UNITY BANCORP INC /NJ/ (UNTY)

ITEM 2 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 $14.5 million, or $1.42 per diluted share for the three months ended June 30, 2026, compared to $16.5 million, or $1.61 per diluted share for the same period in 2025. Return on average assets and return on average common equity for the quarter were 2.01 percent and 15.86 percent, respectively, compared to 2.51 percent and 21.15 percent for the same period in 2025.

Current quarter highlights include:

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Net interest income increased 11.5 percent compared to the prior year’s quarter, primarily due to the increased volume on loans and decreased cost of time deposits and decreased volume on borrowed funds and subordinated debentures, partially offset by increases in the volume of interest-bearing deposits.

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Net interest margin equaled 4.56 percent this quarter compared to 4.49 percent in the prior year’s quarter. The increase was primarily due to the increased yield on FHLB stock complemented by decrease in cost of interest-bearing liabilities.

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The provision for credit losses on loans and off-balance sheet items was $1.2 million for the three months ended June 30, 2026, compared to $1.9 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.

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Noninterest income decreased 67.0 percent compared to the prior year’s quarter, primarily because the quarter ended June 30, 2025 included $3.5 million in one-time realized gains from the sale of Patriot National Bancorp, Inc. common stock.

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Noninterest expense increased 7.0 percent compared to the prior year’s quarter, primarily due to increases in compensation and benefits and processing and communications.

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The effective tax rate was 22.4 percent compared to 23.4 percent in the prior year’s quarter.

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The Company’s performance ratios may be found in the table below.

(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 June 30, 2026, tax-equivalent net interest income amounted to $31.8 million, an increase of $3.3 million or 11.5 percent when compared to the same period in 2025. The net interest margin increased 7 basis points to 4.56 percent for the three months ended June 30, 2026, compared to 4.49 percent for the same period in 2025.

During the three months ended June 30, 2026, tax-equivalent interest income was $46.6 million, an increase of $4.0 million or 9.5% when compared to the same period in 2025. The increase was mainly driven by increases in balance of loans, partially offset by a decrease in yield on loans.

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Of the $4.0 million increase in interest income on a tax-equivalent basis, $4.5 million is due to an increase in volume of interest earning assets, partially offset by a decrease of $0.5 million due to decreases in yield on interest earning assets

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The average volume of interest-earning assets increased $248.7 million to $2.8 billion for the second quarter of 2026 compared to $2.6 billion in 2025. This was due primarily to a $265.2 million increase in average loans and $5.4 million increase in interest-bearing deposits, partially offset by $21.3 million and $0.6 million in securities and FHLB stock, respectively.

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The yield on total interest-earning assets decreased 2 basis points to 6.68 percent for the three months ended June 30, 2026, when compared to the same period in 2025.The yield on the loan portfolio decreased 2 basis points to 6.73 percent.

Total interest expense was $14.8 million for the three months ended June 30, 2026, an increase of $0.8 million or 5.4 percent when compared to the same period in 2025. The increase was driven by an increase in volume of interest-bearing deposits, partially offset by a decrease in yield on interest-bearing deposits and volume of borrowed funds.

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The $0.8 increase in interest expense resulted from a $1.4 million increase in volume of average interest-bearing deposits, partially offset by a $0.4 million and $0.2 million decrease in rate paid on interest-bearing deposits and volume of borrowed funds, respectively.

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The average cost of interest-bearing liabilities decreased 13 basis points to 2.92 percent for the three months ended June 30, 2026 compared to 2025. The cost of interest-bearing deposits decreased 12 basis points to 2.88 percent.

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Interest-bearing liabilities averaged $2.0 billion during the three months ended June 30, 2026, an increase of $182.0 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, interest-bearing demand deposits and time deposits, partially offset by a decrease in borrowed funds.

During the six months ended June 30, 2026, tax-equivalent interest income was $91.8 million, an increase of $8.4 million or 10.1 percent when compared to the same period in 2025. This increase was mainly driven by increases in the average balance of loans offset by a decrease in average balance of securities and yield on loans and securities.

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Of the $8.4 million increase in interest income on a tax-equivalent basis, $8.9 million was due to the increased average volume of interest-earning assets, offset by $0.5 million due to decreased rate on interest earning assets.

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The average volume of interest-earning assets increased $261.9 million to $2.8 billion for the second quarter of 2026 compared to $2.5 billion in 2025. This was due primarily to a $267.0 million increase in average loans and $18.2 million increase in interest-bearing deposits. The increase was offset by a $22.9 and $0.4 million decrease in average investments and FHLB stock respectively.

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The yield on total interest-earning assets decreased 2 basis points to 6.67 percent for the six months ended June 30, 2026, when compared to the same period in 2025. The yield on the loan portfolio decreased 1 basis point to 6.72 percent.

Total interest expense was $29.3 million for the six months ended June 30, 2026, an increase of $1.7 million or 6.0 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 and volume of borrowed funds.

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The $1.7 million increase in interest expense resulted from an increase of $2.9 million in the average volume of interest-bearing deposits, partially offset by a $0.9 million decrease in rate on average interest-bearing liabilities and a $0.3 million decrease in volume of borrowed funds.

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The average cost of interest-bearing liabilities decreased 12 basis points to 2.92 percent for the six months ended June 30, 2026 compared to 2025. The average cost of interest-bearing deposits decreased 11 basis points to 2.88.

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Interest-bearing liabilities averaged $2.0 billion during the six months ended June 30, 2026, an increase of $191.2 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, interest-bearing demand deposits and time deposits, partially offset by a decrease in borrowed funds.

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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.)

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations:

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report and statistical data presented in this document.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is a financial 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,

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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 twenty-two branch offices located in 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, SBA and other commercial credits. The Bank has multiple subsidiaries used to hold part of its investment, other real estate owned and loan portfolios.

The below table reflects a 5-year trend of the Company’s net income and return on average equity, (“ROE”):

Results of Operations

Net income totaled $58.0 million, or $5.67 per diluted share for the year ended December 31, 2025, compared to $41.5 million, or $4.06 per diluted share for the year ended December 31, 2024.

Highlights for the year include:

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The Company’s performance ratios for the past two years are listed in the following table:

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The below table provides net income for 2024 and the component reconciliation to net income for 2025:

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The table below an annualized non-GAAP reconciliation of adjustments called out in the chart above:

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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 net deferred fees earned on loans, versus interest paid on interest-bearing liabilities. Interest-earning assets include loans to consumers and businesses, investment securities, Federal Home Loan Bank (“FHLB”) stock, and interest-earning deposits. Interest-bearing liabilities include interest-bearing demand, savings, brokered and time deposits, borrowed funds and subordinated debentures.

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2025 compared to 2024

During 2025, tax-equivalent net interest income amounted to $117.0 million, an increase of $18.4 million, or 18.7 percent, when compared to the same period in 2024. The net interest margin increased 36 basis points to 4.52 percent for the year ended December 31, 2025, compared to 4.16 percent for the same period in 2024. The net interest spread was 3.69 percent for 2025, a 40 basis point increase compared to 3.29 for the same period in 2024.

During 2025, tax-equivalent interest income was $173.6 million, an increase of $17.9 million, or 11.5 percent, when compared to the same period in the prior year. This increase was mainly driven by the increase in the average balance of loans and in the yield on loans.

Total interest expense was $56.6 million in 2025, a decrease of $0.5 million or 0.9 percent compared to 2024. This decrease was primarily driven by the decrease in the cost of deposits and the decreased average balance of borrowed funds and subordinated debentures, which was partially offset by an increase in the volume of time deposits and interest-bearing demand deposits.

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