Unity Bancorp(US:UNTY)2021-05-05 18:49markdown [**PART I CONSOLIDATED FINANCIAL INFORMATION**](index=3&type=section&id=PART%20I%20CONSOLIDATED%20FINANCIAL%20INFORMATION) [**ITEM 1 Consolidated Financial Statements (Unaudited)**](index=3&type=section&id=ITEM%201%20Consolidated%20Financial%20Statements%20(Unaudited)) Presents unaudited consolidated financial statements for Q1 2021 and Q4 2020, with detailed notes on accounting policies and financial position [**Consolidated Balance Sheets at March 31, 2021 and December 31, 2020**](index=5&type=section&id=Consolidated%20Balance%20Sheets%20at%20March%2031%2C%202021%20and%20December%2031%2C%202020) Provides a snapshot of the Company's financial position, detailing assets, liabilities, and shareholders' equity at quarter-end Consolidated Balance Sheets (in thousands) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total Assets | $2,004,818 | $1,958,914 | | Cash and cash equivalents | $239,577 | $219,311 | | Net Loans | $1,645,483 | $1,604,712 | | Total Liabilities | $1,823,632 | $1,785,003 | | Total Deposits | $1,628,393 | $1,557,959 | | Total Shareholders' Equity | $181,186 | $173,911 | [**Consolidated Statements of Income for the three months ended March 31, 2021 and 2020**](index=6&type=section&id=Consolidated%20Statements%20of%20Income%20for%20the%20three%20months%20ended%20March%2031%2C%202021%20and%202020) Details the Company's financial performance, including interest income, expenses, and net income for the first quarter of 2021 and 2020 Consolidated Statements of Income (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | Change (in thousands) | YoY Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :-------------------- | :------------- | | Total Interest Income | $20,576 | $19,585 | $991 | 5.1% | | Total Interest Expense | $2,558 | $4,341 | $(1,783) | -41.1% | | Net Interest Income | $18,018 | $15,244 | $2,774 | 18.2% | | Provision for Loan Losses | $500 | $1,500 | $(1,000) | -66.7% | | Total Noninterest Income | $3,726 | $2,545 | $1,181 | 46.4% | | Total Noninterest Expense | $9,802 | $9,323 | $479 | 5.1% | | Net Income | $8,496 | $5,368 | $3,128 | 58.3% | | Net Income per Common Share - Basic | $0.81 | $0.49 | $0.32 | 65.3% | | Net Income per Common Share - Diluted | $0.80 | $0.49 | $0.31 | 63.3% | [**Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020**](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20for%20the%20three%20months%20ended%20March%2031%2C%202021%20and%202020) Presents net income and other comprehensive income components, reflecting the total change in equity from non-owner sources Consolidated Statements of Comprehensive Income (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Net income | $8,496 | $5,368 | | Total other comprehensive income (loss) | $655 | $(986) | | Total comprehensive income | $9,151 | $4,382 | [**Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2021 and 2020**](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity%20for%20the%20three%20months%20ended%20March%2031%2C%202021%20and%202020) Outlines the changes in shareholders' equity, including net income, other comprehensive income, dividends, and stock repurchases Consolidated Statements of Changes in Shareholders' Equity (in thousands) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Balance, beginning of period | $173,911 | $160,709 (Dec 31, 2019) | | Net income | $8,496 | $5,368 | | Other comprehensive income, net of tax | $655 | $(986) | | Dividends on common stock | $(804) | $(841) | | Treasury stock purchased | $(1,349) | $(172) | | Balance, end of period | $181,186 | $164,305 (March 31, 2020) | [**Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020**](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20three%20months%20ended%20March%2031%2C%202021%20and%202020) Summarizes cash inflows and outflows from operating, investing, and financing activities for the first quarter Consolidated Statements of Cash Flows (in thousands) | Activity | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Net cash provided by operating activities | $11,649 | $11,484 | | Net cash used in investing activities | $(29,567) | $(3,858) | | Net cash provided by financing activities | $38,184 | $13,353 | | Increase in cash and cash equivalents | $20,266 | $20,979 | | Cash and cash equivalents, end of period | $239,577 | $178,995 | [**Notes to the Consolidated Financial Statements**](index=10&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) Provides detailed explanations and disclosures supporting the consolidated financial statements, including accounting policies and specific financial instrument information [**NOTE 1. Significant Accounting Policies**](index=10&type=section&id=NOTE%201.%20Significant%20Accounting%20Policies) Outlines the key accounting principles and methods used in preparing the financial statements, including estimates and assumptions - The financial statements are unaudited and prepared in accordance with **U.S. GAAP** and **SEC rules**, with management making estimates and assumptions that could differ from actual results[21](index=21&type=chunk)[22](index=22&type=chunk) - The **COVID-19** pandemic has significantly impacted the Company's markets and may materially and adversely affect future financial condition and results of operations[23](index=23&type=chunk)[24](index=24&type=chunk) [**NOTE 2. Litigation**](index=18&type=section&id=NOTE%202.%20Litigation) Discusses ongoing legal proceedings and management's assessment of their potential impact on the Company's financial position - Management believes current litigation will not materially affect the Company's financial position or results of operations[52](index=52&type=chunk) [**NOTE 3. Net Income per Share**](index=18&type=section&id=NOTE%203.%20Net%20Income%20per%20Share) Presents the calculation of basic and diluted net income per common share for the reporting periods Net Income per Share | Metric | Q1 2021 | Q1 2020 | | :-------------------------------- | :------ | :------ | | Net income | $8,496 | $5,368 | | Weighted average common shares outstanding - Basic | 10,437 | 10,883 | | Weighted average common shares outstanding - Diluted | 10,565 | 11,037 | | Net income per common share - Basic | $0.81 | $0.49 | | Net income per common share - Diluted | $0.80 | $0.49 | [**NOTE 4. Income Taxes**](index=19&type=section&id=NOTE%204.%20Income%20Taxes) Details the Company's income tax expense and effective tax rates, including the impact of specific tax regulations Income Tax Expense (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :-------------------- | :--------------------- | :--------------------- | | Income tax expense | $2,946 | $1,598 | | Effective tax rate | 25.7% | 22.9% | - New Jersey's corporate income surtax of **2.5%** was retroactively extended until December 31, 2023, impacting the Company's tax rate[58](index=58&type=chunk) [**NOTE 5. Other Comprehensive (Loss) Income**](index=19&type=section&id=NOTE%205.%20Other%20Comprehensive%20(Loss)%20Income) Reports components of comprehensive income beyond net income, such as unrealized gains or losses on available-for-sale securities Other Comprehensive (Loss) Income (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Period change in other comprehensive income (loss) | $655 | $(986) | | Balance, end of period (Accumulated other comprehensive (loss) income) | $(499) | $(797) | [**NOTE 6. Fair Value**](index=20&type=section&id=NOTE%206.%20Fair%20Value) Describes the methodologies and categorization of fair value measurements for financial instruments - Fair value measurements are categorized into Level **1** (quoted prices in active markets), Level **2** (observable inputs other than quoted prices), and Level **3** (unobservable inputs)[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk)[70](index=70&type=chunk) Fair Value Measurements (in thousands) | Asset/Liability (in thousands) | March 31, 2021 (Fair Value) | Level 1 | Level 2 | Level 3 | | :----------------------------- | :-------------------------- | :------ | :------ | :------ | | Debt securities available for sale | $32,330 | — | $27,792 | $4,538 | | Equity securities | $2,221 | — | $2,221 | — | | Loans held for sale | $10,392 | — | $10,392 | — | | Interest rate swap agreements | $(219) | — | $(219) | — | | Impaired collateral-dependent loans (non-recurring) | $12,591 | — | — | $12,591 | [**NOTE 7. Securities**](index=32&type=section&id=NOTE%207.%20Securities) Provides details on the Company's debt and equity securities portfolios, including fair values and unrealized gains or losses Securities Portfolio (in thousands) | Security Type (in thousands) | March 31, 2021 (Fair Value) | December 31, 2020 (Fair Value) | | :--------------------------- | :-------------------------- | :----------------------------- | | Total debt securities available for sale | $32,330 | $45,617 | | Total equity securities | $2,221 | $1,954 | - Unrealized losses on debt securities are primarily due to increases in interest rate spreads or interest rates, and are not considered other-than-temporarily impaired as the Company does not intend to sell them before recovery of amortized cost[102](index=102&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk) Net Security Gains (Losses) (in thousands) | Metric (in thousands) | Q1 2021 | Q1 2020 | | :-------------------- | :------ | :------ | | Net security gains (losses) | $310 | $(170) | [**NOTE 8. Loans**](index=38&type=section&id=NOTE%208.%20Loans) Details the composition of the loan portfolio by type and provides information on internal risk rating systems Loan Portfolio by Type (in thousands) | Loan Type (in thousands) | March 31, 2021 | December 31, 2020 | | :----------------------- | :------------- | :---------------- | | SBA loans held for investment | $38,296 | $39,587 | | SBA PPP loans | $169,117 | $118,257 | | Commercial loans | $853,078 | $839,788 | | Residential mortgage loans | $448,149 | $467,586 | | Consumer loans | $60,502 | $66,100 | | Consumer construction loans | $90,497 | $87,164 | | Total loans | $1,668,448 | $1,627,817 | - The Company uses a **1-10 internal risk rating system** for SBA 7(a), SBA 504, and commercial loans, categorizing them as Pass (**1-6**), Special Mention (**7**), Substandard (**8-9**), or Loss (**10**)[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk) - Residential mortgage and consumer loans are categorized as performing or nonperforming[124](index=124&type=chunk) Loan Categories by Risk Rating (in thousands) | Loan Category (in thousands) | March 31, 2021 (Total) | December 31, 2020 (Total) | | :--------------------------- | :--------------------- | :------------------------ | | SBA & Commercial loans - Pass | $1,022,055 | $959,487 | | SBA & Commercial loans - Special mention | $28,464 | $31,264 | | SBA & Commercial loans - Substandard | $9,972 | $6,881 | | Residential mortgage & Consumer loans - Performing | $589,872 | $612,588 | | Residential mortgage & Consumer loans - Nonperforming | $9,276 | $8,262 | [**NOTE 9. Allowance for Loan Losses and Reserve for Unfunded Loan Commitments**](index=50&type=section&id=NOTE%209.%20Allowance%20for%20Loan%20Losses%20and%20Reserve%20for%20Unfunded%20Loan%20Commitments) Explains the methodology for calculating the allowance for loan losses and the reserve for unfunded loan commitments Allowance for Loan Losses (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :-------------------- | :------------- | :---------------- | :------------- | | Allowance for loan losses | $22,965 | $23,105 | $17,376 | | Allowance to total loans | 1.38% | 1.42% | 1.21% | | Net charge-offs (Q1) | $640 | N/A | $519 | - The allowance for loan losses methodology includes specific reserves for individually impaired loans and **TDRs**, and general reserves based on a weighted five-year historical net charge-off rate adjusted for environmental factors[148](index=148&type=chunk)[149](index=149&type=chunk)[295](index=295&type=chunk) Reserve for Unfunded Loan Commitments (in thousands) | Reserve (in thousands) | March 31, 2021 | December 31, 2020 | | :--------------------- | :------------- | :---------------- | | Reserve for unfunded loan commitments | $310 | $288 | [**NOTE 10. New Accounting Pronouncements**](index=54&type=section&id=NOTE%2010.%20New%20Accounting%20Pronouncements) Discusses recently adopted and pending accounting standards and their impact on the Company's financial statements - The Company adopted **ASU 2019-12 (Income Taxes)** and **ASU 2020-01 (Equity Securities)** as of January 1, 2021, with no material impact on its consolidated financial statements[161](index=161&type=chunk)[162](index=162&type=chunk) - The Company is currently evaluating the impact of **ASU 2016-13 (Credit Losses)**, **ASU 2020-03 (Financial Instruments)**, **ASU 2020-04 (Reference Rate Reform)**, and **ASU 2020-06 (Convertible Instruments)** on its financial statements[159](index=159&type=chunk)[163](index=163&type=chunk)[166](index=166&type=chunk) [**NOTE 11. Derivative Financial Instruments and Hedging Activities**](index=58&type=section&id=NOTE%2011.%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) Describes the Company's use of derivative instruments, primarily interest rate swaps, for hedging purposes and their fair value - The Company uses interest rate swap agreements to hedge variable-rate debt, receiving variable interest and paying fixed interest to limit interest payment variability[175](index=175&type=chunk) Derivative Financial Instruments (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :---------------------- | :------------- | :---------------- | | Notional amount (in thousands) | $70,000 | $80,000 | | Number of contracts | 4 | 5 | | Fair value (in thousands) | $(219) | $(1,026) | | Gain (loss) recognized in OCI (Q1) (in thousands) | $807 | $(1,410) | [**NOTE 12. Employee Benefit Plans**](index=62&type=section&id=NOTE%2012.%20Employee%20Benefit%20Plans) Provides information on the Company's employee compensation plans, including stock options, restricted stock, 401(k) contributions, and executive retirement plans Employee Benefit Plan Expenses (in thousands) | Metric (in thousands) | Q1 2021 | Q1 2020 | | :-------------------- | :------ | :------ | | Stock option compensation expense | $207,602 | $192,489 | | Restricted stock compensation expense | $166,349 | $172,904 | | 401(k) contributions | $261 | $185 | - The President and CEO's Supplemental Executive Retirement Plan (SERP) provides supplemental nonqualified retirement benefits, with vesting commencing January 1, 2014, and full vesting by January 1, 2024[187](index=187&type=chunk)[188](index=188&type=chunk) [**NOTE 13. Regulatory Capital**](index=69&type=section&id=NOTE%2013.%20Regulatory%20Capital) Details the Company's and Bank's regulatory capital ratios, including the election to use the Community Bank Leverage Ratio framework - The Bank has opted into the **Community Bank Leverage Ratio (CBLR)** framework, which applies to qualifying community banking organizations with less than **$10 billion** in total consolidated assets[196](index=196&type=chunk)[197](index=197&type=chunk)[198](index=198&type=chunk) Community Bank Leverage Ratio | Entity | March 31, 2021 | December 31, 2020 | | :----- | :------------- | :---------------- | | Company CBLR | 10.19% | 10.09% | | Bank CBLR | 9.85% | 9.80% | [**NOTE 14. Leases**](index=69&type=section&id=NOTE%2014.%20Leases) Outlines the Company's accounting for operating leases, including the recognition of right-of-use assets and lease liabilities - The Company recognizes ROU assets and lease liabilities for operating leases with terms greater than **12 months**, in accordance with **ASU 2016-02**[199](index=199&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) Operating Lease Information (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Operating lease ROU assets | $2,247 | $2,365 | | Operating lease liabilities | $2,302 | $2,400 (approx) | | Operating lease cost (Q1) | $149 | $148 | [**ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations**](index=73&type=section&id=ITEM%202%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes Unity Bancorp, Inc.'s Q1 2021 financial condition and results, covering earnings, balance sheet, COVID-19 impact, and regulatory matters [**Overview**](index=73&type=section&id=Overview) Introduces Unity Bancorp, Inc., its banking services, branch network, and corporate structure - Unity Bancorp, Inc. operates Unity Bank, offering commercial and retail banking services through **19 branches** in New Jersey and Pennsylvania, and online[210](index=210&type=chunk) - The Company's structure includes Unity (NJ) Statutory Trust II (issuing subordinated debentures treated as Tier I Capital) and Unity Risk Management, Inc. (a captive insurance company)[211](index=211&type=chunk) [**COVID-19**](index=73&type=section&id=COVID-19) Discusses the adverse economic impact of the COVID-19 pandemic and the Company's response through customer support - The **COVID-19** pandemic has adversely affected the economy, leading the Company to provide short-term payment deferrals and fee waivers to customers[212](index=212&type=chunk)[213](index=213&type=chunk)[214](index=214&type=chunk) - The full impact of the pandemic is uncertain, with potential for increased nonperforming assets and negative effects on loan demand and services due to reduced commercial activity and consumer spending[215](index=215&type=chunk)[216](index=216&type=chunk) [**CARES Act**](index=75&type=section&id=CARES%20Act) Explains the **Paycheck Protection Program (PPP)** established by the **CARES Act** to support small businesses - The **CARES Act** established the **Paycheck Protection Program (PPP)** to assist small businesses with payroll costs, offering potentially forgivable loans[217](index=217&type=chunk)[218](index=218&type=chunk) Paycheck Protection Program (PPP) Summary | Metric | Year Ended Dec 31, 2020 | As of March 31, 2021 | | :-------------------------------- | :---------------------- | :------------------- | | PPP applications approved | 1,224 | N/A | | PPP fundings (approx.) | $143.0 million | N/A | | PPP loans remaining on balance sheet | N/A | $83.5 million | [**Economic Aid Act**](index=75&type=section&id=Economic%20Aid%20Act) Details the reopening of the **PPP** program under the **Economic Aid Act**, including Second Draw **PPP Loans** - The **Economic Aid Act** reopened the **PPP** program, allowing for Second Draw **PPP Loans** for eligible small businesses with significant revenue losses[220](index=220&type=chunk)[221](index=221&type=chunk) Economic Aid Act PPP Loan Fundings | Metric | As of March 31, 2021 | | :-------------------------------- | :------------------- | | PPP loans funded under Economic Aid Act | 723 | | Total fundings under Economic Aid Act | $85.6 million | [**Deferrals**](index=77&type=section&id=Deferrals) Discusses loan payment deferrals granted due to **COVID-19** and their classification regarding **Troubled Debt Restructurings** - Loan payment deferrals granted due to **COVID-19** are not considered **Troubled Debt Restructurings (TDRs)** if borrowers were current as of December 31, 2019, or prior to deferral[223](index=223&type=chunk)[145](index=145&type=chunk) Loan Payment Deferrals (in thousands) | Loan Type (in thousands) | Unpaid principal balance of deferrals (March 31, 2021) | % total deferrals to total loans | | :----------------------- | :----------------------------------------------------- | :------------------------------- | | SBA loans held for investment | $342 | 0.89% | | Commercial loans | $18,421 | 2.16% | | Residential mortgage loans | $1,400 | 0.31% | | Total loans | $20,163 | 1.21% | [**Consent Order**](index=77&type=section&id=Consent%20Order) Addresses the Consent Order from regulatory bodies requiring Unity Bank to enhance its **BSA/AML** compliance program - Unity Bank is subject to a Consent Order from the **FDIC and NJDOBI**, requiring it to strengthen its **BSA/AML program**[225](index=225&type=chunk) - Compliance expenses related to **BSA/AML remediation** totaled **$168 thousand** for Q1 2021, up from **$63 thousand** in Q1 2020[248](index=248&type=chunk) [**Earnings Summary**](index=79&type=section&id=Earnings%20Summary) Provides an overview of the Company's financial performance, including net income, EPS, and key profitability ratios Earnings Summary | Metric | Q1 2021 | Q1 2020 | Change | | :-------------------------------- | :------ | :------ | :----- | | Net income (in millions) | $8.5 | $5.4 | $3.1 | | Net income per diluted share | $0.80 | $0.49 | $0.31 | | Return on average assets | 1.85% | 1.32% | 0.53% | | Return on average equity | 19.51% | 13.23% | 6.28% | | Efficiency ratio | 45.74% | 51.92% | -6.18% | - Key drivers for the improved earnings include an **18.2% increase** in net interest income, a **46.4% increase** in noninterest income, and a **$1.0 million decrease** in the provision for loan losses[232](index=232&type=chunk) [**Net Interest Income**](index=79&type=section&id=Net%20Interest%20Income) Analyzes the components of net interest income, including the impact of changes in earning assets and interest-bearing liabilities Net Interest Income and Margin | Metric | Q1 2021 | Q1 2020 | | :-------------------- | :------ | :------ | | Net interest income (tax-equivalent) | $18.0 million | $15.2 million | | Net interest margin | 4.09% | 3.92% | | Net interest spread | 3.82% | 3.54% | - The increase in net interest income was driven by a **$2.5 million increase** from higher average earning assets (primarily SBA **PPP**, commercial, and consumer construction loans) and a **$1.8 million decrease** in interest expense due to lower rates on interest-bearing liabilities[238](index=238&type=chunk) Net Interest Income Volume and Rate Analysis (in thousands) | Component (in thousands) | Change due to Volume | Change due to Rate | Net Change | | :----------------------- | :------------------- | :----------------- | :--------- | | Total interest income | $2,519 | $(1,535) | $984 | | Total interest expense | $33 | $(1,816) | $(1,783) | | Net interest income | $2,486 | $281 | $2,767 | [**Provision for Loan Losses**](index=83&type=section&id=Provision%20for%20Loan%20Losses) Discusses the provision for loan losses, highlighting the factors influencing its change between periods Provision for Loan Losses (in thousands) | Metric (in thousands) | Q1 2021 | Q1 2020 | | :-------------------- | :------ | :------ | | Provision for loan losses | $500 | $1,500 | - The decrease in provision for loan losses was primarily due to an improved outlook on credit quality, contrasting with increased provisions in 2020 driven by **COVID-19** related loan default risks[242](index=242&type=chunk) [**Noninterest Income**](index=84&type=section&id=Noninterest%20Income) Examines the various sources of noninterest income and their contributions to overall revenue Noninterest Income (in thousands) | Component (in thousands) | Q1 2021 | Q1 2020 | | :----------------------- | :------ | :------ | | Branch fee income | $295 | $317 | | Service and loan fee income | $625 | $376 | | Gain on sale of SBA loans held for sale, net | $245 | $473 | | Gain on sale of mortgage loans, net | $1,750 | $1,051 | | BOLI income | $129 | $173 | | Net security gains (losses) | $310 | $(170) | | Other income | $372 | $325 | | Total noninterest income | $3,726 | $2,545 | - Increased gains on mortgage loan sales (**$699 thousand increase**) and a positive swing in net security gains (**$480 thousand increase**) were the primary drivers of noninterest income growth[246](index=246&type=chunk) [**Noninterest Expense**](index=85&type=section&id=Noninterest%20Expense) Analyzes the components of noninterest expense, including compensation, processing, occupancy, and professional services Noninterest Expense (in thousands) | Component (in thousands) | Q1 2021 | Q1 2020 | | :----------------------- | :------ | :------ | | Compensation and benefits | $6,063 | $5,439 | | Processing and communications | $807 | $708 | | Occupancy | $706 | $624 | | Professional services | $380 | $269 | | Deposit insurance | $214 | $88 | | BSA expenses | $168 | $63 | | Loan collection & OREO (recoveries) expenses | $(49) | $186 | | Other expenses | $245 | $712 | | Total noninterest expense | $9,802 | $9,323 | - The increase in compensation and benefits was primarily due to higher mortgage commissions on increased origination volume[248](index=248&type=chunk) [**Income Tax Expense**](index=86&type=section&id=Income%20Tax%20Expense) Details the Company's income tax expense and effective tax rate, noting the impact of state tax regulations Income Tax Expense (in thousands) | Metric (in thousands) | Q1 2021 | Q1 2020 | | :-------------------- | :------ | :------ | | Income tax expense | $2,946 | $1,598 | | Effective tax rate | 25.7% | 22.9% | - New Jersey's **2.5% corporate income surtax** was retroactively extended until December 31, 2023, contributing to the higher effective tax rate[251](index=251&type=chunk) [**Financial Condition at March 31, 2021**](index=86&type=section&id=Financial%20Condition%20at%20March%2031%2C%202021) Provides an in-depth analysis of the Company's balance sheet components, including securities, loans, asset quality, and funding [**Securities Portfolio**](index=86&type=section&id=Securities%20Portfolio) Details the composition and changes in the Company's available-for-sale debt and equity securities portfolios Securities Portfolio (in thousands) | Security Type (in thousands) | March 31, 2021 | December 31, 2020 | | :--------------------------- | :------------- | :---------------- | | AFS debt securities | $32,330 | $45,617 | | Equity securities | $2,221 | $1,954 | | Total securities portfolio | $34,551 | $47,571 | - The decrease in AFS debt securities was primarily due to **$7.0 million** from sales of corporate securities and **$6.3 million** from principal payments, maturities, and called bonds[259](index=259&type=chunk) [**Loan Portfolio**](index=88&type=section&id=Loan%20Portfolio) Presents the breakdown of the loan portfolio by type and highlights the proportion secured by real estate Loan Portfolio by Type (in thousands) | Loan Type (in thousands) | March 31, 2021 | December 31, 2020 | | :----------------------- | :------------- | :---------------- | | SBA PPP loans | $169,117 | $118,257 | | Commercial loans | $853,078 | $839,788 | | Residential mortgage loans | $448,149 | $467,586 | | Consumer loans | $60,502 | $66,100 | | Total loans | $1,668,448 | $1,627,817 | - Approximately **84%** of the Company's loan portfolio was secured by real estate at March 31, 2021, down from **87%** at December 31, 2020[281](index=281&type=chunk) [**TDRs**](index=93&type=section&id=TDRs) Discusses **Troubled Debt Restructurings (TDRs)**, their valuation methods, and the absence of specific reserves for performing **TDRs** Troubled Debt Restructurings (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total TDRs | $1,079 | $663 | | Number of TDRs | 3 | 1 | - **TDRs** are evaluated for impairment using discounted cash flows or collateral fair value, but no specific reserves were held for the current **TDRs** as they are performing[283](index=283&type=chunk)[146](index=146&type=chunk) [**Asset Quality**](index=95&type=section&id=Asset%20Quality) Reports on the Company's asset quality, including nonperforming loans, nonperforming assets, and potential problem loans Asset Quality Metrics (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :-------------------- | :------------- | :---------------- | :------------- | | Total nonperforming loans | $11,788 | $12,060 | $9,655 | | Total nonperforming assets | $11,788 | $12,060 | $11,178 | | Nonperforming assets to total assets | 0.59% | 0.62% | 0.64% | | Loans past due 90 days or more and still accruing interest | $2,540 | $449 | $0 | - Potential problem loans, categorized by non-passing risk ratings and performing status, totaled **$37.5 million** at March 31, 2021, an increase of **$791 thousand** from year-end[291](index=291&type=chunk)[293](index=293&type=chunk) [**Allowance for Loan Losses and Reserve for Unfunded Loan Commitments**](index=97&type=section&id=Allowance%20for%20Loan%20Losses%20and%20Reserve%20for%20Unfunded%20Loan%20Commitments) Details the methodology and balances for the allowance for loan losses and the reserve for unfunded loan commitments Allowance for Loan Losses and Reserve (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Allowance for loan losses | $22,965 | $23,105 | | Allowance to total loans | 1.38% | 1.42% | | Net charge-offs (Q1) | $640 | N/A | | Reserve for unfunded loan commitments | $310 | $288 | - The allowance for loan losses is determined quarterly based on specific and general reserves, considering loan portfolio risks, historical charge-off rates, and environmental factors[294](index=294&type=chunk)[295](index=295&type=chunk)[296](index=296&type=chunk) [**Deposits**](index=98&type=section&id=Deposits) Provides a breakdown of the Company's deposit base by type, highlighting the composition of funding sources Deposit Composition (in thousands) | Deposit Type (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Total deposits | $1,628,393 | $1,557,959 | | Savings deposits | $502,300 | $455,449 | | Interest-bearing demand | $217,714 | $204,236 | | Noninterest-bearing demand | $465,511 | $459,677 | | Time deposits | $442,868 | $438,597 | - Deposit composition at March 31, 2021: **30.8% savings**, **28.6% noninterest-bearing demand**, **27.2% time**, and **13.4% interest-bearing demand**[305](index=305&type=chunk) [**Borrowed Funds and Subordinated Debentures**](index=100&type=section&id=Borrowed%20Funds%20and%20Subordinated%20Debentures) Details the Company's borrowed funds, including FHLB advances and subordinated debentures, and their use in managing interest rate risk Borrowed Funds and Subordinated Debentures (in thousands) | Borrowing Type (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | FHLB fixed rate advances | $40,000 | $40,000 | | FHLB adjustable rate advances | $20,000 | $30,000 | | FHLB overnight advances | $110,000 | $130,000 | | Subordinated debentures | $10,310 | $10,310 | | Total borrowed funds and subordinated debentures | $180,310 | $210,310 | - The Company uses swap instruments to modify FHLB adjustable rate advances to fixed rates, managing interest rate uncertainty[308](index=308&type=chunk)[310](index=310&type=chunk) [**Interest Rate Sensitivity**](index=102&type=section&id=Interest%20Rate%20Sensitivity) Explains how the Company measures and manages the impact of interest rate changes on its equity and financial performance - The Company uses **Modified Duration of Equity** and **Economic Value of Portfolio Equity (EVPE)** models to measure the impact of interest rate changes on equity[312](index=312&type=chunk) Economic Value of Portfolio Equity (EVPE) Sensitivity | Metric (EVPE with 200 bps rate shock) | March 31, 2021 | December 31, 2020 | | :------------------------------------ | :------------- | :---------------- | | Increase in rising-rate environment | 4.2% | 4.1% | | Decrease in falling-rate environment | 10.7% | 7.5% | - All **EVPE** variances at March 31, 2021, were within the Board-approved guidelines of **+/- 20.0%**[312](index=312&type=chunk) [**Liquidity**](index=102&type=section&id=Liquidity) Describes the Company's liquidity management strategy and primary sources of funds to meet operational needs - The Company's liquidity is managed to meet loan demand, deposit outflows, and interest rate opportunities, with primary sources including deposits, loan payments, security sales, and borrowings[313](index=313&type=chunk)[314](index=314&type=chunk) Cash and Cash Equivalents (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $239,577 | $219,311 | - Operating activities provided **$11.6 million** in net cash, investing activities used **$29.6 million** (primarily for SBA **PPP loans**), and financing activities provided **$38.2 million** (due to deposit growth and new borrowings) in Q1 2021[316](index=316&type=chunk)[317](index=317&type=chunk)[318](index=318&type=chunk) [**Regulatory Capital**](index=104&type=section&id=Regulatory%20Capital) Details the Company's and Bank's regulatory capital ratios and their adherence to the **Community Bank Leverage Ratio** framework - The Bank has elected to use the **Community Bank Leverage Ratio (CBLR)** framework, which simplifies capital requirements for qualifying community banking organizations with less than **$10 billion** in total consolidated assets[324](index=324&type=chunk)[325](index=325&type=chunk)[326](index=326&type=chunk) Regulatory Capital Ratios | Entity | March 31, 2021 | December 31, 2020 | | :----- | :------------- | :---------------- | | Company CBLR | 10.19% | 10.09% | | Bank CBLR | 9.85% | 9.80% | [**Shareholders' Equity**](index=106&type=section&id=Shareholders%27%20Equity) Explains the changes in total shareholders' equity, driven by net income, comprehensive income, and share repurchases Total Shareholders' Equity (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total shareholders' equity | $181,186 | $173,911 | - The increase was primarily due to **$8.5 million** in net income and **$655 thousand** in accumulated other comprehensive income, partially offset by **$1.3 million** in treasury stock purchases and **$804 thousand** in dividends paid[327](index=327&type=chunk) [**Repurchase Plan**](index=106&type=section&id=Repurchase%20Plan) Describes the Company's common stock repurchase plan, including authorized shares and shares repurchased - On February 4, 2021, the Company authorized a new plan to repurchase up to **750 thousand shares** of common stock[328](index=328&type=chunk) Share Repurchase Activity | Metric | Q1 2021 | | :-------------------------------- | :------ | | Shares repurchased | 70,000 | | Average price paid per share | $19.29 | | Shares available for repurchase | 701,000 | [**Impact of Inflation and Changing Prices**](index=108&type=section&id=Impact%20of%20Inflation%20and%20Changing%20Prices) Assesses the relative impact of interest rates versus general inflation on the Company's financial performance - Interest rates have a greater impact on the Company's performance than general inflation due to the monetary nature of its assets and liabilities[332](index=332&type=chunk) [**ITEM 3 Quantitative and Qualitative Disclosures about Market Risk**](index=108&type=section&id=ITEM%203%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Reports no significant changes in the Company's market risk assessment for Q1 2021 compared to the prior annual report - No significant changes in market risk assessment were reported for Q1 2021[333](index=333&type=chunk) [**ITEM 4 Controls and Procedures**](index=108&type=section&id=ITEM%204%20Controls%20and%20Procedures) Management confirmed effective disclosure controls and no significant changes in internal control over financial reporting for Q1 2021 - The Company's disclosure controls and procedures were deemed effective as of March 31, 2021[334](index=334&type=chunk) - No significant change in the Company's internal control over financial reporting occurred during the quarterly period[334](index=334&type=chunk) [**PART II OTHER INFORMATION**](index=108&type=section&id=PART%20II%20OTHER%20INFORMATION) [**ITEM 1 Legal Proceedings**](index=108&type=section&id=ITEM%201%20Legal%20Proceedings) The Company does not expect material adverse effects from ordinary course legal proceedings on its business or financial condition - The Company does not expect any pending legal proceedings to have a material adverse effect on its business or financial condition[334](index=334&type=chunk) [**ITEM 1A Risk Factors**](index=110&type=section&id=ITEM%201A%20Risk%20Factors) Risk factors for Q1 2021 are consistent with those reported in the Company's **Form 10-K** for the year ended December 31, 2020 - Risk factors for Q1 2021 are consistent with those reported in the Company's **Form 10-K** for the year ended December 31, 2020[335](index=335&type=chunk) [**ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds**](index=110&type=section&id=ITEM%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details on unregistered sales of equity securities and use of proceeds are provided in the Management's Discussion and Analysis - Information on unregistered sales of equity securities and use of proceeds is detailed under the "Shareholders Equity - Repurchase Plan" section in Item **2**[336](index=336&type=chunk) [**ITEM 3 Defaults upon Senior Securities**](index=110&type=section&id=ITEM%203%20Defaults%20upon%20Senior%20Securities) No defaults upon senior securities were reported for the period - No defaults upon senior securities[336](index=336&type=chunk) [**ITEM 4 Mine Safety Disclosures**](index=110&type=section&id=ITEM%204%20Mine%20Safety%20Disclosures) This item is not applicable to the Company - Mine Safety Disclosures are not applicable[337](index=337&type=chunk) [**ITEM 5 Other Information**](index=110&type=section&id=ITEM%205%20Other%20Information) No other information was reported for the period - No other information[337](index=337&type=chunk) [**ITEM 6 Exhibits**](index=111&type=section&id=ITEM%206%20Exhibits) Lists exhibits filed with the **Form 10-Q**, including **CEO and CFO** certifications and **Inline XBRL documents** - The report includes certifications by the **CEO and CFO** (Exhibits **31.1**, **31.2**, **32.1**) as required by the **Sarbanes-Oxley Act of 2002**[338](index=338&type=chunk)[340](index=340&type=chunk) - **Inline XBRL documents** (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents, and Cover Page Interactive Data File) are included as exhibits[340](index=340&type=chunk) [**EXHIBIT INDEX**](index=112&type=section&id=EXHIBIT%20INDEX) Provides a comprehensive list of all exhibits accompanying the **Form 10-Q** filing [**SIGNATURES**](index=113&type=section&id=SIGNATURES) - The report was signed by **George Boyan**, **Executive Vice President and Chief Financial Officer**, on May 5, 2021[343](index=343&type=chunk)