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Part 1.-Consolidated Financial Information

Item 1.-Consolidated Financial Statements (unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

See Accompanying Notes to the Unaudited Consolidated Financial Statements

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Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

(unaudited)

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

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Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

September 30, 2004

NOTE 1. Summary of Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of Unity Bancorp, Inc. (the “Parent Company”) and its wholly-owned subsidiaries, Unity (NJ) Statutory Trust I and Unity Bank (the “Bank”, or when consolidated with the Parent Company, the “Company”), reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation of interim results.  Unity Investment Services, Inc. a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.  All significant intercompany balances and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior year amounts to conform to the current year presentation.  The financial information has been prepared in accordance with accounting principles generally accepted in the United States of America and has not been audited.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition and revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses.  Management believes that the allowance for loan losses is adequate.  While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market. The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”).  The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results, which may be expected for the entire year.  As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc. and its consolidated subsidiaries, Unity Bank and Unity (NJ) Statutory Trust I, depending on the context. Interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Stock Based Compensation

The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. No stock-based compensation cost is reflected in net income, as all options granted under those plans have an exercise price equal to the market value of their underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” as amended, to stock based compensation.   On May 27, 2004 the Company announced a 5% stock distribution payable on June 30, 2004 to all shareholders of record as of June 15, 2004 and accordingly, all share amounts have been restated to include the effect of the distribution.

Proforma

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NOTE 2. Litigation

On February 20, 2003, the Bank was named as a defendant in a lawsuit initiated by Commerce Bank, N.A. and Commerce Bank/Shore, N.A. in the Superior Court of New Jersey, Essex County alleging that the Bank, as payor of certain checks written against certain deposit accounts held at the Bank, improperly refused to honor approximately $4,000,000 of checks. Commerce Bank, N.A. and Commerce Bank/Shore, N.A. have petitioned the Superior Court of New Jersey, Essex County for compensatory and consequential damages of $4,028,584, interest, attorney’s fees and costs of suit.  On March 12, 2004, the aforesaid Court granted Commerce Bank, N.A. partial summary judgment in the amount of $1,800,000 of its aforesaid claim.  The Bank has filed an appeal of thepartial summary judgment entered in favor of Commerce Bank.  The Bank has a deposit account set aside to offset the aforesaid mentioned claim.  The Bank has reviewed the relevant circumstances and believes that it acted properly and that the outcome of the lawsuit will not have a material impact on the consolidated financial position of the Company.

During the third quarter of 2004, the Company entered into a settlement agreement with its former Chairman Robert J. Van Volkenburgh thereby settling the pending litigation initiated by Mr. Van Volkenburgh.  Effective immediately upon the execution of the agreement, the parties exchanged general releases and dismissed the litigation with prejudice.  The Company’s payment of the settlement amount called for by the settlement agreement requires the approval of the Federal Deposit Insurance Corporation (“FDIC”) under applicable regulations.  If the FDIC approves the settlement agreement, the Company will pay $275 thousand, net of insurance proceeds. The charge for such settlement agreement, recognized in the third quarter of 2004, reduced net income by approximately $165 thousand or $0.03 per diluted share.

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 the results of the operation of the Company.

NOTE 3. Earnings per share

The following is a reconciliation of the calculation of basic and dilutive earnings per share.  Basic net income per common share is calculated by dividing net income to common shareholders by the weighted average common shares outstanding during the reporting period.  Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period utilizing the Treasury stock method.  On May 27, 2004 the Company announced a 5% stock distribution payable on June 30, 2004 to all shareholders of record as of June 15, 2004 and accordingly, all share amounts have been restated to include the effect of the distribution.  The distribution was recorded at fair value to the extent of available retained earnings.

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ITEM 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2003 consolidated financial statements and notes therein.  When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability.  This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”.  Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates.  These factors include: changes in general, economic, and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Unity Bancorp, Inc.’s interest rate spread or other income anticipated from operations and investments.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is incorporated in New Jersey and is a bank holding company 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”) was granted a charter by the New Jersey Department of Banking and Insurance and commenced operations on March 13, 1991.  The Bank provides a full range of commercial and retail banking services through 13 branch offices located in Hunterdon, Somerset, Middlesex, and Union counties in New Jersey.  These services include the acceptance of demand, savings, and time deposits; extension of consumer, real estate, Small Business Administration (“SBA”) and other commercial credits, as well as personal investment advisory services.  Unity Investment Services, Inc. is also a wholly owned subsidiary of the Bank, used to hold part of the Bank’s investment portfolio.

In addition, Unity (NJ) Statutory Trust I is a statutory Business Trust and wholly-owned subsidiary of Unity Bancorp, Inc.  On September 26, 2002, the trust issued $9.0 million of capital securities to investors.  These floating rate securities are treated as subordinated debentures on the financial statements; however, they qualify as Tier I Capital.  In accordance with the Company’s adoption of Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company de-consolidated the accounts and related activity of Unity (NJ) Statutory Trust I.  See Recent Accounting Pronouncements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for additional information.

Net income for the three months ended September 30, 2004, was $1.4 million, an increase of $129 thousand or 9.9 percent, compared to a net income of $1.3 million for the same period in 2003.  Net income increased to $0.25 per basic share and $0.23 per diluted common share for the third quarter of 2004 compared to $0.23 per basic share and $0.22 per diluted common share for the same period in 2003.  All share amounts have been restated to include the effect of the 5 percent stock distribution paid on June 30, 2004 to all shareholders of record as of June 15, 2004.  The improved operating results for the three months ended September 30, 2004 were primarily the result of increased net interest income and a lower provision for loan losses, offset in part by increased operating expenses and reduced non-interest income compared to the prior year’s period.

For the nine months ended September 30, 2004, net income was $4.0 million, an increase of $303 thousand or 8.3 percent, compared to a net income of $3.7 million for the same period in 2003.  Net income per basic share increased to $0.69 and $0.65 per diluted common share for the nine months ended September 30, 2004 compared to $0.65 per basic share and $0.62 per diluted common share for the same period in 2003.  The improved operating results for the nine months ended September 30, 2004 were primarily the result of increased net interest income and a reduced provision for loan losses, offset in part by increased operating expenses and reduced non-interest income compared to the prior year’s period.

The following are key performance indicators for the three month and nine month periods ended September 30, 2004, and 2003.

*The efficiency ratio is calculated by taking total non-interest expenses, divided by total interest income plus total non-interest income less securities gains.

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Net interest income totaled $5.0 million for the quarter ended September 30, 2004, an increase of $513 thousand, or 11.5 percent, compared to $4.47 million from the same period a year ago.  Net interest margin (net interest income as a percentage of average interest earning assets) increased 12 basis points to 4.30 percent for the current quarter compared to 4.18 percent for the same period a year ago.  The net interest spread (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) was 3.88 percent for the three months ended September 30, 2004 compared to 3.75 percent for the same period a year ago.  For the nine months ended September 30, 2004, net interest income was $14.1 million, an increase of $843 thousand or 6.4 percent, compared to $13.2 million during the same period a year ago.  The net interest margin declined 10 basis points to 4.15 percent for the nine months ended September 30, 2004 compared to the same period a year ago.  The lower net interest margin for the nine months ended September 30, 2004 was primarily the result of higher yielding assets re-pricing in a lower rate environment along with holding higher levels of lower yielding federal funds sold.

Non-interest income was $1.99 million for the three months ended September 30, 2004, a decrease of $140 thousand from the three months ended September 30, 2003.  For the nine months ended September 30, 2004, non-interest income fell $459 thousand or 7.4 percent from the nine month period ended September 30, 2003 to $5.76 million.  These declines were due to lower levels of overdraft fees and loan service fee income.

Non-interest expense was $4.36 million for the three months ended September 30, 2004, an increase of $189 thousand or 4.5 percent compared to $4.17 million for the same period a year ago. The increase was due primarily to the settlement agreement entered into with the Company’s former Chairman, Robert J. Van Volkenburgh.  During the third quarter of 2004, the Company entered into a settlement agreement with its former Chairman Robert J. Van Volkenburgh.  The agreement will, upon completion of review and approval of the Federal Deposit Insurance Corporation (“FDIC”), settle the pending litigation initiated by Mr. Van Volkenburgh. Under the proposed settlement agreement, the Company, should the FDIC approve the proposed settlement agreement, will pay $275 thousand, net of insurance proceeds. The charge for such settlement agreement, recognized in the third quarter, reduced net income by approximately $165 thousand or $0.03 per diluted share.

The increase from the prior year’s comparable quarter was partially offset by decreased compensation and benefits, professional services, loan servicing costs, processing and communication costs and advertising expense.    For the nine-month period ended September 30, 2004, non-interest expense increased $355 thousand or 2.9 percent from the nine-month period ended September 30, 2003 to $12.8 million.  The increase was due primarily to the settlement agreement noted above, increased compensation, occupancy and furniture and equipment costs offset in part by lower processing and communication, professional services, advertising, and loan servicing costs.

During the third quarter of 2004, the Company recorded income tax expense of $852 thousand compared to $747 thousand for the same period a year ago.  Year to date, the Company has recorded income tax expense of $2.3 million, an increase of $126 thousand compared to the first nine months of 2003.  The current 2004 tax provision represents an effective tax rate of approximately 36.0 percent as compared to 37.0 percent for 2003.

Net Interest Income

Tax-equivalent interest income was $6.74 million for the three months ended September 30, 2004, an increase of $573 thousand or 9.3 percent, compared to $6.16 million a year ago.  Of the $573 thousand increase in interest income, $529 thousand is attributable to an increase in the volume of earning assets, while $44 thousand is attributable to an increase in the yield on earning assets.  This increase in interest income is primarily attributed to strong loan growth, higher levels of security investments and a lower average balance of federal funds sold and interest bearing deposits with banks.  During the third quarter of 2004, interest-earning assets averaged $464.5 million, an increase of $35.1 million, or 8.2 percent, compared to the prior year period. The increase in average earning assets consisted of a $25.9 million increase in average securities and a $20.5 million increase in average loans, partially offset by an $11.4 million decrease in average federal funds sold and interest bearing deposits with banks.  The rate earned on interest-earning assets increased 7 basis points to 5.78 percent for the three months ended September 30, 2004, compared to the same period a year ago due to a higher yielding securities portfolio.  The rate earned on average loans fell 14 basis points to 6.33 percent for the quarter from 6.47 percent for the same period a year ago.  The rate earned on the securities portfolio increased 57 basis points to 4.24 percent for the quarter ended September 30, 2004 compared to 3.67 percent a year ago while the rate earned on federal funds sold and interest-bearing deposits increased 77 basis points to 1.90 percent during the same period.

Interest expense was $1.74 million for the three months ended September 30, 2004, an increase of $70 thousand or 4.2 percent, compared to $1.67 million for the same period a year ago.  The rate paid on interest bearing liabilities decreased 6 basis points to 1.90 percent for the three months ended September 30, 2004 from 1.96 percent in the same period in 2003.  The increased interest expense was primarily due to higher balances of interest-bearing liabilities offset in part by lower rates paid on deposit products.  Interest-bearing liabilities averaged $364.2 million for the three months ended September 30, 2004, an increase of $26.1 million, or 7.7 percent, compared to $338.0 million for the prior year period.  Total interest-bearing deposits were $332.8 million on average, an increase of $16.3 million or 5.1 percent compared to $316.6 million from the same period a year ago.  The increase in average interest-bearing deposits was as a result of increases in all categories of deposits with the majority of the growth coming in savings and interest-bearing checking accounts.   During the quarter, average borrowed funds increased $9.9 million to $31.3 million, while the related cost declined 136 basis points due to the addition of a $10 million repurchase agreement at 2.78 percent

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during the first quarter of 2004.  Of the $70 thousand increase in interest expense, $171 thousand is related to an increase in average interest-bearing liabilities partially offset by a $101 thousand decrease due to a decline in yield.

Tax-equivalent net interest income was $4.99 million for the three months ended September 30, 2004, an increase of $503 thousand, or 11.2 percent, compared to $4.49 million from the same period a year ago.  Net interest margin (net interest income as a percentage of average interest earning assets) widened 12 basis points to 4.30 percent compared to 4.18 percent for the same period a year ago.  The widened net interest margin was primarily the result of a higher volume of loans and securities combined with a larger volume of low-cost savings and interest-bearing demand deposits.  The net interest spread (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) was 3.88 percent for the three months ended September 30, 2004 compared to 3.75 percent for the same period a year ago.

Tax-equivalent interest income was $19.19 million for the nine months ended September 30, 2004, an increase of $542 thousand or 2.9 percent, compared to $18.65 million for the nine months ended September 30, 2003.  The increase in interest income was attributed to the growth in the securities and loan portfolios and the increase in the yield on the securities portfolio, partially offset by the reduction in the yield on the loan portfolio.  Of the $542 thousand increase in interest income, $1.2 million is attributable to an increase in the volume of earning assets, offset in part by a decrease of $682 thousand due to an decrease in the yield on earning assets.  During the first nine months of 2004, interest-earning assets averaged $454.5 million, an increase of $38.0 million, or 9.1 percent, compared to the prior year period.  The increase in average earning assets consisted of an $18.4 million increase in average securities, a $14.5 million increase in average loans and a $5.2 million increase in average federal funds sold and interest-bearing deposits with banks.  The rate earned on interest-earning assets decreased 33 basis points to 5.64 percent for the nine months ended September 30, 2004, compared to the same period a year ago due to the re-pricing of assets.  The rate earned on average loans fell 34 basis points to 6.28 percent for the period, compared to 6.62 percent for the same period a year ago, while the rate earned on federal funds sold and interest-bearing deposits decreased 5 basis points to 1.17 percent during the same period.  The rate earned on the securities portfolio increased to 4.20 percent from 4.07 percent, respectively for the nine months ended September 30, 2004 and 2003, respectively.

Interest expense was $5.05 million for the nine months ended September 30, 2004, a decrease of $326 thousand or 6.1 percent, compared to $5.37 million for the same period a year ago.  Such decrease in interest expense was due to the Company reducing the amount paid on interest-bearing deposits and borrowing additional funds at reduced rates.  The rate paid on interest- bearing liabilities decreased 28 basis points to 1.88 percent for the nine months ended September 30, 2004, from 2.16 percent in the same period in 2003.  The reduced interest expense was primarily due to lower rates paid on interest-bearing deposits, partially offset by a higher volume of interest-bearing liabilities.  Interest-bearing liabilities averaged $358.9 million for the nine months ended September 30, 2004, an increase of $25.8 million, or 7.7 percent, compared to $333.1 million for the prior year period.  Total interest-bearing deposits were $331.0 million on average, an increase of $19.6 million or 6.3 percent compared to $311.4 million from the same period a year ago.  The increase in average interest-bearing deposits was as a result of increases in all categories of deposits with the majority of the growth coming in interest-bearing checking accounts.   For the nine months ended September 30, 2004, average borrowed funds increased $6.2 million to $27.9 million, while the related cost declined 135 basis points due to the addition of a $10 million repurchase agreement at 2.78 percent.  Of the $326 thousand decline in interest expense, $785 thousand is due to a decline in rate, partially offset by a $459 thousand increase related to an increase in average interest-bearing liabilities.

Tax-equivalent net interest income was $14.1 million for the nine months ended September 30, 2004, an increase of $868 thousand, or 6.5 percent, compared to $13.3 million from the same period a year ago.  Net interest margin narrowed 10 basis points to 4.15 percent, compared to 4.25 percent for the same period a year ago.  The weakened net interest margin was primarily the result of the reduction in yield on the loan portfolio, and a higher volume of federal funds and interest-bearing deposits with banks.  The net interest spread was 3.76 percent for the nine months ended September 30, 2004 compared to 3.81 percent for the same period a year ago.

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Unity Bancorp, Inc.

Consolidated Average Balance Sheets with resultant Interest and Rates

(unaudited)

(Tax-equivalent basis, dollars in thousands)

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