.


•	These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:

Debt Securities Available for Sale

The fair value of available for sale ("AFS") debt securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of December 31, 2019, the fair value of the Company's AFS debt securities portfolio was $64.3 million. Approximately 44 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $28.0 million at December 31, 2019. Approximately $28.0 million of the residential mortgage-backed securities are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States.

All of the Company’s AFS debt securities were classified as Level 2 assets at December 31, 2019. The valuation of AFS debt securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information. It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities.

Equity Securities with Readily Determinable Fair Values

The fair value of equity securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of December 31, 2019, the fair value of the Company's equity securities portfolio was $2.3 million.

All of the Company's equity securities were classified as Level 2 assets at December 31, 2019. The valuation of securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information.

There were no changes in the inputs or methodologies used to determine fair value during the period ended December 31, 2019, as compared to the period ended December 31, 2018.

Loans Held for Sale

Fair value for loans held for sale is derived from quoted market prices for similar loans, in which case they are characterized as Level 2 assets in the fair value hierarchy.

Interest Rate Swap Agreements

The fair value of interest rate swap agreements is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

The Company's derivative instruments are classified as Level 2 assets, as the readily observable market inputs to these models are validated to external sources, such as industry pricing services, or are corroborated through recent trades, dealer quotes, yield curves, implied volatility or other market-related data.

The tables below present the balances of assets measured at fair value on a recurring basis as of December 31^st for the past two years:



	Fair Value Measurements at December 31, 2019 Using
(In thousands)	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Assets:
Debt Securities available for sale:
U.S. Government sponsored entities	$	5,753	$	—	$	5,753	$	—
State and political subdivisions	5,154		—		5,154		—
Residential mortgage-backed securities	27,964		—		27,964		—
Corporate and other securities	25,404		—		25,404		—
Total debt securities available for sale	$	64,275	$	—	$	64,275	$	—

Equity securities with readily determinable fair values	2,289		—		2,289		—
Total equity securities	$	2,289	$	—	$	2,289	$	—

Loans held for sale	14,862		—		14,862		—
Total loans held for sale	$	14,862	$	—	$	14,862	$	—

Interest rate swap agreements	238		—		238		—
Total swap agreements	$	238	$	—	$	238	$	—

	Fair Value Measurements at December 31, 2018 Using
(In thousands)	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Measured on a recurring basis:
Assets:
Debt Securities available for sale:
U.S. Government sponsored entities	$	5,642	$	—	$	5,642	$	—
State and political subdivisions	4,498		—		4,498		—
Residential mortgage-backed securities	26,613		—		26,613		—
Corporate and other securities	9,960		—		9,960		—
Total debt securities available for sale	$	46,713	$	—	$	46,713	$	—

Equity securities with readily determinable fair values	2,144		—		2,144		—
Total equity securities	$	2,144	$	—	$	2,144	$	—

Loans held for sale	12,177		—		12,177		—
Total loans held for sale	$	12,177	$	—	$	12,177	$	—

Interest rate swap agreements	1,433		—		1,433		—
Total swap agreements	$	1,433	$	—	$	1,433	$	—

Fair Value on a Nonrecurring Basis

The following tables present the assets and liabilities subject to fair value adjustments (impairment) on a non-recurring basis carried on the balance sheet by caption and by level within the hierarchy (as described above):



	Fair Value Measurements at December 31, 2019 Using
(In thousands)	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net (Credit) Provision During Period
Measured on a non-recurring basis:
Financial assets:
OREO	$	1,723	$	—	$	—	$	1,723	$	(231	)
Impaired collateral-dependent loans	1,925		—		—		1,925		(253		)

	Fair Value Measurements at December 31, 2018 Using
(In thousands)	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net (Credit) Provision During Period
Measured on a non-recurring basis:
Financial assets:
OREO	$	56	$	—	$	—	$	56	$	(196	)
Impaired collateral-dependent loans	2,625		—		—		2,625		(335		)

Certain Assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis:

Appraisal Policy

All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice ("USPAP"). Appraisals are certified to the Company and performed by appraisers on the Company's approved list of appraisers. Evaluations are completed by a person independent of Company management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a "retail value" and an "as is value."

OREO

The fair value of OREO is determined using appraisals, which may be discounted based on management's review and changes in market conditions (Level 3 Inputs).

Impaired Collateral-Dependent Loans

The fair value of impaired collateral-dependent loans is derived in accordance with FASB ASC Topic 310, "Receivables." Fair value is determined based on the loan's observable market price or the fair value of the collateral. Partially charged-off loans are measured for impairment based upon an appraisal for collateral-dependent loans. When an updated appraisal is received for a nonperforming loan, the value on the appraisal is discounted in the manner discussed above. If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status. The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status. The Company removes loans from nonaccrual status generally when the borrower makes three months of contractual payments and demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. At December 31, 2019, the valuation allowance for impaired loans was $414 thousand, a decrease of $253 thousand from $667 thousand at December 31, 2018.

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option. These estimated fair values as of December 31, 2019 and December 31, 2018 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

For these short-term instruments, the carrying value is a reasonable estimate of fair value.

Securities

The fair value of securities is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

SBA Loans Held for Sale

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

Loans

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

FHLB Stock

Federal Home Loan Bank stock is carried at cost. Carrying value approximates fair value based on the redemption provisions of the issues.

Servicing Assets

Servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposit Liabilities

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date (i.e. carrying value). The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.

Borrowed Funds and Subordinated Debentures

The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.

Standby Letters of Credit

At December 31, 2019, the Bank had standby letters of credit outstanding of $4.8 million, as compared to $5.7 million at December 31, 2018. The fair value of these commitments is nominal.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments not previously presented as of December 31^st for the past two years:



		December 31, 2019				December 31, 2018
(In thousands)	Fair value level	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and cash equivalents	Level 1	$	158,016	$	158,016	$	145,515	$	145,515
Securities (1)	Level 2	66,564		66,564		63,732		63,600
SBA loans held for sale	Level 2	13,529		14,862		11,171		12,177
Loans, net of allowance for loan losses (2)	Level 2	1,395,634		1,398,997		1,277,907		1,268,909
Federal Home Loan Bank stock	Level 2	14,184		14,184		10,795		10,795
Servicing assets	Level 3	2,026		2,026		2,375		2,375
Accrued interest receivable	Level 2	6,984		6,984		6,399		6,399
OREO	Level 3	1,723		1,723		56		56
Financial liabilities:
Deposits	Level 2	1,250,114		1,252,082		1,207,687		1,204,731
Borrowed funds and subordinated debentures	Level 2	293,310		292,766		220,310		218,879
Accrued interest payable	Level 2	455		455		406		406


(1)	At December 31, 2018, includes held to maturity ("HTM") corporate securities that are considered Level 3. These securities had book values of $3.6 million and market values of $3.4 million. Includes one corporate bond with a book value and market value of $1.0 million.


(2)	Includes impaired loans that are considered Level 3 and reported separately in the tables under the “Fair Value on a Nonrecurring Basis” heading. Collateral-dependent impaired loans, net of specific reserves totaled $1.9 million and $2.6 million at December 31, 2019 and 2018.

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.

20. Condensed Financial Statements of Unity Bancorp, Inc.

(Parent Company Only)



Balance Sheets
(In thousands)	December 31, 2019		December 31, 2018
ASSETS
Cash and cash equivalents	$	2,308	$	1,209
Equity securities	1,355		1,239
Investment in subsidiaries	164,881		143,487
Premises and equipment, net	3,849		3,893
Other assets	967		1,372
Total assets	$	173,360	$	151,200
LIABILITIES AND SHAREHOLDERS' EQUITY
Loan due to subsidiary bank	$	2,304	$	2,396
Other liabilities	37		6
Subordinated debentures	10,310		10,310
Shareholders' equity	160,709		138,488
Total liabilities and shareholders' equity	$	173,360	$	151,200



Statements of Income	For the year ended December 31,
(In thousands)	2019			2018			2017
Dividend from Bank	$	3,300		$	2,890		$	2,452
Gain on sales of securities	17			—			—
Other income	454			425			413
Total income	3,771			3,315			2,865
Interest expenses	366			251			251
Market value (appreciation) write-downs on equity securities	(293		)	171			—
Other expenses	251			261			251
Total expenses	324			683			502
Income before provision for income taxes and equity in undistributed net income of subsidiary	3,447			2,632			2,363
Benefit (provision) for income taxes	78			(14		)	(15		)
Income before equity in undistributed net income of subsidiary	3,369			2,646			2,378
Equity in undistributed net income of subsidiary	20,284			19,273			10,515
Net income	$	23,653		$	21,919		$	12,893



Statements of Cash Flows	For the year ended December 31,
(In thousands)	2019			2018			2017
OPERATING ACTIVITIES
Net income	$	23,653		$	21,919		$	12,893
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary	(20,284		)	(19,273		)	(10,515		)
Gain on sales of securities	(17		)	—			—
Net change in other assets and other liabilities	506			377			(81		)
Net cash provided by operating activities	3,858			3,023			2,297
INVESTING ACTIVITIES
Purchase of land and building	(64		)	—			(55		)
Purchases of securities	—			(1,133		)	(262		)
Proceeds from sales of securities	198			—			—
Net cash provided by (used in) investing activities	134			(1,133		)	(317		)
FINANCING ACTIVITIES
Proceeds from exercise of stock options	453			576			509
Repayment of advances from subsidiaries	(91		)	(87		)	(83		)
Cash dividends paid on common stock	(3,255		)	(2,802		)	(2,380		)
Net cash used in financing activities	(2,893		)	(2,313		)	(1,954		)
Increase (decrease) in cash and cash equivalents	1,099			(423		)	26
Cash and cash equivalents, beginning of period	1,209			1,632			1,606
Cash and cash equivalents, end of period	$	2,308		$	1,209		$	1,632
SUPPLEMENTAL DISCLOSURES
Interest paid	$	479		$	368		$	374

Quarterly Financial Information (Unaudited)

The following quarterly financial information for the years ended December 31, 2019, 2018 and 2017 is unaudited. However, in the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the results of operations for the periods, are reflected.



	2019
(In thousands, except per share data)	March 31		June 30		September 30		December 31
Total interest income	$	18,500	$	18,781	$	19,055	$	19,312
Total interest expense	4,284		4,571		4,651		4,549
Net interest income	14,216		14,210		14,404		14,763
Provision for loan losses	500		350		750		500
Net interest income after provision for loan losses	13,716		13,860		13,654		14,263
Total noninterest income	2,020		2,411		2,710		2,398
Total noninterest expense	8,476		8,791		8,729		8,721
Income before provision for income taxes	7,260		7,480		7,635		7,940
Provision for income taxes	1,520		1,646		1,676		1,820
Net income	$	5,740	$	5,834	$	5,959	$	6,120
Net income per common share - Basic	$	0.53	$	0.54	$	0.55	$	0.56
Net income per common share - Diluted	0.52		0.53		0.54		0.55



	2018
(In thousands, except per share data)	March 31		June 30		September 30		December 31
Total interest income	$	15,640	$	16,369	$	17,194	$	18,060
Total interest expense	2,768		3,225		3,627		3,896
Net interest income	12,872		13,144		13,567		14,164
Provision for loan losses	500		550		500		500
Net interest income after provision for loan losses	12,372		12,594		13,067		13,664
Total noninterest income	2,286		2,312		2,479		1,954
Total noninterest expense	8,194		8,158		8,801		8,268
Income before provision for income taxes	6,464		6,748		6,745		7,350
Provision for income taxes	1,235		1,351		1,255		1,547
Net income	$	5,229	$	5,397	$	5,490	$	5,803
Net income per common share - Basic	$	0.49	$	0.50	$	0.51	$	0.54
Net income per common share - Diluted	0.48		0.49		0.50		0.53



	2017
(In thousands, except per share data)	March 31		June 30		September 30		December 31
Total interest income	$	12,594	$	13,477	$	14,195	$	15,044
Total interest expense	2,204		2,327		2,378		2,544
Net interest income	10,390		11,150		11,817		12,500
Provision for loan losses	250		400		500		500
Net interest income after provision for loan losses	10,140		10,750		11,317		12,000
Total noninterest income	2,204		2,021		2,008		2,037
Total noninterest expense	7,440		7,421		7,554		7,629
Income before provision for income taxes	4,904		5,350		5,771		6,408
Provision for income taxes	1,712		1,906		2,014		3,908
Net income	$	3,192	$	3,444	$	3,757	$	2,500
Net income per common share - Basic	$	0.30	$	0.33	$	0.36	$	0.23
Net income per common share - Diluted	0.30		0.32		0.35		0.23

Selected Consolidated Financial Data



	At or for the years ended December 31,
(In thousands, except percentages)	2019			2018			2017			2016			2015
Selected Results of Operations
Interest income	$	75,648		$	67,263		$	55,310		$	47,024		$	41,651
Interest expense	18,055			13,516			9,453			8,767			7,660
Net interest income	57,593			53,747			45,857			38,257			33,991
Provision for loan losses	2,100			2,050			1,650			1,220			500
Noninterest income	9,539			9,031			8,270			11,060			7,729
Noninterest expense	34,717			33,421			30,044			27,631			26,852
Provision for income taxes	6,662			5,388			9,540			7,257			4,811
Net income	23,653			21,919			12,893			13,209			9,557
Per Share Data
Net income per common share - Basic	$	2.18		$	2.04		$	1.22		$	1.40		$	1.03
Net income per common share - Diluted	2.14			2.01			1.20			1.38			1.02
Book value per common share	14.77			12.85			11.13			10.14			8.45
Market value per common share	22.57			20.76			19.75			15.70			11.34
Cash dividends declared on common shares	0.31			0.27			0.23			0.18			0.13
Selected Balance Sheet Data
Assets	$	1,718,942		$	1,579,157		$	1,455,496		$	1,189,906		$	1,084,866
Loans	1,425,558			1,304,566			1,170,674			973,414			888,958
Allowance for loan losses	(16,395		)	(15,488		)	(13,556		)	(12,579		)	(12,759		)
Securities	66,564			63,732			69,800			61,547			71,336
Deposits	1,250,114			1,207,687			1,043,137			945,723			894,493
Borrowed funds and subordinated debentures	293,310			220,310			285,310			131,310			107,465
Shareholders' equity	160,709			138,488			118,105			106,291			78,470
Common shares outstanding	10,881			10,780			10,615			10,477			9,279
Performance Ratios
Return on average assets	1.54		%	1.53		%	1.02		%	1.17		%	0.96		%
Return on average equity	15.86			17.10			11.47			15.37			12.92
Average equity to average assets	9.69			8.96			8.85			7.59			7.42
Efficiency ratio	52.00			53.07			55.57			56.51			64.41
Dividend payout	14.49			13.43			18.33			13.04			12.50
Net interest spread	3.54			3.65			3.57			3.36			3.42
Net interest margin	3.95			3.97			3.83			3.58			3.63
Asset Quality Ratios
Allowance for loan losses to loans	1.15		%	1.19		%	1.16		%	1.29		%	1.44		%
Allowance for loan losses to nonperforming loans	290.23			225.35			452.77			173.82			175.74
Nonperforming loans to total loans	0.40			0.53			0.26			0.74			0.82
Nonperforming assets to total loans and OREO	0.52			0.53			0.29			0.85			0.99
Nonperforming assets to total assets	0.43			0.44			0.23			0.70			0.82
Net charge-offs to average loans	0.09			0.01			0.06			0.15			0.04
Capital Ratios - Company
Leverage Ratio	10.59		%	9.90		%	9.37		%	9.73		%	8.82		%
Common Equity Tier 1 risk-based capital ratio	11.59			11.40			10.81			11.49			9.37
Tier 1 risk-based capital ratio	12.32			12.24			11.75			12.58			11.18
Total risk-based capital ratio	13.06			13.49			12.87			13.84			12.43
Capital Ratios - Bank
Leverage Ratio	10.15		%	9.52		%	9.03		%	9.50		%	7.95		%
Common Equity Tier 1 risk-based capital ratio	11.81			11.80			11.33			12.23			10.08
Tier 1 risk-based capital ratio	11.81			11.80			11.33			12.23			10.08
Total risk-based capital ratio	12.58			13.05			12.50			13.48			12.36

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Unity Bancorp, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. and its subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 4, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor since 2007.

Blue Bell, Pennsylvania

March 4, 2020

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:

None.

Item 9A. Controls and Procedures:

(a)Evaluation of disclosure controls and procedures:

Based on their evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Interim Principal Financial and Accounting Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)Management’s Report on Internal Control Over Financial Reporting:

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive officer and the principal financial officer, management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2019.

RSM US LLP, the independent registered public accounting firm that audited the Company's December 31, 2019 consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report expressing an opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2019. The report is included in this item under the heading "Report of Independent Registered Public Accounting Firm."

(c)Changes in internal controls:

There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Unity Bancorp, Inc. and Subsidiaries

Opinion on the Internal Control Over Financial Reporting

We have audited Unity Bancorp, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company and our report dated March 4, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

Blue Bell, Pennsylvania

March 4, 2020

Item 9B. Other Information:

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance; Compliance with Section 16(a) of the Exchange Act:

The information concerning the directors and executive officers of the Company under the caption “Election of Directors,” and the information under the captions, “Delinquent Section 16(a) Reports,” and "Governance of the Company," in the Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders, is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2020.

Also, certain information regarding executive officers is included under the section captioned “Executive Officers” in Item 4A of this Annual Report on Form 10-K.

Item 11. Executive Compensation:

The information concerning executive compensation under the caption, “Executive Compensation,” in the Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders, is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2020.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters:

The information concerning the security ownership of certain beneficial owners and management under the caption, “Security Ownership of Certain Beneficial Owners and Management,” in the Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2020.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information with respect to the equity securities that are authorized for issuance under the Company’s equity compensation plans as of December 31, 2019.



Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (A)	Weighted-average exercise price of outstanding options, warrants and rights (B)		Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (A)) (C) (1)
Equity compensation stock option plans approved by security holders	614,311	$	14.78	443,100
Equity compensation plans approved by security holders (Restricted stock plan)	108,740	—		—
Equity compensation plans not approved by security holders	N/A	N/A		N/A
Total	723,051	$	12.56	443,100

(1) Represents securities available for issuance under the 2019 Equity Compensation Plan to be allocated between incentive and non-qualified stock options, restricted stock awards, performance units and deferred stock.

Item 13. Certain Relationships and Related Transactions and Director Independence:

The information concerning certain relationships and related transactions under the caption, “Interest of Management and Others in Certain Transactions; Review, Approval or Ratification of Transactions with Related Persons,” in the Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2020.

Item 14. Principal Accountant Fees and Services:

The information concerning principal accountant fees and services, as well as related pre-approval policies, under the caption, “Independent Registered Public Accounting Firm,” in the Proxy Statement for the Company’s 2020 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2020.

PART IV

Item 15. Exhibits and Financial Statement Schedules:

a)DOCUMENTS:


1.	The following Consolidated Financial Statements and Supplementary Data of the Company and subsidiaries are filed as part of this annual report:

•Consolidated Balance Sheets as of December 31, 2019 and 2018

•Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

•Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

•Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and

2017

•Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

•Notes to Consolidated Financial Statements

•Report of Independent Registered Public Accounting Firm


2.	All Financial Statement Schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

b)EXHIBITS:



Exhibit Number		Description of Exhibits
3(i)		Certificate of Incorporation of the Company, as amended (1)
3(ii)		Bylaws of the Company (4)
4(i)		Form of Stock Certificate (4)
4(vi)		Description of the Registrant's Securities
10(i)		1998 Stock Option Plan (2)
10(ii)		Amended and Restated Employment Agreement dated June 4, 2015 with James A. Hughes (10)
10(iii)		Retention Agreement dated September 18, 2017 with Alan J. Bedner (8)
10(iv)		Retention Agreement dated September 18, 2017 with John Kauchak (8)
10(v)		Retention Agreement dated September 18, 2017 with Janice Bolomey (8)
10(vi)		2002 Stock Option Plan (3)
10(vii)		2006 Stock Option Plan (5)
10(viii)		2011 Stock Option Plan and 2011 Stock Bonus Plan (6)
10(ix)		2013 Stock Bonus Plan (7)
10(x)		2015 Stock Option Plan (9)
10(xi)		Amended and Restated Supplemental Executive Retirement Plan dated October 25, 2018 with James A. Hughes (13)
10(xii)		Executive Incentive Retirement Plan dated October 22, 2015 (11)
10(xiii)		2017 Stock Option Plan (12)
10(xiv)		2019 Equity Compensation Plan (14)
21		Subsidiaries of the Registrant
23.1		Consent of RSM US LLP
31.1		Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of President, Chief Executive Officer, and Chief Financial Officer pursuant to Section 906
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

(1)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Report on Form 8-K filed on July 22, 2002 and incorporated by reference herein.
(2)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on March 30, 1998.
(3)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on April 10, 2002.
(4)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Report on Form 8-K filed February 24, 2017.
(5)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on May 4, 2006.
(6)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form S-8 filed on May 26, 2011 and incorporated by reference herein.
(7)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form S-8 filed on July 12, 2013 and incorporated by reference herein.



(8)		Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Report on Form 8-K filed October 10, 2017.
(9)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form S-8 filed on May 22, 2015 and incorporated by reference herein.
(10)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form 8-K filed on June 5, 2015 and incorporated by reference herein.
(11)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form 8-K filed on October 27, 2015 and incorporated by reference herein.
(12)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form S-8 filed on May 22, 2017 and incorporated by reference herein.
(13)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form 8-K filed on October 30, 2018 and incorporated by reference herein.
(14)		Previously filed with the Securities and Exchange Commission as an Exhibit to Form S-8 filed on June 4, 2019 and incorporated by reference herein.

c)Not applicable

Item 16. Form 10-K Summary:

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNITY BANCORP, INC.



By:	/s/ Laureen S. Cook
	Laureen S. Cook
	Senior Vice President
	Interim Principal Financial and Accounting Officer

Date:	March 4, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Name	Title	Date

/s/ David D. Dallas	Chairman of the Board and Director	March 4, 2020
David D. Dallas

/s/ James A. Hughes	President, Chief Executive Officer and Director	March 4, 2020
James A. Hughes

/s/ Laureen S. Cook	Interim Principal Financial and Accounting Officer	March 4, 2020
Laureen S. Cook

/s/ Dr. Mark S. Brody	Director	March 4, 2020
Dr. Mark S. Brody

/s/ Wayne Courtright	Director	March 4, 2020
Wayne Courtright

/s/ Robert H. Dallas, II	Director	March 4, 2020
Robert H. Dallas, II

/s/ Dr. Mary E. Gross	Director	March 4, 2020
Dr. Mary E. Gross

/s/ Peter E. Maricondo	Director	March 4, 2020
Peter E. Maricondo



Signatures (continued)
Name	Title	Date

/s/ Raj Patel	Director	March 4, 2020
Raj Patel

/s/ Donald E. Souders, Jr.	Director	March 4, 2020
Donald E. Souders, Jr.

/s/ Aaron Tucker	Director	March 4, 2020
Aaron Tucker

/s/ Allen Tucker	Director	March 4, 2020
Allen Tucker

Attached files

UNITY BANCORP INC /NJ/ Reports

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