Borrowed Funds, Subordinated Debentures and Derivatives

12 Months Ended

Dec. 31, 2024

Borrowed Funds, Subordinated Debentures and Derivatives

Borrowed Funds, Subordinated Debentures and Derivatives

7.    Borrowed Funds, Subordinated Debentures and Derivatives

The following table presents the period-end and weighted average rate for borrowed funds and subordinated debentures as of the past two year end dates:

	2024				2023
(In thousands)	Amount		Rate		Amount		Rate
FHLB borrowings:
Non-overnight, fixed rate advances	$	20,504	4.36	%	$	109,438	3.86	%
Overnight advances		140,000	4.67			217,000	5.61
Puttable advances		60,000	3.70			30,000	3.91
Subordinated debentures:	$	10,310	6.19	%	$	10,310	7.21	%

The following table presents borrowed funds and subordinated debentures by maturity over the next five years:

(In thousands)	2025		2026		2027		2028		2029		Thereafter		Total
FHLB borrowings:
Non-overnight, fixed rate advances	$	10,504	$		$	—	$	10,000	$		$	—	$	20,504
Overnight advances		140,000		—		—		—		—		—		140,000
Puttable advances		—		—		—		20,000		40,000		—		60,000
Subordinated debentures:		—		—		—		—		—		10,310		10,310
Total borrowings	$	150,504	$	—	$	—	$	30,000	$	40,000	$	10,310	$	230,814

Subordinated Debentures

At December 31, 2024 and 2023, the Company was a party in the following subordinated debenture transactions:

● On July 24, 2006, Unity (NJ) Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part, prior to maturity but after July 24, 2011. The floating interest rate on the subordinated debentures is the three-month CME term SOFR plus 262 basis points and reprices quarterly. The floating interest rate was  6.189% at December 31, 2024 and 7.212% at December 31, 2023.

● In connection with the formation of the statutory business trust, the trust also issued $465 thousand of common equity securities to the Company, which together with the proceeds stated above were used to purchase the subordinated debentures, under the same terms and conditions. At December 31, 2024 and 2023, $310 thousand of the common equity securities remained.

The capital securities in the above transaction have preference over the common securities with respect to liquidation and other distributions and qualify as Tier 1 capital. Under the terms of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these securities will continue to qualify as Tier 1 capital as the Company has less than $15 billion in assets. In accordance with FASB ASC Topic 810, “Consolidation,” the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust II because it is not the primary beneficiary. The additional capital from this transaction was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to the Bank.

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

Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments

The Company has derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s Consolidated Balance Sheet as Prepaid expenses and other assets or Accrued expenses and other liabilities.

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

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

Risk Management Policies – Hedging Instruments

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

Interest Rate Risk Management – Cash Flow Hedging Instruments

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

At December 31, 2024, and 2023 the Company had no cash collateral pledged for these derivatives. A summary of the Company’s outstanding interest rate swap agreements used to hedge variable rate debt at December 31, 2024 and 2023, respectively is as follows:

(Dollars in thousands)	December 31, 2024			December 31, 2023
Notional amount	$	20,000		$	20,000
Fair value	$	139		$	918
Weighted average pay rate		0.83	%		0.83	%
Weighted average receive rate		5.12	%		5.27	%
Weighted average maturity in years		0.19			1.57
Number of contracts		1			1

In the third quarter of 2024, to hedge floating rate liability exposure, the Company entered into a forward starting pay-fix, receive-float interest rate swap which will commence in the first quarter of 2025, maturing in the first quarter of 2028. The interest rate swap, which qualifies for hedge accounting, is tied to the Secured Overnight Financing Rate (SOFR) for a

notional amount of $20.0 million. The effective fixed rate interest rate obligation to the Company is 2.89%. As of December 31, 2024, the fair value of the swap was $0.6 million.

During the twelve months ended December 31, 2024 the Company received variable rate SOFR payments from and paid fixed rates in accordance with its interest rate swap agreements. The unrealized gains relating to interest rate swaps are recorded as a derivative asset and are included in Prepaid expenses and other assets in the Company’s Consolidated Balance Sheet. The unrealized losses are recorded as a derivative liability and are included in Accrued expenses and other liabilities. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedges no longer be considered effective.  The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

The following table presents the net losses recorded in other comprehensive income and the Consolidated Financial Statements relating to the cash flow derivative instruments at December 31, 2024 and 2023, respectively:

	For the years ended December 31,
(In thousands)	2024		2023
Loss recognized in OCI
Gross of tax	$	(172)	$	(619)
Net of tax		(125)		(450)
Loss reclassified from AOCI into net income
Gross of tax		(925)		(899)
Net of tax		(671)		(635)