10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to

Commission file number 1-12431

Unity Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey	22-3282551
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
64 Old Highway 22, Clinton, NJ	08809
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code (908) 730-7630

Securities registered pursuant to Section 12(b) of the Exchange Act:     None.

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, no par value per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2) Large accelerated filer o Accelerated filer o Non-accelerated filer ý

Indicate by check mark whether the registrant is a shell Company as defined in Rule 12b-2 of the Exchange Act.  Yes  o
No  ý

As of June 30, 2005, the aggregate market value of the registrant’s Common Stock, no par value per share, held by non-affiliates of the registrant was $50,903,233 and 4,273,991 shares of the Common Stock were outstanding. As of March 15, 2006 6,252,489 shares of the registrant’s Common Stock were outstanding.

Documents incorporated by reference:

Portions of Unity Bancorp’s Annual Report to Shareholders for the fiscal year ended December 31, 2005 are incorporated by reference into Parts I, II and IV of this Annual Report on Form 10-K.

Portions of Unity Bancorp’s Proxy Statement for the Annual Meeting of Shareholders to be filed no later than 120 days from December 31, 2005 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Index to Form 10-K

	Part I
Item 1.	Business
	a) General
	b) Statistical information
Item 1A.	Risk Factors
Item 1B.	Unresolved Staff Comments
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information
	Part III
Item 10.	Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services
	Part IV
Item 15.	Exhibits and Financial Statement Schedules
	Signatures

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PART I

Item 1.Business

a)General

Unity Bancorp, Inc. (the “Company” or “Registrant”) is a bank holding company incorporated under the laws of the State of New Jersey to serve as a holding company for Unity Bank (the “Bank”). The Company was originally organized under the laws of the State of Delaware in 1991 and subsequently, in 2002, effected a re-incorporation merger to become a New Jersey corporation. The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank. Pursuant to the New Jersey Banking Act of 1948 (the “Banking Act”), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on December 1, 1994. The only significant activity of the Company is ownership and supervision of the Bank. The Company also owns 100% of the common equity of Unity (NJ) Statutory Trust I. The trust has issued $9.3 million of preferred securities to investors.

The Bank opened for business on September 16, 1991. The Bank received its charter from the New Jersey Department of Banking and Insurance on September 13, 1991. The Bank is a full-service commercial bank, providing a wide range of business and consumer financial services through its main office in Clinton, New Jersey and fourteen New Jersey branches located in Clinton, Colonia, Edison, Flemington, Highland Park, Linden, North Plainfield, Scotch Plains, South Plainfield, Springfield, Union, Bridgewater and Whitehouse. The Bank acquired its Phillipsburg New Jersey branch in the fourth quarter of 2005 in a purchase and assumption transaction with interstate Net Bank. The Bank’s primary service area encompasses the Route 22/Route 78 corridors between the Phillipsburg, New Jersey office and its Linden, New Jersey branch.

The principal executive offices of the Company are located at 64 Old Highway 22, Clinton, New Jersey 08809, and the telephone number is (908) 730-7630. The Company’s website address is www.unitybank.com.

Business of the Company

The Company’s primary business is ownership and supervision of the Bank. The Company, through the Bank, conducts a traditional and community-oriented commercial banking business, and offers services including personal and business checking accounts, time deposits, money market accounts and regular savings accounts. The Company structures its specific services and charges in a manner designed to attract the business of the small and medium sized business and professional community as well as that of individuals residing, working and shopping in its service area. The Company engages in a wide range of lending activities and offers commercial, Small Business Administration (“SBA”), consumer, mortgage, home equity and personal loans.

Service Areas

The Company’s primary service area is defined as the neighborhoods served by the Bank’s offices. The Bank’s main office, located in Clinton, in combination with its Flemington and Whitehouse offices, serves the greater area of Hunterdon County. The Bank’s North Plainfield and Bridgewater offices serve those communities located in the northern, eastern and central parts of Somerset County, and the southernmost communities of Union County. The Bank’s Scotch Plains, Linden, Union, and Springfield offices serve the majority of the communities in Union County, and the southwestern communities of Essex County. The offices in South Plainfield, Highland Park, Edison, and Colonia Township extend the Company’s service area into Middlesex County. The Bank’s Phillipsburg office serves Warren County.

Competition

The Company is located in an extremely competitive area. The Company’s service area is already serviced by major regional banks, large thrift institutions and by a variety of credit unions. In addition, since passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “Modernization Act”), securities firms and insurance companies have been allowed to acquire or form financial institutions, thereby increasing competition in the financial services market. Most of the Company’s competitors have substantially more capital and therefore greater lending limits than the Company. The Company’s competitors generally have established positions in the service area and have greater resources than the Company with which to pay for advertising, physical facilities, personnel and interest on deposited funds. The Company relies on the competitive pricing of its loans, deposits and other services as well as its ability to provide local decision making and personal service in order to compete with these larger institutions.

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Employees

At December 31, 2005, the Company employed 166 full-time and 24 part-time employees. None of the Company’s employees are represented by any collective bargaining units. The Company believes that its relations with its employees are good.

Executive Officers of Registrant

The following table sets forth certain information as of December 31, 2005 about each executive officer of the Company who is not also a director.

Name, Age and Position	Officer Since	Principal Occupation During Past Five Years
John Kauchak, 52 Chief Operations Officer and Executive Vice President of the Company and the Bank	2002	Previously, Mr. Kauchak was the head of Deposit Operations for Unity Bank from 1996 to 2002.
Michael F. Downes, 43, Chief Lending Officer and Executive Vice President of the Company and Bank	2001	Previously, Mr. Downes was a Commercial Lending Officer for Unity Bank from 1996 to 2001.
Alan J. Bedner, 35 Chief Financial Officer and Executive Vice President of the Company and Bank	2003	Previously, Mr. Bedner was Controller for Unity Bank from 2001 to 2003 and an AVP of Financial and Regulatory Reporting at Summit Bancorp from 1996 to 2001.
Kelly Stashko, 46 Chief Technology Officer and Executive Vice President of the Company and Bank	2003	Previously, Ms. Stashko was the head of the IT/Marketing Group for Unity Bank from 1996 to 2003.

SUPERVISION AND REGULATION

General Supervision and Regulation

Bank holding companies and banks are extensively regulated under both federal and state law. These laws and regulations are intended to protect depositors, not stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank. Over the past several years, a number of legislative proposals have been debated in Congress concerning modernization of the nation’s financial system. Many of these proposals would substantially alter the current regulatory framework, particularly as it relates to bank holding companies and their powers. Management of the Company is unable to predict, at this time, which, if any, of these legislative proposals may ultimately be adopted and the impact of any such regulatory proposals on the business of the Company.

General Bank Holding Company Regulation

General. As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, (the “BHCA”), the Company is subject to the regulation and supervision of the Federal Reserve Board (the “FRB”). The Company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. Under the BHCA, the Company’s activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the FRB determines to be so closely related to banking or managing or controlling banks as to be properly incident thereto.

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The BHCA requires, among other things, the prior approval of the FRB in any case where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank (unless it owns a majority of such bank’s voting shares), or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The FRB also considers capital adequacy and other financial and managerial resources and future prospects of the companies and the banks concerned, together with the convenience and needs of the community to be served, when reviewing acquisitions or mergers.

The BHCA also generally prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

The BHCA was substantially amended through the Modernization Act. The Modernization Act permits bank holding companies and banks, which meet certain capital, management and Community Reinvestment Act standards to engage in a broader range of nonbanking activities. In addition, bank holding companies, which elect to become financial holding companies, may engage in certain banking and nonbanking activities without prior FRB approval. Finally, the Modernization Act imposes certain new privacy requirements on all financial institutions and their treatment of consumer information. At this time, the Company has elected not to become a financial holding company, as it does not engage in any nonbanking activities.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the Federal Deposit Insurance Corporation (the “FDIC”) insurance funds in the event the depository institution becomes in danger of default. Under a policy of the FRB with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

Capital Adequacy Guidelines for Bank Holding Companies. The FRB has adopted risk-based capital guidelines for bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $150 million or more. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier I,” consisting of common stockholders’ equity and certain preferred stock and other qualifying hybrid instruments, less certain goodwill items and other intangible assets. The remainder, “Tier II Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt. Total capital is the sum of Tier I and Tier II capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB (determined on a case-by-case basis or as a matter of policy after formal rule-making).

Bank holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting and performing, guaranteed portions of unsold SBA loans which carry a 20% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes

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(including general guarantees and standby letters of credit backing financial obligations) are given a 100% risk-weighting. Transaction related contingencies such as standby letters of credit backing non-financial obligations and undrawn commitments (including commercial credit lines with an initial maturity more than one year) have a 50% risk-weighting. Short-term commercial letters of credit have a 20% risk-weighting and certain short-term unconditionally cancelable commitments have a 0% risk-weighting.

In addition to the risk-based capital guidelines, the FRB has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.

The Company is currently in compliance with these minimum Federal capital requirements.

General Bank Regulation

As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and control of the New Jersey Department of Banking and Insurance (the “Department”). As an FDIC-insured institution, the Bank is subject to regulation, supervision and control of the FDIC, an agency of the federal government. The regulations of the FDIC and the Department affect virtually all activities of the Bank, including the minimum level of capital that the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters.

Insurance of Deposits. The Bank’s deposits are insured up to a maximum of $100,000 per depositor under the Savings Association Insurance Fund of the FDIC. Pursuant to the Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”), the FDIC has established a risk-based assessment system. Premium assessments under this system are based upon:  (i) the probability that the insurance fund will incur a loss with respect to the institution; (ii) the likely amount of the loss; and (iii) the revenue needs of the insurance fund. To effectuate this system, the FDIC has developed a matrix that sets the assessment premium for a particular institution in accordance with its capital level and overall rating by the primary regulator.

Dividend Rights. Under the Banking Act, a bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank’s surplus.

Sarbanes-Oxley Act

On July 30, 2002, the Sarbanes-Oxley Act, or “SOX” was enacted. SOX is not a banking law, but applies to all public companies, including the Company. The stated goals of SOX are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. SOX is the most far reaching U.S. securities legislation enacted in some time. SOX generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended.

SOX includes very specific additional disclosure requirements and new corporate government rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specific issues by the SEC. SOX represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. SOX addresses, among other matters:

•audit committees;

•certification of financial statements by the chief executive officer and the chief financial officer;

•the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

•a prohibition on insider trading during pension plan black out periods;

•disclosure of off-balance sheet transactions;

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•a prohibition on personal loans to officers and directors, unless subject to Federal Reserve Regulation O;

•expedited filing requirements for Form 4 statements of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

•disclosure of whether or not a company has adopted a code of ethics;

•“real time” filing of periodic reports;

•auditor independence; and

•various increased criminal penalties for violations of securities laws.

Complying with the requirements of SOX as implemented by the SEC will increase our compliance costs and could make it more difficult to attract and retain board members.

b)Statistical information

The table below provides a cross-reference to portions of Unity Bancorp. Inc.’s Annual Report to Shareholders for the year ended December 31, 2005 (Exhibit 13 hereto), which to the extent indicated, is incorporated by reference herein. Information that is not applicable is indicated by (N/A):

Description of Financial Data	Annual Report Pages
I. Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential
A. Analysis of Net Interest Earnings	10
B. Average Balance Sheets	12
C. Rate/Volume Analysis	14
II. Investment Portfolio
A. Book value of investment securities	36
B. Investment securities by range of maturity with corresponding average yields	36
C. Securities of issuers exceeding ten percent of stockholders’ equity	N/A
III. Loan Portfolio
A. Types of loans	18
B. Maturities and sensitivities of loans to changes in interest rates	18
C. Risk elements
1) Nonaccrual, past due and restructured loans	19
2) Potential problem loans	19
3) Foreign outstandings	N/A
4) Loan concentrations	18
D. Other interest bearing assets	N/A
IV. Summary of Loan Loss Experience
A. Analysis of the allowance for loan losses	20
B. Allocation of the allowance for loan losses	21
V. Deposits
A. Average amount and average rate paid on major categories of deposits	12
B. Other categories of deposits	N/A
C. Deposits by foreign depositors in domestic offices	N/A
D. Time deposits of $100,000 or more by remaining maturity	39
E. Time deposits of $100,000 or more by foreign offices	N/A
VI. Return on Equity and Assets	48
VII. Short-term Borrowings	39

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Item 1A. Risk Factors

Our business, financial condition, results of operations and the trading prices of our securities can be materially and adversely affected by many events and conditions including the following:

Risks affecting Our Business:

Our earnings may not continue to grow if we are unable to successfully attract core deposits and lending opportunities and exploit opportunities to generate fee-based income.

We have experienced significant growth, and our future business strategy is to continue to expand. Historically, the growth of our loans and deposits has been the principal factor in our increase in net interest income. In the event that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. Our ability to continue to grow depends, in part, upon our ability to expand our market share, successfully attract core deposits, and identify loan and investment opportunities as well as opportunities to generate fee-based income. Our ability to manage growth successfully will also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest rate trends.

Our growth-oriented business strategy could be adversely affected if we are not able to attract and retain skilled employees and manage our expenses.

We expect to continue to experience growth in the scope of our operations and correspondingly in the number of our employees and customers. We may not be able to successfully manage our business as a result of the strain on our management and operations that may result from this growth. Our ability to manage this growth will depend upon our ability to continue to attract, hire and retain skilled employees. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees.

Curtailment of the Small Business Administration loan program could negatively affect the Company.

The Company has historically been a participant in various SBA lending programs, and the Company’s activity under these programs has contributed significantly to its net income. Proposals have been made from time to time to curtail the Federal Government’s funding of the SBA loan programs. Any reduction in SBA funding for its loan programs could negatively effect our results of operations.

Risks Related to the Banking Industry:

The Company is subject to interest rate risk.

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, a flat yield curve, in which short-term deposit and borrowing rates equal longer-term investment or loan rates, could adversely impact net interest income as the spread between interest-earning assets and interest-bearing liabilities compresses.

Although management believes it has implemented effective asset and liability management strategies, to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations.

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Changes in local economic conditions could adversely affect our loan portfolio.

Our success depends to a great extent upon the general economic conditions of the local markets that we serve. Unlike larger banks that are more geographically diversified, we provide banking and financial services primarily to customers in the five counties in New Jersey markets in which we have branches, so any decline in the economy of New Jersey could have an adverse impact on us.

Our loans, the ability of borrowers to repay these loans and the value of collateral securing these loans, are impacted by economic conditions. In addition, a large portion of our income is generated from gains on the sale of SBA loans and the related servicing. Our financial results, the credit quality of our 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. Although economic conditions in our primary market area are strong and have aided our recent growth, we cannot assure you that these conditions will continue to prevail. We cannot assure you that positive trends or developments discussed in this prospectus will continue or that negative trends or developments will not have a significant adverse effect on us.

There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.

The risk of nonpayment (or deferred or delayed payment) of loans is inherent in commercial banking. Such non-payment, or delayed or deferred payment of loans to the Company, if they occur, may have a material adverse effect on our earnings and overall financial condition. Additionally, in compliance with applicable banking laws and regulations, the Company maintains an allowance for loan losses created through charges against earnings. As of December 31, 2005, the Company’s allowance for loan losses was $6.9 million. 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. We seek to minimize our 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 loan losses.

Our allowance for loan losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and nonperformance. Our allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses could materially and adversely affect results of our 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 loan loss experience, 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 our control, and these losses may exceed current estimates. State and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses and have in the past required an increase in our allowance for loan losses. Although we believe that our allowance for loan losses is adequate to cover probable and reasonably estimated losses, we cannot assure you that we will not further increase the allowance for loan losses or that regulators will not require us to increase this allowance. Either of these occurrences could adversely affect our earnings.

We are in competition with many other banks, including larger commercial banks which have greater resources than us.

The banking industry within the State of New Jersey is highly competitive. The Company’s principal market area is served by branch offices of large commercial banks and thrift institutions. In addition, in 1999 the Gramm-Leach-Bliley Financial Modernization Act of 1999 was passed into law. The Modernization Act permits other financial entities, such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing competition. A number of our competitors have substantially greater resources than we do to expend upon advertising and marketing, and their substantially greater capitalization enables them to make much larger loans. Our success depends a great deal upon our judgment that large and mid-size financial institutions do not adequately serve small businesses in our principal market area and our ability to compete favorably for such customers. In addition to competition from larger institutions, we also face competition for individuals and small businesses from recently formed banks seeking to compete as “home town” institutions. Most of these new institutions have focused their marketing efforts on the smaller end of the small business market we serve.

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The laws that regulate our operations are designed for the protection of depositors and the public, but not our stockholders.

The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the deposit insurance funds and not for the purpose of protecting stockholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change. We can give no assurance that future changes in laws and regulations or changes in their interpretation will not adversely affect our business.

We may be subject to higher operating costs as a result of government regulation.

We are subject to extensive federal and state legislation, regulation and supervision which is intended primarily to protect depositors and the Federal Deposit Insurance Company’s Bank Insurance Fund, rather than investors. Legislative and regulatory changes may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for non-bank competitors.

We cannot predict how changes in technology will impact our business.

The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

•telecommunications;

•data processing;

•automation;

•Internet-based banking;

•telebanking; and

•debit cards and so-called “smart cards.”

Our ability to compete successfully in the future will depend on whether we can anticipate and respond to technological changes. To develop these and other new technologies we will likely have to make additional capital investments. Although we continually invest in new technology, we cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future.

The Company’s information systems may experience an interruption or breach in security.

The Company relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

Item 1B.  Unresolved Staff Comments

There are no unresolved staff comments

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Item 2. Properties

The Company presently conducts its business through its main office located at 64 Old Highway 22, Clinton, New Jersey, and its fourteen branch offices.

The following table sets forth certain information regarding the Company’s properties from which it conducts business as of December 31, 2005.

Location	Leased Or Owned	Date Leased or Acquired	Lease Expiration	2005 Annual Rental Fee
Clinton, NJ	Leased	1996	2009	$	483,490
Colonia, NJ	Leased	1995	2008	36,500
Flemington, NJ	Owned	2005	—	—
Linden, NJ	Owned	1997	—	—
Highland Park, NJ	Leased	1999	2009	77,438
North Plainfield, NJ	Owned	1991	—	—
Scotch Plains, NJ	Owned	2004	—	—
Springfield, NJ	Leased	1995	2006	34,049
South Plainfield, NJ	Leased	1999	2009	93,500
Union, NJ	Owned	2002	—	—
Edison, NJ	Leased	1999	2009	108,012
Whitehouse, NJ	Owned	1998	—	—
Bridgewater, NJ	Leased	2003	2008	45,600
Phillipsburg, NJ	Leased	2005	2007	5,700

Item 3. Legal Proceedings

From time to time, the Company is subject to other legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on the business, financial condition, or operating results of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted for a vote of the Company’s shareholders during the fourth quarter of fiscal 2005.

10

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Purchases of Equity Securities

(a)Market Information

The Company’s Common Stock is quoted on the NASDAQ National Market under the symbol “UNTY”. The following table sets forth the high and low bid prices of the Common Stock as reported on the NASDAQ National Market for the periods indicated. The prices reflect the impact of the 5 percent stock distribution paid on June 30, 2005.

	High			Low
Year Ended December 31, 2005:
4th Quarter	$		14.25	$		12.47
3rd Quarter	13.02			11.60
2nd Quarter	12.50			11.35
1st Quarter	13.98			12.00
Year Ended December 31, 2004:
4th Quarter	$	12.57		$	10.91
3rd Quarter	13.25			10.76
2nd Quarter	13.76			10.95
1st Quarter	13.81			10.86

(b)Holders

As of March 1, 2006, there were approximately 556 shareholders of record of the Company’s Common Stock.

(c)Dividends

The following table sets forth the dividends declared by the Company during 2004 and 2005.

	Dividend Declared
Year Ended December 31, 2005:
4th Quarter	$	.05
3rd Quarter	$	.05
2nd Quarter	$	.05
1st Quarter	$	.04
Year Ended December 31, 2004
4th Quarter	$	.04
3rd Quarter	$	.04
2nd Quarter	$	.04
1st Quarter	$	.04

During the fourth quarter of 2005, the Company did not repurchase any of its equity securities.

Item 6.Selected Financial Data

The information under the caption “Selected Consolidated Financial Data” on page 48 of the Company’s Annual Report to Shareholders for the year ended December 31, 2005 is incorporated by reference herein.

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

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 9 through 26 of the Company’s Annual Report to Shareholders for the year ended December 31, 2005 is incorporated by reference herein.

11

Item 7A.Quantitative and Qualitative Disclosure About Market Risk

The information under the caption “Market Risk” on pages 22 through 24 of the Company’s Annual Report to Shareholders for the year ended December 31, 2005 is incorporated by reference herein.

Item 8.Financial Statements and Supplementary Data

The Financial Statements and Notes to Consolidated Financial Statements on pages 28 through 48 of the Company’s Annual Report to Shareholders for the year ended December 31, 2005 are incorporated by reference herein.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.Controls and Procedures

(a)Evaluation of disclosure controls and proceedings.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)Changes in internal controls.

There were not any significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

12

PART III

Item 10.Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act

The information concerning the directors and executive officers of the Company under the caption “Election of Directors” and the information under the captions “Compliance with Section 16(a) of the Securities Exchange Act of 1934”and “Governance of the Company — Audit Committee” in the Proxy Statement for the Company’s 2006 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2006.

Also, refer to the information under the caption “Executive Officers of Registrant” in Part I of this Annual Report on Form 10-K for a description of the Company’s executive officers, who are not also directors.

Item 11.Executive Compensation

The information concerning executive compensation under the caption “Executive Compensation” (other than the “Board of Directors Report on Executive Compensation” and the “Performance Graph”) in the Proxy Statement for the Company’s 2006 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2006.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information concerning the security ownership of certain beneficial owners and management under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for the Company’s 2006 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2006.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information with respect to the equity securities that are authorized for issuance under the Company’s compensation plans as of December 31, 2005.

EQUITY COMPENSATION PLAN INFORMATION

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)			Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation stock option plans approved by security holders	717,581	$		6.10	65,249
Equity compensation plans approved by security holders	25,550	$		13.27	79,450
Equity compensation plans not approved by security holders	—	—			—
Total	743,131	$	6.35		144,699

During the fourth quarter of 2005, the Company did not repurchase any of its equity securities.

Item 13.Certain Relationships and Related Transactions

The information concerning certain relationships and related transactions under the caption “Certain Transactions with Management” in the Proxy Statement for the Company’s 2006 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2006.

13

Item 14.Principal Accountant Fees and Services

The information concerning principal accountant fees and services as well as related pre-approval policies under the caption “Appointment of Auditors for Fiscal 2006” in the Proxy Statement for the Company’s 2006 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2006.

14

PART IV

Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)FINANCIAL STATEMENTS.

The following Consolidated Financial Statements of the Company and subsidiaries included in the Company’s Annual Report to Shareholders for the year ended December 31, 2005 are incorporated by reference in Part II, Item 8.

Report of Independent Registered Public Accounting Firm (page 19)

Consolidated Balance Sheets (page 20)

Consolidated Statements of Income (page 21)

Consolidated Statements of Changes in Shareholders’ Equity (page 22)

Consolidated Statements of Cash Flows (page 23)

Notes to Consolidated Financial Statements (pages 24 through 38)

(b)EXHIBITS.

Exhibit Number	Description of Exhibits
3(i)	Certificate of Incorporation of the Company, as amended (2)
3(ii)	Bylaws of the Company (7)
4(i)	Form of Stock Certificate (7)
10(i)	1994 Stock Option Plan for Non-Employee Directors (1)
10(ii)	1997 Stock Option Plan (3)
10(iii)	1997 Stock Bonus Plan (3)
10(iv)	1998 Stock Option Plan (4)
10(v)	1999 Stock Option Plan (5)
10(vi)	Employment Agreement dated March 23, 2004 with James A. Hughes (8)
10(vii)	Settlement Agreement and General Release dated December 31, 2003 with Anthony J. Feraro (8)
10(viii)	Retention Agreement dated March 23, 2004 with Michael T. Bono (8)
10(ix)	Retention Agreement dated March 23, 2004 with Michael F. Downes (8)
10(x)	Retention Agreement dated March 23, 2004 with Alan J. Bedner (8)
10(xi)	Retention Agreement dated March 23, 2004 with John Kauchak (8)
10(xii)	Retention Agreement dated March 23, 2004 with Kelly Stashko (8)
10(xiii)	2002 Stock Option Plan (6)
10(xiv)	Second Amendment dated September 19, 2003 to Lease Agreement between Unity Bank and Clinton Unity Group (8)
10(xv)	Real Estate Purchase Agreement dated October 23, 2003 between Unity Bank and Premiere Development II, LLC (8)
10 (xvi)	2004 Stock Bonus Plan (9)
13	Portion of Unity Bancorp. Inc. 2005 Annual Report to Shareholders

15

21	Subsidiaries of the Registrant
23	Consent of KPMG LLP
31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President, Chief Executive Officer, and Chief Financial Officer pursuant to Section 906

(1)Previously filed with the Securities and Exchange Commission as an Exhibit to the Registration Statement on Form S-4 (File No. 33-76392) and incorporated by reference herein.

(2)Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Report on Form 8-K filed on July 22, 2002 and incorporated by reference herein.

(3)Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on April 4, 1997.

(4)Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on March 30, 1998.

(5)Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on April 2, 1999.

(6)Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on April 10, 2002.

(7)Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual Report on Form 10-K filed March 26, 2003.

(8)Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual Report on Form 10-K filed March 26, 2004.

(9)Previously filed with the Securities and Exchange Commission as an Exhibit to the Proxy Statement for the Annual Meeting of Shareholders filed on April 15, 2004.

(c)Not applicable

16

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNITY BANCORP, INC.
By:	/s/    Alan J. Bedner
	Alan J. Bedner
	Executive Vice President,
	Chief Financial Officer
March 23, 2006
(Date)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE
/s/        David D. Dallas	Chairman of the Board and Director	March 23, 2006
David D. Dallas
/s/        James A. Hughes	President, Chief Executive Officer and Director	March 23, 2006
James A. Hughes
/s/        Alan J. Bedner	Chief Financial Officer (Principal Financial and	March 23, 2006
Alan J. Bedner	Accounting Officer)
/s/        Frank Ali	Director	March 23, 2006
Frank Ali
/s/        Dr. Mark S. Brody	Director	March 23, 2006
Dr. Mark S. Brody
/s/        Robert H. Dallas, II	Director	March 23, 2006
Robert H. Dallas, II
/s/        Peter E. Maricondo	Director	March 23, 2006
Peter E. Maricondo
/s/        Wayne Courtright	Director	March 23, 2006
Wayne Courtright
/s/        Charles S. Loring	Director	March 23, 2006
Charles S. Loring
/s/        Allen Tucker	Director	March 23, 2006
Allen Tucker

17

EX-13

EXHIBIT 13

Portion of Unity Bancorp, Inc. 2005 Annual Report to Shareholders

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes relating thereto included herein. When necessary, reclassifications have been made to prior period’s data for purposes of comparability with current period presentation.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operation” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2005, contains a summary of the Company’s significant accounting policies. Management believes the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically reviewed with the Audit Committee and the Board of Directors.

The provision for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate . Accordingly, the ability to collect a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in real estate market conditions and may be adversely affected should real estate values decline. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is a bank holding company incorporated in New Jersey 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. The Bank provides a full range of commercial and retail banking services through the Internet and its 14 branch offices located in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey. These services include: the acceptance of demand, savings and time deposits, extension of consumer, real estate, Small Business Administration and other commercial credits.

Results of Operations

Net income for the year ended December 31, 2005, was $6.2 million, a 16.5 percent increase compared to $5.3 million for 2004. This was the result of increased net interest income driven by a higher volume of earning assets and increased non-interest income, partially offset by higher operating expenses and a higher provision for loan losses. Performance highlights for 2005 include:

•Earnings per basic and diluted share for the year ended December 31, 2005 were $1.01 and $0.96, respectively compared to $0.88 and $0.83 for the prior year. All share amounts have been adjusted for the 5 percent stock distribution paid on June 30, 2005.

•Return on average assets equaled 1.10 percent in 2005 and 2004.

1

•Return on average equity equaled 16.29 percent in 2005 and 16.32 percent in 2004.

•The efficiency ratio improved to 61.53 percent in 2005 compared to 64.51 percent in 2004.

During 2005, the Federal Reserve Board raised short-term interest rates 8 times for a total of 200 basis points. This resulted in the target Federal Funds rate increasing from 2.25 percent at December 31,2004 to 4.25 percent at December 31, 2005 and the Prime-lending rate increasing from 5.25 percent to 7.25 percent during this period. These increases resulted in a flat yield curve and a challenging interest rate environment in which to operate. Despite this challenging interest rate environment, the Company was able to grow net interest income due to strong growth in interest earning assets and a stable net interest margin. However, the effect of the flat yield curve may cause the net interest margin and net interest spread to contract in 2006 due to the competitive pricing of deposits in the New Jersey market place and the resulting higher cost of deposits.

2005 vs. 2004

Net interest income, the largest component of operating income, increased $3.1 million or 16.1 percent to $22.2 million for the year ended December 31, 2005 compared to $19.2 million in 2004. The increase in net interest income was attributed to a higher volume of interest earning assets and an increased yield on earning assets, partially offset by a higher cost of funds. Net interest spread, the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities, decreased 3 basis points to 3.74 percent in 2005 from 3.77 percent in 2004. Net interest margin (net interest income as a percentage of average interest-earning assets) decreased slightly to 4.17 percent in 2005, from 4.18 percent in 2004. The primary cause of the decrease in both net interest spread and net interest margin was the higher cost of deposits and the shift of lower cost checking products into higher cost savings and time deposits.

Non-interest income increased $561 thousand or 7.4 percent to $8.2 million in 2005 compared to $7.6 million in 2004. The primary reason for the increase was an increase in loan servicing fees, gains on the sale of residential mortgages, bank owned life insurance income and deposit service charge income, partially offset by lower gains on the sale of SBA loans.

Non-interest expense increased $1.4 million or 8.4 percent to $18.7 million in 2005 from $17.2 million in 2004. This increase was primarily the result of increased compensation and benefits, furniture and equipment, occupancy and processing and communications expenses, offset in part by reduced loan servicing costs and professional fees.

In 2005, the Company recorded income tax expense of $3.7 million, resulting in a 37.3 percent effective tax rate compared to $3.1 million or a 36.4 percent effective tax rate in 2004.

2004 vs. 2003

Net income for the year ended December 31, 2004, was $5.3 million, a 16.3 percent increase compared to $4.6 million for 2003. Earnings per basic and diluted share for the year ended December 31, 2004 were $0.88 and $0.83, respectively compared to $0.77 and $0.74 for the prior year. The increase in earnings from the prior year is primarily the result of increased revenue due to increased net interest income driven by a higher volume of earning assets, a lower provision for loan losses and lower non-interest expenses, partially offset by reduced non-interest income and increased income tax expense.

Net Interest Income

The Company’s principal source of income is net interest income. Net interest income is the difference between the interest earned on its earning assets such as investments and loans, and the interest paid on deposits and borrowings.

Tax-equivalent interest income totaled $33.9 million in 2005, an increase of $7.7 million or 29.2 percent, compared to $26.2 million realized in 2004. Of the $7.7 million increase in interest income on a tax equivalent basis in 2005, $4.8 million can be attributed to the increase in average interest earning assets while $2.9 million may be attributed to an increase in the yield on interest-earning assets. The average volume of interest-earning assets increased $74.5 million to $534.7 million in 2005 compared to $460.2 million in 2004. This was due to a $67.7 million increase in average loans, a $4.7 million increase in average securities and a $2.1

2

million increase in average Federal funds sold and interest bearing deposits with banks. The yield on interest-earning assets increased 64 basis points to 6.34 percent in 2005 due to the impact of a higher overall interest rate environment in 2005 compared to 2004. Variable rate instruments such as SBA loans, commercial loans, consumer home equity lines of credit and federal funds sold and interest on deposits increased due to the higher market rates. Key interest rate increases during 2005 included:

•The average interest rate on Federal funds sold and interest bearing deposits increased 205 basis points to 3.33 percent in 2005,  compared to 1.28 percent in 2004.

•The average interest rate earned on SBA loans increased 199 basis points to 8.82 percent in 2005, compared to 6.83 percent in 2004, due to the quarterly re-pricing of these loans with changes in Prime.

•The average interest rate earned on Consumer loans increased 102 basis points to 5.79 percent in 2005, compared to 4.77 percent in 2004, due to the re-pricing of Prime-based home equity lines of credit.

The higher interest rate environment also increased the cost of funds. Interest expense was $11.6 million in 2005, an increase of $4.6 million or 65.6 percent compared to 2004. Of the $4.6 million increase in interest expense in 2005, $2.4 million was attributed to an increase in interest bearing liabilities and $2.2 million was due to an increase in the rates paid on these liabilities. Interest-bearing liabilities averaged $446.1 million in 2005, an increase of $82.1 million, or 22.5 percent, compared to 2004. The increase in interest-bearing liabilities was a result of increases in the savings and time deposits and the borrowed funds and subordinated debentures categories, offset in part by a decline in interest-bearing demand deposits. Average borrowed funds and subordinated debentures increased $17.4 million to $46.6 million in 2005 compared to $29.2 million in 2004. The average cost of interest-bearing liabilities increased 67 basis points to 2.60 percent, primarily due to the re-pricing of deposits in a higher interest rate environment. The cost of interest bearing deposits increased 67 basis points to 2.40 percent in 2005 as the rates paid on all deposit products increased and the mix of deposits shifted from lower-cost interest bearing demand deposits to higher cost savings and time deposits. The cost of borrowed funds and subordinated debentures increased 12 basis points to 4.32 percent.

Tax-equivalent net interest income amounted to $22.3 million in 2005, an increase of $3.1 million, or 15.9 percent, compared to 2004. Net interest margin decreased slightly to 4.17 percent for 2005, compared to 4.18 percent in 2004. The reduced net interest margin was the result of the higher cost of funding asset growth. The net interest spread was 3.74 percent, a 3 basis point decrease from 3.77 percent in 2004.

For 2004, tax-equivalent net interest income totaled $19.2 million, an increase of $1.3 million or 7.3 percent from the $17.9 million earned in 2003. This increase was the result of a larger volume of interest earning assets offset by an 8 basis point decrease in net interest spread, which averaged 3.77 percent in 2004. Net interest margin was 4.18 percent for 2004, a decrease of 10 basis points compared to 4.28 percent in 2003.

The following table reflects the components of net interest income, setting forth for the periods presented herein: (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) net interest spread, (which is the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) net interest income/margin on average earning assets. Rates/Yields are computed on a fully tax-equivalent basis, assuming a federal income tax rate of 34 percent.

3

Consolidated Average Balance Sheets

(Dollar amounts in thousands – Interest amounts and interest rates/yields on a fully tax-equivalent basis.)

	2005								2004
Years ended December 31,	Average Balance			Interest			Rate/ Yield		Average Balance			Interest			Rate/ Yield
ASSETS
Interest-earning assets:
Federal funds sold and interest-bearing deposits with banks	$	17,160		$	572		3.33	%	$	15,039		$	193		1.28	%
Securities:
Available for sale	74,208			3,152			4.25		83,291			3,374			4.05
Held to maturity	31,139			1,477			4.74		17,395			867			4.98
Total securities	105,347			4,629			4.39		100,686			4,241			4.21
Loans, net of unearned discount:
SBA	74,369			6,558			8.82		62,853			4,296			6.83
Commercial	230,039			16,164			7.03		192,435			12,934			6.72
Residential mortgage	62,103			3,318			5.34		50,242			2,712			5.40
Consumer	45,707			2,648			5.79		38,979			1,860			4.77
Total loans	412,218			28,688			6.96		344,509			21,802			6.33
Total interest-earning assets	534,725			33,889			6.34		460,234			26,236			5.70
Non-interest-earning assets:
Cash and due from banks	12,661								13,304
Allowance for loan losses	(6,398		)						(5,724		)
Other assets	24,399								15,603
Total non-interest-earning assets	30,662								23,183
Total Assets	$	565,387							$	483,417
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	150,420		2,605			1.73		$	188,840		2,656			1.41
Savings deposits	130,911			3,164			2.42		49,330			620			1.26
Time deposits	118,174			3,820			3.23		96,686			2,507			2.59
Total interest-bearing deposits	399,505			9,589			2.40		334,856			5,783			1.73
Other debt	46,604			2,014			4.32		29,169			1,225			4.20
Total interest-bearing liabilities	446,109			11,603			2.60		364,025			7,008			1.93
Non-interest-bearing liabilities:
Demand deposits	78,519								85,283
Other liabilities	2,634								1,445
Total non-interest-bearing liabilities	81,153								86,728
Shareholders’ equity	38,125								32,664
Total Liabilities and Shareholders’ Equity	$	565,387							$	483,417
Net interest spread				22,286			3.74	%				19,228			3.77	%
Tax-equivalent basis adjustment				(52		)						(70		)
Net interest income				$	22,234							$	19,158
Net interest margin							4.17	%							4.18	%

4

	2003								2002							2001
Years ended December 31,	Average Balance			Interest			Rate/ Yield		Average Balance			Interest		Rate/ Yield		Average Balance			Interest		Rate/ Yield
ASSETS
Interest-earning assets:
Federal funds sold and interest-bearing deposits with banks	$	10,846		$	138		1.27	%	$	9,838		$	161	1.64	%	$	22,857		$	1,007	4.41	%
Securities:
Available for sale	63,102			2,403			3.81		53,277			2,522		4.73		55,674			3,327		5.98
Held to maturity	19,633			998			5.08		24,099			1,440		5.98		25,307			1,549		6.12
Total securities	82,735			3,401			4.11		77,376			3,962		5.12		80,981			4,876		6.02
Loans, net of unearned discount:
SBA	65,555			4,115			6.28		57,808			3,750		6.49		40,454			3,565		8.81
Commercial	175,685			12,495			7.11		145,031			10,842		7.48		93,925			7,870		8.38
Residential mortgage	52,014			3,126			6.01		67,470			4,030		5.97		76,560			4,640		6.06
Consumer	32,323			1,676			5.19		26,873			1,550		5.77		27,776			1,934		6.96
Total loans	325,577			21,412			6.58		297,182			20,172		6.79		238,715			18,009		7.54
Total interest-earning assets	419,158			24,951			5.96		384,396			24,295		6.32		342,553			23,892		6.97
Non-interest-earning assets:
Cash and due from banks	14,216								13,879							11,463
Allowance for loan losses	(4,783		)						(3,680		)					(2,785		)
Other assets	13,764								12,317							13,075
Total non-interest-earning assets	23,197								22,516							21,753
Total Assets	$	442,355							$	406,912						$	364,306
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	184,220		2,703			1.47		$	151,115		2,731		1.81		$	109,444		3,093		2.83
Savings deposits	36,976			423			1.14		34,000			760		2.24		30,837			734		2.38
Time deposits	90,814			2,733			3.01		112,799			4,175		3.70		130,063			7,095		5.46
Total interest-bearing deposits	312,010			5,859			1.88		297,914			7,666		2.57		270,344			10,922		4.04
Other debt	21,532			1,169			5.43		15,719			906		5.76		12,911			780		6.04
Total interest-bearing liabilities	333,542			7,028			2.11		313,633			8,572		2.73		283,255			11,702		4.13
Non-interest-bearing liabilities:
Demand deposits	79,102								64,900							56,967
Other liabilities	1,152								1,714							1,670
Total non-interest-bearing liabilities	80,254								66,614							58,637
Shareholders’ equity	28,559								26,665							22,414
Total Liabilities and Shareholders’ Equity	$	442,355							$	406,912						$	364,306
Net interest spread				17,923			3.85	%				15,723		3.59	%				12,190		2.84	%
Tax-equivalent basis adjustment				(56		)						—							—
Net interest income				$	17,867							$	15,723						$	12,190
Net interest margin							4.28%							4.09	%						3.56	%

5

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 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 34 percent.

	2005 versus 2004								2004 versus 2003
Year ended December 31, (Dollar amounts in thousands	Increase (Decrease) Due to Change in								Increase (Decrease) Due to Change in
on a tax equivalent basis)	Volume			Rate		Net			Volume		Rate			Net
Interest Income:
Federal funds sold and interest-bearing deposits	$	31		$	348	$	379		$	54	$	1		$	55
Investment securities	272			116		388			701		139			840
Net loans	4,475			2,411		6,886			1,198		(808		)	390
Total interest income	$	4,778		$	2,875	$	7,653		$	1,953	$	(668	)	$	1,285
Interest Expense:
Interest-bearing demand deposits	$	(595	)	$	544	$	(51	)	$	66	$	(113	)	$	(47	)
Savings deposits	1,635			909		2,544			150		47			197
Time deposits	622			691		1,313			170		(396		)	(226		)
Total deposits	$	1,662		$	2,144	$	3,806		$	386	$	(462	)	$	(76	)
Other debt	753			36		789			358		(302		)	56
Total interest expense	$	2,415		$	2,180	$	4,595		$	744	$	(764	)	$	(20	)
Net interest income-FTE	$	2,363		$	695	$	3,058		$	1,209	$	96		$	1,305
(Decrease) increase in tax-equivalent adjustment						(18		)						14
Net interest income						$	3,076							$	1,291

Provision for Loan Losses

The provision for loan losses is determined based on management’s evaluation of the adequacy of the allowance for loan losses which is maintained at a level that we believe is sufficient to absorb estimated probable losses in the loan portfolio as of the balance sheet date.

The provision for loan losses totaled $1.9 million for 2005, an increase of $675 thousand, compared with $1.2 million for 2004. The provision for loan losses is comprised of the specific and general reserve factors used to determine reserve levels on certain types of loans. The increase in the provision for loan losses for 2005 was attributable to a higher level of non-performing loans and net charge-offs, the change and composition of the loan portfolio, the results of the analysis of the estimated probable losses inherent in the loan portfolio, the credit worthiness of particular borrowers, and general economic conditions. Non-performing loans totaled $4.4 million at December 31, 2005, an increase of $270 thousand compared to $4.1 million at December 31, 2004. Net loan charge-offs for 2005 were $814 thousand compared to $671 thousand in 2004. The provision is based on management’s assessment of the adequacy of the allowance for loan losses described under the section titled Allowance for Loan Losses. Management believes the current provision is appropriate based on its assessment of the adequacy of the allowance for loan losses.

The provision for loan losses totaled $1.2 million for 2004, a decrease of $425 thousand compared to $1.6 million in 2003. In 2004, the Company recorded $671 thousand of net charge-offs, compared to $342 thousand of net charge-offs in 2003. The decrease in the provision from 2003 to 2004 was attributed primarily to the decreased level of non-performing loans, partially offset by an increase in net charge-offs, the change and composition of the loan portfolio, the specific and general reserve factors used to determine reserve levels on certain types of loans, the results of the analysis of the estimated probable losses inherent in the portfolio based upon the review of particular loans, the credit worthiness of particular borrowers, and general economic conditions.

Non-Interest Income

Non-interest income consists of service charges on deposits, service and loan fee income, gains on sales of securities and loans, Bank Owned Life Insurance (BOLI) income and other income. Non-interest income was $8.2 million for 2005, a $561 thousand, or 7.4 percent increase compared to $7.6 million for 2004. The increase in non-interest income was due to the increase in service and loan fee income, gains on Mortgage loans, BOLI income and service charges on deposits, partially offset by lower gains on sales of Small Business Administration (SBA) 7(a) loans.

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The following table shows the components of non-interest income for 2005, 2004 and 2003:

(In thousands)	2005		2004		2003
Service charges on deposit accounts	$	1,766	$	1,618	$	1,977
Service and loan fee income	2,111		1,831		1,956
Gain on SBA loan sales, net	2,956		3,217		3,075
Gain on Mortgage loan sales	382		192		49
Bank owned life insurance	185		—		—
Net security gains	69		76		185
Other income	721		695		1,101
Total non-interest income	$	8,190	$	7,629	$	8,343

Service charges on deposits increased $148 thousand or 9.1 percent to equal $1.8 million in 2005 compared to $1.6 million in 2004. This increase was the result of a higher volume of overdraft fees collected in 2005 compared to the prior year. This was in contrast to 2004 when service charges on deposit accounts decreased $359 thousand, or 18.2 percent, from 2003 due to the Company choosing to

mitigate overdraft risk with certain customers.

Service and loan fee income increased $280 thousand or 15.3 percent to $2.1 million in 2005 compared to $1.8 million in 2004. This was the result of increased prepayment fees, loan processing fees and SBA servicing income. Service and loan fee income amounted to $1.8 million for 2004, a decrease of $125 thousand, or 6.4 percent, from 2003. This decrease was the result of lower levels of prepayment penalties on commercial loans compared to 2003.

Gains on the sale of SBA loans decreased $261 thousand or 8.1 percent to $3.0 million in 2005 compared to $3.2 million in 2004. This decrease was the result of increased broker and employee commissions being paid on these loans. Gains on the sale of SBA loans were $3.2 million in 2004, a 4.6 percent increase over 2003. The increase compared to the prior year was due to an increased volume of SBA loan sales during the period. Gains on SBA loan sales reflect the participation in the SBA’s guaranteed loan program. Under the SBA 7(a) program, the SBA guarantees up to 85 percent of the principal of a qualifying loan. The Company usually sells the guaranteed portion of the loan into the secondary market and retains the unguaranteed portion. Sales of guaranteed SBA loans totaled $37.5 million, $35.9 million, and $34.8 million for 2005, 2004 and 2003, respectively.

Gains on the sale of mortgage loans increased $190 thousand to $382 thousand in 2005, compared to $192 thousand in 2004 due to a larger volume of mortgage loans being sold. Gains on the sale of mortgage loans increased $143 thousand in 2004 to $192 thousand due to a larger volume of mortgage loans being sold as the Company invested more resources in this line of business.

In December 2004, the Company purchased $5 million of BOLI to offset the rising costs of employee benefits. In 2005, the cash surrender value of the BOLI increased $185 thousand.

Net security gains totaled $69 thousand in 2005, a $7 thousand or 9.2 percent decrease compared to the prior year. Net security gains were $76 thousand for the year ended December 31, 2004, a decrease of 58.9 percent, as compared to $185 thousand for the prior year-end. In 2003, the Company recognized an impairment charge of $331 thousand on an asset-backed security, which is included as a reduction in security gains. In 2004, $75 thousand in interest payments were recorded against principal. This bond was sold in 2005.

Other income increased $26 thousand to $721 thousand in 2005 compared to $695 thousand in 2004. This increase was due to increased commercial loan referral income. Other income was $695 thousand in 2004, compared to $1.1 million in 2003. The decrease in other income is due primarily to exiting the joint venture with Hallmark Title Company, and the decreased commissions from the third-party sales of security and annuity products.

Non-Interest Expense

Total non-interest expense was $18.7 million for 2005, an increase of $1.4 million or 8.4 percent over 2004. This increase was primarily the result of increased compensation and benefits, furniture and equipment, occupancy and processing and communications expenses, offset in part by reduced loan servicing costs and professional fees. The following table presents a breakdown of non-interest expense for the years ended December 31, 2005, 2004 and 2003:

(In thousands)	2005		2004		2003
Compensation and benefits	$	9,639	$	8,435	$	8,301
Occupancy, net	2,256		2,085		1,884
Processing & communications	2,010		1,919		2,100
Furniture & equipment	1,350		1,146		1,061
Advertising	697		695		596
Professional services	547		593		1,541
Loan servicing	482		738		651
Deposit insurance	61		61		62
Other expenses	1,634		1,558		1,133
Total non-interest expense	$	18,676	$	17,230	$	17,329

Compensation and benefits expense, the largest component of non-interest expense, totaled $9.6 million in 2005, an increase of $1.2 million or 14.3 percent compared to 2004. This increase was due to increased head count as the Company added retail and lending staff, increased merit and incentive based payments and an increase in medical benefits premiums. Compensation and benefits expense was $8.4

7

million for 2004, an increase of $134 thousand or 1.6 percent, compared to 2003. The increase in compensation and benefits expense for the year was related to the increased head count, merit increases, increases in incentives as a result of increased earnings, and increased medical and benefit premiums. Included in compensation and benefits expense for 2003 is $320 thousand in severance related to the resignation of the former President and Chief Executive Officer. At December 31, 2005, 2004 and 2003 there were 190, 185 and 171 employees respectively.

Occupancy expense increased $171 thousand or 8.2 percent to $2.3 million in 2005. The increase was due to maintenance expense related to branch and back-office refurbishment and a new branch in Phillipsburg, New Jersey. Occupancy expense was $2.1 million for 2004, a 10.7 percent increase over the prior year. The increase in occupancy expense was related to the opening of a new branch location in 2003 and branch maintenance costs; as well as, annual lease adjustments and increased utility and property tax expenses.

Processing and communications expenses increased $91 thousand or 4.7 percent to $2.0 million in 2005 compared to the prior year. These increases were the result of higher data processing and internet banking expenses as our customer base grows as well as increased payroll processing costs. Processing and communications expense decreased to $1.9 million in 2004, a $181 thousand or 8.6 percent decrease compared to 2003. The decrease was due to lower payroll processing costs and lower costs related to the ordering and shipment of coin and currency, partially offset by the increased number of deposit and loan accounts being serviced.

Furniture and equipment expense increased $204 thousand or 17.8 percent to $1.4 million in 2005 compared to the prior year. Furniture and equipment expense increased 8.0 percent to $1.1 million for 2004. The increases over the past two years were due primarily to higher software maintenance and equipment lease expense as we continue to invest in the technology necessary to efficiently service our customers.

Advertising expenses were flat at $697 thousand in 2005 and $695 thousand in 2004. Advertising expenses in 2005 consisted of higher community relations, gifts and marketing events expenses, offset in part by lower marketing expense. Advertising expense was $695 thousand for 2004, an increase of $99 thousand or 16.6 percent, compared to 2003. The increase was due to increased advertising related to new business generation.

Professional service fees decreased $46 thousand to $547 thousand in 2005 compared to 2004 due to lower legal and consulting fees, partially offset by increased accounting and audit fees. Professional services fees totaled $593 thousand for 2004, a $948 thousand, or 61.5 percent decrease, compared to 2003. This decrease is due primarily to $700 thousand in professional fees associated with an audit committee inquiry regarding the former President and Chief Executive Officer. Legal expenses related to ongoing litigation expenses also fell during 2004.

Loan servicing costs decreased $256 thousand or 34.7 percent to $482 thousand in 2005 compared to 2004. The decrease was the result of the collection of prior period expenses. Loan servicing expense amounted to $738 thousand for 2004, an increase of $87 thousand, or 13.4 percent compared to 2003. The increase in loan servicing expenses was related to appraisal and filing costs incurred when generating new loan volume, as well as legal and loan collection costs associated with non-performing loans.

Deposit insurance expense was $61 thousand for 2005 and 2004 and relatively flat compared to $62 thousand in 2003.

Other expenses increased $76 thousand or 4.9 percent to $1.6 million compared to the prior year. This increase was due primarily to increased insurance expenses and employee recruiting expenses. Other expenses amounted to $1.6 million for 2004, an increase of $425 thousand or 37.5 percent from the prior year. The increase was due primarily to the settlement of a lawsuit in 2004 and increases in employee recruiting and education expense.

Income Tax Expense

For 2005, the Company reported income tax expense of $3.7 million for a 37.3 percent effective tax rate compared to $3.1 million or 36.4 percent effective tax rate in 2004. The increase in the tax provision was the result of higher pre-tax earnings and a higher effective tax rate. The reduction in the effective tax rate in 2004 was the result of the realization of a $286 thousand prior period State tax asset valuation allowance. The Company anticipates a 35 percent to 36 percent effective income tax rate in 2006.

The Company reported income tax expense of $3.1 million for a 36.4 percent effective tax rate in 2004 compared to $2.7 million or a 37.1 percent effective tax rate in 2003. The increase in the tax provision was the result of higher pre-tax earnings, partially offset by the reduction in the effective tax rate. The reduction in the effective tax rate was the result of the realization of a $286 thousand prior period State tax valuation allowance asset during 2004. All prior period State tax valuation reserves were utilized in 2004.

Financial Condition

Total assets increased $98.8 million, or 19.2 percent, to $614.2 million at December 31, 2005, compared to $515.4 million at December 31, 2004. This increase was due to a $75.0 million increase in total loans, a $15.8 million increase in federal funds sold and interest bearing deposits, and a $4.7 million increase in total securities funded by an $88.0 million increase in total deposits, a $5.0 million increase in borrowed funds and a $5.1 million increase in shareholders’ equity. Included in this asset growth was $16.4 million in loans and $21.0 million in deposits which were acquired in November 2005 when the Company purchased interState Net Bank’s Phillipsburg, New Jersey branch.

Average total assets for 2005 were $565.4 million, an $82.0 million increase from the prior year’s $483.4 million average

8

balance. The increase in average assets was due primarily to growth in the loan portfolio and federal funds sold and interest bearing deposits, funded by savings and time deposits and borrowed funds.

Investment Securities Portfolio

The Company’s securities portfolio consists of available for sale and held to maturity investments. The investment securities portfolio is maintained for asset-liability management purposes, as an additional source of liquidity, and as an additional source of earnings.

Securities available for sale 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. Securities available for sale consist primarily of mortgage-backed securities, U.S. Government and Federal agency securities, corporate bonds and equity securities.

Securities available for sale were $65.6 million at December 31, 2005, a $12.4 million decrease from year-end 2004. During 2005, there were $8.1 million of purchases, $14.0 million of maturities and pay downs, $5.4 million in sales and $1.1 million in depreciation in the market value of the portfolio. Security purchases and sales consisted primarily of agency bonds and mortgage-backed securities. At December 31, 2005, the portfolio had a net unrealized loss of $1.9 million compared to a net unrealized loss of $781 thousand at the end of the prior year. These unrealized gains and losses are reflected net of tax in shareholders’ equity as other comprehensive loss.

The average balance of securities available for sale amounted to $74.2 million in 2005 compared to $83.3 million in 2004. The average yield earned on the available for sale portfolio increased 20 basis points, to 4.25 percent in 2005 from 4.05 percent in 2004. The weighted average repricing of securities available for sale, adjusted for prepayments, amounted to 3.6 years at December 31, 2005, compared to 4.5 years in 2004.

Included in available for sale securities at December 31, 2004 was a $1.0 million asset-backed security which the Company had classified as impaired due to the Caa1 rating by Moody’s and the default rates on the underlying collateral. In 2005, the Company sold this asset-backed security for $600 thousand and recovered $24 thousand of the previously charged off impairment. At December 31, 2004, the Company had recognized a cumulative impairment of $406 thousand on the security.

Securities held to maturity, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is comprised of mortgage-backed securities, obligations of U.S. Government and government sponsored agencies and corporate securities. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase.

Securities held to maturity were $40.7 million at December 31, 2005, an increase of $17.2 million or 72.8 percent, from year-end 2004. As of December 31, 2005 and 2004, the market value of held to maturity securities was $40.2 million and $23.8 million, respectively. The average balance of securities held to maturity amounted to $31.1 million in 2005 compared to $17.4 million in 2004. The average yield earned on held to maturity securities decreased 24 basis points, from 4.98 percent in 2004 to 4.74 percent in 2005. The weighted average re-pricing of held to maturity securities, adjusted for prepayments, amounted to 3.1 years and 2.7 years at December 31, 2005 and December 31, 2004, respectively.

Approximately 86 percent of the total investment portfolio had a fixed rate of interest.

Securities with a carrying value of $45.4 million and $53.2 million at December 31, 2005 and 2004, respectively, were pledged to secure government deposits, secured other borrowings and for other purposes required or permitted by law.

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 commercial, SBA, residential mortgage and consumer loans. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk.

Total loans increased $75.0 million, or 20.1 percent to $448.6 million at December 31, 2005, from $373.6 million at year-end 2004. Growth in the loan portfolio was generated by increases of $52.8 million in commercial loans, $15.5 million in SBA loans, $4.9 million in consumer loans and $1.8 million in residential mortgages. Approximately $16.4 million in commercial loan growth was the result of the acquisition of the Phillipsburg, New Jersey branch of interState Net Bank in November 2005.

Average loans increased $67.7 million, or 19.7 percent from $344.5 million in 2004, to $412.2 million in 2005. The increase in average loans is due to growth in the commercial, residential real estate, SBA and consumer loan portfolios. The yield on the loan portfolio was 6.96 percent in 2005 compared to 6.33 percent in 2004. The increase in the yield on the loan portfolio was due to a higher interest rate environment in 2005 due to the Federal Reserve raising interest rates 200 basis points.

The SBA provides guarantees of up to 85 percent of the principal amount of SBA 7(a) loans. SBA 7(a) loans available for sale are generally sold in the secondary market with the non-guaranteed portion held in the portfolio. SBA 7(a) loans held to maturity amounted to $64.7 million at December 31, 2005, an increase of $9.1 million from December 31, 2004. SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $14.0 million at December 31,

9

2005, an increase of $6.4 million from December 31, 2004. SBA 7(a) loans are often originated outside of the Company’s market place.

Commercial loans are generally made in the Company’s market place 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 $260.6 million at December 31, 2005, an increase of $52.8 million from year-end 2004. The commercial portfolio is expected to continue to increase in 2006. Included in commercial loans at December 31, 2005 are $48.6 million of SBA 504 loans. The SBA 504 program consists of real estate backed commercial mortgages where generally the Company has the first mortgage and the SBA has the second mortgage on the property. The Company generally has a 50 percent loan to value ratio on SBA 504 program loans.

Residential mortgage loans consist of loans secured by 1-4 family residential properties. These loans amounted to $62.0 million at December 31, 2005, an increase of $1.8 million from December 31, 2004. The Company did not originate a substantial amount of mortgage loans held for investment in 2005. The residential mortgage portfolio is expected to remain flat in 2006.

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 the personal property being purchased. These loans amounted to $47.3 million at December 31, 2005, an increase of $4.9 million or 11.5 percent from $42.4 million at December 31, 2004. The growth in consumer loans is related to the growth in home equity loans and lines. The consumer portfolio is expected to continue to increase in 2006 due to expected increased loan demand.

The following table sets forth the classification of loans by major category, including unearned, deferred costs and excluding the allowance for loan losses for the past five years at December 31:

	2005				2004				2003				2002				2001
(In thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
SBA held for sale	$	14,001	3.1	%	$	7,574	2.0	%	$	14,014	4.1	%	$	14,396	4.6	%	$	17,719	6.5	%
SBA held to maturity	64,660		14.4		55,576		14.9		49,983		14.7		49,784		16.0		35,754		13.1
Commercial	260,581		58.1		207,771		55.6		188,197		55.4		163,813		52.5		119,262		43.8
Residential mortgage	62,039		13.8		60,240		16.1		51,176		15.1		56,297		18.0		73,144		26.8
Consumer	47,286		10.6		42,419		11.4		36,385		10.7		27,504		8.9		26,680		9.8
Total Loans	$	448,567	100.0	%	$	373,580	100.0	%	$	339,755	100.0	%	$	311,794	100.0	%	$	272,559	100.0	%

The Company has a concentration to a group of borrowers in the Hotel/Motel industry of approximately 13 percent of the total loan portfolio. There are no other concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio. There are no foreign loans in the portfolio. As a preferred SBA lender, a portion of the SBA portfolio is outside of the Company’s lending area.

The following table shows the maturity distribution or re-pricing of the loan portfolio and the allocation of floating and fixed interest rates at December 31, 2005.

(In thousands)	Within 1 Year		1-5 Years		After 5 Years		Total
SBA	$	71,260	$	6,538	$	863	$	78,661
Commercial	96,142		138,075		26,364		260,581
Residential mortgage	11,334		32,477		18,228		62,039
Consumer	29,863		5,728		11,695		47,286
Total	$	208,599	$	182,818	$	57,150	$	448,567
Amount of loans based upon:
Fixed interest rates							$	123,669
Floating or adjustable interest rates							324,898
Total							$	448,567

Asset Quality

Inherent in the lending function is the possibility that a customer may not perform in accordance with the contractual terms of the loan. A borrower’s inability to pay its obligations according to the contractual terms can create the risk of past due loans and ultimately credit losses, especially on collateral deficient loans.

Non-performing loans generally consist of loans that are not accruing interest (non-accrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. When a loan is classified as non-accrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Unless the ability to collect principal and interest is reasonably assured, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income.

Credit risk is minimized by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins upon the application for a loan by a

10

prospective borrower. Documentation, including a borrower’s credit history, materials establishing the value of potential collateral, the source of funds for repayment of the loan and other factors are analyzed before a loan is submitted for approval. The loan portfolio is then subject to ongoing internal reviews for credit quality. In addition, an outside firm is used to conduct independent credit reviews.

The following table sets forth information concerning non-performing loans and non-performing assets at December 31 for the past five years:

(In thousands)	2005			2004			2003			2002			2001
Non-performing by category
Commercial	$	1,250		$	1,534		$	1,568		$	213		$	989
SBA	1,391			2,013			3,175			2,669			2,015
Residential mortgage	1,510			288			458			461			—
Consumer	210			256			194			214			180
Total non-performing loans	$	4,361		$	4,091		$	5,395		$	3,557		$	3,184
OREO	178			345			327			196			258
Total non-performing assets	$	4,539		$	4,436		$	5,722		$	3,753		$	3,442
Past due 90 days or more and still accruing interest
Commercial	$	—		$	—		$	1,842		$	347		$	—
SBA	—			—			34			18			13
Residential mortgage	—			—			—			—			—
Consumer	—			—			—			1			56
Total	$	—		$	—		$	1,876		$	366		$	69
Non-performing loans to total loans	0.97		%	1.10		%	1.59		%	1.14		%	1.17		%
Non-performing assets to total loans and OREO	1.01		%	1.19		%	1.68		%	1.20		%	1.26		%
Allowance for loan losses as a percentage of non-performing loans	158.04		%	143.14		%	99.20		%	115.10		%	99.40		%

Non-performing loans were $4.4 million at December 31, 2005, a $270 thousand increase from $4.1 million at year-end 2004. The increase in non-performing loans was due primarily to increased levels of non-performing residential real estate loans. Prior to year-end 2005, the Company sold a $993 thousand note, which is included in total non-performing loans, to an unrelated third party. The Company received $200 thousand of the sales price, which reduced the non-performing loan balance, prior to year-end. The balance of $775 thousand was received in January 2006. Included in non-performing loans at December 31, 2005 are approximately $560 thousand of loans that are guaranteed by the SBA. Also, included in non-performing loans at December 31, 2005 was a $303 thousand commercial credit that was a troubled debt restructuring. Through December 31, 2005, the loan has continued to perform under the new terms.

There were no loans past due 90 days or more and still accruing at December 31, 2005 and 2004.

Other real estate owned (OREO) properties totaled $178 thousand at year-end 2005, a decrease of $167 thousand from $345 thousand at December 31, 2004. Total non-performing assets amounted to $4.5 million at December 31, 2005, an increase of $103 thousand compared with $4.4 million at year-end 2004.

Potential problem loans are those 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 not included in non-performing loans as they continue to perform. Potential problem loans, which consist primarily of commercial and SBA products, were $280 thousand and $1.4 million at December 31, 2005 and 2004, respectively. The decrease was due primarily to the reclassification of a 2004 potential problem loan to non-performing loans in 2005.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable and estimable credit losses in the loan portfolio as of the balance sheet date. Management utilizes a standardized methodology to assess the adequacy of the allowance for loan losses. This process consists of the identification of specific reserves for identified problem loans based on loan grades and the calculation of general reserves based on minimum reserve levels by loan type. Risks within the loan portfolio are analyzed on a continuous basis by management, and

11

periodically by an independent credit review function and by the Company’s audit committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and to quantify 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 loan loss experience and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process, which includes the determination of the adequacy of the allowance for loan losses, is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

Additions to the allowance for loan losses are made by provisions charged to expense whereas the allowance is reduced by net charge-offs (i.e., loans judged to be not collectable are charged against the reserve, less any recoveries on such loans). Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including obtaining updated financial information about the borrower’s financial condition and changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the allowance for loan losses. These agencies have in the past and may in the future require the Company to make additional adjustments based on their judgments about information available to them at the time of their examination.

The allowance for loan losses amounted to $6.9 million at December 31, 2005, compared to $5.9 million at year-end 2004. The increase in the allowance for loan losses was due to the provision for loan losses of $1.9 million exceeding $814 thousand of net charge-offs. The increase in the provision for loan losses can be primarily attributed to the higher level of nonperforming loans and higher level of net charge-offs for 2005 as compared to 2004. The increase in the allowance for loan losses was primarily attributable to the increase and change in the composition of the loan portfolio, the specific and general reserve factors used to determine reserve levels on certain types of loans, the analysis of the estimated probable losses inherent in the loan portfolio based upon the review of particular loans, the credit worthiness of particular borrowers, increased levels of non-performing loans and general economic conditions.

The following is a reconciliation summary of the allowance for loan losses for the past five years:

(In thousands)	2005			2004			2003			2002			2001
Balance at beginning of year	$	5,856		$	5,352		$	4,094		$	3,165		$	2,558
Charge-offs:
Commercial	300			601			294			1,120			614
SBA	301			320			486			276			155
Residential mortgage	49			18			—			28			—
Consumer	523			29			93			170			154
Total charge-offs	1,173			968			873			1,594			923
Recoveries
Commercial	84			181			419			113			11
SBA	204			99			78			32			70
Residential mortgage	—			—			—			—			—
Consumer	71			17			34			28			49
Total recoveries	359			297			531			173			130
Total net charge-offs	$	814		$	671		$	342		$	1,421		$	793
Provision charged to expense	$	1,850		$	1,175		$	1,600		$	2,350		$	1,400
Balance at end of year	$	6,892		$	5,856		$	5,352		$	4,094		$	3,165
Net charge-offs to average loans	0.20		%	0.19		%	0.11		%	0.48		%	0.33		%
Allowance to total loans	1.54		%	1.57		%	1.58		%	1.31		%	1.16		%

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The ratio of allowance for loan losses to total loans at December 31, 2005 and 2004 was 1.54 percent and 1.57 percent, respectively. The allowance for loan losses as a percentage of non-performing loans was 158.04 percent at December 31, 2005, compared to 143.14 percent at the end of 2004.

The following table sets forth, for each of the major lending categories, the amount of the allowance for loan losses allocated to each category and the percentage of total loans represented by such category, as of December 31 of each year. The allocated allowance is the total of identified specific and general reserves by loan category. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio.

	2005				2004				2003				2002				2001
(In thousands)	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Balance applicable to:
SBA	$	1,712	17.5	%	$	1,724	16.9	%	$	1,296	18.8	%	$	1,119	20.6	%	$	776	19.6	%
Commercial	4,417		58.1		3,436		55.6		3,526		55.4		2,463		52.5		1,756		43.8
Residential mortgage	444		13.8		375		16.1		270		15.1		282		18.1		325		26.8
Consumer	319		10.6		321		11.4		260		10.7		230		8.8		308		9.8
Total	$	6,892	100.0	%	$	5,856	100.0	%	$	5,352	100.0	%	$	4,094	100.0	%	$	3,165	100.0	%

Deposits

Deposits, which include non-interest bearing demand deposits and interest-bearing demand, savings and time deposits, are the primary source of the Company’s funds. For 2005, the Company realized continued growth in deposits. This growth was achieved through the emphasis on customer service, competitive rate structures and selective marketing through the Company’s fourteen-branch network, as well as the acquisition of approximately $21 million in deposits in connection with the acquisition of the Phillipsburg, NJ branch of interState Net Bank. The Company’s focus is to establish a comprehensive relationship with retail and business borrowers seeking deposits as well as lending relationships.

The following are period-end deposit balances for each of the last three years.

At December 31,	2005				2004				2003
(In Thousands)	Amount		%		Amount		%		Amount		%
Ending Balance:
Interest-bearing demand deposits	$	139,076	26.7	%	$	164,426	38.0	%	$	199,510	48.1	%
Savings deposits	141,935		27.2		79,557		18.3		38,447		9.3
Time deposits	161,302		30.9		106,076		24.4		90,223		21.7
Non-interest bearing demand deposits	79,547		15.2		83,839		19.3		86,802		20.9
Total deposits	$	521,860	100.0	%	$	433,898	100.0	%	$	414,982	100.0	%

Total deposits increased $88.0 million to $521.9 million at December 31, 2005 from $433.9 million at December 31, 2004. The increase in deposits was the result of a $62.4 million increase in savings deposits and a $55.2 million increase in time deposits, partially offset by a $25.4 million decline in interest-bearing demand deposits and a $4.3 million decline in demand deposits. Approximately $21 million of deposit growth was the result of the acquisition of the Phillipsburg, New Jersey branch of interState Net Bank in November 2005.

The mix of deposits shifted during 2005 as the concentration of demand deposits and interest bearing demand deposits fell and the concentration of higher cost savings and time deposits increased. The average cost of interest bearing deposits in 2005 was 2.40 percent compared to 1.73 percent for 2004. The increase in the cost of deposits can be attributed to the increase in interest rates and the shift in the mix of deposits. The Company expects the trend of growth in the deposit base to continue in 2006.

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The following are average deposits for each of the last three years.

	2005				2004				2003
(In Thousands)	Amount		%		Amount		%		Amount		%
Average Balance:
Interest-bearing demand deposits	$	150,420	31.5	%	$	188,840	45.0	%	$	184,220	47.1	%
Savings deposits	130,911		27.4		49,330		11.7		36,976		9.5
Time deposits	118,174		24.7		96,686		23.0		90,814		23.2
Non-interest bearing demand deposits	78,519		16.4		85,283		20.3		79,102		20.2
Total deposits	$	478,024	100.0	%	$	420,139	100.0	%	$	391,112	100.0	%

Borrowed Funds

Borrowed funds consists primarily of advances from the Federal Home Loan Bank (“FHLB”) of New York and repurchase agreements. These borrowings are used as a source of liquidity or to fund asset growth not supported by deposit generation. Residential mortgages and investment securities collateralize the borrowings from the FHLB, while investment securities are pledged against the repurchase agreements.

As of December 31, 2005, borrowed funds totaled $40 million, an increase of $5 million from the prior year-end. The change since December 31, 2004 was due to the addition of a $10 million FHLB repo-advance in April 2005, offset in part by the maturity of a short-term $5 million repurchase agreement with a rate of 2.50 percent on January 13, 2005.

As of December 31, 2005, the Company was a party to the following borrowed funds transactions:

•A $10 million repurchase agreement with a term of 5 years, expiring on March 11, 2009 and a rate of 2.78 percent. The borrowing may be called by the counterparty if the 3-month LIBOR rate is greater than or equal to 7 percent on March 11, 2005 or on any quarterly payment date thereafter.

•A $10 million FHLB repo-advance with a term of 10 years, expiring on December 15, 2014 and a fixed rate of 2.95 percent. The borrowing is convertible by the FHLB on December 15, 2006 and quarterly thereafter with 4 business days notice into replacement funding for the same or lesser principal amount based on any advance then offered by the FHLB at then current market rates.

•A $10 million FHLB advance with a term of 10 years, expiring on April 27, 2015 and a fixed rate of 3.70 percent. The borrowing is convertible by the FHLB on April 27, 2008 and quarterly thereafter with 4 business days notice into replacement funding for the same or lesser principal amount based on any advance then offered by the FHLB at then current market rates.

•A $10 million advance from the FHLB. The 4.92 percent borrowing from the FHLB matures in 2010 and is callable by the FHLB at any time.

At December 31, 2005, the Company had $27.7 million of additional availability at the FHLB. Pledging additional collateral in the form of 1 to 4 family residential mortgages or investment securities can increase the line with the FHLB. The maximum borrowing line available if additional collateral was pledged as of December 31, 2005 amounted to approximately $50.7 million.

Subordinate Debentures

(Trust Preferred Securities)

On September 26, 2002, Unity (NJ) Statutory Trust I, a statutory business trust and wholly-owned subsidiary of Unity Bancorp Inc., issued $9.0 million of floating rate capital trust pass through securities to investors due on September 26, 2032. The capital securities have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital. The Subordinate Debentures are redeemable, in whole or part, prior to maturity but after September 26, 2007. The floating interest rate at December 31, 2005 was 7.92 percent. The additional capital was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to Unity Bank and to fund stock repurchases.

In accordance with the Company’s adoption of Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust I. See the Capital section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Market Risk

Based on the Company’s business, the two largest risks facing the Company are market risk and credit 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/Liability Committee (ALCO) manages this risk. The principal objectives of the 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, capital, and liquidity

14

requirements, and actively manage risk within Board approved guidelines. The ALCO reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.

The Company uses various techniques to evaluate risk levels on both a short and long-term basis. One of the monitoring tools is the “gap” ratio. A gap ratio, as a percentage of assets, is calculated to determine the maturity and repricing mismatch between interest rate-sensitive assets and interest rate-sensitive liabilities. A gap is considered positive when the amount of interest rate-sensitive assets repricing exceeds the amount of interest rate-sensitive liabilities repricing in a designated time period. A positive gap should result in higher net interest income with rising interest rates, as the amount of the assets repricing exceed the amount of liabilities repricing. Conversely, a gap is considered negative when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets, and lower rates should result in higher net interest income.

Repricing of mortgage-related investments are shown by contractual amortization and estimated prepayments based on the most recent 3-month constant prepayment rate. Callable agency securities are shown based upon their option-adjusted spread modified duration date (“OAS”), rather than the next call date or maturity date. The OAS date considers the coupon on the security, the time to the next call date, the maturity date, market volatility and current rate levels. Fixed rate loans are allocated based on expected amortization.

The following table sets forth the gap ratio at December 31, 2005. Assumptions regarding the re-pricing characteristics of certain assets and liabilities are critical in determining the projected level of rate sensitivity. Certain savings and interest checking accounts are less sensitive to market interest rate changes than other interest bearing sources of funds. Core deposits such as demand interest, savings and money market deposits are allocated based on their expected repricing in relation to changes in market interest rates.

(In thousands)	Under six months			Six months through one year			More than one year through two years			More than two years through five years			More than five years through ten years			More than ten years and not re-pricing			Total
Assets
Cash & due from banks	$	—		$	—		$	—		$	—		$	—		$	11,945		$	11,945
Federal funds sold	26,814			—			—			—			—			—			26,814
Investment securities	10,311			10,024			12,121			43,812			19,378			10,685			106,331
Loans	185,236			23,363			42,828			139,990			43,570			13,580			448,567
Other assets	—			—			—			—			—			20,515			20,515
Total Assets	$	222,361		$	33,387		$	54,949		$	183,802		$	62,948		$	56,725		$	614,172
Liabilities and Shareholders’ Equity
Non-interest bearing demand deposits	$	—		$	—		$	—		$	—		$	—		$	79,547		$	79,547
Savings and interest-bearing demand deposits	171,363			1,849			3,573			62,809			41,417			—			281,011
Time deposits	53,888			62,908			17,076			27,009			421			—			161,302
Borrowed funds and subordinate debentures	9,279			10,000			10,000			20,000			—			—			49,279
Other liabilities	—			—			—			—			—			2,104			2,104
Shareholders’ equity	—			—			—			—			—			40,929			40,929
Liabilities and Shareholders’ Equity	$	234,530		$	74,757		$	30,649		$	109,818		$	41,838		$	122,580		$	614,172
Gap	$	(12,169	)	$	(41,370	)	$	24,300		$	73,984		$	21,110		$	(65,855	)	—
Cumulative Gap	$	(12,169	)	$	(53,539	)	$	(29,239	)	$	44,745		$	65,855		—			—
Cumulative Gap to total assets	(1.98		)%	(8.72		)%	(4.76		)%	7.29		%	10.72		%

At December 31, 2005, there was a six-month liability- sensitive gap of $12.2 million and a one-year liability-sensitive gap of $53.5 million, as compared to asset-sensitivity gaps of $28.7 million and $32.2 million at December 31, 2004. The change in the gap position during the year was in response to the Company modifying the assumptions for the Opportunity savings and checking products, which have evolved as a more rate sensitive product. The six month and one year cumulative gap to total assets ratio was within the board-approved guidelines of +/- 20 percent.

Other models are also used in conjunction with the static gap table, which is not able to capture the risk of changing spread relationships over time, the effects of projected growth in the balance sheet or dynamic decisions such as the

15

modification of investment maturities as a rate environment unfolds. For these reasons, a simulation model is used, where numerous interest rate scenarios and balance sheets are combined to produce a range of potential income results. Net interest income is managed within guideline ranges for interest rates rising or falling by 300 basis points. Results outside of guidelines require action by the ALCO to correct the imbalance. Simulations are typically created over a 12-24 month time horizon. At December 31, 2005, these simulations show that with a 300 basis point immediate increase in interest rates, net interest income would decrease by approximately $1.1 million, or 4.6 percent. An immediate decline of 300 basis points in interest rates would increase net interest income by approximately $293 thousand or 1.2 percent. These variances in net interest income are within the board-approved guidelines of +/- 7 percent.

Finally, to measure the impact of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Like the simulation model, results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity with rate shocks of 200 basis points, is a decline of 15.97 percent in a rising rate environment and a decline of 1.7 percent in a falling rate environment. The variance in the EVPE at December 31, 2005 is within board-approved guidelines of +/- 35 percent.

Operating, Investing and Financing

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2005, the balance of cash and cash equivalents was $38.8 million, an increase of $15.4 million from December 31, 2004.

Net cash provided by operating activities totaled $2.0 million at December 31, 2005, as compared to $9.2 million at December 31, 2004. The primary source of funds was net income from operations adjusted for: provision for loan losses, depreciation expenses, originations of SBA loans held for sale and proceeds of SBA loans held for sale.

Net cash used in investing activities amounted to $58.1 million in 2005, increasing from a year ago. The cash used in investing activities was primarily a result of funding of the loan and securities portfolios, offset by sales, maturities and pay-downs in the investment portfolio.

Net cash provided by financing activities amounted to $71.5 million for 2005, compared to $43.8 million in 2004. The primary increase in cash provided by financing activities was due to growth in the Company’s deposit base and an increase in the Company’s borrowings.

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner.

Parent Company

The principal sources of funds for the Parent Company are dividends paid by the Bank. The Parent Company only pays expenses that are specifically for the benefit of the Parent Company. Other than its investment in the Bank and Unity Statutory Trust I, the Parent Company does not actively engage in other transactions or business. The majority of expenses paid by the Parent Company are related to Unity Statutory Trust I. At December 31, 2005, the Parent Company had $933 thousand in cash and $424 thousand in marketable securities, valued at fair market value.

Consolidated Bank

Liquidity is a measure of the ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner. The principal sources of funds are deposits, scheduled amortization and prepayments of loan and investment principal, sales and maturities of investment securities and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

Total FHLB borrowings amounted to $30.0 million and third party repurchase agreements totaled $10.0 million, as of December 31, 2005. At December 31, 2005, $27.7 million was available for additional borrowings from the FHLB. Pledging additional collateral in the form of 1-4 family residential mortgages or investment securities can increase the line with the FHLB. An additional source of liquidity is the securities available for sale portfolio and SBA loans held for sale portfolio, which amounted to $65.6 million and $14.0 million respectively, at December 31, 2005.

As of December 31, 2005, deposits included $43.6 million of Government deposits, as compared to $38.6 million at year-end 2004. 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. Included in the portfolio were $36.5 million of

16

deposits from four municipalities. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company.

At December 31, 2005, the Bank had approximately $142.5 million of loan commitments, which will either expire or be funded, generally within one year. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded. In addition, approximately 18 percent of these commitments are for SBA Loans, which may be sold into the secondary market.

Off Balance Sheet Arrangements and Contractual Obligations

The following table shows the amounts and expected maturities of off-balance sheet arrangements as of December 31, 2005. Further discussion of these commitments is included in Note 11 to the Consolidated Financial Statements.

(In thousands)	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
Standby letters of credit	$	978	$	10	$	—	$	—	$	988

The following table shows the contractual obligations of the Company by expected payment period, as of December 31, 2005. Further discussion of these commitments is included in Note 11 to the Consolidated Financial Statements.

(In thousands)	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
Long-term debt obligations	$	—	$	—	$	20,000	$	29,279	$	49,279
Operating lease obligations	1,044		2,091		822		279		4,236
Purchase obligations – Fiserv	1,355		1,758		—		—		3,113
Construction of new branch	875		—		—		—		875
Total	$	3,274	$	3,849	$	20,822	$	29,558	$	57,503

Long-term debt obligations include fixed term borrowings from the Federal Home Loan Bank, repurchase agreements and subordinated debentures. The borrowings have defined terms and under certain circumstances are callable at the option of the lender.

Operating leases represent obligations entered into by the Company for the use of land, premise and equipment. The leases generally have escalation terms based upon certain defined indexes.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consists primarily of contractual obligations under data processing service agreements.

Construction of new branch includes a contractual obligation for the creation of a new branch.

Capital

A significant measure of the strength of a financial institution is its capital base. Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and other qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does not qualify for tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a bank to maintain certain capital as a percent of assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1 capital as a percentage of risk-adjusted assets of 4.0 percent and combined tier 1 and tier 2 capital as a percentage of risk-adjusted assets of 8.0 percent.

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The following table summarizes the Company’s and the Bank’s risk-based and leveraged capital ratios at December 31, 2005 and 2004, as well as the required minimum regulatory capital ratios.

Company	Dec. 2005		Dec. 2004		Adequately Capitalized Requirements		Well Capitalized Requirements
Leverage ratio	8.27	%	9.09	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	9.98	%	11.14	%	4.00	%	6.00	%
Total risk-based capital ratio	11.23	%	12.39	%	8.00	%	10.00	%

Bank	Dec. 2005		Dec. 2004		Adequately Capitalized Requirements		Well Capitalized Requirements
Leverage ratio	7.01	%	7.53	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	8.51	%	9.22	%	4.00	%	6.00	%
Total risk-based capital ratio	10.97	%	11.95	%	8.00	%	10.00	%

On September 26, 2002, the Company enhanced its regulatory capital by issuing $9.0 million of floating rate capital securities. These securities qualify as Tier I Capital.

On October 21, 2002, the Company authorized the repurchase of up to 10 percent of its outstanding common stock. The amount and timing of purchases will be dependent on a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alternate uses of funds. As of December 31, 2005 the Company had repurchased a total of 134 thousand shares of which 112 thousand shares have been retired, leaving 460 thousand shares remaining to be repurchased under the plan.

At December 31, 2005, shareholders’ equity was $40.9 million, a $5.1 million increase from year-end 2004. The increase in shareholders’ equity was a result of $6.2 million in net income, $917 thousand from the exercise of stock options, partially offset by $1.2 million of common stock cash dividends and $242 thousand in Treasury stock purchased. The ratio of total equity to assets at December 31, 2005 and 2004 was 6.66 percent and 6.96 percent, respectively.

Forward-Looking Statements

This report contains certain forward looking statements, either expressed or implied, which are provided to assist the reader in understanding anticipated future financial performance. These statements involve certain risks, uncertainties, estimates and assumptions by management.

Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, the overall economy and the interest rate environment; the ability of the customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in tax, accounting or regulatory practices and requirements, and technological changes. Although management has taken certain steps to mitigate the negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on future profitability.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Unity Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unity Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Short Hills , New Jersey
February 17, 2006

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Consolidated Balance Sheets

(In thousands)

December 31,	2005			2004
Assets
Cash and due from banks	$	11,945		$	12,439
Federal funds sold and interest bearing deposits	26,814			10,967
Securities:
Available for sale	65,583			78,014
Held to maturity (fair value of $40,212 and $23,786 in 2005 and 2004, respectively)	40,748			23,579
Total securities	106,331			101,593
Loans:
SBA held for sale	14,001			7,574
SBA held to maturity	64,660			55,576
Commercial	260,581			207,771
Residential mortgage	62,039			60,240
Consumer	47,286			42,419
Total loans	448,567			373,580
Less: Allowance for loan losses	6,892			5,856
Net loans	441,675			367,724
Premises and equipment, net	10,593			8,658
Bank owned life insurance	5,185			5,000
Accrued interest receivable	3,167			2,493
Loan servicing asset	2,438			2,018
Goodwill and other intangibles	1,618			—
Other assets	4,406			4,525
Total Assets	$	614,172		$	515,417
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing demand deposits	$	79,547		$	83,839
Interest bearing demand deposits	139,076			164,426
Savings deposits	141,935			79,557
Time deposits, under $100,000	108,353			73,399
Time deposits, $100,000 and over	52,949			32,677
Total deposits	521,860			433,898
Borrowed funds	40,000			35,000
Subordinated debentures	9,279			9,279
Accrued interest payable	274			176
Accrued expenses and other liabilities	1,830			1,196
Total Liabilities	573,243			479,549
Commitments and contingencies (Note 11)	—			—
Shareholders’ equity:
Common stock, no par value, 12,500 shares authorized, 6,247 shares issued and 6,225 outstanding in 2005; 6,067 shares issued and outstanding in 2004	38,423			34,025
Retained earnings	3,897			2,327
Treasury stock at cost (22 shares in 2005)	(242		)	—
Accumulated other comprehensive loss	(1,149		)	(484		)
Total Shareholders’ Equity	40,929			35,868
Total Liabilities and Shareholders’ Equity	$	614,172		$	515,417

The accompanying notes to the consolidated financial statements are an integral part of these statements.

20

Consolidated Statements of Income

(In thousands, except per share amounts)

For the years ended December 31,			2005				2004				2003
Interest income
Federal funds sold and interest on deposits			$			572	$			193	$				138
Securities:
Available for sale			3,100				3,304				2,347
Held to maturity			1,477				867				998
Total securities			4,577				4,171				3,345
Loans
SBA loans			6,558				4,296				4,115
Commercial loans			16,164				12,934				12,495
Residential mortgage loans			3,318				2,712				3,126
Consumer loans			2,648				1,860				1,676
Total loan interest income			28,688				21,802				21,412
Total interest income			33,837				26,166				24,895
Interest expense
Interest bearing demand deposits			2,605				2,656				2,703
Savings deposits			3,164				620				423
Time deposits			3,820				2,507				2,733
Borrowed funds and subordinated debentures			2,014				1,225				1,169
Total interest expense			11,603				7,008				7,028
Net interest income			22,234				19,158				17,867
Provision for loan losses			1,850				1,175				1,600
Net interest income after provision for loan losses			20,384				17,983				16,267
Non-interest income
Service charges on deposit accounts			1,766				1,618				1,977
Service and loan fee income			2,111				1,831				1,956
Gain on sale of SBA loans held for sale, net			2,956				3,217				3,075
Gain on sale of mortgage loans			382				192				49
Bank owned life insurance			185				—				—
Net security gains			69				76				185
Other income			721				695				1,101
Total non-interest income			8,190				7,629				8,343
Non-interest expense
Compensation and benefits			9,639				8,435				8,301
Occupancy			2,256				2,085				1,884
Processing and communications			2,010				1,919				2,100
Furniture and equipment			1,350				1,146				1,061
Advertising			697				695				596
Professional services			547				593				1,541
Loan servicing			482				738				651
Deposit insurance			61				61				62
Other expenses			1,634				1,558				1,133
Total non-interest expense			18,676				17,230				17,329
Income before provision for income taxes			9,898				8,382				7,281
Provision for income taxes			3,688				3,052				2,698
Net income			$			6,210	$			5,330	$			4,583
Net income per share -	Basic		$		1.01		$		0.88		$		0.77
	Diluted		$	0.96			$	0.83			$	0.74
Weighted average common shares outstanding -		Basic	6,121				6,044				5,952
		Diluted	6,439				6,424				6,235

The accompanying notes to the consolidated financial statements are an integral part of these statements.

21

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands)

	Common Shares		Common Stock		Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, December 31, 2002	5,946		$	31,827	$	(5,006	)	$	—		$	285		$	27,106
Comprehensive income:
Net income					4,583									4,583
Unrealized holding losses on securities arising during the period, net of tax benefit of $398											(655		)
Less: reclassification adjustment for gains included in net income, net of tax of $74											111
Net unrealized holding losses on securities arising during the period, net of tax benefit of $472											(766		)	(766		)
Total comprehensive income														3,817
Common stock dividends declared ($.05 per share)					(323		)							(323		)
Issuance of common stock:
Employee benefit plans	24		162											162
Balance, December 31, 2003	5,970		$	31,989	$	(746	)	$	—		$	(481	)	$	30,762
Comprehensive income:
Net income					5,330									5,330
Unrealized holding gains on securities arising during the period, net of $28											44
Less: reclassification adjustment for gains included in net income, net of tax of $29											47
Net unrealized holding loss on securities arising during the period, net of tax benefit of $1											(3		)	(3		)
Total comprehensive income														5,327
Common stock dividends declared ($.15 per share)					(911		)							(911		)
5% Stock Dividend, including cash-in-lieu of fractional shares			1,342		(1,346		)							(4		)
Issuance of common stock:
Employee benefit plans	97		694											694
Balance, December 31, 2004	6,067		$	34,025	$	2,327		$	—		$	(484	)	$	35,868
Comprehensive income:
Net income					6,210									6,210
Unrealized holding loss on securities arising during the period, net of tax benefit of $382											(622		)
Less: reclassification adjustment for gains included in net income, net of tax of $26											43
Net unrealized holding loss on securities arising during the period, net of tax benefit of $408											(665		)	(665		)
Total comprehensive income														5,545
Common stock dividends declared ($.19 per share)					(1,155		)							(1,155		)
5% Stock Dividend, including cash-in-lieu of fractional shares			3,481		(3,485		)							(4		)
Treasury stock purchased	(22	)						(242		)				(242		)
Issuance of common stock:
Employee benefit plans	180		917											917
Balance, December 31, 2005	6,225		$	38,423	$	3,897		$	(242	)	$	(1,149	)	$	40,929

The accompanying notes to the consolidated financial statements are an integral part of these statements.

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Consolidated Statements of Cash Flows

(In thousands)

For the years ended December 31,	2005			2004			2003
Operating activities:
Net income	$	6,210		$	5,330		$	4,583
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,850			1,175			1,600
Depreciation and amortization	1,033			1,035			884
Deferred income taxes	(16		)	(173		)	(518		)
Net security gains	(69		)	(76		)	(516		)
Write-down on AFS security	—			—			331
Gain on sale of SBA loans held for sale, net	(2,956		)	(3,217		)	(3,075		)
Gain on sale of Mortgage loans	(382		)	(192		)	(49		)
Origination of SBA loans held for sale	(43,884		)	(30,943		)	(34,371		)
Proceeds from the sale of SBA loans held for sale, net	40,413			39,138			37,828
Net change in other assets and liabilities	(168		)	(2,868		)	(3,099		)
Net cash provided by operating activities	2,031			9,209			3,598
Investing activities:
Purchases of securities held to maturity	(25,434		)	(16,900		)	(2,216		)
Purchases of securities available for sale	(8,069		)	(29,993		)	(82,766		)
Maturities and principal payments on securities held to maturity	8,155			6,340			15,330
Maturities and principal payments on securities available for sale	14,014			24,336			40,131
Proceeds from sale of securities available for sale	5,362			6,815			19,113
Purchases of loans	—			(14,081		)	(3,835		)
Net cash received from branch acquisition	4,379			—			—
Proceeds from the sale of other real estate owned	345			260			—
Net increase in loans	(54,062		)	(25,441		)	(25,037		)
Purchase of bank owned life insurance	—			(5,000		)	—
Purchases of premises and equipment	(2,819		)	(2,305		)	(537		)
Net cash used in investing activities	(58,129		)	(55,969		)	(39,817		)
Financing activities:
Net increase in deposits	66,919			18,916			32,397
Proceeds from new borrowings	10,000			25,000			—
Maturities of borrowings	(5,000		)	—			—
Proceeds from the issuance of common stock	853			694			162
Purchase of treasury stock	(242		)	—			—
Cash dividends paid on common stock	(1,079		)	(859		)	(162		)
Net cash provided by financing activities	71,451			43,751			32,397
Increase (decrease) in cash and cash equivalents	15,353			(3,009		)	(3,822		)
Cash and cash equivalents at beginning of year	23,406			26,415			30,237
Cash and cash equivalents at end of year	$	38,759		$	23,406		$	26,415
Supplemental disclosures:
Cash:
Interest paid	$	11,505		$	7,017		$	7,123
Income taxes paid	2,671			4,075			3,053
Non-cash investing activities:
Transfer of loans to other real estate owned	178			345			223
Removal of capital leases, net	—			—			320

The accompanying notes to the consolidated financial statements are an integral part of these statements

23

Notes to Consolidated Financial Statements

1.Summary of Significant Accounting Policies

Overview

The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiary, Unity Bank (or when consolidated with the Parent Company, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Unity Bancorp, Inc. is a bank holding company incorporated in New Jersey 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. The Bank provides a full range of commercial and retail banking services through 14 branch offices located in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey. These services include the acceptance of demand, savings, and time deposits; extension of consumer, real estate, Small Business Administration (“SBA”) and other commercial credits. Unity Investment Services, Inc. a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.

Unity (NJ) Statutory Trust I is a statutory Business Trust and wholly-owned subsidiary of Unity Bancorp, Inc. On September 26, 2002, the trust issued $9.0 million of capital securities to investors. These floating rate securities are treated as subordinated debentures on the financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes. In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust I.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Amounts requiring the use of significant estimates include the allowance for loan losses, valuation of deferred tax assets, the carrying value of loans held for sale and other real estate owned and the fair value disclosures of financial instruments. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior years to conform with the current year presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks and Federal funds sold.

Securities

The Company classifies its securities into two categories, held to maturity and available for sale. Securities are classified as securities held to maturity based on management’s intent and ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts on the level yield method. Securities not classified as securities held to maturity are classified as securities available for sale and are stated at fair value, adjusted for unamortized purchase premiums and discounts on the level yield method. Unrealized gains and losses on securities available for sale are excluded from results of operations and are reported as a separate component of shareholders’ equity, net of taxes. Securities classified as available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risks or for asset/liability management purposes. The cost of securities sold is determined on a specific identification basis. Gains and losses on sales of securities are recognized in the statements of income on the date of sale.

Federal Home Loan Bank Stock

Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost. As of December 31, 2005 and 2004, the Company held $2.1 million and $1.2 million in FHLB stock, respectively.

Loans Held To Maturity and Loans Held For Sale

Loans held to maturity are stated at the unpaid principal balance, net of unearned discounts and net of deferred loan origination fees and costs. Loan origination fees, net of direct loan origination costs, are deferred and are recognized over the estimated life of the related loans as an adjustment to the loan yield utilizing the level yield method.

Interest is credited to operations primarily based upon the principal amount outstanding. When management believes there is sufficient doubt as to the ultimate collectibility of interest on any loan, interest accruals are discontinued and all past due interest, previously recognized as income, is reversed and charged against current period earnings. Payments received on nonaccrual loans are applied as principal. Loans are returned to an accrual status when collectibility is reasonably assured and when the loan is brought current as to principal and interest.

24

Loans and leases are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Loans are charged off when collection is sufficiently questionable and when the Bank can no longer justify maintaining the loan as an asset on the balance sheet. Loans qualify for charge off when, after thorough analysis, all possible sources of repayment are insufficient. These include: 1) potential future cash flow, 2) value of collateral, and/or 3) strength of co-makers and guarantors. All unsecured loans are charged off upon the establishment of the loan’s non-accrual status. Additionally, all loans classified as a loss or that portion of the loan classified as a loss, are charged off. All loan charge offs are approved by the Board of Directors.

Non-performing loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the collectibility of principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income.

The Company evaluates its loans for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company has defined impaired loans to be all non-accrual loans. Impairment of a loan is measured based on the present value of expected future cash flows, net of estimated costs to sell, discounted at the loan’s effective interest rate. Impairment can also be measured based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge or credit to the provision for loan losses.

Loans held for sale are SBA loans and are reflected at the lower of aggregate cost or market value.

The Company originates loans to customers under an SBA program that generally provides for SBA guarantees up to 85 percent of each loan. The Company generally sells the guaranteed portion of each loan to a third party and retains the servicing. The premium received on the sale of the guaranteed portion of SBA loans and the present value of future cash flows of the servicing asset are recognized in income. The non-guaranteed portion is generally held in the portfolio.

Serviced loans sold to others are not included in the accompanying consolidated balance sheets. Income and fees collected for loan servicing are credited to non-interest income when earned, net of amortization on the related servicing asset.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area. Credit reviews of the loan portfolio, designed to identify potential charges to the allowance, are made during the year by management and a loan review consultant. A risk rating 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 loan loss experience, 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. Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses. These agencies may require the Company to make additional provisions based on their judgments about information available to them at the time of their examination.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, not to exceed 30 years.

Other Real Estate Owned

Other real estate owned is recorded at the fair value at the date of acquisition, with a charge to the allowance for loan losses for any excess over fair value. Subsequently, other real estate owned is carried at the lower of cost or fair value,

25

as determined by current appraisals, less estimated selling costs. Certain costs incurred in preparing properties for sale are capitalized to the extent that the appraisal amount exceeds the carry value, and expenses of holding foreclosed properties are charged to operations as incurred.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

Income Per Share

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period presented adjusted for the effect of the stock options, under the treasury stock method. The amounts reported reflect the impact of the 5 percent stock distribution paid on June 30, 2005.

Comprehensive Income

Comprehensive income consists of net income for the current period and the change in unrealized (loss) gain that was reported as a component of shareholders’ equity, net of tax.

Stock-Based Compensation

The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans (the Plans). No stock-based employee compensation cost is reflected in net income, as all options granted under those plans have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” as amended, to stock-based employee compensation.

Proforma

(In thousands, except per share amounts)	2005		2004		2003
Net income
As reported	$	6,210	$	5,330	$	4,583
Proforma	6,143		5,080		4,165
Income per share-
As reported:
Basic	$	1.01	$	0.88	$	0.77
Diluted	$	0.96	$	0.83	$	0.74
Proforma:
Basic	$	1.00	$	0.84	$	0.70
Diluted	$	0.95	$	0.79	$	0.67

The fair value of each option grant under the Plans is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2005, 2004 and 2003 respectively; dividend yields of 1.4%, 1.2%, and 1.1% respectively, expected volatility of 24%, 32%, and 34% respectively, risk-free interest rates of 3.99%, 2.78%, and 2.37% respectively, and expected lives of 4.2 years for 2005 and 3.5 years for 2004 and 2003, respectively. The estimated fair value of each award option was $2.63, $2.94, and $2.89 in 2005, 2004 and 2003, respectively.

Treasury Stock

Treasury stock is accounted for under the cost method and accordingly is presented as a reduction in shareholders’ equity.

Recent Accounting Pronouncements

FASB Staff Position No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (the “FSP”), was issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance in EITF Issue No. 03-1

26

with references to existing authoritative literature concerning other-than-temporary determinations (principally Statement of Financial Accounting Standards No. 115 and SEC Staff Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of the FSP will have a material impact on its financial condition, results of operations or financial statement disclosures.

In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier application permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005.

On April 14, 2005 the Securities and Exchange Commission amended the compliance dates for the Financial Accounting Standard Board’s Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement No. 123R). The Commission’s new rule allows companies to implement Statement No. 123R at the beginning of the next fiscal year, instead of the reporting period that begins after June 15, 2005, or December 15, 2005 for small business issuers (January 1, 2006 for the Company). The Commission’s new rule does not change the accounting required by Statement No. 123R; it changes only the dates for compliance with the standard. The Company has evaluated the impact of implementation of Statement No. 123R and does not believe that its initial adoption will be material.

2.Acquisition

On November 21, 2005, the Bank acquired the Phillipsburg, New Jersey branch of interState Net Bank. The transaction included approximately $21.0 million in deposits, $16.4 million in loans and $80 thousand in vault cash. The acquisition reflects goodwill of approximately $1.5 million, a premium on loans assumed of approximately $35 thousand and a premium on deposit liabilities assumed of approximately $103 thousand. The results of the Phillipsburg branch operations have been included in the consolidated financial statements since the date of the acquisition.

3.Restrictions on Cash

Federal law requires depository institutions to maintain a prescribed amount of cash or noninterest-bearing balances with the Federal Reserve Bank. As of December 31, 2005 and 2004, the Company was required to maintain reserve balances of $80 thousand.

27

4.Securities

This table provides the major components of securities available for sale and held to maturity at amortized cost and estimated

fair value at December 31,

	2005									2004
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available for sale:
US Government sponsored entities	$	11,511	$	—	$	(275	)	$	11,236	$	11,892	$	11	$	(86	)	$	11,817
State and political subdivisions	2,945		—		(110		)	2,835		2,945		—		(96		)	2,849
Mortgage backed securities	48,926		—		(1,422		)	47,504		59,883		206		(856		)	59,233
Corporate debt securities	971		—		(38		)	933		1,967		4		(38		)	1,933
FHLB stock and other equities	3,084		34		(43		)	3,075		2,108		84		(10		)	2,182
Total securities available for sale	$	67,437	$	34	$	(1,888	)	$	65,583	$	78,795	$	305	$	(1,086	)	$	78,014
Securities held to maturity:
US Government sponsored entities	$	5,617	$	—	$	(29	)	$	5,588	$	3,373	$	42	$	—		$	3,415
Mortgage backed securities	30,936		35		(523		)	30,448		18,142		208		(84		)	18,266
Corporate debt securities	4,195		—		(19		)	4,176		2,064		41		—			2,105
Total securities held to maturity	$	40,748	$	35	$	(571	)	$	40,212	$	23,579	$	291	$	(84	)	$	23,786

The table below provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at December 31, 2005 is primarily distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls. The total weighted average yield excludes equity securities.

					After one year				After five years
	Within				through				through				After				Total
	one year				five years				ten years				ten years				carrying
(In thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
Available for sale at fair value:
US Government sponsored entities	$	1,990	4.01	%	$	—	—	%	$	6,339	4.75	%	$	2,907	4.00	%	$	11,236	4.43	%
State and political subdivisions	—		—		—		—		—		—		2,835		3.91		2,835		3.91
Mortgage backed securities	—		—		1,427		3.81		2,993		3.70		43,084		4.31		47,504		4.26
Corporate debt securities	—		—		—		—		—		—		933		5.39		933		5.39
FHLB stock and other equities	3,075		—		—		—		—		—		—		—		3,075		—
Total securities available for sale	$	5,065	4.01	%	$	1,427	3.81	%	$	9,332	4.41	%	$	49,759	4.29	%	$	65,583	4.29	%
Held to maturity at cost:
US Government sponsored entities	$	243	4.43	%	$	4,250	4.72	%	$	1,124	5.12	%	$	—	—	%	$	5,617	4.79	%
Mortgage backed securities	—		—		—		—		3,823		4.33		27,113		4.66		30,936		4.86
Corporate debt securities	1,000		6.42		1,042		4.29		—		—		2,153		5.15		4,195		5.25
Total securities held to maturity	$	1,243	6.03	%	$	5,292	4.63	%	$	4,947	4.51	%	$	29,266	4.70	%	$	40,748	4.79	%

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Gross realized gains on securities available for sale amounted to $81 thousand, $116 thousand and $517 thousand, while gross realized losses amounted to $12 thousand, $40 thousand and $332 thousand for the years 2005, 2004 and 2003, respectively. Included in gross realized losses for 2003 is the recognition of an impairment loss on an asset-backed security. These net amounts are included in non-interest income as securities gains in the Consolidated Statements of Income. Securities with a carrying value of $45.4 million and $53.2 million at December 31, 2005 and 2004, respectively, were pledged to secure government deposits, secured other borrowings and for other purposes required or permitted by law.

Gross unrealized losses on available for sale securities and the estimated market value of the related securities, aggregated by security category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2005 and 2004 are as follows:

	Less than 12 months					Greater than 12 months					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
(In thousands)	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
2005
US Government sponsored entities	$	6,577	$	(39	)	$	9,246	$	(265	)	$	15,823	$	(304	)
State and political subdivisions	—		—			2,835		(110		)	2,835		(110		)
Mortgage backed securities	46,763		(865		)	29,150		(1,080		)	75,913		(1,945		)
Corporate debt securities	4,176		(19		)	932		(38		)	5,108		(57		)
FHLB stock and other equities	249		(19		)	521		(24		)	770		(43		)
Total temporarily impaired investments	$	57,765	$	(942	)	$	42,684	$	(1,517	)	$	100,449	$	(2,459	)
2004
US Government sponsored entities	$	8,462	$	(46	)	$	1,960	$	(40	)	$	10,422	$	(86	)
State and political subdivisions	245		(5		)	2,604		(91		)	2,849		(96		)
Mortgage backed securities	31,330		(320		)	9,900		(620		)	41,230		(940		)
Corporate debt securities	—		—			932		(38		)	932		(38		)
FHLB stock and other equities	—		—			21		(10		)	21		(10		)
Total temporarily impaired investments	$	40,037	$	(371	)	$	15,417	$	(799	)	$	55,454	$	(1,170	)

U.S. Government sponsored entities and state and political subdivision securities: The unrealized losses on investments in securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. Because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these securities are guaranteed by Fannie Mae, Ginnie Mae and the Federal Home Loan Mortgage Corporation. It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than temporarily impaired.

Corporate debt securities: The unrealized losses on corporate debt securities were caused by interest rate increases. The contractual terms of the bonds do not allow the securities to be settled at a price less than the par value of the investments. The credit ratings on these bonds have not decreased materially during the period. The decline in face value is attributed to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than temporarily impaired.

29

5.Loans

The composition of the loan portfolio, net of unearned discount and deferred loan origination fees and costs, at December 31 was as follows:

(In thousands)	2005		2004
SBA held for sale	$	14,001	$	7,574
SBA held to maturity	64,660		55,576
Commercial	260,581		207,771
Residential mortgage	62,039		60,240
Consumer	47,286		42,419
Total Loans	$	448,567	$	373,580

SBA loans sold to others and serviced by the Company are not included in the accompanying consolidated balance sheets. The total amount of such loans serviced, but owned by outside investors, amounted to approximately $151.0 million and $148.0 million at December 31, 2005 and 2004, respectively.

As of December 31, 2005 and 2004, the Bank’s recorded investment in impaired loans, defined as non-accrual loans, was $4.4 million and $4.1 million, respectively, and the related valuation allowance was $2.0 million and $1.4 million at December 31, 2005 and 2004. This valuation allowance is included in the allowance for loan losses in the accompanying balance sheets. Interest income that would have been recorded had these impaired loans performed under the original contract terms was $330 thousand, $347 thousand, and $282 thousand for 2005, 2004 and 2003, respectively. Average impaired loans for 2005, 2004 and 2003 were $4.3 million, $4.4 million and $3.9 million, respectively. Included in non-performing loans at December 31, 2005 and 2004 was a troubled debt restructuring credit. The balance outstanding was $303 thousand and $359 thousand as of December 31, 2005 and 2004, respectively. The modified terms of this loan consisted of lowering the scheduled payment for a twelve month period after which the initial payment schedule would be reinstated. The initial payment schedule has since been reinstated. The loan was performing according to the modified terms as of December 31, 2005 and 2004.

As of December 31, 2005 and 2004 there were no loans past due 90 or more days and still accruing interest.

As of December 31, 2005, approximately 85 percent of the Company’s loans were secured by real estate. A portion of the Company’s SBA loans are located outside the Company’s lending area. The Company has approximately 13 percent of the total loan portfolio to various unrelated and unaffiliated borrowers in the Hotel/Motel industry. Such loans are collateralized by the underlying real property financed and/or partially guaranteed by the SBA.

As of December 31, 2005, $14.5 million in residential mortgages were pledged at the Federal Home Loan Bank to secure borrowed funds, compared to $29.0 million at December 31, 2004.

In the ordinary course of business, the Company may extend credit to officers, directors or their associates. These loans are subject to the Company’s normal lending policy. An analysis of such loans, all of which are current as to principal and interest payments, is as follows:

(In thousands)	2005
Loans to officers, directors or their associates at December 31, 2004	$	11,022
New loans	4,572
Repayments	1,024
Loans to officers, directors or their associates at December 31, 2005	$	14,570

6.Allowance for Loan Losses

The allowance for loan losses is based on estimates. Ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become known, they are reflected in operations in the periods in which they become known.

An analysis of the change in the allowance for loan losses during years 2003 through 2005 is as follows:

(In thousands)	2005		2004		2003
Balance at beginning of year	$	5,856	$	5,352	$	4,094
Provision charged to expense	1,850		1,175		1,600
	7,706		6,527		5,694
Charge-offs	1,173		968		873
Recoveries	359		297		531
Net charge-offs	814		671		342
Balance at end of year	$	6,892	$	5,856	$	5,352

7.Premises and Equipment

The detail of premises and equipment as of December 31, 2005 and 2004 is as follows:

(In thousands)	2005			2004
Land and buildings	$	8,080		$	6,358
Furniture, fixtures and equipment	4,187			4,968
Leasehold improvements	2,045			2,213
Gross premises and equipment	14,312			13,539
Less: Accumulated depreciation	(3,719		)	(4,881		)
Net premises and equipment	$	10,593		$	8,658

Amounts charged to non-interest expense for depreciation of premises and equipment amounted to $867 thousand in 2005, $845 thousand in 2004, and $771 thousand in 2003.

30

The Company currently accounts for all of its leases as operating leases. In addition, the Company has one lease with a related party. The Company leases its Clinton, New Jersey headquarters from a partnership in which Messrs. D. Dallas and R. Dallas are partners. Under the lease for the facility, the partnership received aggregate rental payments of $483.1 thousand, $431.8 thousand, and $419.7 thousand in 2005, 2004 and 2003, respectively. The Company believes that these rent payments reflect market rents and that the leases reflect terms that are comparable to those, which could have been obtained in a lease with an unaffiliated third party. The annual base rent under the leases is fixed until 2009.

8.Other Assets

The detail of other assets as of December 31, 2005 and 2004 is as follows:

(In thousands)	2005		2004
Deferred tax asset	$	3,123	$	2,729
Prepaid expenses	253		302
Other real estate owned	178		345
Net receivable due from SBA	146		437
Other	706		712
Total other assets	$	4,406	$	4,525

9.Deposits

The following schedule details the maturity distribution of time deposits:

(In thousands)	Within 1 year		1 to 2 years		2 to 3 years		3 to 4 years		Over 4 years		Total
At December 31, 2005
$100,000 or more	$	40,225	$	5,321	$	2,399	$	4,650	$	354	$	52,949
Less than $100,000	$	76,571	$	11,755	$	4,794	$	12,947	$	2,286	$	108,353
At December 31, 2004
$100,000 or more	$	17,590	$	4,593	$	3,970	$	2,426	$	4,098	$	32,677
Less than $100,000	$	37,497	$	12,817	$	4,936	$	4,281	$	13,868	$	73,399

10.Borrowed Funds and Subordinate Debentures

The following table presents the period-end and average balance of borrowed funds and subordinate debentures for the last two years with resultant rates:

	2005				2004
(In thousands)	Amount		Rate		Amount		Rate
FHLB borrowings:
At December 31,	$	30,000	3.86	%	$	20,000	3.94	%
Year-to-date average	$	27,160	3.88	%	$	11,175	4.70	%
Repurchase agreements:
At December 31,	$	10,000	2.78	%	$	15,000	2.69	%
Year-to-date average	$	10,164	2.79	%	$	8,715	2.79	%
Subordinate debentures:
At December 31,	$	9,279	7.92	%	$	9,279	5.35	%
Year-to-date average	$	9,279	7.27	%	$	9,279	4.93	%

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FHLB Borrowings

The FHLB borrowings at December 31, 2005 consisted of three $10 million advances. The FHLB advance that was issued on December 19, 2000 has a fixed rate of interest at 4.92 percent, matures on December 20, 2010 and is callable at any time. The FHLB advance that was issued on December 15, 2004 has a fixed rate of 2.95 percent, matures on December 15, 2014 and is callable quarterly on the 15th of March, June, September and December. The FHLB advance that was issued on April 27, 2005 has a fixed rate of 3.70 percent, matures on April 27, 2015 and is callable quarterly on the 27th of July, October, January and April. Due to the call provisions of these advances, the expected maturity could differ from the contractual maturity.

Repurchase Agreements

At December 31, 2005, the Company was a party in a $10 million repurchase agreement that was entered into in March 2004, has a term of 5 years expiring on March 11, 2009, and a rate of 2.78 percent. The borrowing may be called by the issuer if the 3-month London Inter-bank overnight rate (“LIBOR”) is greater than or equal to 7 percent on March 11, 2005, or on any quarterly payment date thereafter.

Subordinate Debentures

On September 26, 2002, Unity (NJ) Statutory Trust I, a statutory business trust and wholly-owned subsidiary of Unity Bancorp Inc., issued $9.0 million of floating rate capital trust pass through securities to investors due on September 26, 2032. The capital securities have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital. In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust I.

The Subordinate Debentures are redeemable in whole or part, prior to maturity but after September 26, 2007. The floating interest rate on the subordinated debentures is the three-month LIBOR plus 340 basis points and re-prices quarterly. The floating interest rate at December 31, 2005 was 7.92 percent. The additional capital was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to Unity Bank and to fund stock repurchases.

11.Commitments and Contingencies

Facility Lease Obligations

The Company operates fourteen branches, eight branches under operating leases, including its headquarters, and six branches are owned. In addition, the Company has a lease on one other location, which is subleased to a third party, with the third party paying rent in equal amounts as per the lease agreement between the Company and the lessor. The leases, contractual expiration range is between the years 2006 and 2014. The following schedule summarizes the contractual rent payments for the future years.

(In thousands)	Operating Lease Rental Payments		Rent from Sublet Locations		Net Rent Obligation
2006	$	1,124	$	80	$	1,044
2007	1,139		80		1,059
2008	1,112		80		1,032
2009	853		87		766
2010	130		74		56
Thereafter	279		0		279

Total rent expense totaled $952 thousand, $882 thousand and $770 thousand for 2005, 2004 and 2003, respectively.

The Company currently accounts for all of its leases as operating leases.

Litigation

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. In the best judgement of management, based upon consultation with counsel, the consolidated financial position and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.

Commitments to Borrowers

Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon the request of the borrower. The Company was committed to advance approximately $142.5 million to its borrowers as of December 31, 2005, compared to $127.3 million at December 31, 2004. At December 31, 2005, $60.7 million of these commitments expire after one year, compared to $37.5 million a year earlier. At December 31, 2005, the Company had $988 thousand in standby letters of credit compared to $994 thousand in 2004. 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. In addition, approximately 18 percent of these commitments are for SBA loans, which may be sold in the secondary market.

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12.Shareholders’ Equity

On October 21, 2002, the Company authorized the repurchase of up 10 percent of the outstanding common stock. The amount and timing of purchases will be dependent on a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alternate uses of funds. As of December 31, 2005 the Company had repurchased a total of 134 thousand shares of which 112 thousand shares have been retired, leaving 460 thousand shares remaining to be purchased under the plan.

On May 26, 2005, the Company announced a 5 percent stock distribution payable on June 30, 2005 to shareholders of record as of June 15, 2005, and accordingly, all share amounts have been restated to include the effect of the distribution. Shareholders’ equity increased $5.1 million to $40.9 million at December 31, 2005 due to $6.2 million in net income and $917 thousand from the exercise of stock options, partially offset by $1.2 million of cash dividends declared through 2005, a $665 thousand depreciation in the market value of the available for sale securities portfolio and $242 thousand in treasury stock purchased. In 2005, the Company declared four dividends totaling $0.19 for the year.

13.Other Income

The other income components for the years ended December 31, 2003 through 2005 are as follows:

(In thousands)	2005		2004		2003
ATM/Check card fees	$	200	$	194	$	183
Loan referral fees	210		168		281
Other	311		333		637
Total other income	$	721	$	695	$	1,101

14.Other Expenses

The other expenses components for the years ended December 31, 2003 through 2005 are as follows:

(In thousands)	2005		2004		2003
Travel, entertainment, training & recruiting	$	577	$	432	$	384
Stationery & supplies	254		232		308
Insurance	443		291		257
Settlement of litigation	—		275		—
Other	360		328		184
Total other expenses	$	1,634	$	1,558	$	1,133

15.Income Taxes

The components of the provision for income taxes are as follows:

(In thousands)	2005			2004			2003
Income Taxes
Federal – Current provision	$	2,950		$	2,740		$	2,669
Federal – Deferred benefit	(12		)	(54		)	(366		)
Total Federal provision	2,938			2,686			2,303
State – Current provision	754			653			588
State – Deferred benefit	(4		)	(98		)	(66		)
Total State provision	750			555			522
Valuation Allowance	—			(189		)	(127		)
Total provision for income taxes	$	3,688		$	3,052		$	2,698

A reconciliation between the reported income taxes and the amount computed by multiplying income before taxes by the statutory Federal income tax rate is as follows:

(In thousands)	2005			2004			2003
Federal income taxes at statutory rate	$	3,365		$	2,850		$	2,476
State income taxes, net of Federal income tax effect	496			431			388
Other, net	(173		)	(40		)	(39		)
Valuation allowance	—			(189		)	(127		)
Provision for income taxes	$	3,688		$	3,052		$	2,698

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The components of the net deferred tax asset at December 31, 2005 and 2004 are as follows:

(In thousands)	2005			2004
Allowance for loan losses	$	2,753		$	1,993
Unrealized loss on securities available for sale	709			327
Deferred loan costs	(184		)	(172		)
Operating loss carry-forward	153			377
Other, net	(308		)	204
Net deferred tax asset	$	3,123		$	2,729

33

The Company computes deferred income taxes under the asset and liability method. Deferred income taxes are recognized for tax consequences of “temporary differences” by applying enacted statutory tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions subject to reduction of the asset by a valuation allowance.

At December 31, 2005, the Company had available for federal and state tax purposes, pre tax net operating loss carry-forwards of approximately $93 thousand and $2.6 million, respectively. The net operating loss carry-forwards for federal and state purposes expire in 2021 and 2008, respectively.

Included as a component of shareholders’ equity is an income tax benefit related to unrealized losses on securities available for sale of ($408) thousand, ($1) thousand and ($472) thousand in 2005, 2004 and 2003, respectively.

16.Income per Common Share

The following is a reconciliation of the calculation of basic and dilutive income per share. All share amounts have been restated to include the effects of the 5 percent stock distribution paid on June 30, 2005.

(In thousands, except per share amounts)	2005		2004		2003
Net income	$	6,210	$	5,330	$	4,583
Weighted average common shares outstanding	6,121		6,044		5,952
Plus: Potential dilutive common stock	318		380		282
Diluted average common shares outstanding	6,439		6,424		6,235
Net Income per common share -
Basic	$	1.01	$	0.88	$	0.77
Diluted	$	0.96	$	0.83	$	0.74

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17.Regulatory Capital

A significant measure of the strength of a financial institution is its capital base. Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, subject to limitations, certain qualifying long-term debt and preferred stock which does not qualify for tier 1 capital. Minimum capital levels are regulated by risk-based capital adequacyguidelines, which require a bank to maintain certain capital as a percentage of assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets). A bank is required to maintain, at a minimum, tier 1 capital as a percentage of risk-adjusted assets of 4 percent and combined tier 1 and tier 2 capital as a percentage of risk-adjusted assets of 8 percent. In addition to the risk-based guidelines, regulators require that a bank, which meets the regulator’s highest performance and operation standards maintain a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of 3 percent. For those banks with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be proportionately increased.

The Company’s capital amounts and ratios for each of the last two years are presented in the following table.

									To Be Well
									Capitalized Under
					For Capital Adequacy				Prompt Corrective
	Actual				Purposes				Action Provisions
(In thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2005
Leverage ratio	$	49,462	8.27	%	$	>23,935	4.00	%	$	>29,919	5.00	%
Tier I risk-based ratio	$	49,462	9.98	%	$	>19,827	4.00	%	$	>29,741	6.00	%
Total risk-based capital ratio	$	55,667	11.23	%	$	>39,655	8.00	%	$	>49,569	10.00	%
As of December 31, 2004
Leverage ratio	$	45,352	9.09	%	$	>19,948	4.00	%	$	>24,935	5.00	%
Tier I risk-based ratio	$	45,352	11.14	%	$	>16,291	4.00	%	$	>24,436	6.00	%
Total risk-based capital ratio	$	50,452	12.39	%	$	>32,582	8.00	%	$	>40,727	10.00	%

The Bank’s capital amounts and ratios for the last two years are presented in the following table.

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(In thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2005
Leverage ratio	$	42,260	7.01	%	$	>24,124	4.00	%	$	>30,155	5.00	%
Tier I risk-based ratio	$	42,260	8.51	%	$	>19,855	4.00	%	$	>29,783	6.00	%
Total risk-based capital ratio	$	54,473	10.97	%	$	>39,711	8.00	%	$	>49,638	10.00	%
As of December 31, 2004
Leverage ratio	$	37,493	7.53	%	$	>19,907	4.00	%	$	>24,884	5.00	%
Tier I risk-based ratio	$	37,493	9.22	%	$	>16,261	4.00	%	$	>24,391	6.00	%
Total risk-based capital ratio	$	48,584	11.95	%	$	>32,522	8.00	%	$	>40,652	10.00	%

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18.Employee Benefit Plans

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 80 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $125 thousand, $61 thousand and $98 thousand to the Plan in 2005, 2004 and 2003, respectively. The Bank does not currently provide any other post retirement or post employment benefits to its employees other than the 401(k) plan.

The Company has several stock option plans. These Plans allow for the grants of options to officers, employees and members of the Board of Directors. Option prices are determined by 100 percent of the fair value on the date of the grant. The period during which the option is vested is generally 3 years, but no option may be exercised after 10 years from the date of the grant. As of December 31, 2005, 1,113,490 shares have been reserved for issuance, of which 717,581 are outstanding, 330,660 have been exercised, forfeited or expired leaving 65,249 available.

Restricted stock is issued under the stock bonus program to reward executives and to retain them by distributing stock over a period of time. The stock awards granted totaled 19,250 shares and 6,300 shares in 2005 and 2004, respectively. The fair market value per share for these grants was $13.60 and $12.27 for 2005 and 2004, respectively. These shares vest over a period of 4 years and are recognized as compensation to the employees over the vesting period. Compensation expense related to the restricted stock totaled $19,335 for 2005. There was no compensation expense related to the restricted stock charged to non-interest expense for 2004 because the shares were granted on December 31, 2004. As of December 31, 2005, 105 thousand shares are reserved for issuance, of which 25,550 are outstanding and 79,450 are available.

Transactions under the five stock option plans are summarized as follows:

	Number of Shares		Exercise Price per Share		Weighted Average Exercise Price
Outstanding, December 31, 2002	874,744		$	2.31 - 9.21	$	4.33
Options granted	187,315		10.23		10.23
Options exercised	(17,812	)	3.02 - 9.67		4.59
Options expired	(84,797	)	3.02 - 9.67		4.66
Outstanding, December 31, 2003	959,450		$	2.43 - 10.26	$	5.66
Options granted	44,799		11.38 - 13.27		11.61
Options exercised	(78,261	)	3.12 - 10.26		3.89
Options expired	(41,977	)	3.12 - 10.26		7.52
Outstanding, December 31, 2004	884,011		$	2.43 - 13.27	$	6.02
Options granted	7,750		11.43 - 12.47		11.77
Options exercised	(155,139	)	2.43 - 11.38		5.55
Options expired	(19,041	)	5.84 - 11.48		9.48
Outstanding, December 31, 2005	717,581		$	2.43 - 13.27	$	6.10

The following table summarizes information about stock options outstanding at December 31, 2005:

Exercise Price		Shares Outstanding	Remaining Contractual Life	Shares Exercisable
<$5.00		323,501	5.4 years	323,501
$	5.01 - $10.00	223,866	5.9 years	223,866
$	10.01 - $14.00	170,214	8.1 years	132,666
$	6.10*	717,581	6.2 years	680,033

* Weighted average exercise price

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19.Fair Value of Financial Instruments

The fair value estimates for financial instruments are made at a discrete point in time based upon relevant market information and information about the underlying instruments.

Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgment regarding a number of factors. These estimates are subjective in nature and involve some uncertainties. Changes in assumptions and methodologies may have a material effect on these estimated fair values. In addition, reasonable comparability between financial institutions may not be likely due to a wide range of permitted valuation techniques and numerous estimates which must be made. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Federal Funds Sold-

For these short-term instruments, the carrying value is a reasonable estimate of fair value.

Securities-

For the held to maturity and available for sale portfolios, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans-

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the credit, collateral and interest rate risk inherent in the loan.

Deposit Liabilities-

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using current market rates.

Borrowings-

The fair value of borrowings is estimated by discounting the projected future cash flows using current market rates.

Unrecognized Financial Instruments-

At December 31, 2005, the Bank had standby letters of credit outstanding of $988 thousand, as compared to $994 thousand at December 31, 2004. The fair value of these commitments is nominal.

Below are the Company’s estimated financial instruments fair values as of December 31, 2005 and 2004:

	2005				2004
(In thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets -
Cash and Federal funds sold	$	38,759	$	38,759	$	23,406	$	23,406
Securities held to maturity	40,748		40,212		23,579		23,786
Securities available for sale	65,583		65,583		78,014		78,014
Loans, net of allowance for possible loan losses	441,675		444,481		367,724		369,155
Financial liabilities -
Total deposits	521,860		520,018		433,898		433,548
Total borrowings	49,279		48,611		44,279		44,080

37

20.Condensed Financial Statements of Unity Bancorp, Inc. (Parent Company Only)

Balance Sheets

	December 31,
(In thousands)	2005		2004
Assets:
Cash	$	933	$	1,492
Securities available for sale	424		454
Capital note due from Bank	6,000		6,000
Investment in subsidiaries	42,734		36,959
Other assets	463		487
Total Assets	$	50,554	$	45,392
Liabilities and Shareholders’ Equity:
Other liabilities	$	346	$	245
Other borrowings	9,279		9,279
Shareholders’ Equity	40,929		35,868
Total Liabilities and Shareholders’ Equity	$	50,554	$	45,392

Statements of Income

	December 31,
(In thousands)	2005			2004		2003
Interest income	$	505		$	501	$	293
Interest expense	678			457		430
Net interest (expense) income	(173		)	44		(137		)
Net security gains	53			25		42
Total (expense) income	(120		)	69		(95		)
Other expenses	58			42		57
(Loss) income before income (benefit) tax and equity in undistributed income of subsidiary	(178		)	27		(152		)
Income (benefit) tax	(75		)	9		(51		)
(Loss) income before equity in undistributed income of subsidiary	(103		)	18		(101		)
Equity in undistributed net income of subsidiary	6,313			5,312		4,684
Net income	$	6,210		$	5,330	$	4,583

Statements of Cash Flows

	December 31,
(In thousands)	2005			2004			2003
Operating Activities:
Net Income	$	6,210		$	5,330		$	4,583
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiary	(6,313		)	(5,312		)	(4,684		)
Gain on sale of securities available for sale	(53		)	(25		)	(42		)
Decrease (increase) in other assets	51			(220		)	101
Increase (decrease) in other liabilities	2			294			(175		)
Net cash (used in) provided by operating activities	(103		)	67			(217		)
Investing Activities:
Sales and maturities of securities available for sale	148			166			268
Purchases of securities available for sale	(136		)	(182		)	(294		)
Dividend from Bank	—			—			2,000
Advance of Capital Note to Bank	—			—			(6,000		)
Net cash provided (used in) by investing activities	12			(16		)	(4,026		)
Financing Activities:
Proceeds from issuance of common stock, net	853			694			162
Payment to repurchase common stock, net	(242		)	—			—
Cash dividends on common stock	(1,079		)	(859		)	(162		)
Net cash used in financing activities	(468		)	(165		)	—
Net decrease in cash and cash equivalents	(559		)	(114		)	(4,243		)
Cash, beginning of year	1,492			1,606			5,849
Cash, end of year	$	933		$	1,492		$	1,606
Supplemental disclosures: Interest paid	$	667		$	457		$	430

38

Quarterly Financial Information (Unaudited)

The following quarterly financial information for the years ended December 31, 2005 and 2004 is unaudited. However, in the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the results of operations for the periods, are reflected. Results of operations for the periods are not necessarily indicative of the results of the entire year or any other interim period.

(In thousands, except per share data)
2005	March 31		June 30		September 30		December 31
Total interest income	$	7,523	$	7,943	$	8,885	$	9,486
Total interest expense	2,258		2,678		3,148		3,519
Net interest income	5,265		5,265		5,737		5,967
Provision for loan losses	300		350		675		525
Net interest income after provision for loan losses	4,965		4,915		5,062		5,442
Total non-interest income	1,791		2,195		2,132		2,072
Total non-interest expense	4,648		4,642		4,582		4,804
Net income before tax	2,108		2,468		2,612		2,710
Income tax provision	798		941		993		956
Net income	1,310		1,527		1,619		1,754
Basic income per common share	$	0.22	$	0.25	$	0.26	$	0.28
Diluted income per common share	$	0.20	$	0.24	$	0.25	$	0.27

(In thousands, except per share data)
2004	March 31		June 30		September 30		December 31
Total interest income	$	6,226	$	6,188	$	6,722	$	7,030
Total interest expense	1,608		1,694		1,743		1,963
Net interest income	4,618		4,494		4,979		5,067
Provision for loan losses	250		250		325		350
Net interest income after provision for loan losses	4,368		4,244		4,654		4,717
Total non-interest income	1,881		1,895		1,985		1,868
Total non-interest expense	4,403		4,019		4,356		4,452
Net income before tax	1,846		2,120		2,283		2,133
Income tax provision	652		773		852		775
Net income	1,194		1,347		1,431		1,358
Basic income per common share	$	0.20	$	0.22	$	0.24	$	0.23
Diluted income per common share	$	0.19	$	0.21	$	0.22	$	0.21

39

Selected Consolidated Financial Data

	At or for the Years Ended December 31st
(In thousands, except per share data)	2005			2004			2003			2002			2001(1)
Selected Results of Operations
Interest income	$	33,837		$	26,166		$	24,895		$	24,295		$	23,892
Interest expense	11,603			7,008			7,028			8,572			11,702
Net interest income	22,234			19,158			17,867			15,723			12,190
Provision for loan losses	1,850			1,175			1,600			2,350			1,400
Other income	8,190			7,629			8,343			7,991			5,391
Other expenses	18,676			17,230			17,329			15,544			14,522
Tax expense (benefit)	3,688			3,052			2,698			2,111			(382		)
Net income	6,210			5,330			4,583			3,709			2,041
Per Share Data
Net income per common share (basic)	$	1.01		$	0.88		$	0.77		$	0.61		$	0.00
Net income per common share (diluted)	0.96			0.83			0.74			0.57			0.00
Book value per common share	6.57			5.91			5.15			4.56			4.14
Market value per common share	14.00			12.19			10.37			7.12			5.62
Cash dividends declared on common shares	0.19			0.15			0.05			—			—
Selected Balance Sheet Data
Total assets	$	614,172		$	515,417		$	467,419		$	433,153		$	379,232
Loans	448,567			373,580			339,755			311,794			272,559
Allowance for loan losses	6,892			5,856			5,352			4,094			3,165
Investment securities	106,331			101,593			92,347			81,754			80,696
Deposits	521,860			433,898			414,982			382,585			339,954
Borrowings	49,279			44,279			19,279			19,279			10,000
Shareholders’ equity	40,929			35,868			30,762			27,103			24,836
Common shares outstanding	6,225			6,067			5,970			5,946			5,919
Performance Ratios
Return on average assets	1.10		%	1.10		%	1.04		%	0.91		%	0.56		%
Return on average common equity	16.29			16.32			16.05			13.95			(0.11		)
Efficiency ratio	61.53			64.51			66.59			66.18			82.60
Net interest spread	3.74			3.77			3.85			3.59			2.84
Net interest margin	4.17			4.18			4.28			4.09			3.56
Asset Quality Ratios
Allowance for loan losses to loans	1.54		%	1.57		%	1.58		%	1.31		%	1.16		%
Allowance for loan losses to non-performing loans	158.04			143.14			99.20			115.10			99.40
Non-performing loans to total loans	0.97			1.10			1.59			1.14			1.17
Non-performing assets to total loans and OREO	1.01			1.19			1.68			1.20			1.26
Net charge-offs to average loans	0.20			0.19			0.11			0.48			0.33
Capital Ratios – Company
Leverage ratio	8.27		%	9.09		%	9.02		%	8.38		%	6.62		%
Tier 1 risk-based capital ratio	9.98			11.14			11.28			11.05			9.53
Total risk-based capital ratio	11.23			12.39			12.53			12.32			10.75
Capital Ratios – Bank
Leverage ratio	7.01		%	7.53		%	7.22		%	6.96		%	6.25		%
Tier 1 risk-based capital ratio	8.51			9.22			9.05			9.16			9.00
Total risk-based capital ratio	10.97			11.95			11.98			10.41			10.22

(1)2001 net income per share includes impact of $1.8 million non-cash preferred dividend.

All share amounts have been restated to include the effect of the 5% stock distribution paid on June 30, 2005.

40

EX-21

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

The Registrant has two subsidiaries, Unity Bank and Unity Statutory Trust I.

Unity Bank has two subsidiaries, Unity Investment Company, Inc., and Unity Financial Services, Inc.

EX-23

EXHIBIT 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Unity Bancorp, Inc.:

We consent to incorporation by reference in the registration statement Nos. 333-64612, 333-64614, 333-20687, 333-105045, and 333-121409 on Form S-8, of Unity Bancorp, Inc., of our report dated February 17, 2006, relating to the consolidated balance sheets of Unity Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, which report is incorporated by reference in the December 31, 2005 Annual Report on Form 10-K of Unity Bancorp, Inc.

KPMG LLP

Short Hills, New Jersey

March 24, 2006

EX-31.1

Exhibit 31.1

Certifications

I, James A. Hughes, certify that:

1.I have reviewed this annual report on Form 10-K of Unity Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses  in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 23, 2006		Name:/s/    James A. Hughes
		Title:  President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications

I, Alan J. Bedner, certify that:

1.I have reviewed this annual report on Form 10-K of Unity Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses  in the design or operation of internal controls over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 23, 2006	Name:/s/      Alan J. Bedner
		Title:  Executive Vice President and Chief
		Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C.

Section 1350, AS ADOPTED

PURSUANT TO SECTION 906 of SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Unity Bancorp. Inc. (the “Company”), certifies that:

(1)to the best of my knowledge, the Annual Report on Form 10-K of the Company for the annual period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 23, 2006	/s/  James A. Hughes
	James A. Hughes
	President and Chief Executive Officer
Dated:  March 23, 2006	/s/  Alan J. Bedner
	Alan J. Bedner
	Executive Vice President and Chief Financial Officer

This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.