Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2025 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2025. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as "believe", "expect", "anticipate", "should", "planned", "estimated" and "potential". Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company's Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent filings with the Securities and Exchange Commission, the following: changes in general, economic and market conditions, including the impact of inflation, tariffs, legislative and regulatory conditions and the development of an interest rate environment that adversely affects Unity Bancorp, Inc.'s interest rate spread or other income anticipated from operations and investments and the impact of health or other emergencies on our employees, operations and customers.
Overview
Unity Bancorp, Inc. (the "Parent Company") is a bank holding company incorporated in New Jersey and registered under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when consolidated with the Parent Company, the "Company") is chartered by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through online banking platforms and its robust branch network located throughout Bergen, Hunterdon, Middlesex, Morris, Ocean, Somerset, Union and Warren counties in New Jersey and Northampton County in Pennsylvania. These services include the acceptance of demand, savings and time deposits and the extension of consumer, real estate, Small Business Administration ("SBA") and other commercial credits. The Bank has multiple subsidiaries used to hold part of its investment and loan portfolios and to hold other real estate owned if the Bank takes title to property securing loans.
Earnings Summary
Net income totaled $14.3 million, or $1.40 per diluted share for the three months ended March 31, 2026, compared to $11.6 million, or $1.13 per diluted share for the same period in 2025. Return on average assets and return on average common equity for the quarter were 2.04 percent and 16.38 percent, respectively, compared to 1.83 percent and 15.56 percent for the same period in 2025.
Current quarter highlights include:
| ● | Net interest income increased 12.8 percent compared to the prior year's quarter, primarily due to the increased volume and yield on loans and decreased cost of time deposits, partially offset by volume of interest-bearing deposits. |
| ● | Net interest margin equaled 4.53 percent this quarter compared to 4.46 percent in the prior year's quarter. The increase was primarily due to the decrease in cost of interest-bearing liabilities. |
| ● | The provision for credit losses on loans and off-balance sheet items was $1.0 million for the three months ended March 31, 2026, compared to $1.3 million in provision for credit losses on loans and off-balance sheet items for the prior year's quarter. The decrease was primarily due to qualitative adjustments. |
| ● | Noninterest income increased 36.9 percent compared to the prior year's first quarter, primarily due to increased gains on sale of SBA loans and mortgage loans. |
| ● | Noninterest expense increased 11.6 percent compared to the prior year's first quarter, primarily due to increases in compensation and benefits and loan related expenses, partially offset by a decrease in director fees. |
| ● | The effective tax rate was 22.7 percent compared to 24.8 percent in the prior year's first quarter. During the first quarter of 2026, Unity purchased $5.1 million of tax credits, resulting in $0.4 million of tax savings. The Company intends to evaluate tax credit opportunities on an ongoing basis, subject to market availability and regulatory considerations. |
The Company's performance ratios may be found in the table below.
| | | | | | | |
| | For the three months ended March 31, | |||||
| | 2026 | | 2025 | |||
Net income per common share - Basic (1) | | $ | 1.43 | | $ | 1.15 | |
Net income per common share - Diluted (2) | | $ | 1.40 | | $ | 1.13 | |
Return on average assets | | 2.04 | % | 1.83 | % | ||
Return on average equity (3) | | 16.38 | % | 15.56 | % | ||
Dividend payout ratio (4) | | | 11.43 | % | | 12.39 | % |
Average equity to average assets (5) | | 12.44 | % | 11.78 | % | ||
| (1) | Defined as net income divided by weighted average shares outstanding. |
| (2) | Defined as net income divided by the sum of the weighted average shares and the potential dilutive impact of the exercise of outstanding options. |
| (3) | Defined as annualized net income divided by average shareholders' equity. |
| (4) | Defined as dividends declared per share divided by diluted net income per share. |
| (5) | Defined as average equity divided by average total assets. |
Net Interest Income
The primary source of the Company's operating income is net interest income, which is the difference between interest and dividends earned on interest-earning assets and fees earned on loans and interest paid on interest-bearing liabilities. Interest-earning assets include loans to individuals and businesses, investment securities and interest-earning deposits. Interest-bearing liabilities include interest-bearing demand, savings, brokered and time deposits, FHLB advances and other borrowings.
During the three months ended March 31, 2026, tax-equivalent net interest income amounted to $30.7 million, an increase of $3.5 million or 12.8 percent when compared to the same period in 2025. The net interest margin increased 7 basis points to 4.53 percent for the three months ended March 31, 2026, compared to 4.46 percent for the same period in 2025.
During the three months ended March 31, 2026, tax-equivalent interest income was $45.2 million, an increase of $4.4 million or 10.7 percent when compared to the same period in 2025. This increase was mainly driven by increases in the average balance of loans, yield of loans and volume of interest-bearing deposits.
| ● | Of the $4.4 million increase in interest income on a tax-equivalent basis, $4.4 million was due to the increased average volume of interest-earning assets. |
| ● | The average volume of interest-earning assets increased $275.4 million to $2.8 billion for the first quarter of 2026 compared to $2.5 billion in 2025. This was due primarily to a $268.8 million increase in average loans and $31.2 million increase in interest-bearing deposits. The increase was offset by a $24.5 million decrease in average investments. |
| ● | The yield on total interest-earning assets decreased 2 basis points to 6.66 percent for the three months ended March 31, 2026, when compared to the same period in 2025. The yield on the loan portfolio increased 2 basis points to 6.70 percent. |
Total interest expense was $14.4 million for the three months ended March 31, 2026, an increase of $0.9 million or 6.6 percent compared to the same period in 2025. This increase was driven by the increased average volume of interest-bearing deposits, partially offset by decreased cost of time deposits.
| ● | The $0.9 million increase in interest expense resulted from an increase of $1.4 million in volume of interest-bearing deposits, partially offset by a $0.5 million decrease in rate on average interest-bearing liabilities. |
| ● | The average cost of interest-bearing liabilities decreased 12 basis points to 2.92 percent for the three months ended March 31, 2026 compared to 2025. |
| ● | Interest-bearing liabilities averaged $2.0 billion during the three months ended March 31, 2026, an increase of $200.5 million, compared to the same period in 2025. The increase in interest-bearing liabilities was primarily due to an increase in savings deposits, brokered deposits, time deposits and interest-bearing demand deposits, partially offset by a decrease in borrowed funds. |
Consolidated Average Balance Sheets
(Dollar amounts in thousands, interest amounts and interest rates/yields on a fully tax-equivalent basis, assuming a federal tax rate of 21 percent.)
| | | | | | | | | | | | | | | | | | |
| | For the three months ended | ||||||||||||||||
| | March 31, 2026 | | March 31, 2025 | ||||||||||||||
| | Average | | | | | | | | Average | | | | | | | ||
| | Balance | | Interest | | | Rate/Yield | | Balance | | Interest | | Rate/Yield | |||||
ASSETS | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 61,424 | | $ | 558 | | | 3.69 | % | $ | 30,259 | | $ | 332 | | 4.45 | % |
FHLB stock | | | 7,214 | | | 134 | | | 7.53 | | | 7,459 | | | 182 | | 9.90 | |
Securities: | | | | | | | | | | | | | | | | | | |
Taxable | | | 118,488 | | | 1,409 | | | 4.76 | | | 142,847 | | | 1,786 | | 5.00 | |
Tax-exempt | | | 1,486 | | | 21 | | | 5.60 | | | 1,596 | | | 18 | | 4.59 | |
Total securities (A) | | | 119,974 | | | 1,430 | | | 4.77 | | | 144,443 | | | 1,804 | | 5.00 | |
Loans: | | | | | | | | | | | | | | | | | | |
SBA loans | | | 41,576 | | | 844 | | | 8.12 | | | 49,638 | | | 934 | | 7.53 | |
Commercial loans | | | 1,528,022 | | | 25,016 | | | 6.55 | | | 1,306,052 | | | 21,314 | | 6.53 | |
Commercial construction loans | | | 152,561 | | | 3,038 | | | 7.96 | | | 140,946 | | | 2,946 | | 8.36 | |
Residential mortgage loans | | | 678,359 | | | 10,913 | | | 6.44 | | | 639,742 | | | 9,947 | | 6.22 | |
Consumer loans | | | 84,037 | | | 1,424 | | | 6.78 | | | 75,156 | | | 1,346 | | 7.16 | |
Residential construction loans | | | 80,226 | | | 1,825 | | | 9.10 | | | 84,414 | | | 1,996 | | 9.46 | |
Total loans (B) | | | 2,564,781 | | | 43,060 | | | 6.72 | | | 2,295,948 | | | 38,483 | | 6.70 | |
Total interest-earning assets | | $ | 2,753,393 | | $ | 45,182 | | | 6.66 | % | $ | 2,478,109 | | $ | 40,801 | | 6.68 | % |
| | | | | | | | | | | | | | | | | | |
Noninterest-earning assets: | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | | 24,735 | | | | | | | | | 23,117 | | | | | | |
Allowance for credit losses | | | (33,007) | | | | | | | | | (27,455) | | | | | | |
Other assets | | | 98,891 | | | | | | | | | 91,553 | | | | | | |
Total noninterest-earning assets | | | 90,619 | | | | | | | | | 87,215 | | | | | | |
Total assets | | $ | 2,844,012 | | | | | | | | $ | 2,565,324 | | | | | | |
| | | | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | | $ | 385,444 | | $ | 1,910 | | | 2.01 | % | $ | 341,991 | | $ | 1,622 | | 1.92 | % |
Savings deposits | | | 563,220 | | | 3,160 | | | 2.28 | | | 495,051 | | | 2,593 | | 2.12 | |
Brokered deposits | | | 265,877 | | | 2,267 | | | 3.46 | | | 213,517 | | | 1,787 | | 3.39 | |
Time deposits | | | 685,355 | | | 6,128 | | | 3.63 | | | 637,936 | | | 6,415 | | 4.08 | |
Total interest-bearing deposits | | | 1,899,896 | | | 13,465 | | | 2.87 | | | 1,688,495 | | | 12,417 | | 2.98 | |
Borrowed funds and subordinated debentures | | | 108,231 | | | 984 | | | 3.64 | | | 119,135 | | | 1,133 | | 3.80 | |
Total interest-bearing liabilities | | $ | 2,008,127 | | $ | 14,449 | | | 2.92 | % | $ | 1,807,630 | | $ | 13,550 | | 3.04 | % |
| | | | | | | | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Noninterest-bearing demand deposits | | | 457,603 | | | | | | | | | 425,569 | | | | | | |
Other liabilities | | | 24,594 | | | | | | | | | 29,833 | | | | | | |
Total noninterest-bearing liabilities | | | 482,197 | | | | | | | | | 455,402 | | | | | | |
Total shareholders' equity | | | 353,688 | | | | | | | | | 302,292 | | | | | | |
Total liabilities and shareholders' equity | | $ | 2,844,012 | | | | | | | | $ | 2,565,324 | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net interest spread | | | | | $ | 30,733 | | | 3.74 | % | | | | $ | 27,251 | | 3.64 | % |
Tax-equivalent basis adjustment | | | | | | (3) | | | | | | | | | - | | | |
Net interest income | | | | | $ | 30,730 | | | | | | | | $ | 27,251 | | | |
Net interest margin | | | | | | | | | 4.53 | % | | | | | | | 4.46 | % |
(A) Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis, assuming a federal tax rate of 21 percent.
(B) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.
The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volume and rates over the periods presented. Changes that are not solely due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Amounts have been computed on a tax-equivalent basis, assuming a federal income tax rate of 21 percent.
| | | | | | | | | |
| | For the three months ended March 31, 2026 versus March 31, 2025 | |||||||
| | Increase (decrease) due to change in: | |||||||
(In thousands on a tax-equivalent basis) | | Volume Mix | | Rate | | Net | |||
Interest income: | | | | | | | | | |
Interest-bearing deposits | | $ | 291 | | $ | (65) | | $ | 226 |
FHLB stock | | (6) | | (42) | | (48) | |||
Securities | | (294) | | (80) | | (374) | |||
Loans | | 4,363 | | 214 | | 4,577 | |||
Total interest income | | $ | 4,354 | | $ | 27 | | $ | 4,381 |
Interest expense: | | | | | | | |||
Demand deposits | | $ | 210 | | $ | 78 | | $ | 288 |
Savings deposits | | 366 | | 201 | | 567 | |||
Brokered deposits | | | 443 | | | 37 | | | 480 |
Time deposits | | 454 | | (741) | | (287) | |||
Total interest-bearing deposits | | 1,473 | | (425) | | 1,048 | |||
Borrowed funds and subordinated debentures | | (102) | | (47) | | (149) | |||
Total interest expense | | 1,371 | | (472) | | 899 | |||
Net interest income - fully tax-equivalent | | $ | 2,983 | | $ | 499 | | $ | 3,482 |
Decrease in tax-equivalent adjustment | | | | | | | | (3) | |
Net interest income | | | | | | | | $ | 3,479 |
Provision for Credit Losses
The provision for credit losses for loans was $1.0 million during the three months ended March 31, 2026, compared to $1.4 million for the same period in 2025.
The provision for credit losses for off-balance sheet exposures was $5 thousand for the three months ended March 31, 2026, compared to a release of $41 thousand for the same period in 2025.
There was no provision for credit losses on securities for the three months ended March 31, 2026 and 2025.
Each period's credit loss provision is the result of Management's analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current and expected economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions "Financial Condition - Asset Quality" and "Financial Condition - Allowance for Credit
Losses and Reserve for Unfunded Loan Commitments." The current provision is considered appropriate under Management's assessment of the adequacy of the allowance for credit losses.
Income Tax Expense
For the quarter ended March 31, 2026, the Company reported income tax expense of $4.2 million for an effective tax rate of 22.7 percent, compared to income tax expense of $3.8 million and an effective tax rate of 24.8 percent for the prior year's quarter. During the first quarter of 2026, Unity purchased $5.1 million of tax credits, resulting in $0.4 million of tax savings.
Financial Condition at March 31, 2026
Total assets increased $60.7 million or 2.0 percent, to $3.0 billion at March 31, 2026, when compared to year end 2025. This increase was primarily due to increases of $56.9 million in gross loans, $12.6 million in cash and cash equivalents, and $0.4 million in accrued interest receivable, partially offset by a decrease of $8.7 million in securities.
Total shareholders' equity increased $12.5 million, when compared to year end 2025, primarily due to earnings and an increase in common stock, partially offset by dividends paid on common stock and the repurchase of shares during the three months ended March 31, 2026.
These fluctuations are discussed in further detail in the paragraphs that follow.
Securities Portfolio
The Company's securities portfolio consists of AFS debt securities, HTM debt securities and equity investments. Management determines the appropriate security classification of AFS and HTM at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.
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, state and political subdivisions, mortgage-backed securities, asset-backed securities and corporate and other securities.
AFS debt securities totaled $63.3 million at March 31, 2026, a decrease of $7.6 million or 10.7 percent, compared to $70.9 million at December 31, 2025. This net decrease was the result of:
| ● | $7.2 million in principal payments, calls and maturities; |
| ● | $0.2 million in unrealized losses recognized through earnings; and |
| ● | $0.2 million of depreciation in market value of the portfolio. At March 31, 2026, the portfolio had a net unrealized loss of $1.8 million compared to a net unrealized loss of $1.6 million at December 31, 2025. These net unrealized losses are reflected net of tax in shareholder's equity as accumulated other comprehensive loss. |
The weighted average life of AFS debt securities, adjusted for prepayments, amounted to 4.9 years and 5.1 years at March 31, 2026 and December 31, 2025, respectively. The effective duration of AFS debt securities amounted to 2.0 and 1.9 years at March 31, 2026 and December 31, 2025, respectively.
HTM debt securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is primarily comprised of obligations of U.S. Government, state and political subdivisions and mortgage-backed securities.
HTM debt securities were $36.6 million at March 31, 2026 and December 31, 2025.
The weighted average life of HTM securities, adjusted for prepayments, amounted to 12.9 years and 14.8 years at March 31, 2026 and December 31, 2025, respectively. As of March 31, 2026 and December 31, 2025, the fair value of HTM securities was $30.4 million. The effective duration of HTM securities amounted to 10.3 years and 10.7 years at March 31, 2026 and December 31, 2025, respectively.
Equity securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and 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") mutual fund investments and the equity holdings of other financial institutions.
Equity securities totaled $15.3 million at March 31, 2026, a decrease of $1.3 million or 7.5 percent, compared to $16.6 million at December 31, 2025. This net decrease was the result of:
| ● | $1.8 million in sales; |
| ● | $0.5 million in unrealized losses; |
| ● | Partially offset by $0.6 million in realized gains; and |
| ● | $0.4 million in purchases |
Securities with a carrying value of $69.0 million and $69.2 million at March 31, 2026 and December 31, 2025, respectively, were held at the FHLB or FRB and were pledged for borrowing purposes; however, there were no securities borrowed against at March 31, 2026 and December 31, 2025.
Approximately 61 percent of the total debt security investment portfolio had a fixed rate of interest at March 31, 2026 compared to 65 percent at March 31, 2025.
See Note 6 to the accompanying Consolidated Financial Statements for more information regarding Securities.
Loan Portfolio
The loan portfolio, which represents the Company's largest asset group, is a significant source of both interest and fee income. The portfolio consists of SBA, commercial, commercial construction, residential mortgage, consumer and residential construction loans. Each of these segments is subject to differing levels of credit and interest rate risk.
Total loans increased $56.9 million or 2.2 percent to $2.6 billion at March 31, 2026, compared to year end 2025. Commercial, commercial construction, residential construction, loans held for sale and consumer loans increased by $41.1 million, $12.0 million, $10.6 million, $3.1 million and $0.4 million, respectively. This was offset by decreases of $8.5 million and $1.8 million in residential mortgage and SBA loans, respectively.
Below is a table of the geographic loan allocation of the Bank's Commercial loan portfolio as of March 31, 2026:
| | | | | | | | | |
| | New Jersey | | New York | | Pennsylvania | | Other | |
Commercial loans | | | | | | | | | |
SBA 504 | | 73.5 | % | 1.4 | % | 25.0 | % | 0.1 | % |
Commercial & industrial | | 91.8 | | 2.0 | | 4.8 | | 1.5 | |
Commercial mortgage - owner occupied | | 84.1 | | 8.4 | | 4.7 | | 3.1 | |
Commercial mortgage - nonowner occupied | | 83.0 | | 6.5 | | 4.2 | | 6.3 | |
Other | | 85.0 | | 14.7 | | 0.3 | | - | |
Commercial construction loans | | 88.1 | | 5.0 | | 6.9 | | - | |
Total | | 84.6 | % | 6.9 | % | 5.1 | % | 3.4 | % |
Average loans increased $268.8 million or 11.7 percent to $2.6 billion for the three months ended March 31, 2026 from $2.3 billion for the same period in 2025. The increase in average loans was due to increases in average commercial, residential mortgages, commercial construction and consumer loans, partially offset by decreases in average residential construction and SBA loans. The yield on the overall loan portfolio increased 2 basis points to 6.72 percent for the three months ended March 31, 2026 when compared to the same period in the prior year.
SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made for the purposes of providing working capital or financing the purchase of equipment, inventory or commercial real estate. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the SBA provides the guarantee. The deficiency may be a higher loan to value ("LTV") ratio, lower debt service coverage ("DSC") ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for startup businesses where there is no history or financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The guaranteed portion of the Company's SBA loans may be sold in the secondary market.
SBA loans held for sale, carried at the lower of cost or market, amounted to $8.2 million at March 31, 2026, an increase of $0.2 million from $8.0 million at December 31, 2025. SBA 7(a) loans held for investment amounted to $32.5 million at March 31, 2026, a decrease of $1.8 million from $34.3 million at December 31, 2025. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was 8.12 percent for the three months ended March 31, 2026 compared to 7.53 percent for the same period in the prior year. The Company sold $4.0 million of SBA loans during the three months ended March 31, 2026.
The guarantee rates on SBA 7(a) loans range from 50 percent to 90 percent, with the majority of the portfolio having a guarantee rate of 75 percent at origination. The guarantee rates are determined by the SBA and can vary from year to year depending on government funding and the goals of the SBA program. Approximately $49.4 million and $49.2 million in SBA loans were sold but serviced by the Bank at March 31, 2026 and December 31, 2025, respectively, and are not included on the Company's Balance Sheet. There is no relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries on the Company's SBA 7(a) loans. Charge-offs taken on SBA 7(a) loans effect the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.
Commercial loans are generally made in the Company's marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $1.6 billion at March 31, 2026, an increase of $41.1 million from year end 2025. The yield on commercial loans was 6.55 percent for the three months ended March 31, 2026, compared to 6.53 percent for the same period in 2025. The SBA 504 program, which consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property, is included in the Commercial loan portfolio. The Commercial Real Estate sub-category includes both owner occupied and non-owner occupied commercial mortgages.
Commercial construction loans amounted to $159.2 million at March 31, 2026, an increase of $12.0 million from the $147.2 million at 2025. The yield on commercial construction loans was 7.96 percent for the three months ended March 31, 2026, compared to 8.36 percent for the same period in 2025.
Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amounted to $668.7 million at March 31, 2026, a decrease of $8.5 million from year end 2025. Sales of conforming mortgage loans totaled $19.3 million for the three months ended March 31, 2026, compared to sales of $7.5 million in the prior year period. The yield on residential mortgages was 6.44 percent for the three months ended March 31, 2026, compared to 6.22 percent for the same period in 2025. Residential mortgage loans maintained in portfolio are generally to individuals that do not qualify for conventional financing. In extending credit to this category of borrowers, the Bank considers other mitigating factors such as credit history, equity and liquid reserves of the borrower. As a result, the residential mortgage loan portfolio of the Bank includes adjustable rate mortgages with rates that exceed the rates on conventional fixed-rate mortgage loan products but which are not considered high priced mortgages.
Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements and other personal needs, and are generally secured by 1 to 4 family residences. These loans amounted to $85.6 million at March 31, 2026, an increase of $0.4 million from year end 2025. The yield on consumer loans was 6.78 percent for the three months ended March 31, 2026, compared to 7.16 percent for the same period in 2025.
Residential construction loans consist of short-term loans for the purpose of funding the costs of building a home. These loans amounted to $83.9 million at March 31, 2026, an increase of $10.6 million from year end 2025. The yield on residential construction loans was 9.10 percent for the three months ended March 31, 2026, compared to 9.46 percent for the same period in 2025.
There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio.
In the normal course of business, the Company may originate loan products whose terms could give rise to additional credit risk. Interest-only loans, loans with high LTV, construction loans with payments made from interest reserves and multiple loans supported by the same collateral (e.g. home equity loans) are examples of such products. However, these products are not material to the Company's financial position and are closely managed via credit controls designed to mitigate their additional inherent risk. Management does not believe that these products create a concentration of credit risk in the Company's loan portfolio. The Company does not have any option adjustable rate mortgage loans.
The majority of the Company's loans are secured by real estate. Declines in the market values of real estate in the Company's trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. At March 31, 2026 and December 31, 2025, approximately 96 percent of the Company's loan portfolio was secured by real estate.
The following table sets forth the classification of loans by loan type, including unearned fees and deferred costs and excluding the allowance for credit losses as of March 31, 2026 and December 31, 2025:
| | | | | | | | | | |
In thousands, except percentages | | March 31, 2026 | | % | | December 31, 2025 | | % | ||
Loans held for sale | | $ | 12,557 | | 0.5% | | $ | 9,490 | | 0.4% |
SBA loans | | | 32,499 | | 1.2% | | | 34,259 | | 1.3% |
Commercial loans | | | | | | | | | | |
SBA 504 | | | 43,254 | | 1.7% | | | 43,802 | | 1.7% |
Commercial & industrial | | | 185,207 | | 7.1% | | | 183,163 | | 7.2% |
Commercial mortgage - owner occupied | | | 681,803 | | 26.2% | | | 660,427 | | 26.0% |
Commercial mortgage - nonowner occupied | | | 561,057 | | 21.6% | | | 531,954 | | 20.9% |
Other | | | 87,845 | | 3.4% | | | 98,686 | | 3.9% |
Total commercial loans | | | 1,559,166 | | 60.0% | | | 1,518,032 | | 59.7% |
Commercial construction loans | | | 159,200 | | 6.1% | | | 147,215 | | 5.8% |
Residential mortgage loans | | | | | | | | | | |
Primary residence | | | 467,329 | | 18.0% | | | 472,482 | | 18.6% |
Secondary residence | | | 67,835 | | 2.6% | | | 71,656 | | 2.8% |
Investor property | | | 133,575 | | 5.1% | | | 133,083 | | 5.2% |
Total residential mortgage loans | | | 668,739 | | 25.7% | | | 677,221 | | 26.6% |
Consumer loans | | | | | | | | | | |
Home equity | | | 82,980 | | 3.2% | | | 82,488 | | 3.2% |
Consumer other | | | 2,634 | | 0.1% | | | 2,731 | | 0.1% |
Total consumer loans | | | 85,614 | | 3.3% | | | 85,219 | | 3.3% |
Residential construction loans | | | 83,881 | | 3.2% | | | 73,277 | | 2.9% |
Total gross loans | | $ | 2,601,656 | | 100.0% | | $ | 2,544,713 | | 100.0% |
For additional information on loans, see Note 7 to the Consolidated Financial Statements.
Asset Quality
Nonaccrual loans were $30.6 million at March 31, 2026, a $0.8 million increase from $29.8 million at December 31, 2025 and a $13.8 million increase from $16.8 million at March 31, 2025, respectively. Since year end 2025, nonaccrual loans in the residential mortgage and consumer segments increased, offset by a decrease in nonaccrual loans in the SBA, commercial and residential construction segments. In addition, there was $0.1 million in loans past due 90 days or more and still accruing interest at March 31, 2026, compared to none at December 31, 2025 and 1.1 million at March 31, 2025.
The following table set forth an analysis of nonaccrual loans as of March 31, 2026 based off of geographical location:
| | | | | | | | | | | | | | | | | |
| | | | | | | | Residential | | | | | | Residential | | | |
(in thousands) | | SBA | | | Commercial | | | Mortgage | | | Consumer | | | Construction | | | Total |
Ending balance: | | | | | | | | | | | | | | | | | |
New Jersey | $ | 1,111 | | $ | 18,375 | | $ | 5,954 | | $ | 1,502 | | $ | 128 | | $ | 27,070 |
New York | | 451 | | | - | | | 1,150 | | | - | | | - | | | 1,601 |
Pennsylvania | | - | | | - | | | 1,811 | | | 55 | | | - | | | 1,866 |
Other | | 83 | | | - | | | - | | | - | | | - | | | 83 |
Total | $ | 1,645 | | $ | 18,375 | | $ | 8,915 | | $ | 1,557 | | $ | 128 | | $ | 30,620 |
The Company also monitors potential problem loans. Potential problem loans are those loans where information about possible credit problems of borrowers causes Management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are categorized by their non-passing risk rating and performing loan status. Potential problem loans totaled $7.8 million at March 31, 2026, a decrease of $3.7 million from $11.5 million at December 31, 2025.
See Note 7 to the accompanying Consolidated Financial Statements for more information regarding Asset Quality.
Allowance for Credit Losses and Reserve for Unfunded Loan Commitments
The allowance for credit losses on loans totaled $33.4 million at March 31, 2026, compared to $32.3 million at December 31, 2025 and $27.7 million at March 31, 2025, with a resulting allowance to total loan ratio of 1.28 percent at March 31, 2026, compared to 1.27 percent at December 31, 2025 and 1.18 percent at March 31, 2025. Net charge-offs amounted to $31 thousand for the three months ended March 31, 2026, compared to net charge-offs of $0.5 million for the same period in 2025. As of March 31, 2026, there was no allowance for credit losses on individually evaluated loans based upon the valuation of the collateral securing each loan.
The Company maintains a reserve for unfunded loan commitments at a level that Management believes is adequate to absorb estimated expected losses. Adjustments to the reserve are made through provision for credit losses and applied to the reserve which is classified in Other liabilities. At March 31, 2026 and December 31, 2025, the commitment reserve totaled $0.7 million.
See Note 8 to the accompanying Consolidated Financial Statements for more information regarding the Allowance for Credit Losses and Reserve for Unfunded Loan Commitments.
Deposits
Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits, are the primary source of the Company's funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to
focus on establishing a comprehensive relationship with business borrowers, seeking deposits as well as lending relationships.
Total deposits increased $55.1 million to $2.4 billion at March 31, 2026 from year end 2025. This increase was due to increases of $47.7 million in savings deposits, $16.4 million in time deposits, $9.0 million in interest-bearing demand deposits, partially offset by decreases of $3.6 million in brokered deposits and $14.4 million in noninterest-bearing demand deposits. The change in the composition of the portfolio from December 31, 2025 reflects a 8.9 percent increase in savings deposits, a 2.4 percent increase in time deposits, a 2.4 percent increase in interest-bearing demand deposits, partially offset by a 1.3 percent decrease in brokered deposits and a 3.1 percent decrease in noninterest-bearing deposits.
As of March 31, 2026, 21.6 percent of total deposits were uninsured or uncollateralized. The Company's deposit composition as of March 31, 2026, consisted of 19.0 percent in noninterest-bearing demand deposits, 17.2 percent in interest-bearing demand deposits, 24.9 percent in savings deposits and 38.9 percent in time deposits.
Borrowed Funds and Subordinated Debentures
As part of the Company's overall funding and liquidity management program, from time to time the Company borrows from the Federal Home Loan Bank of New York. Residential mortgages, commercial loans and debt securities collateralize these borrowings.
Borrowed funds and subordinated debentures totaled $258.6 million and $266.1 million at March 31, 2026 and December 31, 2025, respectively, and are broken down in the following table:
| | | | | | |
(In thousands) | | March 31, 2026 | | December 31, 2025 | ||
FHLB borrowings: | | | | | | |
Non-overnight, fixed rate advances | | $ | 15,774 | | $ | 15,774 |
Overnight advances | | 162,500 | | 170,000 | ||
Puttable advances | | | 70,000 | | | 70,000 |
Subordinated debentures | | 10,310 | | 10,310 | ||
Total borrowed funds and subordinated debentures | | $ | 258,584 | | $ | 266,084 |
In March 2026, the FHLB issued a $250.0 million municipal deposit letter of credit in the name of Unity Bank naming the New Jersey Department of Banking and Insurance as beneficiary, to secure municipal deposits as required under New Jersey law. The FHLB issued an additional $33.0 million municipal deposit letter of credit in the name of Unity Bank naming certain townships in Pennsylvania as beneficiary, to secure municipal deposits as required under Pennsylvania law.
At March 31, 2026, the Company had $108.5 million of additional credit available at the FHLB, $282.2 million of additional credit available at the FRB and $20.0 million of additional credit available from other sources. Pledging additional collateral in the form of 1 to 4 family residential mortgages, commercial loans and investment securities can increase the lines with the FHLB and FRB.
For the three months ended March 31, 2026, average FHLB Borrowings were $97.9 million with a weighted average cost of 3.45%.
Subordinated Debentures
On July 24, 2006, Unity (NJ) Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is the daily compounded SOFR rate with a 0.262 percent spread. The floating interest rate was 5.539 percent at March 31, 2026 and 5.537 percent at December 31, 2025.
Market Risk
Market risk for the Company is primarily limited to interest rate risk, which is the impact that changes in interest rates would have on future earnings. The Company's Asset and Liability Management Committee ("ALCO") manages this risk. The principal objectives of ALCO 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 and capital and liquidity requirements and actively manage risk within Board-approved guidelines. ALCO reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions and interest rate levels.
The following table presents the Company's Economic Value of Equity ("EVE") and Net Interest Income ("NII") sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rate of 100, 200 and 300 bps, which were all in compliance with Board approved tolerances at March 31, 2026 and December 31, 2025:
| | | | | | | | | | | | | | | | | | |
| | Estimated Increase/ (Decrease) in EVE | | | Estimated 12 mo. Increase/ (Decrease) In NII | | ||||||||||||
(In thousands, except percentages) | | EVE | | Amount | | Percent | | | NII | | Amount | | Percent | |||||
March 31, 2026 | | | | | | | | | | | | | | | | | | |
+300 | | $ | 361,735 | | $ | (64,947) | (15.22) | % | | $ | 118,276 | | $ | (9,325) | (7.31) | % | ||
+200 | | | 384,956 | | | (41,726) | (9.78) | | | | 121,863 | | | (5,738) | (4.50) | | ||
+100 | | 407,030 | | (19,652) | (4.61) | | | 124,880 | | (2,721) | (2.13) | | ||||||
0 | | | 426,682 | | | - | | - | | | | 127,601 | | | - | | - | |
-100 | | 427,435 | | 753 | 0.18 | | | 128,323 | | 722 | 0.57 | | ||||||
-200 | | 434,528 | | 7,846 | 1.84 | | | 127,954 | | 353 | 0.28 | | ||||||
-300 | | 440,377 | | 13,695 | 3.21 | | | 127,366 | | (235) | (0.19) | | ||||||
December 31, 2025 | | | | | | | | | | | | | | | | | | |
+300 | | $ | 340,214 | | $ | (64,815) | (16.00) | % | | $ | 117,482 | | $ | (8,261) | (6.57) | % | ||
+200 | | | 363,539 | | | (41,490) | (10.24) | | | | 120,592 | | | (5,151) | (4.10) | | ||
+100 | | 386,622 | | (18,407) | (4.54) | | | 123,439 | | (2,304) | (1.83) | | ||||||
0 | | 405,029 | | | - | | - | | | | 125,743 | | | - | | - | | |
-100 | | 408,925 | | 3,896 | 0.96 | | | 125,933 | | 190 | 0.15 | | ||||||
-200 | | | 411,585 | | 6,556 | 1.62 | | | 125,257 | | (486) | (0.39) | | |||||
-300 | | 417,084 | | 12,055 | 2.98 | | | 124,600 | | (1,143) | (0.92) | | ||||||
Off-Balance Sheet Arrangements and Contractual Obligations
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These transactions may involve elements of credit and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the borrower.
The following table shows the amounts and expected maturities or payment periods of off-balance sheet arrangements and contractual obligations as of March 31, 2026:
| | | | | | | | | | | | | | | |
| | One year | | One to | | Three to | | Over five | | | | ||||
(In thousands) | | or less | | three years | | five years | | years | | Total | |||||
Off-balance sheet arrangements: | | | | | | | | | | | | | | | |
Standby letters of credit | | $ | 441 | | $ | 4,158 | | $ | 50 | | $ | 2,284 | | $ | 6,933 |
Contractual obligations: | | | | | | | | | | | |||||
Time deposits | | 892,112 | | 32,051 | | 1,020 | | 108 | | 925,291 | |||||
Borrowed funds and subordinated debentures | | 168,274 | | 30,000 | | 50,000 | | 10,310 | | 258,584 | |||||
Operating leases | | 607 | | | 871 | | | 769 | | | 2,182 | | | 4,429 | |
Total off-balance sheet arrangements and contractual obligations | | $ | 1,061,434 | | $ | 67,080 | | $ | 51,839 | | $ | 14,884 | | $ | 1,195,237 |
Standby letters of credit represent guarantees of payment issued by the Bank on behalf of a client that is used as "payments 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 and include brokered time deposits.
Borrowed funds and subordinated debentures include fixed and 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.
Liquidity
Liquidity measures the ability to satisfy current and future cash flow needs as they become due. A bank's liquidity reflects its ability to meet loan demand, to accommodate possible outflows in deposits and to take advantage of interest rate opportunities in the marketplace. Our liquidity is monitored by Management and the Board of Directors, which reviews historical funding requirements, our current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments. Our goal is to maintain sufficient asset-based liquidity to cover potential funding requirements in order to minimize our dependence on volatile and potentially unstable funding markets.
The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of investment and loan principal, sales and maturities of investment securities, additional borrowings and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit inflows and outflows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Consolidated Statement of Cash Flows provides detail on the Company's sources and uses of cash, as well as an indication of the Company's ability to maintain an adequate level of liquidity. At March 31, 2026, the balance of cash and cash equivalents was $229.2 million, an increase of $12.6 million from December 31, 2025. A discussion of on- and off-balance sheet liquidity follows.
| ● | Securities. The Company's available for sale investment portfolio amounted to $63.3 million and $70.9 million at March 31, 2026 and December 31, 2025, respectively. |
| ● | Loans. Loans held for sale portfolio amounted to $12.6 million and $9.5 million at March 31, 2026 and December 31, 2025, respectively. Sales of these loans provide an additional source of liquidity for the Company. |
| ● | Commitments. The Company was committed to advance approximately $460.6 million to its borrowers as of March 31, 2026, compared to $508.5 million at December 31, 2025. At March 31, 2026, $204.9 million of these commitments expire within one year, compared to $270.3 million at December 31, 2025. The Company had $6.9 million and $5.9 million in standby letters of credit at March 31, 2026 and December 31, 2025, 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. |
| ● | Deposits. As of March 31, 2026, deposits included $449.6 million of government deposits, as compared to $444.9 million at year end 2025. 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. Within this portfolio the average deposit size was $8.0 million as of March 31, 2026. |
| ● | Borrowed Funds. Total FHLB borrowings amounted to $248.3 million and $255.8 million as of March 31, 2026 and December 31, 2025, 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 March 31, 2026, pledging provided an additional $108.5 million in borrowing potential from the FHLB, $282.2 million from the FRB and $20.0 million from other sources. 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 these lines with the FHLB and FRB. As of March 31, 2026, total available funding plus cash on hand represented 124.4% of uninsured or uncollateralized deposits. |
Regulatory Capital
Consistent with our goal to operate as a sound and profitable financial organization, Unity Bancorp, Inc. and Unity Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As of March 31, 2026, Unity Bank exceeded all capital requirements of the federal banking regulators and was considered well capitalized.
See Note 10 to the accompanying Consolidated Financial Statements for more information regarding Regulatory Capital.
Shareholders' Equity
Repurchase Plan
On August 1, 2024, the Board authorized a repurchase plan permitting the repurchase of up to 500 thousand shares, or approximately 5.0% of the Company's outstanding common stock, in addition to the previously approved repurchase plan authorizing the repurchase of up to 500 thousand shares of common stock. For the quarter ended March 31, 2026, a total of 6,616 shares were repurchased at a weighted average price of $49.01, leaving 562 thousand shares available for repurchase. The timing and amount of additional purchases, if any, will depend upon several factors including the Company's capital needs, the Company's liquidity position, the performance of its loan portfolio, the need for additional provisions for credit losses and the market price of the Company's stock.
Impact of Inflation and Changing Prices
The financial statements and notes thereto, presented elsewhere herein have been prepared in accordance with U.S.
GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all the Company's assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.