UNITY BANCORP INC NJ

Previous wording

The Company has been and may continue to be adversely affected by national financial markets and economic conditions, as well as local conditions.

Current wording

The Company has been and may continue to be affected by national financial markets and economic conditions, as well as local conditions.

Previous wording

The Company’s loans, the ability of borrowers to repay these loans and the value of collateral securing these loans are impacted by economic conditions. The Company’s financial results, the credit quality of its 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. The Company cannot assure 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 itself.

Current wording

The Company’s loans, the ability of borrowers to repay these loans and the value of collateral securing these loans are impacted by economic conditions. The Company’s financial results, the credit quality of its 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. The Company cannot assure that any positive trends or developments discussed in this annual report will continue or that negative trends or developments will not arise.

Previous wording

A significant portion of the Company’s loan portfolio is secured by real estate and events that negatively impact the real estate market could hurt its business.

Current wording

A significant portion of the Company’s loan portfolio is secured by real estate and events that negatively impact the real estate market in the Company’s trade area could hurt its business.

Previous wording

A significant portion of the Company’s loan portfolio is secured by real estate. As of December 31, 2023, approximately 96 percent of its 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 the Company’s 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 the Company’s profitability and asset quality. Any future declines in home prices in the New Jersey, New York and Pennsylvania markets the Company serves also may result in increases in delinquencies and losses in its loan portfolios. Stress in the real estate market, combined with any weakness in economic conditions could drive losses beyond that which is provided for in the Company’s allowance for credit losses. In that event, the Company’s earnings could be adversely affected.

Current wording

A significant portion of the Company’s loan portfolio is secured by real estate. As of December 31, 2024, approximately 96 percent of its 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 the Company’s 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 the Company’s profitability and asset quality. Any future declines in real estate values in the New Jersey, New York and Pennsylvania markets that the Company serves also may result in increases in delinquencies and losses in its loan portfolios. Stress in the real estate market, combined with any weakness in economic conditions could drive losses beyond that which is provided for in the Company’s allowance for credit losses. In that event, the Company’s earnings could be adversely affected.

Previous wording

The risk of nonpayment (or deferred or delayed payment) of loans is inherent in banking. Such nonpayment, or delayed or deferred payment, of loans to the Company may have a material adverse effect on its earnings and overall financial condition. Additionally, in compliance with applicable banking laws and regulations and U.S. Generally Accepted Accounting Principles (“ U.S. GAAP”), the Company maintains an allowance for credit losses created through charges against earnings. As of December 31, 2023, the Company’s allowance for credit losses was $25.9 million, or 1.19 percent of its total loan portfolio and 134.75 percent of its nonperforming assets. 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. The Company seeks to minimize its 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 credit losses.

Current wording

The risk of nonpayment (or deferred or delayed payment) of loans is inherent in banking. Such nonpayment, or delayed or deferred payment, of loans to the Company may have a material adverse effect on its earnings and overall financial condition, such as increased provision for credit losses, asset recovery costs and lower interest income. Additionally, in compliance with applicable banking laws and regulations and U.S. Generally Accepted Accounting Principles (“ U.S. GAAP”), the Company maintains an allowance for credit losses created through charges against earnings. As of December 31, 2024, the Company’s allowance for credit losses was $26.8 million, or 1.18 percent of its total loan portfolio and 204.77 percent of its nonaccrual 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. The Company seeks to minimize its 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 credit losses.

Previous wording

The risk of nonpayment (or deferred or delayed payment) on securities is also inherent in banking. Such nonpayment, or delayed or deferred payment on securities held by the Company, if they occur may have a material adverse effect on the Company’s earnings and overall financial condition. As of December 31, 2023, the Company maintained a valuation reserve on a single available for sale security for $1.3 million. The Company seeks to minimize its credit risk exposure on securities through ongoing monitoring and credit controls, which evaluate the financial condition of the issuer of the securities. However, there can be no assurance that such procedures will actually reduce credit losses.

Current wording

The risk of nonpayment (or deferred or delayed payment) on securities is also inherent in banking. Such nonpayment, or delayed or deferred payment on securities held by the Company, if they occur may have a material adverse effect on the Company’s earnings and overall financial condition. As of December 31, 2024, the Company maintained a valuation reserve on a single available for sale security of $2.8 million. The Company seeks to minimize its credit risk exposure on securities through ongoing monitoring and credit controls, which evaluate the financial condition of the issuer of the securities. However, there can be no assurance that such procedures will actually reduce credit losses.

Previous wording

Like all financial institutions, the Company maintains an allowance for credit losses to provide for loan defaults and nonperformance. Its allowance for credit losses may not be adequate to cover actual losses and future provisions for credit losses could materially and adversely affect the results of 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 credit loss experience, historical trends 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 the Company’s control, and these losses may exceed current estimates. State and federal regulatory agencies, as an integral part of their examination process, review the Company’s loans and allowance for credit losses and may require an increase in its allowance for credit losses. Although the Company believes that its allowance for credit losses is adequate to cover probable and reasonably estimated losses, there can be no assurance that the Company will not further increase the allowance for credit losses or that its regulators will not require an increase to this allowance. Either of these occurrences could adversely affect the Company’s earnings.

Current wording

Like all financial institutions, the Company maintains an allowance for credit losses to provide for loan defaults and nonperformance. Its allowance for credit losses may not be adequate to cover actual losses and future provisions for credit losses could materially and adversely affect the results of 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 credit loss experience, historical trends and other factors that Management feels deserve recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly and, as adjustments become necessary, they

Previous wording

For example, the Dodd-Frank Act has resulted in substantial 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 is signed into law, but different effective dates apply to specific sections of this law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions.

Current wording

For example, the Dodd-Frank Act has resulted in substantial 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 is signed into law, but different effective dates apply to specific sections of this law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. In addition, subsequent legislation and regulatory action has, and future legislation and regulatory action may, amend or revise various provisions of the Dodd-Frank Act.

Previous wording

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act and the implementing regulations thereunder, which could have a material adverse impact either on the financial services industry as a whole, or on the Company’s business, results of operations and financial condition. For a more detailed discussion of the Dodd-Frank Act, see “Item 1-Business – Supervision and Regulation.”

Current wording

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act and the implementing regulations thereunder, which could have a material adverse impact either on the financial services industry as a whole, or on the Company’s business, results of operations and financial condition. It is difficult to predict at this time what specific impact certain provisions and yet-to-be-finalized rules and regulations will have on the Company, including any regulations promulgated by the CFPB. Financial reform legislation and rules could have adverse implications on the financial industry, the competitive environment and the Company’s 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 the Company’s costs of operations and adversely impact its earnings.

Previous wording

Understanding the Company’s accounting policies is fundamental to understanding its 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. The Company has identified its accounting policies regarding the allowance for credit losses and security valuations and security credit events to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

Current wording

Understanding the Company’s accounting policies is fundamental to understanding its 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. The Company has identified its accounting policies regarding the allowance for credit losses to be critical because they require Management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

Previous wording

From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change their guidance governing the form and content of the Company’s external financial statements. In addition, accounting standard setters and those who interpret U.S. GAAP, such as the FASB, SEC, banking regulators and the Company’s 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 the Company’s control, can be hard to predict and could materially impact how it reports financial results and condition. In certain cases, the Company could be required to apply a new or revised guidance retroactively or apply existing guidance differently, which may result in 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 would negatively impact results of operations.

Current wording

From time to time, the Financial Accounting Standards Board (“FASB”) and the U.S. Securities and Exchange Commission (“SEC”) change their guidance governing the form and content of the Company’s external financial statements. In addition, accounting standard setters and those who interpret U.S. GAAP, such as the FASB, SEC, banking regulators and the Company’s 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 the Company’s control, can be hard to predict and could materially impact how it reports financial results and condition. In certain cases, the Company could be required to apply a new or revised guidance retroactively or apply existing guidance differently, which may result in 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 would negatively impact results of operations.

Previous wording

Liquidity is derived primarily from 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. Customer account balances can decrease when customers perceive alternative investments, such as fixed income securities or money market funds, as providing a better risk/return trade off or if customers are concerned about the safety of their deposits, as happened in the first quarter of 2023. If customers move money out of bank deposits and into other investments, or if customers perceive a risk in leaving their deposits with the Bank and transfer the deposits to larger institutions seen as less risky, the Company could lose a low-cost source of funds, increasing its funding costs and reducing the Company’s net interest income and net income.

Current wording

Liquidity is derived primarily from 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. Customer account balances can decrease when customers perceive alternative investments, such as fixed income securities or money market funds, as providing a better risk/return trade off or if customers are concerned about the safety of their deposits. If customers move money out of bank deposits and into other investments, or if customers perceive a risk in leaving their deposits with the Bank and transfer the deposits to larger institutions seen as less risky, the Company could lose a low-cost source of funds, increasing its funding costs and reducing the Company’s net interest income and net income.

Previous wording

The Company maintains elevated wholesale funding balances, including brokered CDs, brokered money market accounts, FHLB advances and other borrowing and deposit sources. These wholesale funding balances typically result in higher funding costs compared to other sources and reduce the Company’s net interest income and net income. Additionally, these sources typically are only available to the Company if the Bank maintains certain capital levels. The Company’s management team monitors wholesale funding as a composition of its balance sheet via the risk management process; however, wholesale deposits may be more prone to liquidity risk.

Current wording

The Company maintains elevated wholesale funding balances, including brokered deposits, FHLB advances and other borrowing and deposit sources. These types of wholesale funding typically result in higher funding costs compared to other sources and reduce the Company’s net interest income and net income. Additionally, these sources typically are only available to the Company if the Bank maintains certain capital levels. The Company’s management team monitors wholesale funding as a composition of its Consolidated Balance Sheet via the risk management process; however, wholesale deposits may be more prone to liquidity risk.

Previous wording

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 Modernization Act permits other financial entities, such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing competition. In addition, financial technology companies, either directly or in partnership with other insured depository institutions, compete for loan and deposit customers. Similarly, larger legacy non-financial companies, such as Apple, Alphabet and Amazon, are further increasing competition to compete for loans, deposits and payments. A number of the Company’s competitors have substantially greater resources than it does to expend upon advertising and marketing, and their substantially greater capitalization enables them to make much larger loans. The Company’s success depends a great deal upon its judgment that large and mid-size financial institutions do not adequately serve small businesses in its principal market area and upon the Company’s ability to compete favorably for such customers. In addition to competition from larger institutions, the Company also faces 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 the Company serves.

Current wording

Apple, Alphabet and Amazon, are further increasing competition to compete for loans, deposits and payments. A number of the Company’s competitors have substantially greater resources than it does to expend upon advertising and marketing, and their substantially greater capitalization enables them to make much larger loans. Additionally, many of these competitors have less regulation than the Company as they are not financial institutions. The Company’s success depends a great deal upon its judgment that large and mid-size financial institutions do not adequately serve small businesses in its principal market area and upon the Company’s ability to compete favorably for such customers. In addition to competition from larger institutions, the Company also faces 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 the Company serves.

Previous wording

In January 2022, the Federal Reserve issued*“Money Payments: The U.S. Dollar in the Age of Digital Transformation”* which discusses a U.S. central bank digital currency (“CBDC”). While this is in the earliest of stages, if this CBDC is implemented by the Federal Reserve, it could change banking on a larger scale as Americans would be able to transact directly with the Federal Reserve.

Current wording

In January 2022, the Federal Reserve issued*“Money Payments: The U.S. Dollar in the Age of Digital Transformation”* which discusses a U.S. central bank digital currency (“CBDC”). While this is in the earliest of stages, if this CBDC is implemented by the Federal Reserve, it could change banking on a larger scale as Americans would be able to transact directly with the Federal Reserve and may not need Banks to serve as intermediaries.

Previous wording

The Company has also been active in competing for New Jersey governmental and municipal deposits. At December 31, 2023, the Company held approximately $346.3 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. While legislation has been introduced in the state legislature, the New Jersey Public Bank Implementation Board has provided its final recommendations to the governor, including that the public bank entity should not be a depository institution but should seek funding from a diverse range of investors and non-depository investment vehicles. However, 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.

Current wording

The Company has also been active in competing for New Jersey governmental and municipal deposits. At December 31, 2024, the Company held approximately $400.5 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. While no legislation has been introduced in the state legislature, the New Jersey Public Bank Implementation Board has provided its final recommendations to the governor, including that the public bank entity should not be a depository institution but should seek funding from a diverse range of investors and non-depository investment vehicles. However, 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.

Previous wording

Given the significant growth in our loan portfolio, many of our loans are unseasoned, meaning that they were originated relatively recently. Approximately 58.7% of our loan portfolio has been originated in the past three years. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance.

Current wording

Given the significant growth in our loan portfolio, many of our loans are unseasoned, meaning that they were originated relatively recently. Approximately 53.0% of our loan portfolio has been originated in the past three years. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance.

Previous wording

In the future, if the Company’s or the Bank’s capital ratios fall below the prevailing regulatory required minimums, the Company 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 existing shareholders or reduce the market price of common stock, or both.

Current wording

In the future, if the Company’s or the Bank’s capital ratios fall below the prevailing regulatory required minimums, or should the Company seek to expand through acquisitions, the Company 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 existing shareholders or reduce the market price of common stock, or both.

Previous wording

The outbreak of disease or other health related events on a regional, national or global level, such as the spread of the COVID-19 coronavirus, may have a material adverse effect on commerce, which may, in turn impact the Company’s lines of business.

Current wording

The outbreak of disease or other health related events on a regional, national or global level and the government’s reaction to such events, may have a material adverse effect on commerce, which may, in turn impact the Company’s lines of business as well as the businesses of its customers.

Previous wording

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

Current wording

Climate change, hurricanes, flooding, earthquakes, terrorism or other adverse events could negatively affect local economies or disrupt operations, which would have an adverse effect on the Company’s business or results of operations.

Previous wording

Hurricanes, flooding and other weather events can disrupt the Company’s operations, result in damage to its properties and negatively affect the local economies in which it operates. In addition, these weather events may result in a decline in value or destruction of properties securing loans and an increase in delinquencies, foreclosures and loan losses. The Company does maintain property insurance policies to cover certain costs associated with these events; however, it is possible that the expenses may exceed coverage, may not be covered at all or may ultimately increase costs associated with future insurance premiums.

Current wording

Furthermore, these weather events may result in a decline in value or destruction of properties securing loans and an increase in delinquencies, foreclosures and credit losses. The Company does maintain property insurance policies to cover certain costs associated with these events; however, it is possible that the expenses may exceed coverage, may not be covered at all or may ultimately increase costs associated with future insurance premiums.

Previous wording

Although the Company has policies and procedures aimed at detecting and preventing the use of its banking network for money laundering and related activities, those policies and procedures may not eliminate instances in which the Company may be used by customers to engage in illegal or improper activities. To the extent that the Company fails to fully comply with the applicable laws and regulations, banking agencies may have the authority to impose fines, other penalties and sanctions on the Company.

Current wording

Although the Company has policies and procedures aimed at detecting and preventing the use of its banking network for money laundering and related activities, those policies and procedures may not eliminate instances in which the Company may be used by customers to engage in illegal or improper activities. To the extent that the Company fails to fully comply

Previous wording

The Company’s ability to maintain its reputation is critical to the success of the business and the failure to do so may materially adversely impact its performance.

Current wording

The Company’s ability to maintain its reputation is critical to the success of the business and the failure to do so may adversely impact its performance.

Previous wording

The Company’s reputation is one of the most valuable components of its business. As such, the Company strives to conduct its business in a manner that maintains its reputation. If the Company’s reputation is negatively impacted by the actions of an employee, certain litigations, regulatory actions, or certain financial concerns the business and therefore, the operating results may be materially adversely impacted.

Current wording

The Company’s reputation is one of the most valuable components of its business. As such, the Company strives to conduct its business in a manner that maintains its reputation. If the Company’s reputation is negatively impacted by the actions of an employee, certain litigations, regulatory actions, or certain financial concerns, the business and therefore the operating results may be adversely impacted.