2

Part 1.-Consolidated Financial Information

Item 1.-Consolidated Financial Statements (unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

See Accompanying Notes to the Consolidated Financial Statements

3

Unity Bancorp

Consolidated Statements of Income

(unaudited)

See Accompanying Notes to the Unaudited Consolidated Financial Statements

4

Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended September 30, 2006 and 2005

(unaudited)

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

5

Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

(unaudited)

See Accompanying Notes to the Consolidated Financial Statements.

6

Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

September 30, 2006

 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 subsidiary, Unity Bank (the “Bank”, or when consolidated with the Parent Company, the “Company”), and 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.  Unity Participation Company, Inc. a wholly-owned subsidiary of the Bank is used to hold part of the Bank’s loan portfolio.  All significant inter-company balances and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior period amounts to conform to the current year presentation.  The financial information has been prepared in accordance with U.S. generally accepted accounting principles 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, 2006 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 subsidiary, Unity Bank, 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, 2005, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Stock Based Compensation

The Company has incentive and non-qualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors.  The period during which the option is vested is generally 3 years, but no option may be exercised after 10 years from the date of the grant.  The exercise price of each option is the market price on the date of grant.  As of September 30, 2006, 1,379,164 shares have been reserved for issuance upon the exercise of options, 738,342 option grants are outstanding, 384,932 option grants have been exercised, forfeited or expired leaving 255,890 shares available for grant.

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.  Restricted stock awards granted during the nine months ended September 30, 2006 and 2005, totaled 9,743 shares and 0 shares, respectively.  The weighted average fair market value per share for these grants was $14.27.  These shares vest over a period of 4 years and are recognized as compensation to the employees over the vesting period.  Compensation expense related to the restricted stock awards totaled $63 thousand and $15 thousand for the nine months ended September 30, 2006 and 2005, respectively.  For the quarters-ended, September 30, 2006 and 2005, compensation expense related to restricted stock totaled $22 thousand and $5 thousand respectively.  As of September 30, 2006, 110,250 shares of restricted stock were reserved for issuance, of which 36,576 shares are outstanding and 73,674 shares are available for grant.

As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (Statement 123R) using the “modified prospective application.”  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.  The provisions apply to all awards granted after the required effective date including existing awards not vested, modified, repurchased or canceled.  Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. No stock-based compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of their underlying common stock on the date of grant.

7

The following table represents the impact of the adoption of SFAS 123R on the Company’s financial statements for the quarter ended September 30, 2006.

The following table represents the impact of the adoption of SFAS 123R on the Company’s financial statements for the nine months ended September 30, 2006.

The following table illustrates the effect on net income and earnings per share for the three and nine month periods ended September 30, 2005 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.

Proforma

During the nine months ended September 30, 2006 and 2005, the Company granted 25,750 options at a weighted average exercise price of $14.15 per share and 8,138 options at a weighted average exercise price of $11.21 per share, respectively.  The Company used the Black Scholes option-pricing model to calculate the $3.44 and $2.51 weighted average fair value of these options, 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:

8

Transactions under the Company’s stock options plans during the nine months ended September 30, 2006 are summarized as follows:

As of September 30, 2006, there was approximately $89 thousand of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock incentive plans.  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 September 30, 2006:

The total intrinsic value (spread between the market value and exercise price) of the stock options exercised during the nine months ended September 30, 2006 and 2005 was $374 thousand and $275 thousand, respectively.   The total intrinsic value of the stock options exercised during the quarters ended September 30, 2006 and 2005 was $170 thousand and $8 thousand, respectively.

On June 30, 2006, the Company paid a 5 percent stock distribution to all shareholders of record as of June 16, 2006 and accordingly, all share amounts have been restated to include the effect of the distribution.

NOTE 2. Litigation

From time to time, the Company is subject to 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 diluted 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.

9

* Non-interest expense divided by net interest income plus non-interest income less securities gains

NOTE 4. Recent accounting pronouncements

In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.”  SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, allows an entity to re-measure and fair value a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation from the host, if the holder irrevocably elects to account for the whole instrument on a fair value basis.  Subsequent changes in the fair value would be recognized in earnings.  Statement 155 is effective for financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier adoption permitted.  The Company does not expect the adoption of Statement No. 155 to have a material impact on its financial statements.

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets.”   SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities.   SFAS No. 156 amends Statement 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable.  This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value.  An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value.  Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities.  By electing that option, an entity may simplify its accounting because this Statement permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period.  The Statement is effective in the first fiscal year beginning after September 15, 2006 with earlier adoption permitted.  The Company does not expect the adoption of Statement No. 156 to have a material impact on its financial statements.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”.  The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes”.  This Interpretation presents a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Interpretation is effective for fiscal years beginning after December 15, 2006.  The Company does not expect the adoption of Interpretation No. 48 to have a material impact on its financial statements.

In September 2006, the Securities and Exchange Commission (SEC) released SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 addresses how uncorrected errors in previous years should be considered when quantifying errors in current-year financial statements.  The SAB requires registrants to consider the effect of all carry over and reversing effects of prior-year misstatements when quantifying errors in current-year financial statements.   The SAB does not change the SEC staff’s previous guidance on evaluating the materiality of errors.  The SAB allows registrants to record the effects of adopting the guidance as a cumulative-effect adjustment to retained earnings.  This adjustment must be reported as of the beginning of the first fiscal year ending after November 15, 2006.  The Company does not expect the adoption of SAB 108 to have a material impact on its financial statements.

10

In September 2006, the FASB issued SFAS no. 157 “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  Accordingly, this Statement does not require any new fair value measurements.  The Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The Company does not expect the adoption of Statement No. 157 to have a material impact on its financial statements.

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 2005 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.  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 registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.  It’s 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 September 13, 1991.  The Bank provides a full range of commercial and retail banking services through 14 branch offices located in Hunterdon, Somerset, Middlesex, Union and Warren counties in New Jersey and a loan production office in Long Island, New York.  The Bank also expects to open its first branch in Pennsylvania in the fourth quarter. These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration 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 for holding and administering certain loan participations.

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 Company’s financial statements.  However, they qualify as Tier I Capital for regulatory capital compliance purposes.  In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust I.

Unity (NJ) Statutory Trust II is a statutory Business Trust and wholly owned subsidiary of Unity Bancorp, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. The floating rate securities are treated as subordinated debentures on the Company’s financial statements.   However, they qualify as Tier I Capital for regulatory capital compliance purposes.  In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of Unity (NJ) Statutory Trust II.

Earnings Summary

Net income for the three months ended September 30, 2006 and 2005 remained stable at $1.6 million.  During 2006, the Company reported increased net interest income, higher non-interest income and a lower provision for loan losses, offset in part by higher operating expenses.

Quarterly performance highlights include:

·      Earnings per basic share equaled $0.25 for the third quarter of 2006 and 2005.

·      Earnings per diluted share decreased to $0.23 for the third quarter of 2006 compared to $0.24 for the same period a year ago.

11

·      Return on average assets equaled 0.97 percent and 1.09 percent for each of the quarters ended September 30, 2006 and 2005, respectively.

·      Return on average common equity equaled 15.05 percent and 16.36 percent for the quarters ended September 30, 2006 and 2005, respectively.

·      The efficiency ratio equaled 65.48 percent for the third quarter of 2006 compared to 58.17 percent for the same period a year ago.

Net income for the nine months ended September 30, 2006 was $4.9 million, an increase of $465 thousand or 10.4 percent, compared to net income of $4.5 million for the same period in 2005.  This was the result of increased net interest income and a lower provision for loan losses, offset in part by lower non-interest income and higher operating expenses.

Year to date performance highlights include:

·      Earnings per basic share increased to $0.75 for the nine months ended September 30, 2006 compared to $0.70 for the same period in 2005.

·      Earnings per diluted share increased to $0.71 for the nine months ended September 30, 2006 compared to $0.66 for the same period a year ago.

·      Return on average assets equaled 1.02 percent and 1.08 percent for each of the nine months ended September 30, 2006 and 2005, respectively.

·      Return on average common equity equaled 15.54 percent and 15.82 percent for the nine months ended September 30, 2006 and 2005, respectively.

·      The efficiency ratio equaled 65.29 percent for the nine months ended September 30, 2006 compared to 62.16 percent for the same period a year ago.

During the first nine months of 2006, financial institutions continued to be pressured by a flat yield curve as the Federal Reserve Board raised short term rates four more times.  Since this rate cycle began in June 2004, the Federal Reserve raised short-term interest rates seventeen times for a total of 425 basis points.  This has resulted in the Federal Funds rate increasing from 1.00 percent to 5.25 percent while the Prime-lending rate increased from 4.00 percent to 8.25 percent.   Despite this challenging interest rate environment, the Company was able to grow net interest income due to strong growth in interest earning assets.  However, the flat yield curve and the competitive pricing of deposits in the New Jersey market place may put further pressure on the net interest margin in 2006 and 2007.

Net interest income, our largest component of operating income, increased $207 thousand or 3.6 percent to $5.9 million for the three months ended September 30, 2006 compared to the same period in 2005.  This increase was the result of a $71.6 million increase in average earning assets partially offset by a reduced net interest margin and spread.    Net interest margin (net interest income as a percentage of average interest earning assets) decreased 33 basis points to 3.79 percent for the current quarter compared to 4.12 percent for the same period a year ago.  Over the same period, net interest spread (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) decreased 43 basis points to 3.26 percent from 3.69 percent a year ago.  For the nine months ended September 30, 2006, net interest income was $18.0 million, an increase of $1.8 million or 10.8 percent, compared to $16.3 million during the same period a year ago.  The net interest margin decreased 20 basis points to 3.96 percent for the nine months ended September 30, 2006 compared to the same period a year ago and the net interest spread declined to 3.45 percent in the current period from 3.74 percent in the same period a year ago.

Non-interest income increased $111 thousand or 5.2 percent to $2.2 million for the three months ended September 30, 2006 compared to $2.1 million for the three months ended September 30, 2005.    This increase was due primarily to increased gains on the sale of Small Business Administration (“SBA”) loans, loan service and fee income and commercial loan referral fees, partially offset by decreased deposit service charges and gains on Mortgage loan sales.  For the nine months ended September 30, 2006, non-interest income was $5.9 million, a decrease of $226 thousand or 3.7 percent compared to $6.1 million during the same period a year ago.  This decrease was due primarily to decreased service and loan fee income and service charges on deposits, partially offset by increased gains on Mortgage loan sales, SBA loan sales and other loan sales.

Non-interest expense was $5.3 million for the three months ended September 30, 2006, an increase of $734 thousand or 16.0 percent compared to $4.6 million for the same period a year ago.   The quarter over quarter increase was due primarily to increased compensation and benefits, occupancy, furniture and equipment, professional services, loan servicing and processing and communications, partially offset by lower advertising expenses.  For the nine-month period ended September 30, 2006, non-interest expense increased $1.7 million or 12.3 percent to $15.6 million compared to the nine-month period ended September 30, 2005.  The year over year increase was due primarily to increased compensation and benefits, occupancy, furniture and equipment, professional services and processing and communications, partially offset by lower loan servicing and advertising expenses.

12

For the quarter ended September 30, 2006, the provision for income taxes was $844 thousand compared to $993 thousand for the same period a year ago. The provision for income taxes decreased $254 thousand to $2.5 million for the nine months ended September 30, 2006 compared to the same period a year ago.   The current 2006 tax provision represents an effective tax rate of approximately 33.5 percent as compared to 38.0 percent for the prior year. The lower effective tax rate for 2006 is related to a higher proportion of revenue being generated at a subsidiary with a lower effective tax rate. Management anticipates an effective rate of approximately 33.5 percent for the remainder of 2006.

Net Interest Income

Tax-equivalent interest income totaled $11.3 million for the three months ended September 30, 2006, an increase of $2.4 million or 26.8 percent, compared to $8.9 million a year ago.  Of the $2.4 million increase in interest income, $1.3 million is due to an increase in the volume of interest-earning assets, while $1.1 million is attributable to an increase in the yield on interest-earning assets. The average volume of interest-earning assets increased $71.6 million to $629.4 million at September 30, 2006 compared to $557.8 million at September 30, 2005.  This was due to a $61.0 million increase in average total loans plus a $6.2 million increase in average federal funds sold and interest bearing deposits and a $4.3 million increase in average total securities.  The impact of the higher interest rate environment in the third quarter of 2006 compared to a year ago was evident in the rates earned on variable rate instruments such as SBA loans, commercial loans and consumer home equity lines of credit, as well as federal funds sold and interest bearing deposits.  Key interest rate increases during the quarter included:

·      The average interest rate earned on federal funds sold and interest bearing deposits increased 222 basis points to 5.18 percent for the three months ended September 30, 2006 compared to 2.96 percent for the same period a year ago.

·      The average interest rate earned on SBA loans equaled 10.48 percent during the quarter, an increase of 151 basis points over the comparable quarter in 2005, due to the quarterly re-pricing of these loans with changes in the Prime rate.

·      The average interest rate earned on Consumer loans increased 122 basis points to 6.89 percent for the three months ended September 30, 2006 compared to 5.67 percent for the same period a year ago due to the re-pricing of Prime based home equity products.

·      The average interest rate earned on Commercial loans was 7.50 percent for the quarter, an increase of 54 basis points over the comparable quarter in 2005.

The higher interest rate environment also increased interest expense and the cost of funds.  Total interest expense was $5.3 million for the three months ended September 30, 2006, an increase of $2.2 million or 68.8 percent, compared to $3.1 million for the same period a year ago. Of the $2.2 million increase in interest expense, $1.3 million is due to an increase in the cost of funds while $823 thousand is related to an increase in average interest-bearing liabilities.  Quarter over quarter, average interest-bearing liabilities increased $75.7 million as average interest-bearing deposits increased $69.4 million and borrowed funds and subordinated debentures increased $6.3 million. Total interest-bearing deposits were $487.3 million on average, an increase of $69.4 million or 16.6 percent compared to $417.9 million for the same period a year ago.  The increase in average interest-bearing deposits was as a result of increases in the savings and time deposit categories, partially offset by a decline in interest-bearing checking accounts.   Average borrowed funds and subordinated debentures increased $6.3 million to $57.2 million as of September 30, 2006 due to the addition of $10 million in subordinated debentures at 159 basis points above the three-month Libor rate on July 24, 2006.   The rate paid on interest bearing liabilities increased 121 basis points to 3.87 percent for the three months ended September 30, 2006 from 2.66 percent in the same period in 2005.  The cost of interest-bearing deposits increased 125 basis points to 3.73 percent as the rates paid on all deposit products increased while the cost of borrowed funds and subordinated debentures increased 91 basis points to 5.12 percent.  The high cost of deposits in the NJ marketplace combined with a shift in our average deposit base from 35 percent interest bearing checking, 37 percent savings and 28 percent time deposits in the third quarter of 2005 to 24 percent, 39 percent and 37 percent in the third quarter of 2006, respectively, contributed to an increase in our cost of funds for the quarter.  The change in the deposit portfolio reflects promotion of the Company’s new variable rate savings product and the transfer of balances from interest bearing demand into the higher cost savings product.

Tax-equivalent net interest income increased $217 thousand to $5.97 million for the quarter ended September 30, 2006 compared to $5.75 million for the same period a year ago.  Net interest margin constricted 33 basis points to 3.79 percent compared to 4.12 percent for the same period a year ago.  The tighter net interest margin was primarily the result of the higher cost of funding. The net interest spread was 3.26 percent for the three months ended September 30, 2006 compared to 3.69 percent for the same period a year ago.

Tax-equivalent interest income totaled $32.0 million for the nine months ended September 30, 2006, an increase of $7.6 million or 31.0 percent, compared to $24.4 million a year ago.  Of the $7.6 million increase in interest income, $4.7 million is due to an increase in the volume of earning assets, while $2.9 million is attributable to an increase in the yield on interest-earning assets. The average volume of interest-earning assets increased $85.4 million to $608.3 million at September 30, 2006 compared to $522.9 million at September 30, 2005.  This was due to a $75.0 million increase in average total loans, a $9.6 million increase

13

in average federal funds sold and interest bearing deposits and an $806 thousand increase in average total securities.  Key interest rate increases during the nine months ended September 30, 2006 included:

·      The average interest rate earned on federal funds sold and interest bearing deposits increased 197 basis points to 4.75 percent for the nine months ended September 30, 2006 compared to 2.78 percent for the same period a year ago.

·      The average interest rate earned on SBA loans equaled 10.30 percent for the nine months ended September 30, 2006, an increase of 178 basis points over the comparable period in 2005, due to the quarterly re-pricing of these loans with changes in the Prime rate.

·      The average interest rate earned on Consumer loans increased 100 basis points to 6.69 percent for the nine months ended September 30, 2006 compared to 5.69 percent for the same period a year ago due to the re-pricing of Prime based home equity products.

·      The average interest rate earned on Commercial loans was 7.44 percent for the nine months ended September 30, 2006, an increase of 51 basis points over the comparable period in 2005.

Total interest expense was $13.9 million for the nine months ended September 30, 2006, an increase of $5.8 million or 71.6 percent, compared to $8.1 million for the same period a year ago. Of the $5.8 million increase in interest expense, $3.3 million is due to an increase in the cost of funds while $2.5 million is related to an increase in average interest-bearing liabilities.  Comparing the nine-month periods ended September 30, 2006 and 2005, average interest bearing liabilities increased $85.3 million in the current year as average interest bearing deposits increased $79.2 million and borrowed funds and subordinated debentures increased $6.1 million. Total interest-bearing deposits were $468.1 million on average, an increase of $79.2 million or 20.4 percent compared to $388.9 million from the same period a year ago.  The increase in average interest-bearing deposits was a result of increases in the savings and time deposit categories, partially offset by a decline in interest-bearing checking accounts.   Average borrowed funds increased $6.1 million to $51.9 million as of September 30, 2006 due to the addition of $10 million in subordinated debentures at 159 basis points above the three-month Libor rate on July 24, 2006. The rate paid on interest bearing liabilities increased 108 basis points to 3.57 percent for the nine months ended September 30, 2006 from 2.49 percent in the same period in 2005.  The cost of interest bearing deposits increased 114 basis points to 3.42 percent as the rates paid on all deposit products increased.  It is expected that the cost of deposits will continue to rise due to competitive pricing in the New Jersey marketplace. In addition, the mix of our average deposit base has shifted from 40 percent interest bearing checking, 32 percent savings and 28 percent time deposits in the nine months ended September 30, 2005 to 26 percent, 38 percent and 36 percent in the nine months ended September 30, 2006, respectively.   The cost of borrowed funds and subordinated debentures increased 59 basis points to 4.85 percent for the nine months ended September 30, 2006 compared to 2005.

Tax-equivalent net interest income increased $1.8 million to $18.0 million for the nine months ended September 30, 2006 compared to $16.3 million for the same period a year ago.  Net interest margin contracted 20 basis points to 3.96 percent compared to 4.16 percent for the same period a year ago.  The tighter net interest margin was primarily the result of the high cost of deposits in the New Jersey market place.  The net interest spread was 3.45 percent for the nine months ended September 30, 2006 compared to 3.74 percent for the same period a year ago.

14

Unity Bancorp, Inc.

Consolidated Average Balance Sheets with resultant Interest and Rates

(unaudited)

(Tax-equivalent basis, dollars in thousands)

15