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)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

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:

Common Stock, no par value	NASDAQ
(Title of Each Class)	(Name of Exchange on Which Registered)

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

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 x

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 x

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 x   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, a non-accelerated filer or a smaller reporting company.  See the definitions of  “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer  o Smaller reporting company x

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

As of June 30, 2008, the aggregate market value of the registrant’s Common Stock, no par value per share, held by non-affiliates of the registrant was $37,629,253 and 5,414,281 shares of the Common Stock were outstanding to non-affiliates.  As of March 1, 2009, 7,119,438 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, 2008 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, 2008 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Index to Form 10-K

		Page
Part I
Item1.	Business
	a)  General	2
	b)  Statistical information	7
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and	12
	Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data	13
Item 7.	Management's Discussion and Analysis of Financial Condition and	13
	Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 8.	Financial Statements and Supplementary Data	13
Item 9.	Changes in and Disagreements with Accountants on Accounting and	14
	Financial Disclosure
Item 9A(T).	Controls and Procedures	14
Item 9B.	Other Information - None	14
Part III
Item 10.	Directors, Executive Officers and Corporate Governance;
	Compliance with Section 16(a) of the Exchange Act	14
Item 11.	Executive Compensation	14
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	And Related Stockholder Matters	14
Item 13.	Certain Relationships and Related Transactions and Director Independence	15
Item 14.	Principal Accountant Fees and Services	15
Part IV
Item 15.	Exhibits and Financial Statement Schedules	15
	Signatures	18

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 1994.  Subsequently, in 2002, the Company 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 II and Unity (NJ) Statutory Trust III.  The trusts have issued $10.3 million and $5.2 million of preferred securities to investors, respectively.

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, Middlesex, North Plainfield, Phillipsburg, Scotch Plains, South Plainfield, Springfield, Union and Whitehouse.  In addition, the Bank has two Pennsylvania branches: one located in Forks Township and a second branch on William Penn Highway in Easton.  The Bank's primary service area encompasses the Route 22/Route 78 corridors between the Forks Township and Easton, Pennsylvania offices 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, NJ, in combination with its Flemington and Whitehouse offices, serves the greater area of Hunterdon County.  The Bank's North Plainfield office serves 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 Middlesex, 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.  The Bank’s Forks Township office and William Penn office serve Northampton County, Pennsylvania.

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 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, 2008, the Company employed 163 full-time and 8 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, 2008, regarding 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, 55, Chief Deposit Officer and Executive Vice President of the Company and Bank	2002	Previously, Mr. Kauchak was the head of Deposit Operations for Unity Bank from 1996 to 2002.
Michael F. Downes, 46, 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, 38, 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.

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.

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.

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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 non-banking activities.  In addition, bank holding companies, which elect to become financial holding companies, may engage in certain banking and non-banking 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.

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 fund 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 $500 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-weighting 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 that are fully secured by residential property, which carry a 50% 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-weighting, 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-weighting.  In converting off-balance sheet items, direct credit substitutes (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 of 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.

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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:During the third quarter of 2008, Congress instituted the Emergency Economic Stabilization Act (the "Act") to address the dysfunctional credit markets.  This Act authorized the Troubled Asset Relief Program (“TARP”) which provided capital to financial institutions and purchased troubled mortgages from institutions.  The U.S. Department of Treasury’s Capital Purchase Program (“CPP”) authorized the Treasury to purchase newly issued preferred stock and common stock purchase warrants from financial institutions or their holding companies. In addition, the Act authorized the temporary increase in the FDIC insurance limit to $250 thousand from $100 thousand per account.  In addition, the FDIC implemented a program to insure all deposits held in noninterest-bearing transactional accounts, regardless of amount, at institutions which do not opt out of the program and which pay an additional assessment to the FDIC.  Both increases in deposit insurance will expire on December 31, 2009, unless extended, and the prior limits, described below, will go back into effect.  The Bank elected not to opt out of this program, and is paying the required assessment.

Prior to the fall of 2008, the Bank's deposits were insured up to a maximum of $100,000 per depositor ($250,000 per IRA account) under the Deposit 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.

The FDIC has significantly increased deposit insurance assessment rates, commencing in the second quarter of 2009.  As increased, the adjusted base assessment rates will range from 12 to 77.5 basis points of deposits, a significant increase over premium rates for the past several years. In addition, the Bank will pay a special assessment of 10 basis points of the amount of deposits in excess of $250,000 held in non-interest bearing transactional accounts under the enhanced insurance program discussed above.  Finally, the FDIC has proposed a special assessment equal to twenty (20) basis points of insured deposits as of June 30, 2009, to be paid on September 30, 2009. This proposal has not yet been finalized.  The FDIC in this proposal has also reserved the right to impose one or more additional special assessments of ten (10) basis points if needed to recapitalize the Deposit Insurance Fund.

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.

On December 5, 2008, the Company completed a transaction with the U.S. Treasury under the CPP through which the Treasury purchased $20.6 million in preferred stock from the Company. As part of the CPP, the Company’s future ability to pay cash dividends is limited for so long as the Treasury holds the preferred stock. As so limited the Company may not increase its quarterly cash dividend above $.05 per share, the quarterly rate in effect  at the time the CPP program was announced, without the prior approval of the Treasury. 

Sarbanes-Oxley Act

On July 30, 2002, the Sarbanes-Oxley Act (“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.

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 SOX includes very specific additional disclosure requirements and new corporate governance rules and 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;

·   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.

The American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (the “ARRA”) became law on February 17, 2009. The main purpose of the ARRA is to provide fiscal stimulus to the U.S. economy and help foster job creation and economic activity. However, portions of the ARRA amend the Emergency Economic Stabilization Act (discussed above) and the terms of the CPP, and impose new requirements on institutions participating in the CPP, like the Company.  Among other things, these provisions require substantial new restrictions on executive compensation, prohibiting severance payments regardless of the cause of an executive’s departure. The ARRA also imposes new certification requirements on management of an institution participating in the CPP, and new review requirements on the compensation committee of such an institution. While management cannot yet assess the impact of these provisions, they may make it more difficult for the Company to attract and retain senior management.

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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, 2008 (Exhibit 13 hereto), which, to the extent indicated, is incorporated by reference herein.  Information that is not applicable is indicated by (N/A):

								Annual Report
Description of Financial Data								Pages
	I.	Distribution of Assets, Liabilities, and Stockholders' Equity; Interest
		Rates and Interest Differential
			A.	Analysis of Net Interest Earnings					9
			B.	Average Balance Sheets					12
			C.	Rate/Volume Analysis					14
II.		Investment Portfolio
			A.	Book value of investment securities					38
			B.	Investment securities by range of maturity with corresponding average yields					38
			C.	Securities of issuers exceeding ten percent of stockholders' equity					N/A
III.		Loan Portfolio
			A.	Types of loans					17
			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					42
			E.	Time deposits of $100,000 or more by foreign offices					N/A
VI.		Return on Equity and Assets							57
VII.		Short-term Borrowings
			A.	Amounts outstanding					42
			B.	Maximum amount of borrowings in each category outstanding at any month-end					42
			C.	Average amount outstanding					42

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:

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Risks affecting Our Business:

The nationwide recession may adversely affect our business by reducing real estate values in our trade area and stressing the ability of our customers to repay their loans.

Our New Jersey trade area, like the rest of the United States, is currently experiencing economic contraction. As a result, many companies have experienced reduced revenues and have laid off employees. These factors have stressed the ability of both commercial and consumer customers to repay their loans, and have, and may in the future, result in higher levels of nonaccrual loans.  In addition, real estate values have declined in our trade area. Since the majority of our loans are secured by real estate, declines in the market value of real estate impact the value of the collateral securing our loans, and could lead to greater losses in the event of  defaults on loans secured by real estate.     

Our FDIC deposit insurance premiums have increased and may continue to increase, substantially increasing our noninterest expense.

During 2008 and 2009, the FDIC has significantly increased its assessments for deposit insurance due to the weakness in the economy and the increased number of bank failures.  In 2007, we paid $67 thousand in deposit insurance assessments, and in 2008 this increased to $589 thousand. The FDIC has already announced an increased assessment, to go into effect for the second quarter of 2009, which will raise insurance premiums for the healthiest banks by 7 basis points. Banks like the Bank that have opted to remain eligible for the FDIC’s increased insurance program for noninterest  bearing deposit must also pay an assessment of 10 basis points of the amount of noninterest bearing deposits in excess of $250,000. Finally, the FDIC has proposed  a special assessment of 20 basis points of insured deposits as of June 30, 2009, to be paid September 30, 2009, with the possibility of an additional 10 basis point special assessment later in 2009. This proposal has not yet been finalized. Had the special assessment been in effect on our deposits at December 31, 2008, we would have paid $1.4 million. These additional costs will adversely affect our results of operations.

Our non-performing assets have substantially increased over the past year, and this has, and will continue, to affect our results of operations.

Over the course of 2008, our total non-performing assets have increased to $16.8 million, or 2.35% of our total loans, from $5.6 million, or 0.93% of our total loans. In addition, our loans that are 90 days past due and still accruing interest have also increased to $2.5 million from $155 thousand. The increase in non-performing assets and loans past due 90 days and still accruing interest reflects the general economic slowdown in our marketplace and its effect on our borrowers, and our focus on SBA lending, which may entail greater credit risk than other types of lending. This deterioration in credit quality has negatively impacted our results of operations, through additional provisions for loan losses and reduced interest income, and will continue to impact our performance until these assets are resolved. In addition, future increases in our non-performing assets will further negatively affect our results of operations. We can give you no assurance that our non-performing assets will not increase further.   

We are subject to interest rate risk and variations in interest rates may negatively affect our financial performance; in addition dislocation and volatility in the credit markets may negatively affect the value of our assets.

 Beginning in mid 2007, there has been significant turmoil and volatility in global financial markets.   Nationally, we have seen economic factors such as a recession, a rise in unemployment, and a weakened US dollar. Recent market uncertainty regarding the financial sector has increased.  In addition to the impact on the economy, changes in interest rates, in the shape of the yield curve, or in valuations in the debt or equity markets or disruptions in the liquidity or other functioning of financial markets, all of which have been seen recently, could directly impact us in one or more of the following ways:

·        Net interest income, the difference between interest earned on our interest-earning assets and interest paid on interest-bearing liabilities, represents a significant portion of our earnings.  Both increases and decreases in the interest rate environment may reduce our profits.   We expect that we will continue to realize income from the spread between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities.  The net interest spread is affected by the differences between the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.  Our interest-earning assets may not reprice as slowly or rapidly as our interest-bearing liabilities.

·        The market value of our securities portfolio may decline and result in other-than-temporary charges or realized losses on the sale of securities.  The value of securities in our portfolio are affected by factors that impact the U.S. securities market in general as well specific financial sector factors such as the deterioration of the credit worthiness of issuers.  Further declines in these sectors may result in future other-than-temporary impairment charges and/or realized losses on the sale of securities.

·        Asset quality may deteriorate as borrowers become unable to repay their loans.

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·        Lack of liquidity within the capital markets which we use to raise funds to support our business transactions may impact the cost of funds or our ability to raise funds.

Due to the current state of the yield curve, our net interest margin and net interest spread have declined.  Continued declines in our net interest margin and net interest spread will negatively impact our results of operations.

During 2008, the yield curve, particularly short-term interest rates, has fallen as the Federal Open Market Committee (“FOMC”) has intervened and lowered interest rates to encourage economic growth.  This has impacted our results of operations, as our variable rate earning assets have repriced quicker than our funding (our deposits).

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, to 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 ability to attract and retainer senior management may be adversely affected by the restrictions imposed upon us under the CPP, as revised by the American Reinvestment and Recovery Act.  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 absence of a secondary market for SBA loans could negatively affect our operation.

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 affect our results of operations.

Historically, the Company has sold into the secondary market substantially all of the guaranteed portion of its loans originated under the SBA’s loan programs. However, starting in the fall of 2008, the secondary market for SBA loans lost liquidity, and SBA loan program participants like the Company have had difficulty selling SBA loans in the secondary market. To address the situation, the Company must either reduce the number of SBA loans it originates, which could negatively impact its earnings, or keep the loans in its portfolio, increasing its asset base and stressing its capital. Either alternative may adversely affect the Company and its results of operations.

There is a risk that the SBA will not honor their guarantee.

The Company has historically been a participant in various SBA lending programs which guarantee up to 85% of the principal on the underlying loan.  There is a risk that the SBA will not honor their guarantee if a loan is not underwritten to SBA guidelines.  The Company follows the underwriting guidelines of the SBA, however our ability to manage this will depend on our ability to continue to attract, hire and retain skilled employees who have knowledge of the SBA program. 

9

Risks Related to the Banking Industry:

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 six counties in the New Jersey market and one county in Pennsylvania in which we have branches, so any decline in the economy of New Jersey or eastern Pennsylvania 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 non-payment (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, 2008, the Company’s allowance for loan losses was $10.3 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 the 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 our 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 also 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 upon 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 “hometown” 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 are intended primarily to protect depositors and the Federal Deposit Insurance Corporation’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;

·   Tele-banking; 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 affect on the Company’s financial condition and results of operations.

Item 1B. Unresolved Staff Comments:

There are no unresolved staff comments.

Item 2. Properties:

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

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The following table sets forth certain information regarding the Company’s properties from which it conducts business as of December 31, 2008.

Location	Leased or Owned	Date Leased or Acquired	Lease Expiration	2008 Annual Rental Fee
Clinton, NJ	Leased	1996	2009	535,102
Colonia, NJ	Leased	1998	2009	37,394
Flemington, NJ	Owned	2005	-----	-----
Linden, NJ	Owned	1997	-----	-----
Highland Park, NJ	Leased	1999	2009	90,609
North Plainfield, NJ	Owned	1991	-----	-----
Scotch Plains, NJ	Owned	2004	-----	-----
Springfield, NJ	Leased	1995	2011	33,607
South Plainfield, NJ	Leased	1999	2009	109,223
Union, NJ	Owned	2002	-----	-----
Edison, NJ	Leased	1999	2009	126,716
Whitehouse, NJ	Owned	1998	-----	-----
Phillipsburg, NJ	Leased	2005	2010	80,588
Middlesex, NJ	Owned	2007	-----	-----
Forks Township, PA	Leased	2006	2010	55,918
William Penn (Easton), PA	Leased	2007	2010	68,303
Great Neck, NY	Leased	2006	2009	9,073

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 2008.

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 Global National Market under the symbol “UNTY.”  The following table sets forth the high and low closing 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 27, 2008.

	High		Low
Year Ended December 31, 2008: 4th Quarter	$	4.85	$	2.81
3rd Quarter		6.95		4.00
2nd Quarter		8.00		6.48
1st Quarter		9.25		7.50
Year Ended December 31, 2007: 4th Quarter	$	10.78	$	6.95
3rd Quarter		11.23		9.28
2nd Quarter		11.43		10.74
1st Quarter		13.85		10.98

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 (b)         Holders

As of March 1, 2009, there were approximately 495 shareholders of record of the Company’s Common Stock.

(c)         Dividends

The following table sets forth the dividends declared by the Company during 2008 and 2007.  The amounts reflect the impact of the 5 percent stock dividend paid on June 27, 2008.

	Dividend Declared
Year Ended December 31, 2008:
4th Quarter	$	.00
3rd Quarter	$	.00
2nd Quarter	$	.05
1st Quarter	$	.05
Year Ended December 31, 2007:
4th Quarter	$	.05
3rd Quarter	$	.05
2nd Quarter	$	.05
1st Quarter	$	.04

Under the terms of the CPP, we are limited in our ability to pay cash dividends. Without the approval of the Treasury, we can

not pay a quarterly cash dividend in excess of $0.05 per share, the amount of our last quarterly cash dividend prior to October 14, 2008. In addition,  during the third quarter of 2008, the Company revised its cash dividend payment policy.  The decision was made based upon the current economic environment to retain capital so that the holding company can remain a source of strength to the subsidiary bank.  Previously, the Company had paid a quarterly cash dividend at a rate set by the Board based upon a number of factors.  The Board has now established a targeted dividend payout ratio of 20 percent of the Company’s earnings, subject to adjustment based upon factors existing at the time of the dividend and the Company’s projected capital needs.  The Board now intends to pay a cash dividend once annually, in the next succeeding year.  The Company declared two dividends in 2008 totaling $0.10.

Item 6. Selected Financial Data:

The information under the caption, “Selected Consolidated Financial Data,” on page 57 of the Company’s Annual Report to Shareholders for the year ended December 31, 2008, 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 7 through 26 of the Company’s Annual Report to Shareholders for the year ended December 31, 2008, is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk:

The information under the caption, “Market Risk,” on pages 22 through 23 of the Company’s Annual Report to Shareholders for the year ended December 31, 2008, is incorporated by reference herein.

Item 8. Financial Statements and Supplementary Data:

The Financial Statements and Notes to Consolidated Financial Statements on pages 33 through 57 of the Company’s Annual Report to Shareholders for the year ended December 31, 2008, are incorporated by reference herein.

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

None.

Item 9A(T). 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 Chief Executive Officer and Chief 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) Management’s Report on Internal Control Over Financial Reporting

The information under the caption, “Management’s Report on Internal Control Over Financial Reporting,” on page 27 of the Company’s Annual Report to Shareholders for the year ended December 31, 2008, is incorporated by reference herein.

 (c) 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.

Item 9B. Other Information - None

PART III

Item 10. Directors, Executive Officers and Corporate Governance; 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," in the Proxy Statement for the Company’s 2009 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, 2009.

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,” in the Proxy Statement for the Company’s 2009 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, 2009.

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 2009 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, 2009.

14

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, 2008.

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		872,274	$	5.94		75,984
Equity compensation plans approved by security holders		50,424		9.76		44,508
Equity compensation plans not approved by security holders		-		-		-
Total		922,698	$	6.15		120,492

There were no share repurchases during 2008.  Pursuant to the requirements of the Treasury’s Capital Purchase Program, the Company has suspended its stock repurchase program.

Item 13. Certain Relationships and Related Transactions and Director Independence:

The information concerning certain relationships and related transactions under the caption, “Certain Transactions with Management,” in the Proxy Statement for the Company’s 2009 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, 2009.

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 2009,” in the Proxy Statement for the Company’s 2009 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, 2009.

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, 2008, are incorporated by reference in Part II, Item 8.

Report of Independent Registered Public Accounting Firm (page 28)

Consolidated Balance Sheets (page 29)

Consolidated Statements of Income (page 30)

15

Consolidated Statements of Changes in Shareholders’ Equity (page 31)

Consolidated Statements of Cash Flows (page 32)

Notes to Consolidated Financial Statements (pages 33 through 57)

 (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(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(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)
10(xvii)	2006 Stock Option Plan (10)
13	Portion of Unity Bancorp. Inc. 2008 Annual Report to Shareholders
21	Subsidiaries of the Registrant
23.1	Consent of McGladrey & Pullen, 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.

16

(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.

(10)   Previously filed with the Securities and Exchange Commission as an Exhibit to the Current Report on Form 8-K filed on April 27, 2006 and incorporated by reference herein.

(c)           Not applicable

17

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.

          < /font>

/s/ Alan J. Bedner

Alan J. Bedner

Executive Vice President and Chief Financial Officer

          Dated:  March 19, 2009

 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  19, 2009
David D. Dallas
/s/ James A. Hughes	President, Chief Executive Officer And Director	March  19, 2009
James A. Hughes
/s/ Alan J. Bedner	Chief Financial Officer (Principal Financial and Accounting Officer)	March  19, 2009
Alan J. Bedner
/s/ Raj Patel	Director	March  19, 2009
Raj Patel
/s/ Dr. Mark S. Brody	Director	March  19, 2009
Dr. Mark S. Brody
/s/ Robert H. Dallas, II	Director	March  19, 2009
Robert H. Dallas, II
/s/ Peter E. Maricondo	Director	March  19, 2009
Peter E. Maricondo
/s/ Wayne Courtright	Director	March  19, 2009
Wayne Courtright
/s/ Charles S. Loring	Director	March  19, 2009
Charles S. Loring
/s/ Allen Tucker	Director	March  19, 2009
Allen Tucker

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EX-13

Management’s Discussion & Analysis of

Financial Condition & 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 Operations” 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, 2008, contains a summary of the Company’s significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, income taxes, servicing assets, cash flow hedges and other-than-temporary impairment on securities 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. These critical policies are periodically reviewed with the Audit Committee and the Board of Directors.

Allowance for Loan Losses

The provision for loan losses is based upon management’s evaluation of the adequacy of the allowance for loan losses, 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 collectability 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 local real estate market conditions and may be adversely affected should real estate values continue to 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.

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.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.  Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a

19

Annual Report Page 7

liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are recognized in income tax expense on the income statement.

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Servicing Assets

Servicing assets represent the allocated value of retained servicing rights on loans sold.  Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues.  Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Any impairment, if temporary, would be reported as a valuation allowance.

For additional information on servicing assets, see Note 5 to the Consolidated Financial Statements.

Derivative Instruments and Hedging Activities

The Company uses derivative instruments, such as interest rate swaps, to manage interest rate risk.  The Company recognizes all derivative instruments at fair value as either assets or liabilities in other assets or other liabilities.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship.  For derivatives not designated as an accounting hedge, the gain or loss is recognized in trading noninterest income.

For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.  The Company does not have any fair value hedges or hedges of foreign operations.

The Company formally documents the relationship between the hedging instruments and hedged item, as well as the risk management objective and strategy before undertaking a hedge.  For hedging relationships in which effectiveness is measured, the Company formally assesses both at inception and on an ongoing basis, if the derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item.  If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued.

For derivatives that are designated as cash flow hedges, the effective portion of the gain or loss on derivatives is reported as a component of other comprehensive income or loss.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

Hedge accounting discontinues when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is no longer designated as a fair value or cash flow hedge or it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period.  If the Company determines that the derivative no longer qualifies as a cash flow or fair value hedge and therefore hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings.

For additional information on derivative instruments, see Note 12 to the Consolidated Financial Statements.

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For additional information on other-than-temporary impairment, see Note 4 to the Consolidated Financial Statements.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is a bank holding company incorporated in New Jersey and registered under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank,” or when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance. The Bank provides a full range of commercial and retail banking services through the Internet and its sixteen branch offices located in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey and Northampton County in Pennsylvania. These services include the acceptance of demand, savings and time deposits and the extension of consumer, real estate, Small Business Administration (“SBA”) and other commercial credits.

Results of Operations

The past year has been a period of unprecedented financial, credit and capital market stress.  Everyday brought about more negative news reporting increased turmoil in the financial markets, corporate bankruptcies, layoffs, rising unemployment, etc.  The economy was and remains under considerable stress today with the financial sector being hit the hardest.  Factors such as lack of liquidity in the markets, continued fall-out from the subprime mortgage crisis, asset “fair market” value write-downs, capital adequacy concerns and credit quality

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concerns have resulted in a lack of confidence by the markets in the financial industry this year.

During the third quarter, this lack of confidence became so strained that Congress intervened with its Emergency Economic Stabilization Act (the “Act”) to address the dysfunctional markets.  This Act authorized the Troubled Asset Relief Program (“TARP”) which provided capital to financial institutions and purchased troubled assets from institutions.  The U.S. Department of Treasury’s Capital Purchase Program (“CPP”) authorized the Treasury to purchase newly issued preferred stock and common stock purchase warrants from financial institutions or their holding companies. In addition, the Act authorized the temporary increase in the FDIC insurance limit to $250 thousand from $100 thousand per account.  The FDIC also implemented a program to insure all deposits held in noninterest-bearing transactional accounts, regardless of amount, at institutions which do not opt out of the program and which pay an additional assessment to the FDIC.  These enhanced deposit insurance programs are scheduled to expire at year-end in 2009.  These governmental actions were designed to rebuild confidence in the financial markets, increase liquidity and strengthen the financial sector.

In December 2008, the Company sold $20.6 million of preferred stock to the U.S. Department of Treasury under the Capital Purchase Program and issued warrants to purchase 764,778 shares of common stock at an exercise price of $4.05. Unity has been well-capitalized, however, due to the turbulence within the economy, the Company believed that participation in this program was prudent and in the best interests of its community and shareholders.

Unity’s 2008 results were affected by the economic downturn due to higher loan loss provisions, security write-downs on Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock and the collapse of the secondary market for SBA loan sales:

·   The provision for loan losses increased $3.0 million year over year due to an increase in inherent credit risk within the loan portfolio.

·   Earnings were impacted by the realized losses and other-than-temporary impairment charges (“OTTI”) on callable FHLMC perpetual preferred securities of $1.7 million. This consisted of OTTI charges of $1.2 million and losses on sales of $469 thousand.  In addition, OTTI charges of approximately $300 thousand were recorded on a pooled trust preferred security and two bank equity securities during the year.

·   Secondary markets for many types of financial assets, including the guaranteed portion of SBA loans, have closed down or become very restrictive in response to the credit crisis. Consequently, Unity held all current production of SBA loans in portfolio and did not sell any loans in the fourth quarter of the year.  In addition, late in the third quarter Unity closed its SBA origination offices outside its New Jersey, New York and Pennsylvania primary trade areas. Although this will lead to reduced SBA loan origination volume and premiums on sales for the foreseeable future, the cost savings are prudent given the current market environment.

Despite this challenging operating environment, the Company’s performance included the following accomplishments:

·   Total assets increased 19.4 percent to $898.3 million,

·   Continued market share expansion as total loans increased 16.2 percent from one year ago,

·   Total deposits increased 17.6 percent from one year ago, and

·   The Company remained well-capitalized.

Net income for the year ended December 31, 2008 was $1.9 million compared to $4.7 million for 2007.  Performance ratios included:

	2008			2007
Earnings per basic share (1)	$	0.26		$	0.65
Earnings per diluted share (1)	$	0.25		$	0.63
Return on average assets		0.23	%		0.66	%
Return on average equity (2)		3.72	%		10.11	%
Efficiency ratio		71.90	%		71.48	%

      (1)   Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by weighted average shares outstanding.

(2)   Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by average shareholders’ equity.

Drivers of reduced earnings include:

·   A reduced net interest margin,

·   An increased provision for loan losses,

·   A lower level of net gains on reduced SBA loan sales due to lower premiums on sales in the dysfunctional credit markets,

·   Impairment charges on callable FHLMC perpetual preferred stock, and

·   Higher deposit insurance expense due to increased FDIC assessment rates.

Net Interest Income

The primary source of income for the Company is net interest income, the difference between the interest earned on earning assets such as investments and loans, and the interest paid on deposits and borrowings.  Factors that impact the Company’s net interest income include the interest rate environment, the volume and mix of interest-earning assets and interest-bearing liabilities, and the competitive nature of the Company’s market place.

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Since December 31, 2007, the Federal Open Market Committee has lowered interest rates 400 basis points in an attempt to stimulate economic activity.  Over this period, the Fed Funds target rate fell to 0.25 percent and the Prime rate fell to 3.25 percent.  These decreases have resulted in lower yields on earning assets as well as lower funding costs which have combined with a shift in funding mix to reduce net interest margin.  In addition, the competition for high quality loans and deposits, and customer migration from lower to higher rate deposit products has impacted the level of net interest margins across the financial industry.

During 2008, tax-equivalent interest income increased $1.9 million or 3.8 percent to $50.9 million.  This increase was driven by a higher volume of interest-earning assets despite the lower average yield on these assets:

·   Of the $1.9 million increase in interest income on a tax-equivalent basis, $7.2 million can be attributed to the increase in average interest-earning assets partially offset by a $5.3 million decrease due to reduced yields on the interest-earning assets.

·   The average volume of interest-earning assets increased $102.7 million to $781.2 million in 2008 compared to $678.5 million in 2007. This was due primarily to a $94.9 million increase in average loans as all loan products increased.

·   The yield on interest-earning assets decreased 71 basis points to 6.52 percent in 2008 due to the lower overall interest rate environment compared to 2007.  Yields on variable rate instruments, such as SBA loans, commercial loans and consumer home equity lines of credit, decreased due to these lower market rates while the average yield on residential mortgage loans increased 12 basis points to 5.96 percent in 2008.

Total interest expense was $23.5 million in 2008, a decrease of $1.0 million or 4.1 percent compared to 2007.  This decrease was driven by the lower overall interest rate environment in 2008 despite the shift in deposit mix toward higher priced products:

·   Of the $1.0 million decrease in interest expense in 2008, $5.8 million was attributed to a decrease in the rates paid on interest-bearing liabilities, partially offset by a $4.8 million increase due to a higher volume of these liabilities.

·   Interest-bearing liabilities averaged $691.5 million in 2008, an increase of $103.2 million, or 17.5 percent, compared to 2007.  The increase in interest-bearing liabilities was a result of increases in time deposits and borrowed funds, offset in part by a decline in interest-bearing demand and savings deposits.  Average borrowed funds and subordinated debentures increased $23.3 million to $108.2 million in 2008 compared to $85.0 million in 2007 as these funding sources provided favorable pricing compared to alternative sources of funds as market rates began to fall.

·   The average cost of interest-bearing liabilities decreased 77 basis points to 3.39 percent, primarily due to the repricing of deposits and borrowings in a lower interest rate environment.  The cost of interest-bearing deposits decreased 76 basis points to 3.25 percent in 2008 and the cost of borrowed funds and subordinated debentures decreased 85 basis points to 4.18 percent.

·   The lower costs of funding were offset somewhat by the shift in the mix of deposits from lower cost savings and interest-bearing demand deposits to higher cost time deposits.

Tax-equivalent net interest income amounted to $27.5 million in 2008, an increase of $2.9 million, or 11.7 percent, compared to 2007. Net interest margin decreased 11 basis points to 3.51 percent for 2008, compared to 3.62 percent in 2007.  The net interest spread was 3.13 percent, a 6 basis point increase from 3.07 percent in 2007.

The table on pages 12 and 13 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.

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Consolidated Average Balance Sheets

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

For the years ended December 31,

	2008									2007
	Average Balance			Interest			Rate/ Yield			Average Balance			Interest			Rate/ Yield
ASSETS
Interest-earning assets:
Federal funds sold and interest-bearing deposits with banks	$	26,686		$	471			1.76	%	$	22,290		$	1,068			4.79	%
Federal Home Loan Bank stock		4,353			240			5.51			3,336			258			7.73
Securities:
Available for sale		74,243			3,761			5.07			65,853			3,253			4.94
Held to maturity		31,710			1,654			5.22			37,724			1,986			5.26
Total securities (A)		105,953			5,415			5.11			103,577			5,239			5.06
Loans, net of unearned discount:
SBA		101,430			8,370			8.25			84,185			9,039			10.74
SBA 504		74,617			5,572			7.47			66,393			5,345			8.05
Commercial		308,751			21,424			6.94			275,448			20,393			7.40
Residential mortgage		100,110			5,971			5.96			68,443			3,995			5.84
Consumer		59,291			3,462			5.84			54,789			3,722			6.79
Total loans (A),(B)		644,199			44,799			6.95			549,258			42,494			7.74
Total interest-earning assets	$	781,191		$	50,925			6.52	%	$	678,461		$	49,059			7.23	%
Noninterest-earning assets:
Cash and due from banks		17,529									13,467
Allowance for loan losses		(9,179	)								(8,184	)
Other assets		31,667									29,304
Total noninterest-earning assets		40,017									34,587
Total Assets	$	821,208								$	713,048
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	84,336		$	1,468			1.74	%	$	85,750		$	1,928			2.25	%
Savings deposits		168,784			3,644			2.16			204,214			8,064			3.95
Time deposits		330,174			13,836			4.19			213,407			10,206			4.78
Total interest-bearing deposits		583,294			18,948			3.25			503,371			20,198			4.01
Borrowed funds and subordinated debentures		108,214			4,526			4.18			84,962			4,276			5.03
Total interest-bearing liabilities	$	691,508		$	23,474			3.39	%	$	588,333		$	24,474			4.16	%
Noninterest-bearing liabilities:
Demand deposits		78,282									75,581
Other liabilities		2,531									2,416
Total noninterest-bearing liabilities		80,813									77,997
Shareholders’ equity		48,887									46,718
Total Liabilities and Shareholders’ Equity	$	821,208								$	713,048
Net interest spread				$	27,451			3.13	%				$	24,585			3.07	%
Tax-equivalent basis adjustment					(160	)								(159	)
Net interest income				$	27,291								$	24,426
Net interest margin								3.51	%								3.62	%

(A)   Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis.  They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent and applicable state tax rates.

(B)   The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

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2006									2005									2004
Average Balance			Interest			Rate/ Yield			Average Balance			Interest			Rate/ Yield			Average Balance			Interest			Rate/ Yield
$	21,606		$	1,042			4.82	%	$	17,160		$	572			3.33	%	$	15,039		$	193			1.28	%
	2,340			139			5.94			1,513			76			5.02			1,195			21			1.76
	64,134			2,964			4.62			72,695			3,076			4.23			82,096			3,353			4.08
	41,156			2,069			5.03			31,139			1,477			4.74			17,395			867			4.98
	105,290			5,033			4.78			103,834			4,553			4.38			99,491			4,220			4.24
	84,113			8,615			10.24			74,369			6,558			8.82			62,853			4,296			6.83
	54,462			4,514			8.29			40,655			3,010			7.40			36,513			2,517			6.89
	240,311			17,400			7.24			189,384			13,154			6.95			155,922			10,417			6.68
	59,933			3,305			5.51			62,103			3,318			5.34			50,242			2,712			5.40
	47,652			3,208			6.73			45,707			2,648			5.79			38,979			1,860			4.77
	486,471			37,042			7.61			412,218			28,688			6.96			344,509			21,802			6.33
$	615,707		$	43,256			7.02	%	$	534,725		$	33,889			6.34	%	$	460,234		$	26,236			5.70	%
	12,439									12,661									13,304
	(7,493	)								(6,398	)								(5,724	)
	29,302									24,399									15,603
	34,248									30,662									23,183
$	649,955								$	565,387								$	483,417
$	117,730		$	2,648			2.25	%	$	150,420		$	2,605			1.73	%	$	188,840		$	2,656			1.41	%
	183,815			6,948			3.78			130,911			3,164			2.42			49,330			620			1.26
	169,572			7,101			4.19			118,174			3,820			3.23			96,686			2,507			2.59
	471,117			16,697			3.54			399,505			9,589			2.40			334,856			5,783			1.73
	55,756			2,735			4.91			46,604			2,014			4.32			29,169			1,225			4.20
$	526,873		$	19,432			3.69	%	$	446,109		$	11,603			2.60	%	$	364,025		$	7,008			1.93	%
	77,747									78,519									85,283
	2,218									2,634									1,445
	79,965									81,153									86,728
	43,117									38,125									32,664
$	649,955								$	565,387								$	483,417
			$	23,824			3.33	%				$	22,286			3.74	%				$	19,228			3.77	%
				(79	)								(52	)								(70	)
			$	23,745								$	22,234								$	19,158
							3.87	%								4.17	%								4.18	%

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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.

Year ended December 31,	2008 versus 2007									2007 versus 2006
(Dollar amounts in thousands on a tax-equivalent basis)	Increase (Decrease) Due to change in									Increase (Decrease) Due to change in
	Volume			Rate			Net			Volume			Rate			Net
Interest Income:
Federal funds sold and interest-bearing deposits	$	179		$	(776	)	$	(597	)	$	32		$	(6	)	$	26
Federal Home Loan Bank stock		67			(85	)		(18	)		70			49			119
Investment securities		104			72			176			(96	)		302			206
Net loans		6,818			(4,513	)		2,305			4,504			948			5,452
Total interest income	$	7,168		$	(5,302	)	$	1,866		$	4,510		$	1,293		$	5,803
Interest Expense:
Interest-bearing demand deposits	$	(31	)	$	(429	)	$	(460	)	$	(720	)	$	-		$	(720	)
Savings deposits		(1,224	)		(3,196	)		(4,420	)		794			322			1,116
Time deposits		5,016			(1,386	)		3,630			2,011			1,094			3,105
Total deposits	$	3,761		$	(5,011	)	$	(1,250	)	$	2,085		$	1,416		$	3,501
Borrowed funds and subordinated debentures		1,048			(798	)		250			1,472			69			1,541
Total interest expense	$	4,809		$	(5,809	)	$	(1,000	)	$	3,557		$	1,485		$	5,042
Net interest income – fully tax-equivalent	$	2,359		$	507		$	2,866		$	953		$	(192	)	$	761
Increase in tax-equivalent adjustment								1									80
Net interest income							$	2,865								$	681

Provision for Loan Losses

The provision for loan losses totaled $4.5 million for 2008, an increase of $3.0 million compared to $1.6 million for 2007.

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 management believes is sufficient to absorb estimated probable losses in the loan portfolio as of the balance sheet date.  (For additional information, see the section titled Allowance for Loan Losses and Unfunded Loan Commitments). Management believes the current provision is appropriate based on its assessment of the adequacy of the allowance for loan losses.

Noninterest Income

Historically, Unity has had a strong source of noninterest income in the form of gains on the sale of its SBA loans.  Under the SBA 7(a) program, the SBA guarantees up to 85 percent of the principal of a qualifying loan. In the past, the Company would sell the guaranteed portion of the loan into the secondary market and retain the unguaranteed portion.  However, during 2008, pricing in the secondary market for SBA loans began to deteriorate in response to the credit crisis.  Consequently, Unity held a significant portion of its current production of SBA loans. This decision resulted in lower levels of noninterest income and will likely continue in the foreseeable future. In addition, other-than-temporary impairment (“OTTI”) charges and losses realized on the sales of securities have significantly reduced noninterest income during 2008.

Noninterest income was $2.7 million for 2008, a $3.2 million, or 54.6 percent decrease compared to $5.9 million for 2007.  The following table shows the components of noninterest income for 2008 and 2007:

(In thousands)	2008			2007
Service charges on deposit accounts	$	1,393		$	1,383
Service and loan fee income		1,271			1,607
Gain on sale of SBA loans held for sale, net		1,217			2,399
Gain on sale of mortgage loans		40			52
Bank owned life insurance		210			198
Other-than-temporary impairment charges on securities		(1,540	)		(607	)
Net security (losses) gains		(378	)		36
Other income		481			872
Total noninterest income	$	2,694		$	5,940

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·   Although the Company’s deposit base increased from 2007 to 2008, service charges on deposits remained relatively flat.  During this period, lower levels of overdraft fees were offset by increased analysis fees on commercial accounts.

·   Service and loan fee income decreased as a result of lower prepayment penalties on commercial loans and SBA servicing income.

·   Net gains on SBA loan sales decreased $1.2 million or 49.3 percent compared to 2007 as a result of a lower volume of loans sold and lower premiums on the sales due to market conditions.  SBA loan sales totaled $24.8 million for the twelve months ended December 31, 2008, compared to $41.6 million for 2007.  As a result of the significantly reduced premiums and the absence of liquidity in the secondary market for SBA loans resulting from the recent credit crisis, the Company closed all SBA production offices outside of its New Jersey, Pennsylvania and New York footprint late in the third quarter. Consequently, management believes that net gains on SBA loan sales will remain at lower levels or continue to decline for the foreseeable future.

·   Gains on the sale of mortgage loans remained relatively flat in 2007 and 2008 as the Company chose to hold these loans in its portfolio in response to volatility within the market.  Sales of mortgage loans totaled $2.6 million and $3.0 million for 2008 and 2007, respectively.

·   In December 2004, the Company purchased $5.0 million of bank owned life insurance (“BOLI”) to offset the rising costs of employee benefits.  In 2008, the cash surrender value of the BOLI increased $210 thousand compared to $198 thousand the prior year.

·   OTTI charges on securities consisted of write-downs of approximately $1.2 million on three callable FHLMC perpetual preferred securities due to the decline in market value of these securities and the eventual placement of FHLMC in conservatorship that occurred in September of 2008.  In addition, OTTI charges of approximately $300 thousand were taken on a pooled trust preferred security and two bank equities during the year.  During 2007, an OTTI charge of $607 thousand was recorded on the same callable FHLMC perpetual preferred securities, which the Company classified as impaired due to their decline in market value and the uncertainty that they would recover their $3.9 million book value within a reasonable period.

·   In addition to the OTTI charges listed above, the Company sold approximately $2.1 million in book value of the FHLMC securities in 2008 and recorded a pretax loss of approximately $469 thousand on the sales. This loss was partially offset by $91 thousand in gains on other sales for a net security loss of $378 thousand in 2008.  During 2007, the Company realized gains on the sales of securities of $36 thousand.

·   Other income totaled $481 thousand and $872 thousand in 2008 and 2007, respectively.  The decrease in 2008 was primarily due to lower levels of loan referral fees.

Noninterest Expense

Total noninterest expense was $22.9 million for 2008, an increase of $826 thousand or 3.7 percent over 2007. Growth of Unity’s SBA lending franchise during the first half of the year, increased professional fees and higher FDIC insurance assessment rates contributed to the increase in operational expense.

The following table presents a breakdown of noninterest expense for the years ended December 31, 2008 and 2007:

(In thousands)	2008		2007
Compensation and benefits	$	11,985	$	11,446
Occupancy		2,773		2,777
Processing and communications		2,251		2,433
Furniture and equipment		1,675		1,675
Professional services		898		598
Loan collection costs		662		604
Deposit insurance		589		67
Advertising		451		457
Other expenses		1,655		2,056
Total noninterest expense	$	22,939	$	22,113

·   Compensation and benefits expense, the largest component of noninterest expense, increased as the Company added retail and lending staff through the first half of 2008. In addition, merit and incentive based payments and medical benefits premiums increased. In the third quarter, the Company commenced staff reductions. The benefits of this reduction will be realized primarily in 2009. At December 31, 2008 and 2007 there were 167 and 201 full-time equivalent employees, respectively.

·   Occupancy expense remained flat this past year.

·   Processing and communications expenses decreased as the Company began to realize savings from the investments which were made in phone and data line elements of its infrastructure in 2007 as well as lower items processing costs.

·   Furniture and equipment expense remained unchanged year over year.

·   Loan collection costs increased as the Company addressed delinquent loans.

·   Professional service fees increased in 2008 in response to higher consulting costs related to tax planning, compliance with the Sarbanes-Oxley Act of 2002 and process reviews.

·   Deposit insurance expense increased significantly in 2008 and is expected to continue to increase in the foreseeable future due to FDIC mandated increases in deposit insurance.  Previously, FDIC insurance expense was lower due to one time credits provided by the FDIC.

·   Advertising expense remained flat in 2008 due to the use of less expensive delivery channels for new business generation.

·   Other expenses decreased $401 thousand or 9.5 percent to $1.7 million compared to the prior year.  This decrease was due primarily to decreased employee expenses including recruiting, education and travel expenses, reduced office supply expense due to a vendor change and the recovery of previously charged off retail operating losses.

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Income Tax Expense

For 2008, the Company reported income tax expense of $616 thousand for a 24.2 percent effective tax rate compared to $2.0 million or a 29.5 percent effective tax rate in 2007.  The decrease in the tax provision was the result of lower pretax earnings and a lower effective tax rate.  The latter is related to a higher proportion of revenue being generated at a subsidiary with a lower effective tax.  The Company anticipates a 32 percent effective income tax rate in 2009.

Financial Condition

Total assets increased $146.1 million, or 19.4 percent, to $898.3 million at December 31, 2008, compared to $752.2 million at December 31, 2007. This increase was due to a $95.8 million increase in total loans and a $50.9 million increase in total securities funded by a $105.8 million increase in total deposits, a $20.0 million increase in borrowed funds and a $20.5 million increase in shareholders’ equity.

Average total assets for 2008 were $821.2 million, a $108.2 million increase from the prior year’s $713.0 million average balance. The increase in average assets was due primarily to growth in the loan portfolio funded by time deposits and borrowed funds.

Investment Securities Portfolio

The Company’s securities portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) investments. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.

AFS securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. AFS securities consist primarily of U.S. Government sponsored agencies, obligations of state and political subdivisions, mortgage-backed securities, corporate bonds and equity securities.

AFS securities totaled $117.3 million at December 31, 2008, an increase of $52.5 million or 80.9 percent, compared to $64.9 million at December 31, 2007.   This net increase was the result of the following:

·   $80.7 million of purchases, which consisted primarily of mortgage-backed securities and collateralized mortgage obligations (“CMOs”).  During December of 2008, the Company took advantage of favorable credit spreads and purchased approximately $45.3 million in available for sale mortgage-backed securities and CMOs,

·   $19.0 million of maturities and principal pay downs,

·   $4.8 million in sales.  Sales consisted primarily of callable FHLMC perpetual preferred stock in response to a decline in their market value and uncertainty regarding the financial viability of the issuer,

·   $1.9 million transfer to held to maturity.  Two securities with a market value of $1.9 million were transferred from available for sale to held to maturity during the third quarter of 2008, consistent with the Company’s intent and ability to hold these securities until maturity,

·   $1.2 million in OTTI adjustments.  OTTI adjustments during the year consisted primarily of write-downs on callable FHLMC perpetual preferred securities and two bank equities, and

·   $207 thousand depreciation in the market value of the portfolio.  At December 31, 2008, the portfolio had a net unrealized loss of $974 thousand compared to a net unrealized loss of $767 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.

        At December 31, 2008, available for sale securities included three callable FHLMC perpetual preferred securities with a total book value of $13 thousand.  These securities were initially classified as OTTI in December 2007, at which time a $607 thousand impairment charge was taken, due to their declines in market value and the uncertainty that they would recover their book value.  During 2008, additional OTTI charges of approximately $1.2 million were taken on these securities due to further declines in their market value and the eventual placement of FHLMC into conservatorship.  In addition, the Company sold approximately $2.1 million in book value of these securities during the year, resulting in a pretax loss of approximately $469 thousand.

At December 31, 2008, the Company’s available for sale portfolio included one bank trust preferred security with a book value of $975 thousand and a market value of $318 thousand. The Company monitors the credit worthiness of the issuer of this security quarterly. At December 31, 2008, the Company had not taken any OTTI adjustments on this security. Management will continue to monitor the performance of the security and the underlying institution for impairment. Changes in the credit worthiness of the underlying issuer may result in OTTI charges and realized losses in the future.

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The average balance of securities available for sale amounted to $74.2 million in 2008 compared to $65.9 million in 2007. The average yield earned on the available for sale portfolio increased 13 basis points, to 5.07 percent in 2008 from 4.94 percent in 2007. The weighted average repricing of securities available for sale, adjusted for prepayments, amounted to 2.1 years at December 31, 2008, compared to 2.8 years in 2007.

HTM securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is comprised of U.S. Government sponsored agencies, obligations of state and political subdivisions, mortgage-backed securities and corporate bonds.

HTM securities were $32.2 million at December 31, 2008, a decrease of $1.6 million or 4.7 percent, from year-end 2007.  This net decrease was the result of:

·   $6.8 million in purchases,

·   $1.9 million transfer from available for sale,

·   $9.9 million in principal payments, maturities and called bonds, and

·   $306 thousand other-than-temporary impairment charge on a pooled trust preferred security.

As of December 31, 2008 and 2007, the market value of held to maturity securities was $30.1 million and $33.6 million, respectively. The average balance of securities held to maturity amounted to $31.7 million in 2008 compared to $37.7 million in 2007. The average yield earned on held to maturity securities decreased 4 basis points, from 5.26 percent in 2007 to 5.22 percent in 2008. The weighted average repricing of held to maturity securities, adjusted for prepayments, amounted to 3.7 years and 3.0 years at December 31, 2008 and December 31, 2007, respectively.

At December 31, 2008, the Company’s held to maturity portfolio included two pooled bank trust preferred securities with a book value of $1.6 million and a market value of $300 thousand. The Company monitors the credit worthiness of the underlying issuers of these securities quarterly. At December 31, 2008, the Company had taken a $306 thousand OTTI adjustment on one of these pooled bank trust preferred securities. The Company will continue to monitor the performance of these securities and the underlying institutions for impairment. Changes in the credit worthiness of the underlying issuer may result in OTTI charges and realized losses in the future.

Approximately 85 percent of the total investment portfolio had a fixed rate of interest at December 31, 2008.

Securities with a carrying value of $69.9 million and $62.0 million at December 31, 2008 and 2007, respectively, were pledged to secure Government deposits, secure 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 SBA, SBA 504, commercial, residential mortgage and consumer loans. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk.

Total loans increased $95.8 million, or 16.2 percent to $685.9 million at December 31, 2008, from $590.1 million at year-end 2007. Growth in the loan portfolio was generated by increases of $59.4 million in residential mortgages, $14.5 million in commercial loans, $11.8 million in SBA loans, $5.4 million in consumer loans and $4.7 million in SBA 504 loans.

Average loans increased $94.9 million or 17.3 percent from $549.3 million in 2007, to $644.2 million in 2008.  The increase in average loans was due to growth in all segments of the portfolio.  The yield on the loan portfolio fell 79 basis points to 6.95 percent in 2008 compared to 7.74 percent in 2007. This decrease was the result of variable rate, prime-based loan products such as SBA loans and home equity lines of credit repricing lower as rates fell during 2008.  The prime rate fell 400 basis points to 3.25 percent by year-end 2008.

SBA 7(a) loans held to maturity amounted to $83.1 million at December 31, 2008, an increase of $14.3 million from December 31, 2007. SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $22.2 million at December 31, 2008, a decrease of $2.5 million from December 31, 2007.  The SBA provides guarantees of up to 85 percent of the principal amount of SBA 7(a) loans. Historically, SBA 7(a) loans available for sale have been sold in the secondary market with the nonguaranteed portion held in the portfolio. However, during the third quarter of 2007 the Company announced a strategic decision to begin retaining a significant portion of its SBA 7(a) program loans in its portfolio, rather than selling them into the secondary market.  During the third quarter of 2008, in response to the recent credit crisis, reduced premiums on the sale of SBA 7(a) loans and a lack of liquidity in the secondary market for SBA loans, the Company closed all SBA production offices outside of its New Jersey, Pennsylvania and New York primary trade area.  Consequently, management believes the volume of SBA 7(a) loans originated will remain at current lower levels or continue to decline for the foreseeable future.

At December 31, 2008, SBA 504 loans totaled $76.8 million. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans.

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 $308.2 million at

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December 31, 2008, an increase of $14.5 million from year-end 2007. The commercial portfolio is expected to continue to increase in 2009.

Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amountedto $133.1 million at December 31, 2008, an increase of $59.4 million from December 31, 2007. Growth during 2008 was due to a new relationship with an established builder of high-end residential properties.

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 $62.6 million at December 31, 2008, an increase of $5.4 million from December 31, 2007. The growth in consumer loans is related to the growth in home equity loans and lines.

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

	2008					2007					2006					2005					2004
			% of					% of					% of					% of					% of
(In thousands)	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total
SBA held for sale	$	22,181		3.2	%	$	24,640		4.2	%	$	12,273		2.4	%	$	14,001		3.1	%	$	7,574		2.0	%
SBA held to maturity		83,127		12.1			68,875		11.7			66,802		13.2			64,660		14.4			55,576		14.9
SBA 504		76,802		11.2			72,145		12.2			58,067		11.4			48,639		10.9			36,913		9.9
Commercial		308,165		44.9			293,641		49.7			254,128		50.1			211,942		47.2			170,858		45.7
Residential mortgage		133,110		19.5			73,697		12.5			63,493		12.5			62,039		13.8			60,240		16.1
Consumer		62,561		9.1			57,134		9.7			52,927		10.4			47,286		10.6			42,419		11.4
Total Loans	$ 685,946			100.0	%	$ 590,132			100.0	%	$ 507,690			100.0	%	$ 448,567			100.0	%	$ 373,580			100.0	%

The Company has a concentration to a group of borrowers in the Hotel/Motel industry of approximately 11 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 to borrowers outside the Company’s lending area.

The following table shows the maturity distribution or repricing of the loan portfolio and the allocation of floating and fixed interest rates at December 31, 2008:

(In thousands)	Within 1 Year		1-5 Years		After 5 Years		Total
SBA	$	77,915	$	26,078	$	1,315	$	105,308
SBA 504		14,738		53,604		8,460		76,802
Commercial		109,504		170,354		28,307		308,165
Residential mortgage		32,356		60,654		40,100		133,110
Consumer		30,622		9,025		22,914		62,561
Total	$	265,135	$	319,715	$	101,096	$	685,946
Amount of loans with maturities or repricing dates greater thanone year:
Fixed interest rates							$	228,206
Floating or adjustable interest rates								192,605
Total							$	420,811

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.

Nonperforming loans generally 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 ability to collect 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.  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 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 as a source of additional information for management’s consideration.

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

(In thousands)	2008			2007			2006			2005			2004
Nonperforming by category
SBA (1)	$	4,228		$	2,110		$	5,212		$	1,391		$	2,013
SBA 504		4,600			-			-			757			260
Commercial		5,247			1,630			3,172			493			1,274
Residential mortgage		1,808			1,192			322			1,510			288
Consumer		237			529			203			210			256
Total nonperforming loans	$	16,120		$	5,461		$	8,909		$	4,361		$	4,091
OREO		710			106			211			178			345
Total nonperforming assets	$	16,830		$	5,567		$	9,120		$	4,539		$	4,436
Past due 90 days or more and still accruing interest
SBA	$	332		$	114		$	-		$	-		$	-
SBA 504		-			-			-			-			-
Commercial		146			41			-			-			-
Residential mortgage		2,058			-			78			-			-
Consumer		-			-			-			-			-
Total	$	2,536		$	155		$	78		$	-		$	-
Nonperforming loans to total loans		2.35	%		0.93	%		1.75	%		0.97	%		1.10	%
Nonperforming assets to total loans and OREO		2.45	%		0.94	%		1.80	%		1.01	%		1.19	%
Allowance for loan losses as a percentage of nonperforming loans		64.06	%		153.49	%		85.58	%		158.04	%		143.14	%
(1) SBA loans guaranteed	$	1,983		$	714		$	2,953		$	758		$	1,240

Nonperforming loans were $16.1 million at December 31, 2008, a $10.7 million increase from $5.5 million at year-end 2007.  During 2008, there was approximately $17.1 million in loans transferred into nonaccrual status; however, this was partially offset by $5.5 million in payoffs, charge-offs or principal pay downs. Included in nonperforming loans at December 31, 2008 was approximately $2.0 million of loans that are guaranteed by the SBA.  The increase in nonperforming loans was primarily related to credit deterioration in the SBA 7(a) and SBA 504 portfolios, most of which is secured by real estate.

There were $2.5 million of loans past due 90 days or more and still accruing at December 31, 2008, compared to $155 thousand at December 31, 2007.

Other real estate owned (“OREO”) properties totaled $710 thousand at year-end 2008, an increase of $604 thousand from $106 thousand at December 31, 2007.

Potential problem loans are those where information about possible credit problems of borrowers causes uncertainty as to the ability of such borrowers to comply with loan repayment terms.  These loans are not included in nonperforming loans as they continue to perform.  Potential problem loans were $2.7 million at December 31, 2008 and $2.6 million at December 31, 2007.

Allowance for Loan Losses and Unfunded Loan Commitments

The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable and estimated credit losses in the loan portfolio as of the balance sheet date.  While allocations may be made to specific loans the total reserve is available for all loan losses.

Management utilizes a standardized methodology to assess the adequacy of the allowance for loan losses.  This process includes the allocation of specific and general reserves. Specific reserves are made to significant individual impaired loans and are determined in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan.  Impaired loans have been defined to include all nonaccrual loans.  All other “nonimpaired” loans are allocated a general reserve.  This general reserve is set based upon the historical net charge-off rate adjusted for certain environmental factors such as:  delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.

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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 uncollectable 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 $10.3 million at December 31, 2008, compared to $8.4 million at year-end 2007.  The increase in the allowance for loan losses was due to the provision for loan losses of $4.5 million exceeding $2.6 million of net charge-offs. In addition, the increase in the allowance for loan losses was attributable to 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, general economic conditions, and increased levels of nonperforming loans.

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

(In thousands)	2008			2007			2006			2005			2004
Balance at beginning of year	$	8,383		$	7,624		$	6,892		$	5,856		$	5,352
Charge-offs:
SBA		1,246			770			573			301			320
SBA 504		1,000			-			-			18			175
Commercial		408			155			298			282			426
Residential mortgage		25			-			-			49			18
Consumer		145			50			62			523			29
Total charge-offs		2,824			975			933			1,173			968
Recoveries:
SBA		177			147			20			204			99
SBA 504		-			-			-			-			15
Commercial		39			18			75			84			166
Residential mortgage		-			-			-			-			-
Consumer		51			19			20			71			17
Total recoveries		267			184			115			359			297
Total net charge-offs	$	2,557		$	791		$	818		$	814		$	671
Provision charged to expense	$	4,500		$	1,550		$	1,550		$	1,850		$	1,175
Balance at end of year	$	10,326		$	8,383		$	7,624		$	6,892		$	5,856
Net charge-offs to average loans		0.40	%		0.14	%		0.17	%		0.20	%		0.19	%
Allowance to total loans		1.51	%		1.42	%		1.50	%		1.54	%		1.57	%

In addition to the allowance for loan losses, the Company maintains an allowance for unfunded loan commitments.  Commitments to extend credit represent arrangements to lend funds or provide liquidity subject to specified contractual conditions.  At December 31, 2008, a $105 thousand commitment reserve was reported on the balance sheet as an “other liability” compared to $102 thousand at December 31, 2007.  Management determines this amount using estimates of future loan funding and losses related to those credit exposures.

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 31st  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.

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	2008					2007					2006					2005					2004
			% of					% of					% of					% of					% of
(In thousands)	Amount		Total			Amount		Total			Amount		Total			Amount		Total			Amount		Total
Balance applicable to:
SBA	$	2,603		15.3	%	$	2,188		15.9	%	$	2,066		15.6	%	$	1,712		17.5	%	$	1,724		16.9	%
SBA 504		1,083		11.2			907		12.2			802		11.4			661		10.9			528		9.9
Commercial		4,486		44.9			4,208		49.7			4,063		50.1			3,756		47.2			2,908		45.9
Residential mortgage		1,494		19.5			570		12.5			305		12.5			444		13.8			375		16.1
Consumer		660		9.1			510		9.7			388		10.4			319		10.6			321		11.2
Total	$	10,326		100.0	%	$	8,383		100.0	%	$	7,624		100.0	%	$	6,892		100.0	%	$	5,856		100.0	%

Deposits

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits, are the primary source of the Company’s funds.  The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships.  For 2008, the Company realized continued growth in deposits.  This growth was achieved through an emphasis on customer service, competitive rate structures and selective marketing through the Company’s branch network.  The Company continues to focus on establishing a comprehensive relationship with 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,	2008					2007					2006
(In thousands)	Amount		%			Amount		%			Amount		%
Ending balance:
Interest-bearing demand deposits	$	87,046		12.3	%	$	78,019		13.0	%	$	105,382		18.6	%
Savings deposits		134,875		19.1			196,390		32.7			205,919		36.4
Time deposits		411,106		58.1			256,259		42.6			175,392		30.9
Noninterest-bearing demand deposits		74,090		10.5			70,600		11.7			79,772		14.1
Total deposits	$	707,117		100.0	%	$	601,268		100.0	%	$	566,465		100.0	%

Total deposits increased $105.8 million to $707.1 million at December 31, 2008 from $601.3 million at December 31, 2007. The increase in deposits was the result of a $154.8 million increase in time deposits, $9.0 million increase in interest-bearing demand deposits and a $3.5 million increase in demand deposits, partially offset by a $61.5 million decline in savings deposits.

The mix of deposits shifted during 2008 as the concentration of noninterest-bearing and interest-bearing demand deposits and savings deposits fell and the concentration of higher-cost time deposits increased.  The average cost of interest-bearing deposits in 2008 was 3.25 percent compared to 4.01 percent for 2007.  The decrease in the cost of deposits can be attributed to the lower interest rate environment, partially offset by the shift in the mix of deposits.  The Company expects continued growth in the deposit base in 2009.

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

	2008					2007					2006
(In thousands)	Amount		%			Amount		%			Amount		%
Average balance:
Interest-bearing demand deposits	$	84,336		12.7	%	$	85,750		14.8	%	$	117,730		21.4	%
Savings deposits		168,784		25.5			204,214		35.3			183,815		33.5
Time deposits		330,174		50.0			213,407		36.8			169,572		30.9
Noninterest-bearing demand deposits		78,282		11.8			75,581		13.1			77,747		14.2
Total deposits	$	661,576		100.0	%	$	578,952		100.0	%	$	548,864		100.0	%

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Borrowed Funds and Subordinated Debentures

Borrowed funds consist primarily of fixed rate 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, 2008, borrowed funds totaled $120.5 million, an increase of $20.0 million from the prior year-end, as the pricing available for borrowed funds presented a favorable alternative to the high cost of deposits in the New Jersey and Eastern Pennsylvania market places. The change since December 31, 2007 was due to a $5.0 million increase in FHLB overnight lines of credit and a $15.0 million repo-advance in February 2008.

As of December 31, 2008 and 2007, the Company was a party to the following transactions:

(In thousands)	2008		2007
FHLB borrowings:
Overnight line of credit	$	10,000	$	5,000
Fixed rate advances		40,000		40,000
Repurchase agreements		30,000		30,000
Other repurchase agreements		25,000		10,000
Subordinated debentures		15,465		15,465

At December 31, 2008, the Company had $93.0 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.

For additional information see Note 10 to the Consolidated Financial Statements.

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

The 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, 2008.  Assumptions regarding the repricing 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 interest-bearing demand, savings and money market deposits are allocated based on their expected repricing in relation to changes in market interest rates.

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(In thousands)	Under six months			Six months through one year			More than one year through three years			More than three years through five years			More than five years through ten years			More than ten years and not repricing			Total
Assets
Cash & due from banks	$	-		$	-		$	-		$	-		$	-		$	18,902		$	18,902
Federal funds sold		15,529			-			-			-			-			-			15,529
FHLB/ACBB stock		-			-			-			-			-			4,857			4,857
Investment securities		34,397			25,500			28,456			35,980			16,827			8,349			149,509
Loans		215,787			49,348			72,464			247,251			70,209			30,887			685,946
Other assets		-			-			-			-			-			23,567			23,567
Total Assets	$	265,713		$	74,848		$	100,920		$	283,231		$	87,036		$	86,562		$	898,310
Liabilities and Shareholders’ Equity
Noninterest-bearing demand deposits		-			-			-			-			-			74,090			74,090
Savings and interest-bearing demand deposits		108,061			1,031			10,396			82,851			19,582			-			221,921
Time deposits		140,301			116,938			85,081			68,038			748			-			411,106
Borrowed funds and subordinated debentures		35,000			-			10,000			-			75,000			465			120,465
Other liabilities		-			-			-			-			-			2,925			2,925
Shareholders’ equity		-			-			-			-			-			67,803			67,803
Liabilities and Shareholders’ Equity	$	283,362		$	117,969		$	105,477		$	150,889		$	95,330		$	145,283		$	898,310
Interest Rate Swap	$	15,000		$	-		$	-		$	(15,000	)	$	-		$	-		$	-
Gap	$	(2,649	)	$	(43,121	)	$	(4,557	)	$	117,342		$	(8,294	)	$	(58,721	)	$	-
Cumulative Gap	$	(2,649	)	$	(45,770	)	$	(50,327	)	$	67,015		$	58,721		$	-		$	-
Cumulative Gap to total assets		(0.3	)%		(5.1	)%		(5.6	)%		7.5	%		6.5	%		-			-

At December 31, 2008, there was a six-month liability-sensitive gap of $2.6 million and a one-year liability-sensitive gap of $45.8 million, as compared to liability-sensitivity gaps of $128.2 million and $142.7 million at December 31, 2007.  The six-month and one-year cumulative gap to total assets ratios were 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 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 200 basis points.  Results outside of guidelines require action by ALCO to correct the imbalance.  Simulations are typically created over a 12 to 24 month time horizon.  At December 31, 2008, these simulations show that with a 200 basis point immediate increase in interest rates, net interest income would decrease by approximately $269 thousand, or 0.9 percent. An immediate decline of 200 basis points in interest rates would decrease net interest income by approximately $1.1 million or 3.7 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 ALCO.  The Company’s variance in the economic value of equity with rate shocks of 200 basis points is a decline of 13.96 percent in a rising rate environment and a decrease of 16.23 percent in a falling rate environment.  The variance in the EVPE at December 31, 2008 is within Board-approved guidelines of +/- 35 percent.

Financial Derivatives

In order to manage interest rate risk, the Company may enter into financial derivative contracts such as interest rate swaps.  At December 31, 2008 and 2007 the Company was a party to interest rate swap agreements used to hedge variable rate debt as follows:

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(Dollars in thousands)	2008			2007
Notional amount	$	15,000		$	10,000
Weighted average pay rate		4.05	%		4.10	%
Weighted average receive rate (three-month LIBOR)		3.22	%		4.88	%
Weighted average maturity in years		2.90			3.73
Unrealized loss relating to interest rate swaps	$	(1,013	)	$	(23	)

For additional information, see Note 12 to the Company’s Consolidated Financial Statements.

Operating, Investing and Financing

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2008, the balance of cash and cash equivalents was $34.4 million, a decrease of $1.9 million from December 31, 2007.

Net cash provided by operating activities totaled $4.4 million for the year ended December 31, 2008, as compared to using $3.7 million for the year ended December 31, 2007. The primary source of funds was net income from operations adjusted for: provision for loan losses, depreciation expenses, proceeds from SBA loans held for sale and mortgage loans held for sale, offset by originations of SBA and mortgage loans held for sale.

Net cash used in investing activities amounted to $152.1 million in 2008, increasing $85.2 million from a year ago.  The cash used in investing activities was primarily a result of funding the loan and securities portfolios, partially offset by sales, maturities and paydowns in the investment portfolio.

Net cash provided by financing activities amounted to $145.7 million for 2008, compared to $51.5 million in 2007. The primary increase in cash provided by financing activities was due to growth in the Company’s deposit base, an increase in the Company’s borrowings and the sale of perpetual preferred stock to the U.S. Treasury.

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

Generally, the Parent Company’s cash is used for the payment of operating expenses and cash dividends.  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, Unity Statutory Trust II and Unity Statutory Trust III, 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 II and Unity Statutory Trust III.

At December 31, 2008, the Parent Company had $6.1 million in cash and $94 thousand in marketable securities, valued at fair market value compared to $433 thousand in cash and $216 thousand in marketable securities at December 31, 2007.  The increase in cash at the Parent Company was due primarily to the receipt of $20.6 million from the sale of perpetual preferred stock through the U.S. Treasury’s CPP program and issuance of related warrants, partially offset by the funding of $15.0 million in capital to the Bank and the payment of cash dividends.

Consolidated Bank

The principal sources of funds at the Bank 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 $80.0 million and third party repurchase agreements totaled $25.0 million, as of December 31, 2008.  At December 31, 2008, $93.0 million was available for additional borrowings from 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.  An additional source of liquidity is the securities available for sale portfolio and SBA loans held for sale portfolio, which amounted to $117.3 million and $22.2 million respectively, at December 31, 2008.

As of December 31, 2008, deposits included $18.7 million of Government deposits, as compared to $30.5 million at year-end 2007. 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 $15.7 million of deposits from five municipalities.  The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company.

 The Company was committed to advance approximately $111.9 million to its borrowers as of December 31, 2008, compared to $132.0 million at December 31, 2007.  At December 31, 2008, $31.2 million of these commitments expire after one year, compared to $31.4 million a year earlier.  At December 31, 2008, the Company had $4.5 million in standby letters of credit compared to $3.9 million in 2007.  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 12 percent at December 31, 2008 and 25 percent at December 31, 2007, of these commitments are for SBA loans, which may be sold in the secondary market.

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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, 2008. 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	$	4,388	$	124	$	-	$	-	$	4,512

The following table shows the contractual obligations of the Company by expected payment period, as of December 31, 2008. Further discussion of these commitments is included in Notes 10 and 11 to the Consolidated Financial Statements.

(In thousands)	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
Borrowed funds and subordinated debentures	$	20,000	$	10,000	$	-	$	90,465	$	120,465
Operating lease obligations		1,092		831		700		137		2,760
Purchase obligations		854		1,810		16		-		2,680
Total	$	21,946	$	12,641	$	716	$	90,602	$	125,905

Borrowed funds and subordinated debentures 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 consist primarily of contractual obligations under data processing service agreements.

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 as 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.

In addition, banks are required to meet a leverage capital requirement, which measures tier 1 capital against average assets. Banks which are highly rated and not experiencing significant growth are required to maintain a leverage ratio of 3 percent while all other banks are expected to maintain a leverage ratio 100 to 200 basis points higher.

The following table summarizes the Company’s and the Bank’s risk-based and leveraged capital ratios at December 31, 2008 and 2007, as well as the minimum regulatory capital ratios required to be deemed “well-capitalized.”

Company	2008			2007			Adequately Capitalized Requirements			Well- Capitalized Requirements
Leverage ratio		9.54	%		8.25	%		4.00	%		N/A
Tier 1 risk-based capital ratio		12.02	%		9.81	%		4.00	%		N/A
Total risk-based capital ratio		13.27	%		11.06	%		8.00	%		N/A

Bank	2008			2007			Adequately Capitalized Requirements			Well- Capitalized Requirements
Leverage ratio		7.88	%		7.06	%		4.00	%		5.00	%
Tier 1 risk-based capital ratio		9.93	%		8.39	%		4.00	%		6.00	%
Total risk-based capital ratio		12.41	%		11.00	%		8.00	%		10.00	%

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At December 31, 2008, shareholders’ equity was $67.8 million, an increase of $20.5 million from year-end 2007.  The increase in shareholders’ equity was a result of the following:

 ·   $20.6 million in proceeds from the sale of perpetual preferred stock to the U.S. Treasury and the issuance of related warrants,

 ·   $1.9 million in net income,

 ·   $583 thousand from the exercise of stock options and employee stock-based compensation,

 ·   $1.3 million depreciation in the market value of securities,

 ·   $675 thousand of common stock and cash dividends,

 ·   $614 thousand of net unrealized loss on cash flow hedge derivatives, and

 ·   $78 thousand in dividends accrued on preferred stock.

The ratio of total equity to assets at December 31, 2008 and 2007 was 7.55 percent and 6.28 percent, respectively.

On October 3, 2008 Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets.  One of the provisions resulting from the EESA Act was the Treasury’s Capital Purchase Program (“CPP”) which provides direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions.   This program is voluntary and requires an institution to comply with several restrictions and provisions, including limits on executive compensation, stock redemptions, and declaration of dividends.  The CPP provides for a minimum investment of 1 percent of risk-weighted assets, with a maximum investment of the lesser of 3 percent of risk-weighted assets or $25.0 billion.  The perpetual preferred stock has a dividend rate of 5 percent per year until the fifth anniversary of the Treasury investment and a dividend of 9 percent thereafter.  The CPP also requires the Treasury to receive warrants for common stock equal to 15 percent of the capital invested by the Treasury. The Company received an investment in perpetual preferred stock of $20.6 million as consideration for the preferred stock and warrants issued on December 5, 2008.  The Company valued the common stock warrants at $2.6 million. The warrants are accounted for as equity securities.

Pursuant to the requirements of the Treasury’s Capital Purchase Program, the Company has suspended its stock repurchase program.  The Company’s share repurchase program, which was approved on October 21, 2002, authorized the repurchase of up to 10 percent of its outstanding common stock.  The amount and timing of purchases is 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, 2008 the Company had repurchased a total of 556 thousand shares of which 131 thousand shares have been retired, leaving 153 thousand shares remaining to be repurchased under the plan.  As part of its capital management program, the Company did not repurchase any of its shares in 2008.

During the third quarter of 2008, the Company revised its cash dividend payment policy.  The decision was made based upon the current economic environment to retain capital so that the holding company can remain a source of strength to the subsidiary bank.  Previously, the Company had paid a quarterly cash dividend at a rate set by the Board based upon a number of factors.  The Board has now established a targeted dividend payout ratio of 20 percent of the Company’s earnings, subject to adjustment based upon factors existing at the time of the dividend and the Company’s projected capital needs.  The Board now intends to pay a cash dividend once annually, in the next succeeding year.  The Company declared two dividends in 2008 totaling $0.10.

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 those listed under Item 2A - “Risk Factors” in the Company’s Annual Report on Form 10-K; the overall economy and the interest rate environment; the ability of 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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Management’s Report on Internal Control

Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive officer and the principal financial officer, management conducted an evaluation of the effectiveness of our control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the framework, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.

Pursuant to temporary rules of the Securities and Exchange Commission, management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008 has not been attested to by McGladrey & Pullen, LLP, the independent registered public accounting firm that audited the Company’s Consolidated Financial Statements for the year ended December 31, 2008, as stated in their report which is included herein.

James A. Hughes

President and Chief Executive Officer

Alan J. Bedner

Executive Vice President and Chief Financial Officer

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Report of Independent Registered Public

Accounting Firm

To the Board of Directors and Stockholders

Unity Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. and subsidiaries (“the Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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, 2008, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements.

We were not engaged to examine management’s assessment about the effectiveness of Unity Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008 included in the accompanying “Management’s Report on Internal Control Over Financial Reporting” and, accordingly, we do not express an opinion thereon.

McGladrey & Pullen, LLP

Blue Bell, Pennsylvania

March 19, 2009

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Consolidated Balance Sheets

(In thousands)

For the years ended December 31,	2008			2007
ASSETS
Cash and due from bank	$	18,902		$	14,336
Federal funds sold and interest-bearing deposits		15,529			21,976
Cash and cash equivalents		34,431			36,312
Securities:
Available for sale		117,348			64,855
Held to maturity (fair value of $30,088 and $33,639 in 2008 and 2007, respectively)		32,161			33,736
Total securities		149,509			98,591
Loans:
SBA held for sale		22,181			24,640
SBA held to maturity		83,127			68,875
SBA 504		76,802			72,145
Commercial		308,165			293,641
Residential mortgage		133,110			73,697
Consumer		62,561			57,134
Total loans		685,946			590,132
Less: Allowance for loan losses		10,326			8,383
Net loans		675,620			581,749
Premises and equipment, net		12,580			12,102
Bank owned life insurance		5,780			5,570
Federal Home Loan Bank stock		4,857			4,395
Accrued interest receivable		4,712			3,994
Goodwill and other intangibles		1,574			1,588
Loan servicing asset		1,503			2,056
Other assets		7,744			5,839
Total Assets	$	898,310		$	752,196
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	74,090		$	70,600
Interest-bearing demand deposits		87,046			78,019
Savings deposits		134,875			196,390
Time deposits, under $100,000		270,275			168,244
Time deposits, $100,000 and over		140,831			88,015
Total deposits		707,117			601,268
Borrowed funds		105,000			85,000
Subordinated debentures		15,465			15,465
Accrued interest payable		805			635
Accrued expenses and other liabilities		2,120			2,568
Total Liabilities		830,507			704,936
Commitments and contingencies (Note 11)		-			-
Shareholders’ equity:
Cumulative Perpetual Preferred stock, Series B, $1 liquidation preference per share, 500 shares authorized, 21 shares issued and outstanding in 2008; there were no shares issued and outstanding in 2007		18,064			-
Common stock, no par value, 12,500 shares authorized, 7,544 shares issued and 7,119 outstanding in 2008; 7,488 shares issued and 7,063 outstanding in 2007		55,179			49,447
Retained earnings		1,085			2,472
Treasury stock at cost (425 shares in 2008 and 2007)		(4,169	)		(4,169	)
Accumulated other comprehensive loss		(2,356	)		(490	)
Total Shareholders’ Equity		67,803			47,260
Total Liabilities and Shareholders’ Equity	$	898,310		$	752,196

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Consolidated Statements of Income

(In thousands, except per share amounts)

For the years ended December 31,
	2008			2007
INTEREST INCOME
Federal funds sold and interest-bearing deposits	$	471		$	1,068
Federal Home Loan Bank stock		240			258
Securities:
Available for sale		3,673			3,167
Held to maturity		1,582			1,913
Total securities		5,255			5,080
Loans:
SBA		8,370			9,039
SBA 504		5,572			5,345
Commercial		21,424			20,393
Residential mortgage		5,971			3,995
Consumer		3,462			3,722
Total loans		44,799			42,494
Total interest income		50,765			48,900
INTEREST EXPENSE
Interest-bearing demand deposits		1,468			1,928
Savings deposits		3,644			8,064
Time deposits		13,836			10,206
Borrowed funds and subordinated debentures		4,526			4,276
Total interest expense		23,474			24,474
Net interest income		27,291			24,426
Provision for loan losses		4,500			1,550
Net interest income after provision for loan losses		22,791			22,876
NONINTEREST INCOME
Service charges on deposit accounts		1,393			1,383
Service and loan fee income		1,271			1,607
Gain on sale of SBA loans held for sale, net		1,217			2,399
Gain on sale of mortgage loans		40			52
Bank owned life insurance		210			198
Other-than-temporary impairment charges on securities		(1,540	)		(607	)
Net security (losses) gains		(378	)		36
Other income		481			872
Total noninterest income		2,694			5,940
NONINTEREST EXPENSE
Compensation and benefits		11,985			11,446
Occupancy		2,773			2,777
Processing and communications		2,251			2,433
Furniture and equipment		1,675			1,675
Professional services		898			598
Loan collection costs		662			604
Deposit insurance		589			67
Advertising		451			457
Other expenses		1,655			2,056
Total noninterest expense		22,939			22,113
Income before provision for income taxes		2,546			6,703
Provision for income taxes		616			1,978
Net income	$	1,930		$	4,725
Preferred stock dividends and discount accretion		110			-
Income available to common shareholders	$	1,820		$	4,725
Net income per share - Basic	$	0.26		$	0.65
Diluted	$	0.25		$	0.63
Weighted average common shares outstanding - Basic		7,097			7,245
Diluted		7,249			7,527

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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Consolidated Statements of Changes in Shareholders’ Equity

(In thousands)

		Preferred		Common Stock					Retained			Treasury			Accumulated Other Comprehensive			Total Shareholders’
		Stock		Shares			Amount		Earnings			Stock			Loss			Equity
Balance, December 31, 2006	$	-		7,296		$	44,343	$	2,951		$	(242	)	$	(824	)	$	46,228
Comprehensive income:
Net Income									4,725									4,725
Net unrealized securities gains															348			348
Net unrealized loss on cash flow hedge derivative															(14	)		(14	)
Total comprehensive income																		5,059
Dividends on Common Stock ($.19 per share)									(1,381	)								(1,381	)
5% Stock Dividend, including cash-in lieu of fractional shares							3,820		(3,823	)								(3	)
Common stock purchased				(399	)							(3,927	)					(3,927	)
Issuance of common stock:
Stock issued, including related tax benefits				148			992											992
Stock-based compensation				18			292											292
Balance, December 31, 2007	$	-		7,063		$	49,447	$	2,472		$	(4,169	)	$	(490	)	$	47,260
Comprehensive income:
Net Income									1,930									1,930
Net unrealized securities losses															(1,252	)		(1,252	)
Net unrealized loss on cash flow hedge derivative															(614	)		(614	)
Total comprehensive income																		64
Cumulative Perpetual Stock Issued to U.S. Treasury			18,032				2,617											20,649
Accretion of Discount on Preferred Stock			32						(32	)								-
Dividends on Preferred Stock (5% annually)									(78	)								(78	)
Dividends on Common Stock ($.10 per share)									(672	)								(672	)
5% Stock Dividend, including cash-in-lieu of fractional shares							2,532		(2,535	)								(3	)
Issuance of common stock:
Stock issued, including related tax benefits				34			235											235
Stock-based compensation				22			348											348
Balance, December 31, 2008		$	18,064	7,119		$	55,179	$	1,085		$	(4,169	)	$	(2,356	)	$	67,803

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,	2008				2007
OPERATING ACTIVITIES:
Net income		$	1,930		$	4,725
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses			4,500			1,550
Net amortization of purchase premiums and discounts on securities			76			76
Depreciation and amortization			597			1,000
Deferred income tax benefit			(1,262	)		(693	)
Other-than-temporary impairment charges on securities			1,540			607
Net security loss (gains)			378			(36	)
Stock compensation expense			348			292
Gain on sale of SBA loans held for sale, net			(1,217	)		(2,399	)
Gain on sale of mortgage loans			(40	)		(52	)
Origination of mortgage loans held for sale			(2,612	)		(2,963	)
Origination of SBA loans held for sale			(28,164	)		(53,948	)
Proceeds from the sale of mortgage loans held for sale, net			2,652			3,016
Proceeds from the sale of SBA loans held for sale, net			26,050			43,980
Loss on the sale of fixed assets			23			-
Net change in other assets and liabilities			(351	)		1,129
Net cash provided by (used in) operating activities			4,448			(3,716	)
INVESTING ACTIVITIES:
Purchases of securities held to maturity			(6,762	)		-
Purchases of securities available for sale			(80,744	)		(18,630	)
Purchases of Federal Home Loan Bank stock, at cost			(1,857	)		(4,720	)
Maturities and principal payments on securities held to maturity			9,871			9,034
Maturities and principal payments on securities available for sale			18,955			11,032
Proceeds from sale of securities available for sale			4,422			5,346
Proceeds from redemption of Federal Home Loan Bank stock			1,395			3,278
Proceeds from the sale of other real estate owned			520			645
Net increase in loans			(96,362	)		(71,328	)
Proceeds from the sale of premises and equipment			268			31
Purchases of premises and equipment			(1,759	)		(1,587	)
Net cash used in investing activities			(152,053	)		(66,899	)
FINANCING ACTIVITIES:
Net increase in deposits			105,849			34,803
Proceeds from new borrowings			51,000			40,000
Repayments of borrowings			(31,000	)		(10,000	)
Sale of perpetual preferred stock to U.S. Treasury			18,032			-
Warrants issued to U.S. Treasury			2,617			-
Redemption of Trust Preferred Securities			-			(9,000	)
Proceeds from the issuance of common stock			235			992
Purchase of common stock			-			(3,927	)
Cash dividends paid on common stock			(1,009	)		(1,377	)
Net cash provided by financing activities			145,724			51,491
Decrease in cash and cash equivalents			(1,881	)		(19,124	)
Cash and cash equivalents at beginning of year			36,312			55,436
Cash and cash equivalents at end of year		$	34,431		$	36,312
SUPPLEMENTAL DISCLOSURES:
Cash:
Interest paid		$	23,304		$	24,314
Income taxes paid			1,530			3,358
Noncash investing activities:
Transfer of loans to other real estate owned			1,124			540
Transfer of securities from available for sale to held to maturity			1,860			-
Accrued dividends on common stock			675			1,384

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

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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 16 branch offices located in Hunterdon, Middlesex, Somerset, Union and Warren counties in New Jersey and Northampton County in Pennsylvania.  These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration (“SBA”) and other commercial credits.  Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.  Unity Participation Company, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s loan portfolio.

The Company has two statutory trust subsidiaries that are wholly-owned by Unity Bancorp, Inc.  See details in Note 10 to the Consolidated Financial Statements.

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 and servicing assets, the carrying value of loans held for sale and other real estate owned, the determination of other-than-temporary impairment for securities and the fair value disclosures of financial instruments.  Actual results could differ from those estimates.

Reclassifications

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest-bearing deposits.

Securities

The Company classifies its securities into two categories, available for sale and held to maturity.  Securities that are classified as available for sale are stated at fair value.  Unrealized gains and losses on securities available for sale are excluded from results of operations and are reported as other comprehensive income, 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.  Securities are classified as 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.

Transfers between the available for sale and held to maturity portfolios are accounted for at fair value.  Unrealized holding gains and losses are accounted for at the date of transfer.  For securities transferred to available for sale from held to maturity, unrealized gains or losses as of the date of the transfer are recognized in a separate component of shareholders’ equity.  For securities transferred into the held to maturity portfolio from the available for sale portfolio, unrealized gains or losses as of the date of transfer continue to be reported in a separate component of the shareholders’ equity and are amortized over the remaining life of the security as an adjustment to its yield, consistent with amortization of the premium or accretion of discount.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.

For additional information on securities, see Note 4 to the Consolidated Financial Statements.

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, 2008 and 2007, the Company held $4.9 million and $4.4 million in FHLB stock, respectively.

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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 ability to collect interest on a 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 the ability to collect is reasonably assured and when the loan is brought current as to principal and interest.

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 Company 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 flows, 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 nonaccrual 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.

Nonperforming 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 ability to collect 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 nonaccrual 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 net amount of loan origination fees on loans sold are included in the carrying value and in the gain or loss on the sale.

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 unguaranteed portion is generally held in the portfolio.  During the third quarter of 2007, the Company announced its strategy to retain more SBA loans in its portfolio due to lower premiums on sales.

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

For additional information on loans, see Note 5 to the Consolidated Financial Statements.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Allowance for Loan Losses and Unfunded Loan Commitments

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 with support from a loan review consultant.  A risk rating system, consisting of multiple grading categories, is utilized as an analytical tool to assess

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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.

The Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses.  Adjustments to the allowance are made through other expenses and applied to the allowance which is maintained in other liabilities.

For additional information, see Note 6 to the Consolidated Financial Statements.

Premises and Equipment

Land is carried at cost.  Buildings 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.  For additional information on premises and equipment, see Note 7 to the Consolidated Financial Statements.

Other Real Estate Owned

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

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions.  Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are recognized in income tax expense on the income statement.

For additional information on income taxes, see Note 16 to the Consolidated Financial Statements.

Income Per Share

Basic net income per share is computed by dividing the income available to common shareholders for the period by the weighted average number of common shares outstanding for the period.  Diluted net income per share is computed by dividing income available to common shareholders for the period by the weighted average number of common shares outstanding for the period presented adjusted for the effect of common stock equivalents, such as stock options and nonvested restricted stock and warrants, under the treasury stock method.  Net income is reduced by the dividends on the cumulative perpetual preferred stock issued to the U.S. Treasury and the accretion of the discount on the preferred stock.  The amounts reported have been adjusted for the impact of dividends declared on common stock.  For additional information on income per share, see Note 17 to the Consolidated Financial Statements.

Other Comprehensive Income

Other comprehensive income consists of the change in unrealized (loss) gain on securities available for sale and derivatives designated as cash flow hedges that were

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reported as a component of shareholders’ equity, net of tax.  For additional information on other comprehensive income, see Note 22 to the Consolidated Financial Statements.

Derivative Instruments and Hedging Activities

The Company uses derivative instruments, such as interest rate swaps, to manage interest rate risk.  The Company recognizes all derivative instruments at fair value as either assets or liabilities in other assets or other liabilities.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship.  For derivatives not designated as an accounting hedge, the gain or loss is recognized in trading noninterest income.

For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation.  The Company does not have any fair value hedges or hedges of foreign operations.

The Company formally documents the relationship between the hedging instruments and hedged item, as well as the risk management objective and strategy before undertaking a hedge.  For hedging relationships in which effectiveness is measured, the Company formally assesses, both at inception and on an ongoing basis, if the derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item.  If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued.

For derivatives that are designated as cash flow hedges, the effective portion of the gain or loss on derivatives is reported as a component of other comprehensive income or loss.  The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

Hedge accounting discontinues when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is no longer designated as a fair value or cash flow hedge or it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period.  If the Company determines that the derivative no longer qualifies as a cash flow or fair value hedge and therefore hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings.

For additional information on derivative instruments, see Note 12 to the Consolidated Financial Statements.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“Statement 123R”).  Statement 123R requires public companies to recognize compensation expense related to stock-based compensation awards over the period during which an employee is required to provide service for the award.  Compensation expense is equal to the fair value of the award, net of estimated forfeitures, and is recognized over the vesting period of such awards.  

For additional information on the Company’s stock-based compensation, see Note 19 to the Consolidated Financial Statements.

Treasury Stock

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

Bank Owned Life Insurance

The Company purchased life insurance policies on certain members of management.  Bank owned life insurance (“BOLI”) is recorded at its cash surrender value or the amount that can be realized.

Advertising

The Company expenses the costs of advertising in the period incurred.

Dividend Restrictions

Banking regulations require maintaining certain capital levels that may limit the dividends paid by our bank to our holding company or by our holding company to our shareholders.  In addition, the Company’s participation in the U.S. Department of Treasury’s Capital Purchase Program places restrictions on increased dividend declarations.

Operating Segments

While management monitors the revenue streams of its various products and services, operating results and financial performance are evaluated on a company-wide basis.  The Company’s Management uses consolidated results to make operating and strategic decisions.  Accordingly, there is only one reportable segment.

Servicing Assets

Servicing assets represent the estimated fair value of retained servicing rights at the time loans are sold.  Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues.  Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Any impairment, if temporary, would be reported as a valuation allowance.

Fair Value

Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurement, which provides a framework for measuring fair value under generally accepted accounting principles.  SFAS 157 applies to all financial instruments that are being measured and reported on a fair value basis.

The Company also adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, on January 1, 2008.  SFAS 159 allows an entity the irrevocable

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option to elect fair value for the initial and subsequent measurement of certain financial assets on a contract-by-contract basis.  SFAS 159 requires that the difference between the carrying value before election of the fair value option and the fair value of these instruments be recorded as an adjustment to beginning retained earnings in the period of adoption.  The Company presently elected not to report any of its existing financial assets or liabilities at fair value and consequently did not have any adoption related adjustments.

For additional information on the fair value of the Company’s financial instruments, see Note 20 to the Consolidated Financial Statements.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) Statement No. 157, Fair Value Measurements, became effective for fiscal years beginning after November 15, 2007.  However, the FASB has deferred the effective date in Statement 157 for nonfinancial assets and nonfinancial liabilities (except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis - at least annually) with the issuance of FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157, to fiscal years beginning after November 15, 2008.  This deferral does not apply to entities that have issued interim or annual financial statements that include application of the measurement and disclosure provisions of Statement 157. This FSP lists examples of items for which deferral would apply, including nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods (nonrecurring fair value measures).  Financial Assets and Financial Liabilities are defined in FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments.  Accordingly, the Company has deferred the disclosures related to the fair value of Goodwill as of December 31, 2008.  The Company does not expect that adoption of the FSP will have a material impact on its financial condition or results of operations.

FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, was issued on October 10, 2008, and became effective upon issuance.  This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with Statement 157 and clarifies the application of Statement 157 in a market that is not active.  This FSP was effective upon issuance, including prior periods for which financial statements have not been issued.  Revisions resulting from a change in the valuation technique or its application are accounted for as a change in accounting estimate (FASB Statement No. 154, Accounting Changes and Error Corrections). The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application.  The adoption of this FSP did not have a material impact on the Company’s financial condition or results of operations.

FSP No. EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferrer in Securitized Financial Assets, to achieve more consistent determination of whether an other-than-temporary impairment has occurred.  The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance.  The objective of an other-than-temporary impairment analysis is to determine whether it is probable that the holder will realize some portion of the unrealized loss on an impaired security. U.S. GAAP indicates that the holder may ultimately realize the unrealized loss on the impaired security because, for example, (a) it is probable that the holder will not collect all of the contractual or estimated cash flows, considering both the timing and amount or (b) the holder lacks the intent and ability to hold the security to recovery.  In making its other-than-temporary impairment assessment, the holder should consider all available information relevant to the ability to collect the security, including information about past events, current conditions, and the value of underlying collateral.  The EITF is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively.  Retrospective application to a prior interim or annual reporting period is not permitted.  The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.  OTTI charges amounted to $1.5 million during 2008. Additional OTTI charges may be realized in the future as the result of changes in the financial condition and near-term prospects of the issuer or the inability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.  This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

In December 2007, FASB issued Statements of Financial Accounting Standards (“SFAS”) No. 141 (R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.  SFAS No. 141 revises the previous statement on business combinations and requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-

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date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the financial effect of the business combination.  As this Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, this Statement was not applicable to the Company for the year ended December 31, 2008.  SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way – as equity in the Consolidated Financial Statements.

2.          Goodwill

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Intangible Assets, which includes requirements to test goodwill and indefinite-lived intangible assets on an annual basis for impairment, rather than amortize them.  Management conducted annual and interim tests and determined that the Company’s recorded goodwill totaling $1.5 million, which resulted from the 2005 acquisition of its Phillipsburg, New Jersey branch, is not impaired as of December 31, 2008.

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, 2008 and 2007, the Company was required to maintain reserve balances of $80 thousand.

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, 2008 and 2007:

	2008									2007
(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	$	4,132	$	27	$	(3	)	$	4,156	$	7,473	$	61	$	(18	)	$	7,516
State and political subdivisions		2,946		-		(228	)		2,718		2,945		-		(34	)		2,911
Mortgage-backed securities		109,630		992		(1,043	)		109,579		47,242		157		(510	)		46,889
Corporate debt securities		975		-		(657	)		318		3,973		-		(416	)		3,557
Other equities		639		-		(62	)		577		3,989		29		(36	)		3,982
Total securities available for sale	$	118,322	$	1,019	$	(1,993	)	$	117,348	$	65,622	$	247	$	(1,014	)	$	64,855
Securities held to maturity:
US Government sponsored entities	$	2,000	$	119	$	-		$	2,119	$	7,189	$	93	$	-		$	7,282
State and political subdivisions		3,157		-		(251	)		2,906		3,159		13		(93	)		3,079
Mortgage-backed securities		25,450		193		(880	)		24,763		22,383		95		(208	)		22,270
Corporate debt securities		1,554		-		(1,254	)		300		1,005		3		-			1,008
Total securities held to maturity	$	32,161	$	312	$	(2,385	)	$	30,088	$	33,736	$	204	$	(301	)	$	33,639

	Within one year					After one year through five years					After five years through ten years					After ten years					Total carrying
(In thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale at fair value:
US Government sponsored entities	$	-		-	%	$	-		-	%	$	2,110		2.50	%	$	2,046		5.09	%	$	4,156		3.76	%
State and political subdivisions		-		-			-		-			-		-			2,718		3.91			2,718		3.91
Mortgage-backed securities		-		-			1,479		3.73			14,652		4.24			93,448		5.09			109,579		4.97
Corporate debt securities		-		-			-		-			-		-			318		2.79			318		2.79
Other equities		-		-			-		-			-		-			577		0.31			577		0.31
Total securities available for sale	$	-		-	%	$	1,479		3.73	%	$	16,762		4.02	%	$	99,107		5.02	%	$	117,348		4.90	%
Held to maturity at cost:
US Government sponsored entities	$	-		-	%	$	2,000		5.00	%	$	-		-	%	$	-		-	%	$	2,000		5.00	%
State and political subdivisions		-		-			-		-			-		-			3,157		4.46			3,157		4.46
Mortgage-backed securities		-		-			1,430		4.54			7,608		4.81			16,412		5.13			25,450		5.00
Corporate debt securities		-		-			-		-			-		-			1,554		6.35			1,554		3.65
Total securities held to maturity	$	-		-	%	$	3,430		4.81	%	$	7,608		4.81	%	$	21,123		5.12	%	$	32,161		4.88	%

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        The table on the previous page provides the remaining contractual maturities and yields of securities within the investment portfolios.  The carrying value of securities at December 31, 2008 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.

In 2008 and 2007, gross realized gains on sales of securities amounted to $91 thousand and $49 thousand, while gross realized losses amounted to $469 thousand and $13 thousand, respectively. The net of these amounts is included in noninterest income in the Consolidated Statements of Income as securities (losses) gains.  The gross losses in 2008 are attributed to the Company selling approximately $2.1 million in book value of callable Freddie Mac perpetual preferred securities during the year, resulting in a pretax loss of approximately $469 thousand on the sales.  This loss was partially offset by $91 thousand in gross gains on other sales for a net security loss of $378 thousand in 2008.   During 2007, the Company’s net realized gains on the sales of securities were $36 thousand.

Also included in noninterest income are other-than-temporary impairment (“OTTI”) charges of $1.5 million and $607 thousand for 2008 and 2007, respectively.  OTTI charges on securities during 2008 included write-downs of approximately $1.2 million on three callable Freddie Mac perpetual preferred securities due to the decline in market value of these securities and the eventual placement of FHLMC in conservatorship that occurred in September of 2008.  In addition, OTTI charges were taken on a pooled trust preferred security and two bank equities during the year.  During 2007, an OTTI charge of $607 thousand was recorded on the same callable FHLMC perpetual preferred securities, which the Company classified as impaired due to their decline in market value and the uncertainty that they would recover their $3.9 million book value within a reasonable period.

Two securities with a market value of $1.9 million were transferred from available for sale to held to maturity during the third quarter of 2008, consistent with the Company’s intent and ability to hold these securities until maturity.  Unrealized losses at the date of transfer amounted to $1.1 million and continue to be reported in accumulated other comprehensive income, with amortization over the estimated remaining life of the securities.

Securities with a carrying value of $69.9 million and $62.0 million at December 31, 2008 and 2007, respectively, were pledged to secure Government deposits, secure other borrowings and for other purposes required or permitted by law.  Included in these figures was $2.7 million and $2.9 million pledged against Government deposits at December 31, 2008 and 2007, respectively.

       The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007 are as follows:

	Less than 12 months					Greater than 12 months					Total
(In thousands)	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
2008
U.S. Government sponsored entities	$	2,110	$	(3	)	$	11	$	-		$	2,121	$	(3	)
State and political subdivisions		5,624		(479	)		-		-			5,624		(479	)
Mortgage-backed securities		32,113		(1,024	)		11,668		(899	)		43,781		(1,923	)
Corporate debt securities		-		-			618		(1,911	)		618		(1,911	)
Other equities		82		(34	)		472		(28	)		554		(62	)
Total temporarily impaired investments	$	39,929	$	(1,540	)	$	12,769	$	(2,838	)	$	52,698	$	(4,378	)
2007
U.S. Government sponsored entities	$	112	$	-		$	5,094	$	(18	)	$	5,206	$	(18	)
State and political subdivisions		3,035		(107	)		1,270		(20	)		4,305		(127	)
Mortgage-backed securities		9,569		(77	)		35,827		(641	)		45,396		(718	)
Corporate debt securities		3,558		(416	)		-		-			3,558		(416	)
Other equities		-		-			559		(36	)		559		(36	)
Total temporarily impaired investments	$	16,274	$	(600	)	$	42,750	$	(715	)	$	59,024	$	(1,315	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  As of December 31, 2008, the number of securities in an unrealized loss position in each category was as follows: three securities of U.S. Government sponsored entities, eighteen state and political subdivision securities, fifty-nine mortgage-backed securities, three corporate debt securities, and four

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other equity securities.  The unrealized losses in each of these categories are discussed in the paragraphs that follow.

U.S. Government sponsored entities and state and political subdivision securities:  The unrealized losses on investments in securities were caused by the increase in interest rate spreads.  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 majority of 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 the current liquidity in the credit markets 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 increases in interest rate spreads.  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 decline in face value is attributed to changes in interest rates and the current liquidity in the credit markets 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.

Other equity securities:  Included in this category is stock of other financial institutions.  The unrealized losses on other equity securities are caused by decreases in the market prices of the shares.  The Company has the ability and intent to hold these shares until a market price recovery; therefore these investments are not considered other-than-temporarily impaired.

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)	2008		2007
SBA held for sale	$	22,181	$	24,640
SBA held to maturity		83,127		68,875
SBA 504		76,802		72,145
Commercial		308,165		293,641
Residential mortgage		133,110		73,697
Consumer		62,561		57,134
Total loans	$	685,946	$	590,132

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 $140.8 million and $140.4 million at December 31, 2008 and 2007, respectively.  At December 31, 2008 and 2007, the carrying value, which approximates fair value, of servicing rights was $1.5 million and $2.1 million, respectively.  The fair value of servicing rights was determined using a discount rate of 15 percent, constant prepayment speeds ranging from 15 to 18, and interest strip multiples ranging from 2.08 to 3.80, depending on each individual credit.  A summary of the changes in the related servicing asset for the past two years follows:

Years ending December 31,
(In thousands)	2008			2007
Balance at beginning of year	$	2,056		$	2,294
SBA servicing rights capitalized		392			797
SBA changes in fair value		(945	)		(1,035	)
Provision for loss in fair value		-			-
Balance at end of year	$	1,503		$	2,056

In addition, the Company had $1.7 million and $2.2 million related to the retained portion of the unsold SBA loans at December 31, 2008 and 2007, respectively.

As of December 31, 2008 and 2007, the Bank’s recorded investment in impaired loans, defined as nonaccrual loans, was $16.1 million and $5.5 million, respectively, and the related valuation allowance was $1.0 million and $372 thousand at December 31, 2008 and 2007.  This valuation allowance is included in the allowance for loan losses in the accompanying balance sheets.  Additional interest income that would have been recorded had these impaired loans performed under the original contract terms was $910 thousand and $475 thousand for 2008 and 2007, respectively.  Interest income collected on these impaired loans totaled $44 thousand and $42 thousand for 2008 and 2007, respectively.  Average impaired loans for 2008 and 2007 were $7.8 million and $5.7 million, respectively.  There were no loans restructured during 2008.  As of December 31, 2008 and 2007, there were $2.5 million and $155 thousand in loans past due 90 or more days and still accruing interest, respectively.

In the normal course of business, the Company may originate loan products whose terms could give rise to additional credit risk.  Interest-only loans, loans with high loan-to-value ratios, construction loans with payments made from interest reserves and multiple loans supported by the same collateral (e.g. home equity loans) are examples of such products.  However, these products are not material to the Company’s financial position and are closely managed via credit controls that mitigate their additional inherent risk.  Management does not believe that these products create a concentration of credit risk in the Company’s loan portfolio.

As of December 31, 2008, approximately 96 percent of the Company’s loans were secured by real estate.  A

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portion of the Company’s SBA loans are located outside the Company’s lending area.  Approximately 11 percent of the Company’s total loan portfolio consists of loans 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, 2008, residential mortgages provided $61.5 million in borrowing capacity at the Federal Home Loan Bank compared to $37.0 million at December 31, 2007.

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)	2008
Loans to officers, directors or their associates at December 31, 2007	$	16,326
New loans		2,940
Repayments		(598	)
Director retirement		(592	)
Loans to officers, directors or their associates at December 31, 2008	$	18,076

6.          Allowance for Loan Losses & Unfunded Loan Commitments

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 for the years 2008 and 2007 is as follows:

(In thousands)	2008		2007
Balance at beginning of year	$	8,383	$	7,624
Provision charged to expense		4,500		1,550
		12,883		9,174
Charge-offs		2,824		975
Recoveries		267		184
Net charge-offs		2,557		791
Balance at end of year	$	10,326	$	8,383

The Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses.  Adjustments to the allowance are made through other expense and applied to the allowance which is maintained in other liabilities.  The commitment reserve was $105 thousand and $102 thousand at December 31, 2008 and December 31, 2007, respectively.

7.          Premises and Equipment

The detail of premises and equipment as of December 31, 2008 and 2007 is as follows:

(In thousands)	2008			2007
Land and buildings	$	10,370		$	9,658
Furniture, fixtures and equipment		6,233			5,192
Leasehold improvements		2,343			2,628
Gross premises and equipment		18,946			17,478
Less:  Accumulated depreciation		(6,366	)		(5,376	)
Net premises and equipment	$	12,580		$	12,102

Amounts charged to noninterest expense for depreciation of premises and equipment amounted to $1.2 million in 2008 and $1.1 million in 2007.

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 two Board members, Messrs. D. Dallas and R. Dallas are partners. Under the lease for the facility, the partnership received aggregate rental payments of $553 thousand annually in 2007 and 2008.  The Company believes that these rent payments reflect market rents and that the lease reflects 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 lease is fixed until 2010.

8.       Other Assets

The detail of other assets as of December 31, 2008 and 2007 is as follows:

(In thousands)	2008		2007
Deferred tax asset	$	5,656	$	3,939
Other real estate owned		710		106
Prepaid expenses		488		586
Net receivable due from SBA		290		388
Other		600		820
Total other assets	$	7,744	$	5,839

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9.          Deposits

The following schedule details the maturity distribution of time deposits:

(In thousands)	3 months or less		More than 3  through 6 months		More than 6 through 12 months		More than 12 months		Total
At December 31, 2008
$100,000 or more	$	46,482	$	19,679	$	36,382	$	38,288	$	140,831
Less than $100,000		37,724		36,416		80,556		115,579		270,275
At December 31, 2007
$100,000 or more	$	27,150	$	25,956	$	19,474	$	15,435	$	88,015
Less than $100,000		44,533		41,190		40,992		41,529		168,244

10.Borrowed Funds and Subordinated Debentures

The following tables present the period-end and average balances of borrowed funds and subordinated debentures for the last two years with resultant rates, as well as expected maturities over the next five years:

	2008					2007
(In thousands)	Amount		Rate			Amount		Rate
FHLB borrowings and repurchase agreements :
At December 31,	$	80,000		4.14	%	$	75,000		4.39	%
Year-to-date average	$	70,167		4.14	%	$	51,889		4.29	%
Maximum outstanding	$	90,000				$	75,000
Repurchase agreements:
At December 31,	$	25,000		3.37	%	$	10,000		2.91	%
Year-to-date average	$	22,582		3.33	%	$	10,795		3.01	%
Maximum outstanding	$	25,000				$	20,000
Subordinated debentures:
At December 31,	$	15,465		5.48	%	$	15,465		6.63	%
Year-to-date average	$	15,465		5.52	%	$	22,278		7.74	%
Maximum outstanding	$	15,465				$	24,744

(In thousands)	2009		2010		2011		2012		2013		Thereafter
FHLB borrowings and repurchase agreements	$	10,000	$	10,000	$	-	$	-	$	-	$	60,000
Repurchase agreements		10,000		-		-		-		-		15,000
Subordinated debentures		-		-		-		-		-		15,465
Total	$	20,000	$	10,000	$	-	$	-	$	-	$	90,465

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FHLB Borrowings

The FHLB borrowings at December 31, 2008 and 2007 consisted of four $10 million advances, three $10 million repurchase agreements and overnight line of credit advances.  The terms of these transactions are as follows:

·   The $10 million FHLB overnight line of credit advance issued on December 31, 2008, was at a rate of 0.44 percent and was repaid on January 2, 2009.The $5 million FHLB overnight line of credit advance issued on December 31, 2007, was at a rate of 3.61 percent and was repaid on January 2, 2008.

·   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 quarterly on the 19th 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 on April 27, 2008 and quarterly thereafter on the 27th of July, October, January and April.

·   The FHLB advance that was issued on November 2, 2006 has a fixed rate of 4.025 percent, matures on November 2, 2016 and is callable on November 2, 2007 and quarterly thereafter on the 2nd of February, May, August and November.

·   The FHLB advance that was issued on August 10, 2007 has a fixed rate of 4.234%, matures on August 10, 2017 and is callable on August 10, 2009 and quarterly thereafter on the 10th of November, February, May and August.

·   The FHLB repo-advance that was issued on December 15, 2006 has a fixed rate of 4.13 percent, matures on December 15, 2016 and is callable on December 15, 2008 and quarterly thereafter on the 15th of March, June, September and December.

·   The FHLB repo-advance that was issued on April 5, 2007 has a fixed rate of 4.208%, matures on April 5, 2017 and is callable on April 5, 2009 and quarterly thereafter on the 5th of July, October, January and April.

·   The FHLB repo-advance that was issued on December 20, 2007 has a fixed rate of 3.337%, matures on December 20, 2017 and is callable on December 20, 2010 and quarterly thereafter on the 20th of March, June, September and December.

Due to the call provisions of these advances, the expected maturity could differ from the contractual maturity.

Repurchase Agreements

At December 31, 2008, the Company was a party in the following Repurchase Agreements:

·   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 three-month London Inter-bank overnight rate (“LIBOR”) is greater than or equal to 7 percent.

·   A $15 million repurchase agreement that was entered into in February 2008, has a term of 10 years expiring on February 28, 2018, and a rate of 3.67 percent.  The borrowing may be called by the issuer on the Repurchase Date of May 29, 2008 and quarterly thereafter.

Subordinated Debentures

At December 31, 2008, the Company was a party in the following subordinated debenture transactions:

·   On July 24, 2006, Unity (NJ) Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on July 24, 2036. The subordinated debentures are redeemable in whole or part, prior to maturity but after July 24, 2011. The floating interest rate on the subordinated debentures is the three-month LIBOR plus 159 basis points and reprices quarterly.  The floating interest rate at December 31, 2008 was 3.09 percent and 6.47 percent at December 31, 2007.

·   On December 19, 2006, Unity (NJ) Statutory Trust III, a statutory business trust and wholly-owned subsidiary of Unity Bancorp, Inc., issued $5.0 million of floating rate capital trust pass through securities to investors due on December 19, 2036. The subordinated debentures are redeemable in whole or part, prior to maturity but after December 19, 2011. The floating interest rate on the subordinated debentures is the three-month LIBOR plus 165 basis points and reprices quarterly.  The floating interest rate at December 31, 2008 was 3.83 percent and 6.77 percent at December 31, 2007.

·   In connection with the formation of the statutory business trusts, the trusts also issued $465 thousand of common equity securities to the Company, which together with the proceeds stated above were used to purchase the subordinated debentures, under the same terms and conditions.

The Company has the ability to defer interest payments on the subordinated debentures for up to five years without being in default.

The capital securities in each of the above transactions 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

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consolidate the accounts and related activity of Unity (NJ) Statutory Trust II and Unity (NJ) Statutory Trust III.  The additional capital from each of these transactions was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to Unity Bank.

11. Commitments and Contingencies

Facility Lease Obligations

The Company operates sixteen branches, nine branches under operating leases, including its headquarters, and seven 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 generally between the years 2009 and 2013.  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
2009	$	1,179	$	87	$	1,092
2010		494		73		421
2011		410		-		410
2012		356		-		356
2013		344		-		344
Thereafter		137		-		137

Rent expense totaled $1.2 million for 2008 and 2007, 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 judgment 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 $111.9 million to its borrowers as of December 31, 2008, compared to $132.0 million at December 31, 2007.  At December 31, 2008, $31.2 million of these commitments expire after one year, compared to $31.4 million a year earlier.  At December 31, 2008, the Company had $4.5 million in standby letters of credit compared to $3.9 million in 2007.  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 12 percent at December 31, 2008 and 25 percent at December 31, 2007, of these commitments are for SBA loans, which may be sold in the secondary market.

12. Derivative Instruments and Hedging Activities

Derivative Financial Instruments

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

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

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

Risk Management Policies – Hedging Instruments

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

Interest Rate Risk Management – Cash Flow Hedging Instruments

The Company has long-term variable rate debt as a source of funds for use in the Company’s lending and

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investment activities and for other general business purposes.  These debt obligations expose the Company to variability in interest payments due to changes in interest rates.  If interest rates increase, interest expense increases.  Conversely, if interest rates decrease, interest expense decreases.  Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, hedged a portion of its variable-rate interest payments.  To meet this objective, management entered into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments during the contract period.

At December 31, 2008 and 2007 the information pertaining to outstanding interest rate swap agreements used to hedge variable rate debt is as follows:

(Dollars in thousands)	2008			2007
Notional amount	$	15,000		$	10,000
Weighted average pay rate		4.05	%		4.10	%
Weighted average receive rate		3.22	%		4.88	%
Weighted average maturity in years		2.90			3.73
Unrealized loss relating to interest rate swaps	$	(1,013	)	$	(23	)

These agreements provided for the Company to receive payments at a variable rate determined by a specific index (three-month LIBOR) in exchange for making payments at a fixed rate.

The unrealized loss relating to interest rate swaps was recorded as a derivative liability.  Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income.

13. Shareholders’ Equity

Shareholders’ equity increased $20.5 million to $67.8 million at December 31, 2008 due to $1.9 million in net income, $20.6 million from the issuance of cumulative perpetual preferred stock to the U.S. Treasury, and $583 thousand from the issuance of common stock under employee benefit plans, partially offset by a $1.3 million net unrealized loss in the available for sale securities portfolio, a $614 thousand net unrealized loss on cash flow hedge derivatives, $78 thousand in dividends accrued on preferred stock, and $675 thousand of dividends declared during 2008.  The issuance of common stock under employee benefit plans includes nonqualified stock options and restricted stock expense, related entries, employee option exercises and the tax benefit of options exercised.

During the third quarter of 2008, the Company revised its cash dividend payment policy.  The decision was made based upon the current economic environment to retain capital so that the holding company can remain a source of strength to the subsidiary bank.  Previously, the Company had paid a quarterly cash dividend at a rate set by the Board based upon a number of factors.  The Board has now established a targeted dividend payout ratio of 20 percent of the Company’s earnings, subject to adjustment based upon factors existing at the time of the dividend and the Company’s projected capital needs.  The Board now intends to pay a cash dividend once annually, in the next succeeding year.  The Company declared two dividends in 2008 totaling $0.10.

On October 21, 2002, the Company authorized the repurchase of up 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.  During 2008, the Company did not repurchase any shares of its common stock.  As of December 31, 2008, the Company had repurchased a total of 556 thousand shares, of which 131 thousand shares have been retired, leaving 153 thousand shares remaining to be purchased under the plan.  The Company has suspended its share repurchase program, as required by the U.S. Treasury’s Capital Purchase Plan.

On April 24, 2008, the Company announced a 5 percent stock distribution payable on June 27, 2008 to shareholders of record as of June 13, 2008, and accordingly, all share amounts have been restated to include the effect of the distribution.

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets.  One of the provisions resulting from the EESA Act is the Treasury’s Capital Purchase Program (“CPP”) which provides direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions.   This program is voluntary and requires an institution to comply with several restrictions and provisions, including limits on executive compensation, stock redemptions, and declaration of dividends.  The U.S. Treasury may unilaterally amend the terms of this agreement.  The CPP provides for a minimum investment of 1 percent of risk-weighted assets, with a maximum investment of the lesser of 3 percent of risk-weighted assets or $25.0 billion.  The perpetual preferred stock has a dividend rate of 5 percent per year until the fifth anniversary of the Treasury investment and a dividend of 9 percent thereafter.  These dividends are payable quarterly to the U.S. Treasury.  The preferred stock is callable after three years at par value.  The preferred stock ranks senior to the institution’s common stock in the event of liquidation.  The CPP also requires the Treasury to receive warrants for common stock equal to 15 percent of the capital invested by the U. S. Treasury.   The Company received an investment in perpetual preferred stock of $20.6 million on December 5, 2008.   These proceeds were allocated between the preferred stock and warrants based on relative fair value in accordance with APB Opinion No. 14,  Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.  The allocation of proceeds resulted in

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a discount on the preferred stock that will be accreted over five years.  The Company issued 764,778 common stock warrants to the U.S. Treasury and $2.6 million of the proceeds were allocated to the warrants.  The warrants are accounted for as equity securities.  The warrants have a contractual life of ten years and have an exercise price of $4.05.

14.          Other Income

The other income components for the years ended December 31, 2008 and 2007 are as follows:

(In thousands)	2008		2007
Loan referral fees	$	6	$	233
ATM/Check card fees		243		224
Other		232		415
Total other income	$	481	$	872

15. Other Expenses

The other expenses components for the years ended December 31, 2008 and 2007 are as follows:

(In thousands)	2008		2007
Travel, entertainment, training and recruiting	$	603	$	772
Insurance		359		359
Director fees		308		302
Stationery and supplies		230		319
Reserve for commitments		3		(25	)
Other		152		329
Total other expenses	$	1,655	$	2,056

16. Income Taxes

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

(In thousands)	2008			2007
Federal – current provision	$	2,004		$	2,545
Federal – deferred benefit		(884	)		(587	)
Total Federal provision		1,120			1,958
State – current benefit		(126	)		126
State – deferred benefit		(378	)		(106	)
Total State provision		(504	)		20
Total provision for income taxes	$	616		$	1,978

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)	2008			2007
Federal income taxes at statutory rate	$	866		$	2,279
(Decreases) increases resulting from:
Tax-exempt interest		(90	)		(114	)
Bank owned life insurance		(71	)		(67	)
Meals and entertainment		19			21
State income taxes, net of federal income tax effect		-			13
Other, net		(108	)		(154	)
Provision for income taxes	$	616		$	1,978
Effective tax rate		24.2	%		29.5	%

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, 2008 and 2007 are as follows:

(In thousands)	2008		2007
Deferred tax assets:
Allowance for loan losses	$	4,056	$	3,240
Reserve for impaired securities		637		243
Lost interest on nonaccrual loans		508		289
Net unrealized cash flow hedge losses		385		9
Net unrealized security losses		370		291
Stock-based compensation		202		182
Deferred compensation		114		96
Deferred servicing fee income		87		64
Other		107		108
Total deferred tax assets		6,466		4,522
Deferred tax liabilities:
Deferred loan costs		517		351
Goodwill		124		84
Bond accretion		84		89
Depreciation		81		-
Other		4		59
Total deferred tax liabilities		810		583
Net deferred tax asset	$	5,656	$	3,939

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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.

Included as a component of shareholders’ equity is an income tax expense (benefit) related to unrealized losses on securities available for sale of $(1.7) million and $(476) thousand in 2008 and 2007, respectively.  In addition, there is $(628) thousand and $(14) thousand related to cash flow hedges at December 31, 2008 and 2007, respectively.

The Company adopted FASB Interpretation 48 as of January 1, 2007.  The adoption did not have a material impact on the Company’s financial position or results of operation.  The Company did not recognize or accrue any interest or penalties related to income tax during the years ended December 31, 2008 and 2007.  The Company does not have an accrual for uncertain tax positions as of December 31, 2008, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law.  Tax returns for all years 2005 and thereafter are subject to future examination by tax authorities.

17.          Net Income per Share

The following is a reconciliation of the calculation of basic and dilutive income per share.  All share amounts have been adjusted for the 5 percent stock distributions paid in 2008 and 2007.  When computing net income per share, net income is reduced by the dividends on the cumulative perpetual preferred stock issued to the U.S. Treasury and the accretion of the discount on the preferred stock.  The reconciliation between reported net income and net income per share is shown below.

(In thousands, except per share amounts)	2008		2007
Net income	$	1,930	$	4,725
Less: Preferred stock dividends and discount accretion		110		-
Income available to common shareholders	$	1,820	$	4,725
Weighted average common shares outstanding		7,097		7,245
Plus:  Potential dilutive common stock		152		282
Diluted average common shares outstanding		7,249		7,527
Net Income per share -
Basic	$	0.26	$	0.65
Diluted	$	0.25	$	0.63

Stock options for 389 thousand and 137 thousand shares were not considered in computing diluted earnings per share for 2008 and 2007, respectively, because they were antidilutive.  In addition, the 764,778 common stock warrants which were issued to the U.S. Treasury as part of the Capital Purchase Program were antidilutive at December 31, 2008.

18. 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.  The parent company and its subsidiary bank are subject to various regulatory capital requirements administered by banking regulators.  Quantitative measures of capital adequacy include the leverage ratio (tier 1 capital as a percentage of tangible assets), tier 1 risk-based capital ratio (tier 1 capital as a percent of risk-weighted assets) and total risk-based capital ratio (total risk-based capital as a percent of total risk-weighted assets).

Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Company and the 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).  Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines.  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 must be maintained.  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 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.

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The Company’s capital amounts and ratios for each of 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, 2008
Leverage ratio	$	83,671		9.54	%	≥ $ 35,071		4.00	%	≥ $ 43,839		N/A
Tier I risk-based capital ratio	$	83,671		12.02	%	≥ $ 27,846		4.00	%	≥ $ 41,769		N/A
Total risk-based capital ratio	$	92,394		13.27	%	≥ $ 55,692		8.00	%	≥ $ 69,616		N/A
As of December 31, 2007
Leverage ratio	$	61,157		8.25	%	≥ $ 29,654		4.00	%	≥ $ 37,067		N/A
Tier I risk-based capital ratio	$	61,157		9.81	%	≥ $ 24,947		4.00	%	≥ $ 37,421		N/A
Total risk-based capital ratio	$	68,962		11.06	%	≥ $ 49,895		8.00	%	≥ $ 62,369		N/A

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, 2008
Leverage ratio	$	69,049		7.88	%	≥ $ 35,043		4.00	%	≥ $ 43,804		5.00	%
Tier I risk-based capital ratio	$	69,049		9.93	%	≥ $ 27,806		4.00	%	≥ $ 41,709		6.00	%
Total risk-based capital ratio	$	86,259		12.41	%	≥ $ 55,612		8.00	%	≥ $ 69,514		10.00	%
As of December 31, 2007
Leverage ratio	$	52,249		7.06	%	≥ $ 29,617		4.00	%	≥ $ 37,021		5.00	%
Tier I risk-based capital ratio	$	52,249		8.39	%	≥ $ 24,919		4.00	%	≥ $ 37,378		6.00	%
Total risk-based capital ratio	$	68,545		11.00	%	≥ $ 49,837		8.00	%	≥ $ 62,297		10.00	%

19. 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 $195 thousand and $185 thousand to the Plan in 2008 and 2007, 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 incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors.  In addition, restricted stock is issued under the stock bonus program to reward employees and directors and to retain them by distributing stock over a period of time.

In the following paragraphs, all share amounts have been adjusted for the 5 percent stock distributions paid in 2008 and 2007.

Stock Option Plans

Grants under the Company’s incentive and nonqualified option plans, generally vest over 3 years and must be exercised within 10 years of the date of the grant.  The exercise price of each option is the market price on the date of grant.  As of December 31, 2008, 1,520,529 shares have been reserved for issuance upon the exercise of options, 872,274 option grants are outstanding, 572,271 option grants have been exercised, forfeited or expired, leaving 75,984 shares available for grant.

The Company granted 149,263 and 108,978 options in 2008 and 2007, respectively.  The fair value of the options granted during each period was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2008			2007
Number of options granted		149,263			108,978
Weighted average exercise price	$	5.07		$	10.46
Weighted average fair value of options	$	1.43		$	3.06
Expected life (years)		4.03			5.15
Expected volatility		44.74	%		33.34	%
Risk-free interest rate		1.63	%		4.41	%
Dividend yield		2.55	%		1.92	%

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The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding.  Expected volatility of the Company’s stock price was based on the historical volatility over the period commensurate with the expected life of the options.  The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of grant.  The expected dividend yield is the projected annual yield based on the grant date stock price.

Statement 123R requires that the fair value of equity awards be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period).  Compensation expense related to stock options totaled $150 thousand and $112 thousand in 2008 and 2007, respectively.  The related income tax benefit was approximately $61 thousand and $46 thousand in 2008 and 2007, respectively.

Transactions under the Company’s stock option plans for the last two years are summarized as follows:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2006		804,971		$	5.52		5.3	$	6,304,483
Options granted		108,978			10.46
Options exercised		(135,285	)		4.63
Options forfeited		(9,217	)		11.93
Options expired		(3,393	)		11.72
Outstanding at December 31, 2007		766,054		$	6.28		5.2	$	1,981,902
Options granted		149,263			5.07
Options exercised		(536	)		5.04
Options forfeited		(10,236	)		10.08
Options expired		(32,271	)		8.48
Outstanding at December 31, 2008		872,274		$	5.94		5.0	$	252,815
Exercisable at December 31, 2008		652,267		$	5.62		3.6	$	245,615

As of December 31, 2008, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock incentive plans totaled approximately $329 thousand.  That cost is expected to be recognized over a weighted average period of 2.2 years.

The following table summarizes information about stock options outstanding at December 31, 2008:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Shares Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Shares Exercisable		Weighted Average Exercise Price
$	0.00 - 4.00		359,927		3.9	$	3.20		287,927	$	3.04
	4.01 - 8.00		277,254		5.9		5.75		175,316		5.34
	8.01 - 12.00		155,758		4.6		9.17		155,391		9.16
	12.01 - 16.00		79,335		7.8		12.75		33,633		12.83
Total			872,274		5.0	$	5.94		652,267	$	5.62

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The following table presents information about options exercised:

	2008		2007
Number of options exercised		536		135,285
Total intrinsic value of options exercised	$	1,094	$	834,950
Cash received from options exercised		2,703		625,736
Tax deduction realized from options exercised		438		169,574

Upon exercise, the Company issues shares from its authorized but unissued, common stock to satisfy the options.

Restricted Stock Awards

Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period.  The awards are recorded at fair market value and amortized into salary expense on a straight line basis over the vesting period.

Restricted stock awards granted during the past two years include:

Grant Year	Shares		Average Grant Date Fair Value
2008		22,600	$	6.28
2007		19,549	$	12.55

Compensation expense related to the restricted stock awards totaled $198 thousand in 2008 and $180 thousand in 2007.   As of December 31, 2008, there was approximately $345 thousand of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s stock incentive plans.  That cost is expected to be recognized over a weighted average period of 2.2 years.

As of December 31, 2008, 121,551 shares of restricted stock were reserved for issuance, of which 74,998 shares are outstanding, 2,045 shares were issued and 44,508 shares are available for grant.

The following table summarizes nonvested restricted stock activity for the twelve months ended December 31, 2008:

	Shares			Average Grant Date Fair Value
Nonvested restricted stock at December 31, 2007		44,614		$	12.30
Granted		22,600			6.28
Vested		(13,900	)		12.14
Forfeited		(2,890	)		10.46
Nonvested restricted stock at December 31, 2008		50,424		$	9.76

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20. Fair Value of Financial Instruments

Fair Value Measurement

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated, or generally unobservable inputs.  The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  Based on the observability of the inputs used in valuation techniques, the Company is required to provide the information according to the fair value hierarchy.  The fair value hierarchy ranks the quality and reliability of the information used to determine fair values.  Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

·   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

·   Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

·   Quoted prices for similar assets or liabilities in active markets.

·   Quoted prices for identical or similar assets or liabilities in inactive markets.

·   Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

·   Generally, this includes U.S. Government and agency mortgage-backed securities, corporate debt securities, derivative contracts and loans held for sale.

Level 3 Inputs

·   Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

·   These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value:

Securities Available for Sale

The fair value of available for sale securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers.  If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

SBA Servicing Rights

SBA servicing rights do not trade in an active, open market with readily observable prices.  The Company estimates the fair value of SBA servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.  The fair value of SBA servicing rights as of December 31, 2008 was determined using a discount rate of 15 percent, constant prepayment rates of 15 to 18 CPR, and interest strip multiples ranging from 2.08 to 3.80, depending on each individual credit.  Due to the nature of the valuation inputs, SBA servicing rights are classified as Level 3 assets.

Interest Rate Swap Agreements

Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of Level 1 markets.  These markets do, however, have comparable, observable inputs in which an alternative pricing source values these assets or liabilities in order to arrive at a fair value.  The fair values of our interest swaps are measured based on the difference between the yield on the existing swaps and the yield on current swaps in the market (i.e. The Yield Book); consequently, they are classified as Level 2 instruments.

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The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Securities available for sale	$	38,915	$	78,433	$	-	$	117,348
SBA servicing assets		-		-		1,503		1,503
Total		38,915		78,433		1,503		118,851
Financial Liabilities:
Interest rate swap agreements		-		1,013		-		1,013
Total	$	-	$	1,013	$	-	$	1,013

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

(In thousands)	Securities Available for Sale			SBA Servicing Assets
Beginning balance January 1, 2008	$	2,711		$	2,056
Total net gains (losses) included in:
Net income		-			-
Other comprehensive income		(851	)		-
Purchases, sales, issuances and settlements, net		-			(553	)
Transfers in and/or out of Level 3		(1,860	)		-
Ending balance December 31, 2008	$	-		$	1,503

There were no gains and losses (realized and unrealized) included in earnings for assets and liabilities held at December 31, 2008.

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the FAS 157 hierarchy as of December 31, 2008, for which a nonrecurring change in fair value has been recorded during the twelve months ended December 31, 2008.

(In thousands)	Level 1		Level 2		Level 3		Total			Total fair value loss during year ended  December 31, 2008
Financial Assets:
SBA loans held for sale	$	-	$	22,733	$	-	$	22,733	$	-
Impaired loans		-		-		10,326		10,326		643

SBA Loans Held for Sale

The fair value of SBA loans held for sale was determined using a market approach that includes significant other observable inputs (Level 2 Inputs).  The Level 2 fair values were estimated using quoted prices for similar assets in active markets.

Impaired Loans

The fair value of impaired collateral dependent loans is derived in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan.  Fair value is determined based on the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. 

 The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets.  The valuation allowance for impaired loans at December 31, 2008 was $1.0 million.  During the twelve months ended December 31, 2008, the valuation allowance for impaired loans increased $643 thousand from $372 thousand at December 31, 2007.

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Fair Value of Financial Instruments (SFAS 107 Disclosure)

SFAS 107, Disclosures About Fair Value of Financial Instruments (“SFAS 107”), requires the disclosure of the estimated fair value of financial instruments, including those financial instruments for which the Company did not elect the fair value option. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above.

The following methods and assumptions were used to estimate the fair value of other 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

The fair value of securities is determined in the manner previously discussed above.

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, except for previously discussed impaired loans.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is carried at cost.

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.

Borrowed Funds & Subordinated Debentures

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Standby Letters of Credit

At December 31, 2008, the Bank had standby letters of credit outstanding of $4.5 million, as compared to $3.9 million at December 31, 2007.  The fair value of these commitments is nominal.

The table below presents the estimated fair values of the Company’s financial instruments as of December 31, 2008 and 2007:

	2008				2007
(In thousands)	Carrying  Amount		Estimated  Fair Value		Carrying  Amount		Estimated Fair Value
Financial assets:
Cash and Federal funds sold	$	34,431	$	34,431	$	36,312	$	36,312
Securities available for sale		117,348		117,348		64,855		64,855
Securities held to maturity		32,161		30,088		33,736		33,639
Loans, net of allowance for possible loan losses		675,620		696,966		581,749		581,502
Federal Home Loan Bank stock		4,857		4,857		4,395		4,395
SBA servicing assets		1,503		1,503		2,056		2,056
Accrued interest receivable		4,712		4,712		3,994		3,994
Financial liabilities:
Deposits		707,117		706,475		601,268		589,607
Borrowed funds and subordinated debentures		120,465		130,217		100,465		101,898
Accrued interest payable		805		805		635		635
Interest rate swap agreements		1,013		1,013		23		23

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

Balance Sheets	December 31,
(In thousands)	2008		2007
Assets:
Cash	$	6,094	$	433
Securities available for sale		94		216
Capital note due from Bank		8,500		8,500
Investment in subsidiaries		68,810		53,366
Other assets		862		469
Total Assets	$	84,360	$	62,984
Liabilities & Shareholders’ Equity:
Other liabilities	$	1,092	$	259
Other borrowings		15,465		15,465
Shareholders’ Equity		67,803		47,260
Total Liabilities & Shareholders’ Equity	$	84,360	$	62,984

Statements of Income	December 31,
(In thousands)	2008			2007
Interest income	$	764		$	1,321
Interest expense		867			1,724
Net interest expense		(103	)		(403	)
Net security (losses) gains		(66	)		22
Other expenses		40			39
Loss before income tax benefit and equity in undistributed income of subsidiary	$	(209	)	$	(420	)
Income tax benefit		(68	)		(143	)
Loss before equity in undistributed income of subsidiary	$	(141	)	$	(277	)
Equity in undistributed income of subsidiary		2,071			5,002
Net income	$	1,930		$	4,725

Statements of Cash Flows	December 31,
(In thousands)	2008			2007
Operating Activities:
Net income	$	1,930		$	4,725
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiary		(2,071	)		(5,002	)
Losses (gains) on sales of securities available for sale		66			(22	)
Decrease in other assets		-			62
Increase (decrease) in other liabilities		98			(421	)
Net cash provided by (used in) operating activities		23			(658	)
Investing Activities:
Sales and maturities of securities available for sale		13			108
Purchases of securities available for sale		-			(59	)
Dividend from Bank		725			1,000
Repayment of Capital Note to Bank		-			6,000
Net cash provided by investing activities		738			7,049
Financing Activities:
Redemption of subordinated debentures		-			(9,000	)
Proceeds from issuance of preferred stock		18,032			-
Capital issued to Bank		(15,000	)		-
Warrants issued to U.S. Treasury		2,617			-
Proceeds from issuance of common stock, net		260			1,119
Purchase of common stock, net		-			(3,927	)
Cash dividends on common stock		(1,009	)		(1,022	)
Net cash provided by (used in) financing activities		4,900			(12,830	)
Net increase (decrease) in cash and cash equivalents		5,661			(6,439	)
Cash, beginning of year		433			6,872
Cash, end of year	$	6,094		$	433
Supplemental disclosures:  Interest paid	$	869		$	1,690

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22. Other Comprehensive Income (Loss)

(In thousands)

Net unrealized gains (losses) on securities	Pretax			Tax			After-tax
Balance at December 31, 2006	$	-		$	-		$	(824	)
Unrealized holding gains on securities arising during the period		(8	)		24			(32	)
Less:  Reclassification adjustment for losses included in net income		(571	)		(191	)		(380	)
Net unrealized gains on securities arising during the period		563			215			348
Balance at December 31, 2007							$	(476	)
Unrealized holding losses on securities arising during the period		(3,248	)		(720	)		(2,528	)
Less:  Reclassification adjustment for losses included in net income		(1,918	)		(642	)		(1,276	)
Net unrealized losses on securities arising during the period		(1,330	)		(78	)		(1,252	)
Balance at December 31, 2008							$	(1,728	)
Net unrealized losses on cash flow hedges	Pretax			Tax			After-tax
Balance at December 31, 2006	$	-		$	-		-
Unrealized holding losses arising during the period		(23	)		(9	)		(14	)
Balance at December 31, 2007							$	(14	)
Unrealized holding losses arising during the period		(991	)		(377	)		(614	)
Balance at December 31, 2008							(628		)

Two securities with a market value of $1.9 million were transferred from the available for sale category to held to maturity during the third quarter of 2008, consistent with the Company’s intent and ability to hold these securities until maturity.  Unrealized losses at the date of transfer amounted to $1.1 million and continue to be reported in accumulated other comprehensive income, with amortization over the estimated remaining life of the securities.

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Quarterly Financial Information (Unaudited)

The following quarterly financial information for the years ended December 31, 2008 and 2007 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.

(In thousands, except per share data)
2008	March 31		June 30		September 30			December 31
Total interest income	$	12,635	$	12,267	$	12,965		$	12,898
Total interest expense		6,000		5,429		5,883			6,162
Net interest income		6,635		6,838		7,082			6,736
Provision for loan losses		450		650		2,100			1,300
Net interest income after provision for loan losses		6,185		6,188		4,982			5,436
Total noninterest income		1,455		1,028		(344	)		555
Total noninterest expense		5,770		5,617		5,779			5,773
Net income before tax		1,870		1,599		(1,141	)		218
Income tax provision		626		495		(139	)		(366	)
Net income		1,244		1,104		(1,002	)		584
Basic income per common share	$	0.18	$	0.16	$	(0.14	)	$	0.07
Diluted income per common share	$	0.17	$	0.15	$	(0.14	)	$	0.07

(In thousands, except per share data)
2007	March 31		June 30		September 30		December 31
Total interest income	$	11,702	$	11,975	$	12,566	$	12,657
Total interest expense		5,683		5,888		6,593		6,310
Net interest income		6,019		6,087		5,973		6,347
Provision for loan losses		200		350		450		550
Net interest income after provision for loan losses		5,819		5,737		5,523		5,797
Total noninterest income		1,679		1,748		1,460		1,053
Total noninterest expense		5,417		5,267		5,501		5,928
Net income before tax		2,081		2,218		1,482		922
Income tax provision		630		676		430		242
Net income		1,451		1,542		1,052		680
Basic income per common share	$	0.20	$	0.21	$	0.15	$	0.10
Diluted income per common share	$	0.19	$	0.20	$	0.14	$	0.09

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Selected Consolidated Financial Data

(In thousands)

At or for the years ended December 31,
	2008			2007			2006			2005			2004
Selected Results of Operations
Interest income	$	50,765		$	48,900		$	43,177		$	33,837		$	26,166
Interest expense		23,474			24,474			19,432			11,603			7,008
Net interest income		27,291			24,426			23,745			22,234			19,158
Provision for loan losses		4,500			1,550			1,550			1,850			1,175
Noninterest income		2,694			5,940			7,638			8,190			7,629
Noninterest expense		22,939			22,113			21,045			18,676			17,230
Provision for income taxes		616			1,978			2,943			3,688			3,052
Net income		1,930			4,725			5,845			6,210			5,330
Per Share Data
Net income per common share (basic)	$	0.26		$	0.65		$	0.81		$	0.88		$	0.76
Net income per common share (diluted)		0.25			0.63			0.77			0.83			0.71
Book value per common share		6.99			6.70			6.34			5.68			5.10
Market value per common share		3.90			8.10			13.34			12.10			10.53
Cash dividends declared on common shares		0.10			0.19			0.18			0.16			0.12
Selected Balance Sheet Data
Assets	$	898,310		$	752,196		$	694,106		$	614,172		$	515,417
Loans		685,946			590,132			507,690			448,567			373,580
Allowance for loan losses		10,326			8,383			7,624			6,892			5,856
Securities		149,509			98,591			105,457			104,160			100,357
Deposits		707,117			601,268			566,465			521,860			433,898
Borrowed funds and subordinated debentures		120,465			100,465			79,744			49,279			44,279
Shareholders’ equity		67,803			47,260			46,228			40,929			35,868
Common shares outstanding		7,119			7,063			7,296			7,206			7,023
Performance Ratios
Return on average assets		0.23	%		0.66	%		0.90	%		1.10	%		1.10	%
Return on average equity		3.72			10.11			13.56			16.29			16.32
Efficiency ratio		71.90			71.48			67.21			61.53			64.51
Net interest spread		3.13			3.07			3.33			3.74			3.77
Net interest margin		3.51			3.62			3.87			4.17			4.18
Asset Quality Ratios
Allowance for loan losses to loans		1.51	%		1.42	%		1.50	%		1.54	%		1.57	%
Allowance for loan losses to nonperforming loans		64.06			153.49			85.58			158.04			143.14
Nonperforming loans to total loans		2.35			0.93			1.75			0.97			1.10
Nonperforming assets to total loans and OREO		2.45			0.94			1.80			1.01			1.19
Net charge-offs to average loans		0.40			0.14			0.17			0.20			0.19
Capital Ratios – Company
Leverage ratio		9.54	%		8.25	%		9.08	%		8.27	%		9.09	%
Tier I risk-based capital ratio		12.02			9.81			10.80			9.98			11.14
Total risk-based capital ratio		13.27			11.06			13.60			11.23			12.39
Capital Ratios – Bank
Leverage ratio		7.88	%		7.06	%		7.20	%		7.01	%		7.53	%
Tier I risk-based capital ratio		9.93			8.39			8.55			8.51			9.22
Total risk-based capital ratio		12.41			11.00			12.38			10.97			11.95

All share amounts have been adjusted for the 5% stock distributions paid on June 27, 2008, June 29, 2007, June 30, 2006, June 30, 2005, and June 30, 2004.

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EX-21

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

 The Registrant has three subsidiaries, Unity Bank, Unity (NJ) Statutory Trust II and Unity (NJ) Statutory Trust III.  Unity Bank has three subsidiaries, Unity Investment Services, Inc., Unity Participation Company, Inc. and Unity Financial Services, Inc.

EX-23.1

EXHIBIT 23.1

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. 333-134360, 333-64612, 333-64614, 333-20687, 333-105045, and 333-121409 on Form S-8 of Unity Bancorp, Inc., of our report dated March 19, 2009, relating to the audit of the 2008 consolidated financial statements of Unity Bancorp, Inc., which appear in the Annual Report to Shareholders, which report is incorporated by reference in the Annual Report on Form 10-K of Unity Bancorp, Inc. for the year ended December 31, 2008.

McGladrey & Pullen, LLP

Blue Bell, Pennsylvania

March 19, 2009

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)           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

d)           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.

Dated:  March 19, 2009          

/s/ James A. Hughes

James A. Hughes

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)           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

d)           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.

Dated:  March 19, 2009

/s/ Alan J. Bedner

Alan J. Bedner

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, 2008 (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 19, 2009              

/s/ James A. Hughes

James A. Hughes

President and Chief Executive Officer

Dated:  March 19, 2009              

/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.