0001104659-02-001016.txt : 20020415 0001104659-02-001016.hdr.sgml : 20020415 ACCESSION NUMBER: 0001104659-02-001016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITY BANCORP INC /DE/ CENTRAL INDEX KEY: 0000920427 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223282551 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12431 FILM NUMBER: 02590413 BUSINESS ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 BUSINESS PHONE: 9087307630 MAIL ADDRESS: STREET 1: 64 OLD HIGHWAY 22 CITY: CLINTON STATE: NJ ZIP: 08809 10-K 1 j3027_10k.htm 10-K Draft 10-k (40085633.DOC;1)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended		December 31, 2001
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.

(Name of small business issuer as specified in its charter)

Delaware		22-3282551
(State or other jurisdiction		(I.R.S. employer
of incorporation or organization)		identification no.)

64 Old Highway 22, Clinton, NJ		08809
(Address of principal executive offices)		(Zip Code)

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

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

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

Title of each class: Common Stock, No Par Value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer’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.

The number of shares of the Issuer’s Common Stock, no par value, outstanding as of March 14, 2002, was 5,180,236

UNITY BANCORP, INC.

DOCUMENTS INCORPORATED BY REFERENCE

	10-K Item	Document Incorporated
Item 6	.Selected Financial Data	Annual Report to Shareholders for the fiscal year ended December 31, 2001

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Annual Report to Shareholders for the fiscal year ended December 31, 2001

Item 7A	Qualitative and Quantitative Disclosure About Market Risk	Annual Report to Shareholders for the fiscal year ended December 31, 2001

Item 8	Financial Statements	Annual Report to Shareholders for the fiscal year ended December 31, 2001

Item 10	Directors and Executive Officers of the Company; Compliance with Section 16(a) of the Exchange Act	Proxy Statement for 2002 Annual Meeting of Shareholders to be filed no later than April 30, 2002

Item 11	Executive Compensation	Proxy Statement for 2002 Annual Meeting of Shareholders to be filed no later than April 30, 2002

Item 12	Security Ownership of Certain Beneficial Owners and Management	Proxy Statement for 2002 Annual Meeting of Shareholders to be filed no later than April 30, 2002

Item 13	Certain Relationships and Related Transactions	Proxy Statement for 2002 Annual Meeting of Shareholders to be filed no later than April 30, 2002

Index to Form 10-K

Part I

Item 1.	Description of the Business

	a) General

	b) Statistical information

Item 2.	Description of Properties

Item 3.	Legal Proceedings

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

Part II

Item 5.	Market for Common Equity and Related Stockholder Matters

Item 6.	Selected Financial Data

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

	Results of Operations

Item 7A.	Qualitative and Quantitative Disclosure About Market Risk

Item 8.	Financial Statements

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

	Financial Disclosure

Part III

Item 10.	Directors and Executive Officers

Item 11.	Executive Compensation

Item 12.	Security Ownership of Certain Beneficial Owners and Management

Item 13.	Certain Relationships and Related Transactions

Part IV

Item 14.	Exhibits and Reports on Form 8-K

	Signatures

PART I

Item 1. Description of the Business

a) General

Unity Bancorp, Inc. (the “Company” or “Registrant”) is a bank holding company incorporated under the laws of the State of Delaware to serve as a holding company for Unity Bank (the “Bank”). 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 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 and twelve (12) branches located in Clinton, Colonia, Edison, Flemington, Highland Park, Linden, North Plainfield, Scotch Plains, South Plainfield, Springfield, Union and Whitehouse, New Jersey. The Bank’s primary service area encompasses the Route 22/Route 78 corridor between the Bank’s Clinton, New Jersey main office and its Linden, New Jersey branch.

During 2001, the Company and the Bank operated under regulatory agreements with their respective federal and state regulators. These agreements required the Company and the Bank to adopt strategic and capital plans to increase the Bank’s leverage ratio to 6% or above, review and adopt various policies and procedures, adopt programs with regard to the resolution of certain criticized assets, and provide ongoing reporting to the various regulatory agencies with regard to the Bank’s and Company’s progress in meeting the requirements of the agreements. The agreements also prohibited the Bank from paying dividends to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval. All agreements between the Company and the bank and their respective federal and state regulators were terminated in the first quarter of 2002.

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.

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

Service Areas

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

Competition

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

Employees

At December 31, 2001, the Company employs 125 full-time and 21 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.

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 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.

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

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

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

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

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

Bank holding company assets are given risk–weights of 0%, 20%, 50% and 100%. In addition, certain off–balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk–weight will apply. These computations result in the total risk–weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting and performing, guaranteed portions of unsold SBA loans, which carry a 20% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk–weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk–weight. In converting off–balance sheet items, direct credit substitutes including general guarantees and standby letters of credit backing financial obligations, are given a 100% risk-weighing. Transaction related contingencies such as standby letters of credit backing non-financial obligations and undrawn commitments (including commercial credit lines with an initial maturity or more than one year) have a 50% risk-weighing. Short-term commercial letters of credit have a 20% risk-weighing and certain short–term unconditionally cancelable commitments have a 0% risk-weighing.

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 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 impact virtually all activities of the Bank, including the minimum level of capital the Bank must maintain, the ability of the Bank to pay dividends, the ability of the Bank to expand through new branches or acquisitions and various other matters.

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

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

b) Statistical information

The table below provides a cross-reference to portions of Unity Bancorp. Inc.’s 2001 Annual Report to Shareholders 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	5
	B. Average Balance Sheets	7
	C. Rate/Volume Analysis	8

II.	Investment Portfolio
	A. Book value of investment securities	24
	B. Investment securities by range of maturity with corresponding average yields	24
	C. Securities of issuers exceeding ten percent of stockholders’ equity	N/A

III.	Loan Portfolio
	A. Types of loans	10
	B. Maturities and sensitivities of loans to changes in interest rates	11
	C. Risk elements
	1) Nonaccrual, past due and restructured loans	11
	2) Potential problem loans	11
	3) Foreign outstandings	N/A
	4) Loan concentrations	N/A
	D. Other interest bearing assets	N/A

IV.	Summary of Loan Loss Experience
	A. Analysis of the allowance for loan losses	12
	B. Allocation of the allowance for loan losses	13

V.	Deposits
	A. Average amount and average rate paid on major categories of deposits	7
	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	25
	E. Time deposits of $100,000 or more by foreign offices	N/A

VI.	Return on Equity and Assets	5

VII	Short-term Borrowings	26

Item 2. Description of Properties

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

The following table sets forth certain information regarding the Company’s properties for which it conducts business as of December 31, 2001.

	Leased	Date Leased	Lease	2001 Annual
Location	Or Owned	or Acquired	Expiration	Rental Fee
Clinton, NJ	Leased	1996	2006	$	398,363
Colonia, NJ	Leased	1995	2005	32,633
Flemington, NJ	Leased	1995	2003	47,625
Linden, NJ	Owned	1991	—	—
Highland Park, NJ	Leased	1999	2024	68,972
North Plainfield, NJ	Owned	1991	—	—
Scotch Plains, NJ	Leased	1996	2006	70,957
Springfield, NJ	Leased	1995	2003	30,484
South Plainfield, NJ	Leased	1999	2024	83,276
Union, NJ	Leased	1996	2006	61,558
Edison, NJ	Leased	1999	2024	96,201
Whitehouse, NJ	Owned	1998	—	—

Item 3. Legal Proceedings

The Company and the Bank are periodically parties to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business. None of these proceedings individually or in the aggregate is expected to have a material adverse effect upon the Company.

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

No matters were submitted for a vote of the Registrant’s shareholders during the fourth quarter of fiscal 2001.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company’s Common Stock trades on the NASDAQ National Market under the symbol “UNTY”. As of December 31, 2001, there were 595 stockholders of record of the Common Stock.

The following table sets forth the high and low bid prices of the Common Stock along with the closing prices, as reported on the NASDAQ National Market for 2001 and 2000. The NASDAQ high and low bid prices reflect inter-dealer quotations, without retail mark-up, mark-down or commissions and do not necessarily represent actual transactions.

UNITY BANCORP, INC., COMMON STOCK PRICES AND CASH DIVIDENDS
	High	Low	Close
2001:
4^th Quarter	$6.50	$4.69	$6.50
3^rd Quarter	6.18	4.00	5.05
2^nd Quarter	4.50	3.05	4.00
1^st Quarter	4.00	2.00	3.50
2000:
4^th Quarter	$4.38	$2.00	$2.00
3^rd Quarter	4.94	3.44	3.44
2^nd Quarter	6.25	3.50	3.88
1^st Quarter	6.68	5.25	6.00

Item 6. Selected Financial Data

See Selected Consolidated Financial Data in the 2001 Annual Report to Shareholders which information is incorporated by reference herein

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

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2001 Annual Report to Shareholders which information is incorporated by reference herein.

Item 7A. Qualitative and Quantitative Disclosure About Market Risk

See Selected Consolidated Financial Data in the 2001 Annual Report to Shareholders which information is incorporated by reference herein

Item 8. Financial Statements

See Financial Statements and Notes to Financial Statements in the 2001 Annual Report to Shareholders which information is incorporated by reference herein.

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

None.

PART III

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

Information concerning directors and executive officers is included in the definitive Proxy Statement for the Company’s 2002 Annual Shareholders Meeting under the captions “ELECTION OF DIRECTORS” and information concerning compliance with Section 16(a) of the Exchange Act is included under the caption “COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934,” each of which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2001.

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

Name, Age and Position	Officer Since	Principal Occupation During Past Five Years
Michael T.Bono, 60, Chief Retail Officer and Executive Vice President of the Company and the Bank	2001	Previously, Mr. Bono was a Retail Officer for Unity Bank.
Michael F. Downes, 39, Chief Lending Officer and Executive Vice President of the Company and Bank	2001	Previously, Mr. Downes was a Commercial Lending Officer for Unity Bank

Item 11. Executive Compensation

Information concerning executive compensation is included in the definitive Proxy Statement for the Company’s 2002 Annual Meeting under the caption “EXECUTIVE COMPENSATION,” which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2002.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information concerning security ownership of certain beneficial owners and management is included in the definitive Proxy Statement for the Company’s 2002 Annual Shareholders Meeting under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,” which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2002.

Item 13. Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions is included in the definitive Proxy Statement for the Company’s 2002 Annual Shareholders Meeting under the caption “Certain Transactions with Management,” which is incorporated herein by reference. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2002.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a) (1) Financial statements

See Financial Statements and Notes to Financial Statements on pages 18 to 30 of the 2001 Annual Report to Shareholders which information is incorporated by reference herein.

(a) (2) Other Exhibits.

Exhibit
Number		Description of Exhibits
3(i)		Certificate of Incorporation of the Company, as amended (2 )
3(ii)		Bylaws of the Company (1 )
4(i)		Form of Stock Certificate (2 )
10(i)		1994 Stock Option Plan for Non–Employee Directors (1 )
10(ii)		Stock Bonus Plan (2 )
10(iii)		1997 Stock Option Plan (3 )
10(iv)		1997 Stock Bonus Plan (3 )
10(v)		1998 Stock Option Plan (4 )
10(vi)		Employment Agreement with Anthony J. Ferraro
10(vii)		Retention Agreement with James A. Hughes
10(viii)		Change in Control Agreement with Michael T. Bono
10(ix)		Change in Control Agreement with Michael F. Downes
13		Unity Bancorp. Inc. 2001 Annual Report to Shareholders
21		Subsidiaries of the Registrant
23a		Consent of KPMG LLP

(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the Registrant’s Registration Statement on Form S-4, Registration No. 33-76392.

(2) Incorporated by reference from Exhibits 3(i) to 27 from the Registrant’s Registration Statement on Form SB-2, Registration No. 333-12565.

(3) Incorporated by reference from Exhibits B and C from the Company’s definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.

(4) Incorporated by reference from Exhibit A from the Company’s definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.

(a) Reports on Form 8-K - None

Date Item Reported

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, hereunto duly authorized.

		UNITY BANCORP, INC.

Dated:	March 28, 2002	By:	/s/ James A. Hughes
			James A. Hughes
			Chief Financial Officer

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	March 28, 2002
David D. Dallas

/s/ Anthony J. Ferraro	President and Chief Executive Officer	March 28, 2002
Anthony J. Ferraro

/s/ James A. Hughes	Chief Financial Officer (Principal	March 28, 2002
James A. Hughes	Financial and Accounting Officer)

/s/ Charles S. Loring	Director	March 28, 2002
Charles S. Loring

/s/ Peter P. DeTommaso	Director	March 28, 2002
Peter P. DeTommaso

/s/ Allen Tucker	Director	March 28, 2002
Allen Tucker

EX-10.6 3 j3027_ex10d6.htm EX-10.6 UNITY. Feraro Employment Agreement 2001 (40078015.DOC;3)

Exhibit 10.6

EMPLOYMENT AGREEMENT

This Employment Agreement (the Agreement”) is made as of this 26^th day of February, 2002, by and between ANTHONY J. FERARO, an individual residing at (“Executive”), UNITY BANK, a New Jersey state bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (the “Bank) and UNITY BANCORP, INC. a Delaware corporation and holding company of the Bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (“Unity”) (Bank and Unity collectively, “Employer”).

WHEREAS, Executive is currently employed as the President of Employer pursuant to an employment agreement between Executive and the Bank dated as of the 18th day of October, 1999 (the “Original Agreement”); and

WHEREAS, Executive and Employer desire for Executive to continue his employment with the Employer and desire that this Agreement replace the Original Agreement and govern the terms and conditions of Executive’s employment.

NOW, THEREFORE, in consideration of the premises and covenants contained herein, and with the intent to be legally bound hereby, the parties hereto hereby agree as follows:

1. Employment. Employer hereby agrees to employ the Executive, and the Executive hereby accepts such employment, upon the terms and conditions set forth herein.

2. Position and Duties. The Executive shall be employed as President of Employer, to perform such services in that capacity as are usual and customary for comparable institutions and as shall from time to time be established the Board of Directors of the Employer. Executive agrees that he will devote his full business time and efforts to his duties hereunder.

3. Cash Compensation. Employer shall pay to the Executive compensation for his services as follows:

(a) Base Salary. The Executive shall be entitled to receive, commencing upon the date of this Agreement, an annual base salary (the “Base Salary”) of $305,000 which shall be payable in installments in accordance with Employer’s usual payroll method. Annually thereafter, on or prior to the anniversary date of this Agreement, the Board of Directors shall review the Executive’s performance, the status of Employer and such other factors as the Board of Directors or a committee thereof shall deem appropriate, and may, but shall not be obligated to, adjust the Base Salary accordingly.

(b) Discretionary Bonus. Executive and the Board of Directors of Employer or a committee thereof shall meet and establish performance criteria for the Executive. Based upon the

Executive’s satisfaction of such criteria, the Executive shall be entitled to receive annually a bonus, the amount to be agreed upon by the Board of Directors or a committee thereof and the Executive. The Executive and the Board of Directors or a committee thereof shall meet annually on or prior to the anniversary date of the Agreement to review the Executive’s performance and to mutually agree upon new performance criteria for the upcoming year.

4. Other Benefits.

(a) Fringe Benefits. Executive shall be entitled to participate in such benefit programs as are made available generally to employees of Employer.

(b) Life Insurance. Employer shall obtain for the benefit of Executive life insurance on the life of Executive in the amount of two and one-half times Executive’s annual Base Salary. Upon any termination of Executive without “Cause” hereunder pursuant to Section 6(c), or upon any Change in Control (as defined below), Employer shall transfer to Executive any rights Employer may have in any policies of insurance acquired to satisfy this provision. Payment of any premiums under any such policies shall thereafter be the sole obligation of Executive, and not of Employer.

(c) Stock Options. Executive shall be entitled to participate in such stock option plans as the Board of Directors may, in its discretion, determine.

5. Term. The term of this Agreement shall be three (3) years, commencing upon the date hereof and continuing until the third anniversary hereof; provided, however, that on a daily basis, one additional day shall be added to the term of this Agreement, so that the remaining term shall always be three (3) years, either the Executive or Employer shall have provided the other with written notice of its intention to cease extending the term of this Agreement.

6. Termination.

(a) Cause. As used in this Agreement, the term “Cause” shall mean any of the following actions: the Executive’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation or final cease-and-desist order or a material breach of any provision of this Agreement.

(b) Termination With Cause. Employer shall have the right to terminate the Executive for Cause, upon written notice to him of such determination, specifying the alleged Cause. In the event of such termination, the Executive shall not be entitled to any further benefits under this Agreement; provided, however, that nothing contained herein shall excuse Employer from paying all benefits earned or accrued up to the date of such termination.

(c) Termination Without Cause. If Employer terminates the Executive’s employment hereunder without Cause, Executive will be entitled to receive a payment equal to twice his then current

annual Base Salary. Any payments provided for hereunder shall be made by a lump sum payment within ten (10) days of any such termination. In addition, to the extent Executive participated in Employer’s hospital, health and medical programs as of the date of such termination, Employer shall continue to provide Executive with such benefits for a period of twelve (12) months after such termination. The Executive shall have no duty to mitigate damages in connection with the termination of his employment without cause. If the Executive obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits, in a manner substantially similar to the benefits payable by Employer hereunder, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder.

(d) Death or Disability. This Agreement shall terminate upon Executive’s death or his disability, as defined herein. Upon Executive’s death or his disability, the obligation of Employer hereunder to pay Executive the compensation called for under Section 3 hereof shall terminate, and Employer’s only obligation shall be to pay Executive any and all benefits to which Executive was entitled at the time of such death or disability under any benefit plans of Employer then in place. For purposes of this Agreement, the term “disability” shall mean a good faith determination by the Board of Directors of Unity that Executive is unable to substantially perform his material duties as prescribed in this Agreement due to his incapacity or disability, physical or mental, for a period of six (6) consecutive months,

7. Change in Control.

(a) Upon the consummation of a Change in Control (as herein defined), Executive shall have the right, upon written notice to the Employer, to terminate his employment hereunder and the provisions of Section 7(c) shall apply as if the Executive had been terminated.

(b) A “Change in Control” shall mean:

(1) a reorganization, merger, consolidation or sale of all or substantially all of the assets of Unity, or a similar transaction in which Unity is not the resulting entity;

(2) individuals who constitute the Incumbent Board (as herein defined) of the Unity cease for any reason to constitute a majority thereof;

(3) the occurrence of any transaction requiring the approval of the Board of Governors of the Federal Reserve System under 12 C.F.R. §225.41 et seq., except a transaction by any party owning 10% or more of Unity’s outstanding stock as of the date hereof; or

(4) an event of a nature that would be required to be reported in response to Item I of the current report on Form 8–K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or

(5) Without limitation, a change in control shall be deemed to have occurred at such time as (i) any “person” (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than Unity is or becomes a “beneficial owner” (as defined in Rule 13–d under the Exchange Act) directly or indirectly, of securities of Unity representing 25% or more of Unity’s outstanding securities ordinarily having the right to vote at the election of directors, excluding any securities purchased by Employer’s employee stock ownership plan and trust, or any other employee benefit plans established by Employer from time to time in determining whether such person is the beneficial owner of more than 25% of Unity’s securities; or

(6) A proxy statement soliciting proxies from stockholders of Unity is disseminated by someone other than the current management of Unity, seeking stockholder approval of a plan of reorganization, merger or consolidation of Unity or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by Unity;

(7) A tender offer is made for 25% or more of the voting securities of Unity and the shareholders owning beneficially or of record 25% or more of the outstanding securities of Unity have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.

. For these purposes, “Incumbent Board” means the Board of Directors of Unity on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.

(c) Upon the termination of Executive’s employment, either by Executive as permitted under Section 7(a) or by Employer or its successor without cause and within eighteen (18) months following a Change in Control, Executive shall be entitled to receive a lump sum payment equal to three (3) times his then current Base Salary (giving no effect to any bonuses Executive may have earned under Section 3(b) hereof). In addition, Employer shall be obligated to maintain all policies of medical or disability insurance then covering Executive for a term of one year after such termination. The payments provided for hereunder shall be in lieu of, and not in addition to, any payments Executive may be entitled to under Section 6(c).

(d) Upon the occurrence of Change in Control and the negotiation by Executive of a mutually acceptable replacement employment agreement with the Employer or its successor, in lieu of

any rights which Executive may have under paragraph (c) hereof, Executive shall be entitled to a payment equal to 1.5 times his then current Base Salary. This payment to Executive shall be in lieu of any other right to payment Executive may have pursuant to this Agreement (other than for compensation or bonuses earned but not yet paid).

Notwithstanding anything contained in section 7 above, in the event all compensation to be provided to Executive conditioned upon the occurrence of a Change in Control, whether under this Agreement or in connection with any other agreement or benefit plan of the Employer to which Executive is a party or in which he participates, exceeds 2.99 times the Executive’s Base Amount, as that term is defined under Section 280G of the Internal Revenue Code and regulations of the Internal Revenue Service promulgated thereunder, the total compensation to be paid to the Executive shall be reduced to an amount that is $1.00 less than 2.99 times the Executive’s Base Amount. Executive shall have the right to determine which benefits to which he would otherwise be entitled shall be reduced.

8. Covenant Not to Compete. Executive agrees that during the term of his employment hereunder and for a period of one (1) year after the termination of his employment, he will not in any way, directly or indirectly, manage, operate, control, accept employment or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation whose stock is listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System) any enterprise which competes with Employer in the business of banking in the geographic areas in which Employer conducts its business on the date of Executive’s termination. In the event that this covenant not to compete shall be found by a court of competent jurisdiction to be invalid or unenforceable as against public policy, such court shall exercise discretion in reforming such covenant to the end that Executive shall be subject to a covenant not to compete that is reasonable under the circumstances and enforceable by Employer. Executive agrees to be bound by any such modified covenant not to compete.

9. Miscellaneous.

(a) Governing Law. This Agreement shall be governed by and interpreted under the substantive law of the State of New Jersey.

(b) Severability. If any provision of this Agreement shall be held to be invalid, void, or unenforceable, the remaining provisions hereof shall in no way be affected or impaired, and such remaining provisions shall remain in full force and effect.

(c) Entire Agreement; Amendment. This Agreement sets forth the entire understanding of the parties with regarding to the subject matter contained herein and supersedes any and

all prior agreements, arrangements or understandings relating to the subject matter hereof, including specifically the Original Agreement, and may only be amended by written agreement signed by both parties hereto or their duly authorized representatives.

(d) Notices. Notices hereunder shall be sent by Certified Mail, Return Receipt Requested, to the address set forth for each party on the first page of this Agreement. Notices to Employer shall be directed to the attention of the Chairman of the Board.

(e) Termination of Original Agreement. Upon the execution of this Agreement, the Original Agreement shall be deemed terminated and voided and the rights of the parties hereto shall be determined solely by reference to this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

	UNITY BANK

	By:	/s/ DAVID D. DALLAS
		David D. Dallas, Chairman of the Board

	UNITY BANCORP, INC.

	By:	/s/ DAVID D. DALLAS
		David D. Dallas, Chairman of the Board

	EXECUTIVE:

	By:	/s/ ANTHONY J. FERARO
		Anthony J. Feraro

EX-10.7 4 j3027_ex10d7.htm EX-10.7 UNITY. Hughes Retention Agreement (40077985.DOC;3)

Exhibit 10.7

RETENTION AGREEMENT

RETENTION AGREEMENT (this “Agreement”) made as of this 26th day of February, 2002 by and between UNITY BANK, a New Jersey state bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (the “Bank), UNITY BANCORP, INC. a Delaware corporation with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (“Unity”) (Bank and Unity collectively, “Employer”), and JAMES A. HUGHES, an individual residing at 4 Lance Road, Lebanon, New Jersey 08833 (the “Executive”).

W I T N E S S E T H:

WHEREAS, Executive is presently employed by Employer as an executive officer of the Bank in the position of Executive Vice-President and Chief Financial Officer; and

WHEREAS, Employer wishes to ensure that it will continue to retain Executive in its employ and to receive Executive’s undivided effort and attention;

NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto, intending to be legally bound, agree as follows:

1. Termination. Executive may be terminated at any time, without prejudice to Executive’s right to compensation or benefits as provided herein or pursuant to any other benefit plan or policy of Employer. Executive’s rights upon a termination shall be as follows:

(a) Cause. Employer may terminate Executive for cause. Upon such a termination, Executive shall be entitled to no further compensation or employment related benefits from and after the date of such termination, except for the payment of accrued and unpaid compensation through the date of such termination and except for the provision of any statutorily required benefits. As used in this Agreement, the term “cause” shall mean the Executive’s personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar minor offenses which do not adversely effect Employer’s reputation or standing in the community) or final cease-and-desist order or a material breach of any provision of this Agreement.

(b) Termination Without Cause. Upon a termination of Executive’s employment hereunder without “cause”, Executive shall be entitled to receive his then current Base Salary (as defined below) for a nine (9) month period (the “Termination Payment”). Executive’s “Base Salary” at any time shall be that annual salary most recently approved by the Board of Directors of Employer or any committee thereof. Such payments shall be made in periodic payments in the same manner in which the

Executive’s salary was paid through the time of such termination. Employer shall continue to provide the Executive with hospital, health, medical and life insurance, and any other like benefits in effect at the time of such termination for a nine (9) month period. In addition, the vesting period for any stock options granted to Executive shall accelerate.

Executive shall also be entitled to payments for periods or partial periods that occurred prior to the date of termination and for which the Executive has not yet been paid.

The Executive shall have no duty to mitigate damages in connection with his termination by Employer without “cause”. However, if the Executive obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits, in a manner substantially similar to the benefits payable by Employer hereunder, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder.

(c) Resignation With Cause. Executive shall have the right to resign his employment with Employer at any time hereunder, providing notice as require by the Employer’s employment related policies then in effect. In the event such a resignation is for “good cause” (as defined below), such resignation shall deemed a termination without cause under subparagraph (b) hereof, and Executive shall be entitle to receive all such benefits as are provided for under such subparagraph (b) hereof.

For purposes of this provision, the term “good cause” shall mean any of the following:

(i) A material reduction in Executive’s duties, responsibilities, title or employment status from its level as of the date hereof;

(ii) Subject to the next subsection, a reduction in Executive’s total annual compensation to below $140,000; or

(iii) In the event of the Employer, for the proceeding fiscal year, has reported earnings of at least 80% of the Employer’s budgeted earnings, if Executive’s total compensation is below $175,000; or

(iv) Employer terminates this Agreement..

For purposes determining the value of Executive’s compensation, all compensation provided to Executive, cash and non-cash, shall be taken into account. For purpose of valuing stock options, the Black-Scholes method shall be utilized in the same manner as provided in the Employers proxy statement for the prior year.

2. Change in Control.

(a) Upon the occurrence of a Change in Control (as herein defined), regardless of

whether Executive’s employment with Employer continues, Executive shall be entitled to receive a payment equal to 100% of his current Base Salary for a nine (9) month period (the “Change in Control Payment”). The Change in Control Payment shall be made to Executive, at Executive’s discretion, either over a nine (9) month period and in the same manner in which Executive’s salary has customarily been paid, or in a single lump sum payment to be made within sixty (60) days of Employer’s receipt of written notice by Executive directing that the Payment be made in a lump sum.

In addition to the foregoing, if Executive chooses to receive the Change in Control Payment over time rather than in a lump sum, Executive shall be entitled to receive from Employer or its successor, hospital, health, medical and life insurance, and any other like benefits in effect at the time of such Change in Control for a nine (9) month period after the Change in Control on the terms and at the same cost to Executive as Executive was receiving such benefits on the date of the Change in Control. However, if the Executive obtains new employment and such new employment provides for hospital, health, medical and life insurance, and other benefits, in a manner substantially similar to the benefits payable by Employer hereunder, Employer may permanently terminate the duplicative benefits it is obligated to provide hereunder.

Upon the Executive becoming entitled to a Change in Control Payment hereunder, and provided that Executive has received an offer of “Comparable Employment” with the Employer or its successor upon the consummation of such Change in Control, Executive shall not be entitled to receive any other payment hereunder solely because of the Change In Control. If Executive does not receive an offer of “Comparable Employment, it shall be deemed a termination without cause, and Executive shall be entitled to receive the payments due under Section 1(b) hereof. For purpose hereof, the term “Comparable Employment” shall mean an offer of employment for position which has all the following characteristics:

(i) The total annual compensation offered Executive has a value at least as great as the total compensation provided to Executive to in the last full fiscal year a prior to the Change in Control;

(ii) Regardless of title, the responsibilities and duties of the position shall be of as substantial a nature as those of Executive’s position prior to such Change in Control; and

(iii) Executive’s primary place of employment shall not be more than 30 miles away from Executive’s place of employment as of the time of the Change in Control.

In the event that Executive is offered Comparable Employment, the provisions of the Agreement shall remain in full force and effect after the payment of the Change in Control payment, and by way of illustration, and not by limitation, Executive’s rights under Paragraph 1(b) and 1(c) hereunder

shall remain in full force and effect.

(b) A “Change in Control” shall mean:

(i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of Unity or a similar transaction in which Unity is not the resulting entity; or

(ii) individuals who constitute the Incumbent Board (as herein defined) of Unity cease for any reason to constitute a majority thereof; or

(iii) the occurrence of an event of a nature that would be required to be reported in response to Item I of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or

(iv) Without limitation, a Change in Control shall be deemed to have occurred at such time as (i) any “person” (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than Unity or the trustees or any administrator of any employee stock ownership plan and trust, or any other employee benefit plans, established by Employer from time-to-time is or becomes a “beneficial owner” (as defined in Rule 13-d under the Exchange Act) directly or indirectly, of securities of Unity representing 25% or more of Unity’s outstanding securities ordinarily having the right to vote at the election of directors; or

(iv) A proxy statement soliciting proxies from stockholders of Unity is disseminated by someone other than the current management of Unity, seeking stockholder approval of a plan of reorganization, merger or consolidation of Unity or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by Unity; or

(vi) A tender offer is made for 25% or more of the voting securities of Unity and shareholders owning beneficially or of record 25% or more of the outstanding securities of Unity have tendered or offered to sell their shares pursuant to such tender and such tendered shares have been accepted by the tender offeror.

For these purposes, “Incumbent Board” means the Board of Directors of Unity Bancorp, Inc. on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.

3. No Guaranty of Employment. Nothing in this Agreement shall be construed as guarantying the employment of the Executive. Executive shall remain an “employee at will” of Employer at all times during the term of this Agreement.

4. Notices. Any and all notices, demands or requests required or permitted to be given under this Agreement shall be given in writing and sent, (i) by registered or certified U.S. mail, return receipt requested, (ii) by hand, (iii) by overnight courier or (iv) by telecopier addressed to the parties hereto at their addresses set forth above or such other addresses as they may from time-to-time designate by written notice, given in accordance with the terms of this Section, together with copies thereof as follows:

In the case of Executive, with a copy to:

In the case of Employer, with a copy to:

Windels Marx Lane & Mittendorf, LLP

120 Albany Street Plaza, 6^th Floor

New Brunswick, New Jersey 08901

Telecopier No. (732) 846-8877

Attention: Robert A. Schwartz

Notice given as provided in this Section shall be deemed effective: (i) on the date hand delivered, (ii) on the first business day following the sending thereof by overnight courier, (iii) on the seventh calendar day (or, if it is not a business day, then the next succeeding business day thereafter) after the depositing thereof into the exclusive custody of the U.S. Postal Service or (iv) on the date telecopied.

5. Assignability. Neither this Agreement nor the rights or obligations of Executive hereunder may be assigned , whether by operation of law or otherwise. This Agreement shall be binding upon, and inure to the benefit of, Employer and its Successors and assigns. This Agreement shall inure to the benefit of the Executive’s heirs, executors, administrators and other legal representatives.

6. Waiver. The waiver by Employer or the Executive of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent or other breach hereof.

7. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without giving effect to principles of conflict of laws.

8. Entire Agreement. This Agreement contains the entire agreement of the parties hereto

with respect to the subject matter hereof and may not be amended, waived, changed, modified or discharged, except by an agreement in writing signed by the parties hereto.

9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument.

10. Amendment. This Agreement may be modified or amended only by an amendment in writing signed by both parties.

11. Severability. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision, only to the extent it is invalid or unenforceable, and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein.

12. Section Headings. The headings contained in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

13. Fees and Expenses. If any party to this Agreement institutes any action or proceeding to enforce this Agreement, the prevailing party in such action or proceeding shall be entitled to recover from the non-prevailing party all legal costs and expenses incurred by the prevailing party in such action, including, but not limited to, reasonable attorneys’ fees and other reasonable legal costs and expenses.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement under their

respective hands and seals as of the day and year first above written.

ATTEST:	UNITY BANK

	By:	/s/DAVID D. DALLAS
		David D. Dallas, Chairman of the Board

ATTEST:	UNITY BANCORP, INC.

	By:	/s/DAVID D. DALLAS
		David D. Dallas, Chairman of the Board

WITNESS:	EXECUTIVE:


	/s/JAMES HUGHES
James Hughes

EX-10.8 5 j3027_ex10d8.htm EX-10.8 UNITY.Change In Control Agreement (40077536.DOC;3)

Exhibit 10.8

CHANGE IN CONTROL AGREEMENT

CHANGE IN CONTROL AGREEMENT (this “Agreement”) made as of this 26th day of February, 2002 by and between UNITY BANK, a New Jersey state bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (the “Bank), Unity Bancorp, Inc. a Delaware corporation with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (“Unity”) (Bank and Unity collectively, “Employer”), and Michael Bono, an individual residing at (“Executive”).

W I T N E S S E T H:

WHEREAS, Executive is a valued employee of the Bank;

WHEREAS, Employer wishes to ensure that it will continue to get Executive’s undivided effort and attention;

NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto, intending to be legally bound, agree as follows:

1. Change in Control.

(a) Upon the occurrence of a Change in Control (as herein defined), Executive shall become entitled to receive the payments (the “Payments”) provided for under either paragraph (c) or paragraph (d) below.

(b) A “Change in Control” shall mean:

(i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of Unity or a similar transaction in which Unity is not the resulting entity; or

(ii) individuals who constitute the Incumbent Board (as herein defined) of Unity cease for any reason to constitute a majority thereof; or

Securities Exchange Act of 1934 (the “Exchange Act”); or

(iv) Without limitation, a change in control shall be deemed to have occurred at such time as (i) any “person” (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than Unity or the trustees or any administrator of any employee stock ownership plan and trust, or any other employee benefit plans, established by Employer from time-to-time is or becomes a “beneficial owner” (as defined in Rule 13-d under the Exchange Act) directly or indirectly, of securities of Unity representing 25% or more of Unity’s outstanding securities ordinarily having the right to vote at the election of directors; or

(v) A proxy statement soliciting proxies from stockholders of Unity is disseminated by someone other than the current management of Unity, seeking stockholder approval of a plan of reorganization, merger or consolidation of Unity or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by Unity; or

For these purposes, “Incumbent Board” means the Board of Directors of Unity on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.

(c) In the event the conditions of Section (a) above are satisfied, and, in connection with such Change in Control Executive’s employment with Employer and/or its successors is terminated within twelve (12) months of such Change In Control, regardless of whether such termination is by Employer or its successor, through Executive’s resignation of employment with Employer, or Executive’s failure to accept an offer of employment with any successor to Employer, Executive shall be entitled to receive a payment equal to eighteen (18) months of Executive’s then current monthly Base Salary (as defined below). The Payment shall be made to Executive, in a single lump sum payment to be made within thirty (30) days of the termination of Executive’s employment. For purposes of this Agreement, the Executive’s monthly Base Salary shall be that annual salary most recently approved by Employer’s Board of Directors or a committee thereof divided by twelve.

In addition to the foregoing, Executive shall be entitled to receive from Employer or its successor, hospital, health, medical and life insurance on the terms and at the same cost to Executive as Executive was receiving such benefits upon the date of the Change in Control. Employer’s obligation to continue such insurance benefits will be for a period of twelve (12) months.

(d) In the event the conditions of Section (a) are satisfied and Executive’s employment with the Employer or its successor is not terminated in connection with such Change in Control but rather is continued by the Employer or its successor, in lieu of the payment provided for under paragraph (c) above, Executive shall be entitled to receive a payment equal to nine months of the Executive’s then current Base Salary. Such payment shall be made upon the consummation of the Change in Control. If Executive’s employment is subsequently terminated and Executive becomes entitled to benefits under paragraph (c) above, Employer or its successor shall receive credit against any payments required under paragraph (c) for any payments made hereunder.

2. No Guaranty of Employment. Nothing in this Agreement shall be construed as guarantying the employment of the Executive. Executive shall remain an “employee at will” of Employer at all time during the term of this Agreement.

3. Notices. Any and all notices, demands or requests required or permitted to be given under this Agreement shall be given in writing and sent, (i) by registered or certified U.S. mail, return receipt requested, (ii) by hand, (iii) by overnight courier or (iv) by telecopier

addressed to the parties hereto at their addresses set forth above or such other addresses as they may from time-to-time designate by written notice, given in accordance with the terms of this Section, together with copies thereof as follows:

In the case of Executive, to the address set forth on the first page hereof or to such other address as Executive shall provide in writing to the Employer for the provision of notices hereunder.

In the case of Employer, to the address set forth on the first page hereof with a copy to:

Windels Marx Lane & Mittendorf, LLP

120 Albany Street Plaza, 6^th Floor

New Brunswick, New Jersey 08901

Telecopier No. (732) 846-8877

Attention: Robert A. Schwartz

4. Term. This Agreement shall have a term of three years from the date hereof; provided, however, that in the event the term of this Agreement would terminate at any time after the Employer has engaged in substantive negotiations regarding a transaction which would lead to a Change in Control, this Agreement shall continue to remain in full force in effect until the earlier to occur of (i) the effectuation of the Change in Control or (ii) the termination of the negotiations for the proposed transaction which would have resulted in the Change in Control.

5. Covenant Not to Compete. Executive agrees that in the event he becomes entitled to a payment under Section 1(c) hereof, for a period of six (6) months after the termination of his employment, he will not in any way, directly or indirectly, manage, operate, control, accept employment or a consulting position with or otherwise advise or assist or be connected with or

own or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation whose stock is listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System) any enterprise which competes with Employer in the business of banking in the geographic areas in which Employer conducts its business on the date of Executive’s termination. In the event that this covenant not to compete shall be found by a court of competent jurisdiction to be invalid or unenforceable as against public policy, such court shall exercise discretion in reforming such covenant to the end that Executive shall be subject to a covenant not to compete that is reasonable under the circumstances and enforceable by Employer. Executive agrees to be bound by any such modified covenant not to compete.

6. Assignability. The services of the Executive hereunder are personal in nature, and neither this Agreement nor the rights or obligations of Executive hereunder may be assigned, whether by operation of law or otherwise. This Agreement shall be binding upon, and inure to the benefit of, Employer and its Successors and assigns. This Agreement shall inure to the benefit of the Executive’s heirs, executors, administrators and other legal representatives.

7. Waiver. The waiver by Employer or the Executive of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent or other breach hereof.

8. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without giving effect to principles of conflict of laws.

9. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter hereof and may not be amended, waived, changed, modified or discharged, except by an agreement in writing signed by the parties hereto.

10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument.

11. Amendment. This Agreement may be modified or amended only by an amendment in writing signed by both parties.

12. Severability. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision, only to the

extent it is invalid or unenforceable, and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein.

13. Section Headings. The headings contained in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

14. Fees and Expenses. If any party to this Agreement institutes any action or proceeding to enforce this Agreement, the prevailing party in such action or proceeding shall be entitled to recover from the non-prevailing party all legal costs and expenses incurred by the prevailing party in such action, including, but not limited to, reasonable attorneys’ fees and other reasonable legal costs and expenses.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement under their

respective hands and seals as of the day and year first above written.

ATTEST:	UNITY BANK

	By:		/s/ DAVID D. DALLAS
David D. Dallas, Chairman of the Board



ATTEST:	UNITY BANCORP, INC.

	By:		/s/ DAVID D. DALLAS
			David D. Dallas, Chairman of the Board



WITNESS:	EXECUTIVE:

	By:	/s/ MICHAEL BONO
		Michael Bono

EX-10.9 6 j3027_ex10d9.htm EX-10.9 UNITY.Change In Control Agreement (40077536.DOC;3)

Exhibit 10.9

CHANGE IN CONTROL AGREEMENT

CHANGE IN CONTROL AGREEMENT (this “Agreement”) made as of this 25th day of March, 2002 by and between UNITY BANK, a New Jersey state bank with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (the “Bank), Unity Bancorp, Inc. a Delaware corporation with its principal place of business located at 64 Old Highway 22, Clinton, New Jersey 08809 (“Unity”) (Bank and Unity collectively, “Employer”), and Michael Downes, an individual residing at (“Executive”).

W I T N E S S E T H:

WHEREAS, Executive is a valued employee of the Bank;

WHEREAS, Employer wishes to ensure that it will continue to get Executive’s undivided effort and attention;

NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties hereto, intending to be legally bound, agree as follows:

1. Change in Control.

(b) A “Change in Control” shall mean:

(i) a reorganization, merger, consolidation or sale of all or substantially all of the assets of Unity or a similar transaction in which Unity is not the resulting entity; or

(ii) individuals who constitute the Incumbent Board (as herein defined) of Unity cease for any reason to constitute a majority thereof; or

(iii) the occurrence of an event of a nature that would be required to be reported in response to Item I of the current report on Form 8-K, as

in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or

though he were a member of the Incumbent Board.

3. Notices. Any and all notices, demands or requests required or permitted to be given under this Agreement shall be given in writing and sent, (i) by registered or certified U.S.

mail, return receipt requested, (ii) by hand, (iii) by overnight courier or (iv) by telecopier addressed to the parties hereto at their addresses set forth above or such other addresses as they may from time-to-time designate by written notice, given in accordance with the terms of this Section, together with copies thereof as follows:

In the case of Executive, to the address set forth on the first page hereof or to such other address as Executive shall provide in writing to the Employer for the provision of notices hereunder.

In the case of Employer, to the address set forth on the first page hereof with a copy to:

Windels Marx Lane & Mittendorf, LLP

120 Albany Street Plaza, 6^th Floor

New Brunswick, New Jersey 08901

Telecopier No. (732) 846-8877

Attention: Robert A. Schwartz

employment or a consulting position with or otherwise advise or assist or be connected with or own or have any other interest in or right with respect to (other than through ownership of not more than five percent (5%) of the outstanding shares of a corporation whose stock is listed on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System) any enterprise which competes with Employer in the business of banking in the geographic areas in which Employer conducts its business on the date of Executive’s termination. In the event that this covenant not to compete shall be found by a court of competent jurisdiction to be invalid or unenforceable as against public policy, such court shall exercise discretion in reforming such covenant to the end that Executive shall be subject to a covenant not to compete that is reasonable under the circumstances and enforceable by Employer. Executive agrees to be bound by any such modified covenant not to compete.

7. Waiver. The waiver by Employer or the Executive of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent or other breach hereof.

8. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey without giving effect to principles of conflict of laws.

10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute one and the same instrument.

11. Amendment. This Agreement may be modified or amended only by an amendment in writing signed by both parties.

12. Severability. If any provision of this Agreement shall be held invalid or

unenforceable, such invalidity or unenforceability shall attach only to such provision, only to the extent it is invalid or unenforceable, and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein.

13. Section Headings. The headings contained in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement under their

respective hands and seals as of the day and year first above written.

ATTEST:	UNITY BANK



	By:	/s/		DAVID D. DALLAS
David D. Dallas, Chairman of the Board



ATTEST:	UNITY BANCORP, INC.



	By:	/s/	DAVID D. DALLAS
		David D. Dallas, Chairman of the Board



WITNESS:	EXECUTIVE:

	By:	/s/	MICHAEL DOWNES
		Michael Downes

EX-13 7 j3027_ex13.htm EX-13 The Company’s capital amounts and ratios for each of the last two years are presented in the following table

Mission Statement

Our mission is to fulfill the needs of our shareholders, customers and employees by being a profitable, sound and responsive community bank.

We commit to:

• Provide quality products and services;

• Be creative and responsive to our customers;

• Select, train and maintain a professional team and provide an environment where employees feel motivated to achieve outstanding performance and in which they can obtain a sense of personal worth, growth, achievement and recognition;

• Strongly support the continued growth and development of our community.

The foundation of our business practice includes:

• Confidentiality and Professionalism

• Honesty and Integrity

• Safety and Soundness

• Accuracy and Dependability

Table of Contents

Shareholders’ Message

Directors and Management

Management’s Discussion and Analysis

Independent Auditors’ Report

Consolidated Financial Statements

Notes to Financial Statements

Products and Services

Company Information

Shareholders’ Message

What a difference a year makes!

A year ago in the shareholders’ message, we promised you that 2001 was going to be the commencement of Unity’s financial turnaround and the year that we return to profitability. We are glad to report that we did return to profitability and have completed the first leg of our journey in making Unity a high performing community bank. We assure you, the best is yet to come!

If you recall, in 2000 the Company reported a $5.9 million loss, was placed under a regulatory Cease and Desist Order, sold off 5 of its then 17 branches, dissolved its mortgage subsidiary and installed a new management team. Nothing quite that exciting happened in 2001. The Company simply focused on improving operational processes, growing revenues and deposits, reducing expenses and delivering quality service to our customers. We focused on the fundamentals.

As a result of the Company’s improved financial and capital positions, the regulatory orders on both the Bank and Company were lifted in early 2002. The lifting of the orders was the end of a chapter in Unity’s history that we never care to repeat. Although a painful lesson, we have learned from the process and are stronger for it.

Due to the hard work of the entire Unity team, the Company earned $2 million in 2001, which was in line with our strategic plan. The Company’s financial position has significantly improved from the prior year as we continued to grow earning assets and branch deposits. We have started 2002 with significantly improved fundamentals over the prior year.

In 2001, Unity was the third largest SBA lender in the State of New Jersey and the 27th largest SBA lender in the country. Unity received both the Silver Award and the Distinguished Lender Award from the SBA in recognition as the #1 SBA Lender for a midsize company in the state. In addition to our award winning SBA team, we have an excellent commercial lending staff that specializes in small-to-middle market customers. Our goal is to develop full service relationships supporting the many needs of the businesses in the markets we serve.

On the retail side of the business, we continue to focus on the financial needs of our customers with attractive consumer loan rates, annuities, investments and various deposit products. Many of our branches are now open seven days a week and/or with longer hours to make banking available to customers when it is convenient for them.

Our PC banking and bill paying applications allow our customers access to their accounts 24 hours a day, seven days a week. In addition, we have opened Cafés to make banking a more pleasurable experience.

Our goal is to distinguish ourselves as an alternative from traditional branch banking, providing better service and better products, which will ultimately enhance our profitability. If you are not already a bank customer, as a Unity shareholder, we hope that you stop by and visit one of our twelve branches.

In Closing

Although we are proud of our success in 2001, we will not pause, for there is still much work to be done. Our goal for 2002 is to continue to execute our strategic plan which projects the following performance ratios for 2002: return on average assets 1.03%; return on average common equity 14.45%; and an efficiency ratio of 65.7%. These ratios are a significant increase from what we were able to achieve in 2001. However we are confident that these targets are attainable.

We and the employees of Unity are committed to succeeding. In 2002, we will increase our intensity and make our shareholders proud of what we can and will accomplish.

The Board of Directors, management and staff thank you and appreciate your continued loyalty and support.

/s/ David D. Dallas		/s/ Anthony J. Feraro
David D. Dallas		Anthony J. Feraro
Chairman		President/CEO

Directors and Management

Board of Directors

Frank Ali (2)

Joined Unity Bank as a Director in March 2002.

Dr. Mark S. Brody (2)

Joined Unity Bank as a Director in February 2002. Provides investment advice to the clients of Financial Planning Analysts, a New York-based financial planning firm. Non practicing physician licensed in New York State.

Donna Butler, Esq. (2)

Joined Unity Bank as a Director in April 2001. Member of New York and New Jersey Bars.

David D. Dallas (1)

Chairman of Unity Bancorp, Inc. and Unity Bank. Founding member of Unity Bank in 1991. Chief Executive Officer of Dallas Group of America, a manufacturer of specialty chemicals based in Whitehouse, NJ.

Robert H. Dallas, II (2)

Founding member of Unity Bank in 1991. President of Dallas Group of America, a manufacturer of specialty chemicals based in Whitehouse, NJ.

Peter P. DeTommaso (1)

Founding member of Unity Bank in 1991. Retired President of Homeowners Heaven, Inc., a building and lumber supply company based in North Plainfield, NJ.

Anthony J. Feraro (2)

Joined the Company in November 1999 and serves as President and Chief Executive Officer.

James A. Hughes, CPA (2)

Joined the Company in December 2000 and serves as Executive Vice President and Chief Financial Officer.

Charles S. Loring (1)

Founding member of Unity Bank in 1991. Owner of Charles S. Loring, CPA, an accounting firm based in Branchburg, NJ.

Samuel Stothoff (2)

Founding member of Unity Bank in 1991. President of Samuel Stothoff Company, a well drilling company based in Flemington, NJ.

Allen Tucker (1)

Vice Chairman of Unity Bancorp, Inc. and Unity Bank. Joined Unity Bank as a Director in 1995. President of Tucker Enterprises, a real estate development firm based in Clark, NJ.

Executive Officers

Michael T. Bono

Joined the Company in August 1995 and serves as Executive Vice President and Chief Retail Officer.

Michael F. Downes

Joined the Company in September 1996 and serves as Executive Vice President and Chief Lending Officer.

Anthony J. Feraro (2)

Joined the Company in November 1999 and serves as President and Chief Executive Officer.

James A. Hughes, CPA (2)

Joined the Company in December 2000 and serves as Executive Vice President and Chief Financial Officer.

(1) Director of Unity Bancorp and Unity Bank

(2) Director of Unity Bank

Senior Management

Alan Bedner, CPA

Joined the Company in April 2001 and serves as Senior Vice President, Controller.

John Frangelli

Joined the Company in March 2001 and serves as Senior Vice President, Commercial Lending.

John Kauchak

Joined the Company in February 1996 and serves as Executive Vice President, Chief Operating Officer.

Kelly Stashko

Joined the Company in September 1996 and serves as Senior Vice President, Information Technology.

Management’s Discussion and Analysis

of Financial Condition and Results of Operation

SELECTED CONSOLIDATED FINANCIAL DATA

	At or for the Years Ended December 31st
	2001			2000			1999			1998			1997
	(Dollars in thousands, except per share data)
Selected Results of Operations
Interest income	$	23,892		$	28,017		$	23,688		$	17,480		$	15,025
Interest expense	11,702			16,322			12,738			7,165			6,312
Net interest income	12,190			11,695			10,950			10,315			8,713
Provision for loan losses	1,400			716			1,743			804			497
Other income	5,391			7,666			5,606			4,407			3,043
Other expenses	14,522			23,718			20,578			10,499			7,985
Tax (benefit) expense	(382		)	839			(2,387		)	1,282			1,259
Net income (loss)	2,041			(5,912		)	(3,378		)	2,137			2,015
Per Share Data
Net income (loss) per common share (basic)(1)	0.00			(1.71		)	(0.91		)	0.67			0.65
Net income (loss) per common share (diluted)(1)	0.00			(1.71		)	(0.91		)	0.64			0.64
Book value per common share	4.80			4.32			5.88			7.01			6.39
Cash dividend on common shares	—			—			0.24			0.20			0.20
Selected Balance Sheet Data
Total assets	379,232			356,003			438,969			254,612			213,782
Loans	272,559			226,140			322,532			166,792			134,176
Allowance for loan losses	3,165			2,558			2,173			1,825			1,322
Investment securities	80,696			70,837			74,349			40,929			41,308
Deposits	339,954			320,318			357,538			226,860			192,414
Borrowings	10,000			10,000			53,000			—			—
Shareholders’ equity	24,836			21,314			21,792			26,346			19,990
Performance Ratios
Return on average assets	0.56		%	(1.44		)%	(0.94		)%	0.93		%	1.05		%
Return on average common equity (1)	(0.11		)%	(33.43		)%	(14.33		)%	10.17		%	10.78		%
Efficiency ratio	82.60		%	N/M			N/M			71.32		%	67.92		%
Net interest margin	3.56		%	3.19		%	3.49		%	4.91		%	4.72		%
Net interest spread	2.84		%	2.61		%	3.01		%	3.99		%	3.60		%
Asset Quality Ratios
Allowance for loan losses to loans	1.16		%	1.13		%	0.67		%	1.09		%	0.98		%
Allowance for loan losses to non-performing loans	99.40		%	88.12		%	153.90		%	79.45		%	140.19		%
Non-performing loans to total loans	1.17		%	1.28		%	0.44		%	1.38		%	0.70		%
Non-performing assets to total loans and OREO	1.26		%	1.35		%	0.90		%	2.04		%	0.70		%
Net charge-offs to average loans	0.33		%	0.12		%	0.59		%	0.21		%	0.05		%
Capital Ratios — Company
Leverage ratio	6.62		%	5.50		%	4.35		%	10.87		%	9.51		%
Tier 1 risk-based capital ratio	9.53		%	9.61		%	6.17		%	13.89		%	13.29		%
Total risk-based capital ratio	10.75		%	10.76		%	6.88		%	14.85		%	14.28		%
Capital Ratios — Bank
Leverage ratio	6.25		%	5.24		%	4.01		%	7.09		%	7.35		%
Tier 1 risk-based capital ratio	9.00		%	9.12		%	5.62		%	8.84		%	10.13		%
Total risk-based capital ratio	10.22		%	10.26		%	6.33		%	9.80		%	11.03		%

(1) Includes impact of $1.8 million non-cash preferred dividend as a result of preferred stock conversion to common stock in 2001.

N/M - Not Meaningful

The following discussion and analysis of financial condition and results of operations 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.

Overview

Unity Bancorp, Inc.(the “Parent Company”) is a bank holding company incorporated in Delaware 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 12 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 and other commercial credits, as well as personal investment advisory services.

In 1999, the Company incurred losses causing the Bank and the Company’s capital ratios to fall below levels required under federal regulation. Due to continued losses through the first two quarters of 2000, the Bank and the Company entered into stipulations and agreements with each of their respective regulators on July 18, 2000. Under these agreements, the Bank and the Company were each required to take a number of affirmative steps including hiring an outside consulting firm to review their respective management structures and adopting a strategic and capital plan to increase the Bank’s leverage ratio above 6.00 percent by December 31, 2001. The agreements prohibited the Bank from paying a dividend to the Company and the Company from paying dividends on its common or preferred stock, without regulatory approval.

As a result of the Company’s restructuring efforts in 2001 and 2000, the Company and the Bank exceeded the “well capitalized” designation for all federal capital ratios at December 31, 2001 and met the 6.0 percent capital requirement imposed under its stipulations and agreements.

As a result of the improvement in the Company’s financial performance and regulatory capital ratios, in the first quarter of 2002, the regulators lifted all agreements with the Bank and the Company. As a result of the lifting of the agreements, the Bank and the Company are no longer prohibited from paying dividends. The Company has no intention of paying dividends on its common stock in the near future.

Results of Operations

Net income for the year ended December 31, 2001, was $2.0 million compared to a net loss of $5.9 million for 2000. After consideration of the preferred stock dividends, net loss to common shareholders was $21 thousand, or $0.00 loss per basic share for December 31, 2001, compared to a $6.3 million loss, or $1.71 loss per basic share for the same period a year ago. The improved operating results were primarily the result of a decrease in non-interest expense.

Net interest income for the year ended December 31, 2001, was $12.2 million compared to $11.7 million in 2000, an increase of $495 thousand or 4.2 percent. The increase in net interest income was attributed to an increase in net interest spread in 2001, even though net earning assets were at lower levels. The increase in interest spread was benefited by the decrease in cost of funds, caused by the run off of high cost time deposits. Net interest margin increased from 3.19 percent in 2000 to 3.56 percent in 2001.

Non-interest income for 2001 was $5.4 million, a decrease of $2.3 million, or 29.7 percent, from 2000. The results for 2000 include a $3.5 million gain on the sale of deposits, offset by $1.2 million in losses from loan sales in 2000.

Non-interest expenses were $14.5 million in 2001, a decrease of $9.2 million, or 38.8 percent, as compared to $23.7 million recorded in 2000. The reduction in non-interest expense is directly related to the dissolution of Certified Mortgage Associates “CMA”and fewer branches resulting from the branch sales in 2000 and improved expense control in 2001.

As a result of taxable earnings in 2001, tax valuation reserves were reversed resulting in a $382 thousand tax benefit. In 2000 the Company recorded tax expense of $839 thousand as valuation reserves were recorded against deferred tax assets dependent on future taxable income.

On July 13, 2001, the Company concluded an exchange offer for shares of its Series A Preferred Stock. As a result of the exchange, the Company recorded a $1.8 million non-cash dividend, representing the value of the additional consideration transferred in the transaction over the fair value of the securities issuable pursuant to the original terms of the agreement.

For the year ended December 31, 2000, the Company realized an after-tax loss of $5.9 million. The losses incurred in 2000 were significantly impacted by the results of a discontinued subsidiary, CMA. In total, CMA accounted for approximately $4.4 million of the Company’s $5.9 million loss. Two loan sales in 2000 contributed $1.9 million to the Company’s losses, offset by the $3.5 million gain on the deposit sales.

Net Interest Income

The Company’s results of operations depend primarily on its net interest income, which is the difference between the interest earned on its earning assets and the interest paid on funds borrowed to support those assets. Net interest margin is a function of the difference between the weighted average rate received on interest-earning assets as compared with that of the cost of interest-bearing liabilities.

Interest income was $23.9 million in 2001, a decrease of $4.2 million, or 14.7 percent, compared to $28.0 million a year ago. Interest-earning assets averaged $342.6 million in 2001, a decrease of $27.6 million, or 7.5 percent, compared to 2000. The decrease in average earning assets occurred as a result of the reduction of financial assets in 2000 in conjunction with the Company’s capital restoration plan. The rate earned on interest-earning assets decreased 63 basis points to 6.97 percent in 2001, primarily due to a lower interest rate environment and higher balances in lower yielding investments. Of the $4.2 million decline in interest income in 2001, $1.8 million can be attributed to the reduction in average interest earning assets and $2.4 million was related to the reduction in yield.

Interest expense was $11.7 million in 2001, a decrease of $4.6 million or 28.3 percent, compared to $16.3 million in 2000. Interest-bearing liabilities averaged $283.3 million in 2001, a decrease of $43.6 million or 13.3 percent compared to 2000. The decreases in average interest bearing liabilities can be attributed to a reduction in deposits due to branch sales in 2000. The rate paid on interest bearing liabilities decreased 86 basis points to 4.13 percent, primarily due to a lower interest rate environment. Of the $4.6 million decline in interest expense in 2001,$2.2 million was attributed to the reduction in average interest bearing liabilities while $2.4 million was related to the reduction in the rate paid on these liabilities.

Total average interest-bearing deposits were $270.3 million in 2001, a decline of $44.4 million, or 14.1 percent from 2000. The decline in interest-bearing deposits was a result of sales of $48.0 million in deposits in December 2000 and the planned reduction of higher costing governmental time deposits. The rate paid on interest bearing deposits was 4.04 percent for 2001, a decrease of 91 basis points from last year. The decrease in rate was due to the run off of higher promotional rate time deposits and the lower interest rate environment.

Net interest income amounted to $12.2 million in 2001, an increase of $495 thousand or 4.2 percent compared to 2000. The increase in net interest income was a result of increased spreads. Net interest spread amounted to 2.84 percent in 2001, an increase of 23 basis points compared to 2.61 percent in 2000. Net interest margin was 3.56 percent for 2001, an increase of 37 basis points compared to 3.19 percent in 2000. Net interest margin in 2001 has increased in each respective quarter and was 4.04 percent in the fourth quarter of 2001.

For 2000, net interest income increased $0.7 million, or 6.8 percent to $11.7 million from $11.0 million for 1999. This increase was due to the growth in interest-earning assets, partially offset by the increase in the cost of interest-bearing liabilities. On average, interest-earning assets increased $54.3 million, or 17.2 percent, to $370.2 million. The increase in earning-assets was primarily attributed to a $40.5 million increase in average loans. Interest expense paid on deposits and borrowed funds was $16.3 million in 2000, a $3.6 million increase over 1999. Average interest-bearing liabilities increased 15.7 percent, or $44.3 million, to average $326.9 million for 2000. The cost of interest-bearing liabilities increased from 4.51 percent in 1999 to 4.99 percent in 2000. The increase in interest-bearing liabilities was due to higher promotional rates of interest to attract new customers to the new branch locations. Net interest spread declined from 3.01 percent in 1999 to 2.61 percent in 2000. The decline in net interest spread was the result of the increased cost of interest-bearing deposits. As a result of the decline in net interest spread, net interest margin decreased to 3.19 percent in 2000, from 3.49 percent in 1999.

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

Consolidated Average Balance Sheets

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

	2001							2000										1999
Year ended December 31,	Average Balance			Interest		Rate/ Yield		Average Balance				Interest				Rate/ Yield		Average Balance				Interest				Rate/ Yield
ASSETS
Interest-earning assets:
Federal funds sold and Interest-bearing deposits with banks	$	22,857		$	1,007	4.41	%	$	19,531			$	1,380			7.07	%	$	12,564			$	824			6.56	%
Securities:
Available for sale	55,674			3,327		5.98		38,663				2,602				6.73		34,744				2,071				5.96
Held to maturity	25,307			1,549		6.12		33,736				2,010				5.96		30,749				1,794				5.83
Total securities	80,981			4,876		6.02		72,399				4,612				6.37		65,493				3,865				5.90
Loans, net of unearned discount:
SBA loans	40,454			3,565		8.81		24,581				2,535				10.31		18,258				1,972				10.80
Commercial	93,925			7,870		8.38		99,677				8,877				8.91		109,267				9,596				8.78
Residential mortgage	76,560			4,640		6.06		82,296				4,842				5.88		42,069				2,400				5.71
Consumer	27,776			1,934		6.96		71,703				5,878				8.20		68,205				5,099				7.48
Total loans	238,715			18,009		7.54		278,257				22,132				7.96		237,799				19,067				8.02
Total interest-earning assets	342,553			23,892		6.97		370,187				28,124				7.60		315,856				23,756				7.52
Noninterest-earning assets:
Cash and due from banks	11,463							17,666										18,576
Allowance for loan losses	(2,785		)					(2,434			)							(1,995			)
Other assets	13,075							26,157										28,620
Total noninterest-earning assets	21,753							41,389										45,201
Total Assets	$	364,306						$		411,576								$		361,057
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Interest-bearing demand	$	109,444		3,093		2.83		$	116,541			5,129				4.40		$	87,952			3,210				3.65
Savings deposits	30,837			734		2.38		35,491				782				2.20		35,245				1,075				3.05
Time deposits	130,063			7,095		5.46		162,736				9,675				5.95		139,187				7,212				5.18
Total interest-bearing deposits	270,344			10,922		4.04		314,768				15,586				4.95		262,384				11,497				4.38
Other debt	12,911			780		6.04		12,095				736				6.09		20,159				1,241				6.16
Total interest-bearing liabilities	283,255			11,702		4.13		326,863				16,322				4.99		282,543				12,738				4.51
Noninterest-bearing liabilities:
Demand deposits	56,967							59,885										50,663
Other liabilities	1,670							2,212										4,280
Total noninterest-bearing liabilities	58,637							62,097										54,943
Shareholders’ equity	22,414							22,616										23,571
Total Liabilities and Shareholders’ Equity	$	364,306						$		411,576								$		361,057
Net interest spread				12,190		2.84	%					11,802				2.61	%					11,018				3.01	%
Tax-equivalent basis adjustment				—								(107			)							(68			)
Net interest income				$	12,190							$		11,695								$		10,950
Net interest margin						3.56	%									3.19	%									3.49	%

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 34.0 percent.

Year ended December 31	2001 versus 2000 Increase (Decrease) Due to Change in									2000 versus 1999 Increase (Decrease) Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
	(Dollar amounts in thousands on a tax equivalent basis)
Interest Income:
Net loans	$	(2,562	)	$	(1,561	)	$	(4,123	)	$	3,252		$	(187	)	$	3,065
Investment securities	547			(399		)	148			447			277			724
Federal funds sold and Interest- bearing deposits	191			(448		)	(257		)	265			314			579
Total interest income	$	(1,824	)	$	(2,408	)	$	(4,232	)	$	3,964		$	404		$	4,368

Interest Expense:
Interest-bearing deposits	$	(297	)	$	(1,739	)	$	(2,036	)	$	389		$	447		$	836
Savings deposits	(108		)	60			(48		)	333			458			791
Time deposits	(1,830		)	(750		)	(2,580		)	1,220			1,243			2,463
Total deposits	$	(2,235	)	$	(2,429	)	$	(4,664	)	$	1,942		$	2,148		$	4,090
Other debt	50			(6		)	44			(496		)	(10		)	(506		)
Total interest expense	$	(2,185	)	$	(2,435	)	$	(4,620	)	$	1,446		$	2,138		$	3,584
Net interest income-FTE	$	361		$	27		$	388		$	2,518		$	(1,734	)	$	784
Increase (decrease) in tax-equivalent adjustment							107									(39		)
Net interest income							$	495								$	745

Provision for Loan Losses

The provision for loan losses is determined based on management’s evaluation of the adequacy of the allowance for loan losses which is maintained at a level sufficient to absorb estimated probable losses in the loan portfolio as of the balance sheet date. The provision for loan losses totaled $1.4 million for 2001, an increase of $684 thousand, compared with $716 thousand for 2000. The increase in the provision for loan losses for 2001 was attributable to an increase in net charge-offs, the increase and change in the composition of the loan portfolio, the specific and general reserve factors used to determine reserve levels on certain types of loans, the analysis of the estimated probable losses inherent in the loan portfolio based upon the review of particular loans, the credit worthiness of particular borrowers, and general economic conditions. The provision is based on management’s assessment of the adequacy of the allowance for loan losses described under the section titled Allowance for Loan Losses. As such management believes the current provision is appropriate based on the assessment of the adequacy of the allowance for loan losses.

The provision for loan losses totaled $716 thousand for 2000, compared to $1.7 million in 1999. In 1999, the Company recorded $1.4 million of net charge-offs, compared to $331 thousand of net charge-offs in 2000. The net charge-offs in 1999 primarily related to one borrower. The lower 2000 provision for loan losses was a result of the reduced level of charge-offs and the decline in the loan portfolio, somewhat mitigated by the increased level of non-performing loans.

Non-Interest Income

Non-interest income consists of service charges on deposits, service and loan fee income, gains on sales of securities and loans and other income. Non-interest income was $5.4 million for 2001, a decrease of $2.3 million, or 29.7 percent, compared to $7.7 million for 2000. The decrease in non-interest income was primarily attributed to $3.5 million of gains realized on deposit sales in 2000, while there were no comparable transactions in 2001.

The following table shows the components of Non-interest Income for 2001, 2000 and 1999.

Non-Interest Income

	2001		2000			1999
	(In thousands)
Service charges on deposit accounts	$	1,262	$	1,174		$	778
Service and loan fee income	1,261		1,140			1,065
Gain on SBA loan sales	2,014		2,142			1,324
Net securities gains	157		3			193
Other income	697		690			507
(Loss) gain on other loan sales	—		(960		)	1,739
Gain on sale of deposits	—		3,477			—
Total non-interest income	$	5,391	$	7,666		$	5,606

Service charges on deposits amounted to $1.3 million for 2001, an increase of $88 thousand, or 7.5 percent from 2000. The increase in deposit service charges over the last two years is attributed to the improved collection of deposit fees and account charges such as non-sufficient funds.

Service and loan fee income amounted to $1.3 million for 2001, an increase of $121 thousand, or 10.6 percent from 2000. The growth in loan and servicing fees for the past two years can be attributed to the growth of the serviced Small Business Administration (“SBA”) loan portfolio, which amounted to $100.0 million, $86.5 million and $65.7 million at December 31, 2001, 2000 and 1999, respectively.

Gains on the sale of SBA loans amounted to $2.0 million in 2001, a decrease of $128 thousand from the $2.1 million in 2000. The decline in gains on the sale of SBA loans in 2001 was due to the Company retaining SBA loans to enhance net interest income. Gains on SBA loan sales were $2.1 million in 2000, an increase of $818 thousand from $1.3 million in 1999, related to the increase in the volume of SBA loans sold. Gains on SBA loan sales reflect the participation in the SBA’s guaranteed loan program. Under the SBA program, the SBA guarantees up to 85 percent of the principal of a qualifying loan. The Company usually sells the guaranteed portion of the loan into the secondary market. Sales of guaranteed SBA loans totaled $30.0 million, $30.4 million and $24.3 million for 2001, 2000 and 1999, respectively. These loans are sold servicing retained.

Other income amounted to $697 thousand in 2001, compared to $690 thousand in 2000. Included in other income for 2000 is income from a cancelled bank owned life insurance policy, which was cancelled in mid 2000.

(Loss) gain on other loan sales amounted to a loss of $960 thousand for 2000 and a gain of $1.7 million for 1999. The loss in 2000 includes a $731 thousand loss on the sale of adjustable rate mortgages, a $1.2 million loss on home equity loans and a $960 thousand gain on the sale of mortgages from CMA, a discontinued subsidiary. The gains in 1999 are related to the sale of mortgages from CMA.

Non-Interest Expense

Total non-interest expense amounted to $14.5 million for 2001, a decrease of $9.2 million, or 38.8 percent compared to 2000. Non-interest expense for 2000 includes the operations of CMA and five additional branches. The reduction in non-interest expense is directly related to the dissolution of CMA, branch sales and improved expense control.

The following table presents a breakdown of non-interest expense for the years ended December 31, 2001, 2000 and 1999:

Non-Interest Expense

	2001		2000			1999
	(In thousands)
Compensation and benefits	$	6,814		$	9,198	$	8,710
Occupancy, net	1,648			2,230		2,383
Processing & communications	2,071			2,314		1,841
Furniture & equipment	1,100			1,227		1,332
Professional services	690			1,471		1,386
Deposit insurance	501			311		192
Loan servicing	270			707		672
Write-off of CMA goodwill	—			3,208		—
Amortization of goodwill	—			387		393
Other expenses	1,428			2,665		3,669
Total non-interest expense	$	14,522		$	23,718	$	20,578

Compensation and benefits expense amounted to $6.8 million for 2001, a decrease of $2.4 million, or 25.9 percent compared to 2000. The decrease in compensation and benefits is related to the reduction in the number of employees during the year, fewer branches and the dissolution of CMA. Total full time equivalent employees amounted to 146, 133 and 165 at December 31, 2001, 2000 and 1999, respectively.

Compensation and benefits expense for 2000 reflected an average of approximately 170 employees, as the majority of the reduction in employees took place in the fourth quarter of 2000. The increase in compensation and benefits from 1999 to 2000 was a result of the increase in employees due to the acquisition of CMA and the branch expansion.

Occupancy expense amounted to $1.6 million for 2001, a decrease of $582 thousand, or 26.1 percent compared to 2000. The decrease in occupancy expense is primarily related to the reduction in the number of branches.

Processing and communications expense amounted to $2.1 million for 2001 a decrease of $243 thousand or 10.5 percent compared to 2000. The decrease in processing and communications expense is related to the lower level of processing transactions due to the reduced number of branches. The increase in processing and communications from 1999 to 2000 was related to the full year impact of the branch expansion in 2000 over the prior year.

Furniture and equipment expense amounted to $1.1 million for 2001, a decrease of $127 thousand, or 10.4 percent compared to 2000. The decrease in furniture and equipment expense is related to the reduction in the number of branches.

Professional service fees amounted to $690 thousand for 2001, a decrease of $781 thousand, or 53.1 percent compared to 2000. Professional services for 2000 and 1999 were impacted by increased legal expense associated with suits against the Company and increased professional fees as a result of increased regulatory supervision in complying with the regulatory orders. The decrease in professional fees in 2001 is a result of the company no longer needing these additional services due to its improved financial condition.

Deposit insurance amounted to $501 thousand for 2001, an increase of $190 thousand or 61.1 percent compared to 2000. Deposit insurance increased as a result of an increase in risk assessment in late 2000, which increased the premium for 2001. The insurance assessment was adjusted downward in mid 2001 due to the Company’s improved financial condition.

Loan servicing expense amounted to $270 thousand for 2001, a decrease of $437 thousand compared to 2000. The decrease in loan servicing expenses for 2001 is a result of the Company’s increased reimbursement from the SBA for their share of collection costs on loans serviced on its behalf.

Other expenses amounted to $1.4 million for 2001, a decrease of $1.2 million compared to 2000. The decrease in other expense is a result of lower advertising and travel and expense costs. Other expenses decreased to $2.7 million in 2000 compared to $3.7 million in 1999 as a result of a write-down of uncollected assets associated with a check-kiting scheme in 1999.

Income Tax Expense

For 2001, the Company reported $382 thousand of income tax benefits as compared to $839 thousand tax expense in 2000. As a result of continued losses in 1999 and 2000, the Company recorded tax valuation reserves against deferred tax assets dependent on future taxable income in 2000. As a result of taxable earnings in 2001 and projected future taxable income, tax valuation reserves were reversed which offset current tax expense. The Company anticipates that the effective income tax expense rate in 2002 will be approximately 35 percent.

Financial Condition

Total assets increased $23.2 million, or 6.5 percent, to $379.2 million at December 31, 2001, compared to $356.0 million at December 31, 2000. Total loans increased $46.4 million, or 20.5 percent, to $272.6 million at December 31, 2001, compared to $226.1 million at December 31, 2000. The securities portfolio, including securities held to maturity and available for sale, increased $9.9 million, or 13.9 percent to $80.7 million at December 31, 2001, compared to $70.8 million at December 31, 2000. On average for the year ended December 31, 2001, total assets were $364.3 million, a $47.3 million decrease from the prior years $411.6 million average balance. The decrease in average assets was due to the loan and deposit sales in 2000 to enhance the company’s liquidity and capital levels.

Deposits amounted to $340.0 million at December 31, 2001, an increase of $19.6 million, or 6.1 percent, from $320.3 million in 2000. On average, deposits declined $47.3 million to $327.3 million in 2001, as a result of the deposit sales in late 2000. In December 2000, $48.0 million of deposits were sold in conjunction with the branch sales. In addition, in 2000 the Company reduced non core government deposits. The Company does not have any brokered deposits. Total borrowings were flat for the year at $10.0 million.

Shareholders’ equity increased $3.5 million, or 16.5 percent, to $24.8 million at December 31, 2001 compared to $21.3 million at December 31, 2000. This increase was the result of the $2.0 million net operating profit before preferred stock dividends, $289 thousand of accumulated other comprehensive income as a result of appreciation in the securities portfolio and $1.1 million of capital raised through a private placement offering of common stock. As of December 31, 2001 and 2000 the Company met the well capitalized designation for regulatory purposes.

On July 13, 2001, the Company concluded an exchange offer for shares of its Series A Preferred Stock, with 94 percent of the 103.5 thousand shares converting to common stock. Under the terms of the exchange offer, 10.1 shares of common stock and 10.1 common stock purchase warrants were issued for each share of Series A Preferred Stock. Each warrant allows the holder to purchase one share of common stock at an exercise price of $5.50 for a fifteen-month period ending October 16, 2002. In addition, one share of common stock and one common stock purchase warrant were issued in full satisfaction of each $4.95 of accrued but unpaid dividends on each share of Series A Preferred Stock tendered. Approximately $627 thousand of unpaid dividends were settled in the exchange offer. Under the terms of the exchange offer, approximately 1.1 million shares of common stock and 1.1 million warrants were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and the related unpaid dividends. Six thousand shares of Series A Preferred Stock remains outstanding at December 31, 2001.

As a result of the exchange, the Company recorded a $1.8 million non-cash dividend, representing the value of the additional consideration transferred in the transaction over the fair value of securities issuable pursuant to the original terms of the agreement. This dividend had no impact on total capital, but impacted earnings per common share in the third quarter of 2001.

In September 2001, the Company commenced a Private Placement common stock offering to raise additional capital to support asset growth and to increase regulatory capital. The Company’s offering raised $1.1 million in capital through the issuance of 269 thousand common shares. The shares issued in the private placement are restricted from sale for one year and were issued at $4.11 per share.

Loan Portfolio

The loan portfolio is a significant source of both interest and fee income. The portfolio consists of commercial, SBA, residential mortgage and consumer loans. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Loans increased $46.4 million, or 20.5 percent to $272.6 million at December 31, 2001, from year-end 2000. Growth in the loan portfolio was generated by increases of $23.3 million in SBA loans and $30.9 million in commercial loans offset by a decline of $3.8 million in residential mortgages and $4.0 million in consumer loans. Average loans decreased $39.5 million, or 14.2 percent, from $278.3 million in 2000 to $238.7 million in 2001. The decrease in average loans is due primarily to loan sales of $36.4 million of adjustable rate mortgages and $44.8 million home equity loans in 2000. The yield on the loan portfolio was 7.54 percent in 2001 compared to 7.96 in 2000. The decline in the yield on the loan portfolio was due to a lower interest rate environment.

SBA loans provide guarantees up to 85 percent of the principal by the SBA. SBA loans available for sale are generally sold in the secondary market with the non-guaranteed portion held in the portfolio. SBA loans held to maturity amounted to $35.8 million at December 31, 2001, an increase of $12.3 million from year-end 2000. SBA loans held for sale, carried at the lower of cost or market, amounted to $17.7 million at December 31, 2001, an increase of $11.0 million from year-end 2000. The held for sale SBA loan portfolio increased in 2001 due to the intentional build up of saleable product as the Company elected to hold loans to enhance interest income. SBA loans are often originated outside of the Company’s market place.

Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $119.3 million at December 31, 2001, an increase of $30.9 million from year-end 2000. The commercial portfolio is expected to continue to increase in 2002. Included in commercial loans at December 31, 2001 are $3.6 million in lease loans.

Residential mortgage loans consist of loans secured by 1-4 family residential properties. These loans amounted to $73.1 million at December 31, 2001, a decrease of $3.8 million from year-end 2000. In 2001 the Company purchased $11.6 million in residential mortgages. The Company does not originate a material amount of mortgage loans held for investment. As such, the residential mortgage portfolio is expected to decline in 2002.

Approximately $23.0 million of the residential mortgage portfolio, with an additional borrowing value of $13.0 million, is available to collateralize borrowings from the FHLB of New York.

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 $26.7 million at December 31, 2001 a decrease of $4.0 million from year-end December 2000. The decrease in the consumer loan portfolio was primarily the result of auto loan pay-downs.

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

	2001				2000				1999				1998				1997
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
	(In thousands)
SBA held for sale	$	17,719	6.5	%	$	6,741	3.0	%	$	3,745	1.2	%	$	3,569	2.2	%	$	2,786	2.1	%
SBA held to maturity	35,754		13.1	%	23,436		10.3	%	12,735		3.9	%	15,124		9.1	%	14,986		11.2	%
Commercial	119,262		43.8	%	88,375		39.1	%	105,096		32.6	%	110,313		66.1	%	95,565		71.2	%
Residential mortgage	73,144		26.8	%	76,924		34.0	%	107,447		33.3	%	8,551		5.1	%	10,398		7.7	%
Consumer	26,680		9.8	%	30,664		13.6	%	93,509		29.0	%	29,235		17.5	%	10,483		7.8	%
Total Loans	$	272,559	100.0	%	$	226,140	100.0	%	$	322,532	100.0	%	$	166,792	100.0	%	$	134,218	100.0	%

There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio. There are no foreign loans in the portfolio. As a preferred SBA lender, a portion of the SBA portfolio is outside of the Company’s lending area.

The following table shows the maturity distribution or repricing of the loan portfolio and the allocation of floating and fixed interest rates at December 31, 2001.

Loan Maturities

	Within 1 Year		1 - 5 Years		After 5 Years		Total
	(In thousands)
SBA	$	53,473	$	—	$	—	$	53,473
Commercial	52,229		62,847		4,186		119,262
Residential mortgage	3,160		65,781		4,203		73,144
Consumer	16,455		7,690		2,535		26,680
Total	$	125,317	$	136,318	$	10,924	$	272,559
Amount of loans based upon:
Fixed interest rates							$	113,235
Floating or adjustable interest rates							159,324
Total							$	272,559

Asset Quality

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

Non-performing loans consist of loans that are not accruing interest (non-accrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the collectibility of principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans past due 90 days and still accruing interest are not included in non-performing loans. Management has evaluated the loans past due 90 days or greater and still accruing interest and determined that they are well collateralized and in the process of collection. The majority of loans 90 days past due and still accruing interest are loans where customers continue to make the monthly principal and interest payments, however, the loans have matured and are pending renewal.

Credit risk is minimized by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins upon the origination of a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value of potential collateral, the source of funds for repayment of the loan and other factors are analyzed before a loan is submitted for approval. The loan portfolio is then subject to ongoing internal reviews for credit quality. In addition, an outside firm is used to conduct independent credit reviews.

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

	2001			2000			1999			1998			1997
	(In thousands)
Non-performing by category
Commercial & SBA	$	3,004		$	2,064		$	692		$	—		$	—
Real Estate	—			807			720			2,297			861
Consumer	180			32			—			—			82
Total non-performing loans	$	3,184		$	2,903		$	1,412		$	2,297		$	943
OREO	258			142			1,505			—			—
Other asset (1)	—			—			—			1,131			—
Total non-performing assets	$	3,442		$	3,045		$	2,917		$	3,428		$	943

Past due 90 days or more and still accruing interest
Commercial & SBA	$	13		$	578		$	—		$	803		$	346
Real Estate	—			694			159			790			206
Consumer	56			—			7			7			—
Total	$	69		$	1,272		$	166		$	1,600		$	552
Non-performing loans to total loans	1.17		%	1.28		%	0.44		%	1.38		%	0.70		%
Non-performing assets to total loans and OREO	1.26		%	1.21		%	0.70		%	1.97		%	0.70		%
Allowance for loans losses as a percentage of non-performing loans	99.40		%	88.12		%	153.90		%	79.45		%	140.19		%

(1) Reflects the value of an impaired asset associated with an unauthorized overdraft

Nonperforming loans increased $281 thousand from $2.9 million at year-end 2000, to $3.2 million at December 31, 2001. The increase in nonaccrual loans is due primarily to increased levels of non-performing commercial accounts. Included in non-performing loans are $1.3 million of loans that are guaranteed by the SBA. Loans past due 90 days or more and still accruing decreased $1.2 million from December 31, 2000 to $69 thousand primarily as a result of renewal of performing loans which had matured. Other real estate owned (OREO) properties increased by $116 thousand in 2001, from

$142 thousand at year-end 2000. OREO is carried at the lower of cost or market, less estimated selling costs. Total non-performing assets amounted to $3.4 million, an increase of $397 thousand compared with $3.0 million at year-end 2000.

Potential problem loans are those where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are not included in non-performing loans as they continue to perform. Potential problem loans, which consist primarily of commercial product were $0.3 million and $0.3 million at December 31, 2001 and 2000, respectively.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the financial statements as of the balance sheet date. Management utilizes a standardized methodology to assess the adequacy of the allowance for loan losses. This process consists of the identification of specific reserves for identified problem loans based on loan grades and the calculation of general reserves based on minimum reserve levels by loan type. Risks within the loan portfolio are analyzed on a continuous basis by management, and periodically by an independent credit 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 to quantify the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrowers, past and expected loan loss experience and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process, which includes the determination of the adequacy of the allowance for loan losses, is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

Additions to the allowance are made by provisions charged to expense whereas the allowance is reduced by net charge-offs (i.e., loans judged to be not collectable are charged against the reserve, less any recoveries on such loans). Although management attempts to maintain the allowance at a level deemed adequate to provide for potential 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 Bank 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 $3.2 million at December 31, 2001, compared to $2.6 million the prior year-end. The increase in the allowance for loan losses was due to the provision for loan losses of $1.4 million exceeding $0.8 million of net charge-offs. The increase was primarily attributable to the increase and change in the composition of the loan portfolio, the specific and general reserve factors used to determine reserve levels on certain types of loans, the analysis of the estimated potential losses inherent in the loan portfolio based upon the review of particular loans, the credit worthiness of particular borrowers and general economic conditions.

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

	2001			2000			1999			1998			1997
	(In thousands)
Balance at beginning of year	$	2,558		$	2,173		$	1,825		$	1,322		$	886
Charge-offs:
Commercial and SBA	756			278			432			60			10
Residential mortgage	48			19			871			254			55
Consumer	119			75			130			15			3
Total Charge-offs	923			372			1,433			329			68

Recoveries:
Commercial and SBA	42			12			16			—			—
Real estate	39			17			2			23			6
Consumer	49			12			20			5			—
Total recoveries	130			41			38			28			6
Total net charge-offs	$	793		$	331		$	1,395		$	301		$	62
Provision charged to expense	$	1,400		$	716		$	1,743		$	804		$	498
Balance at end of year	$	3,165		$	2,558		$	2,173		$	1,825		$	1,322
Net charge-offs to average loans	0.33		%	0.12		%	0.59		%	0.21		%	0.05		%
Allowance to total loans	1.16		%	1.13		%	0.67		%	1.09		%	0.98		%

The ratio of allowance for loan losses to total loans at December 31, 2001 and 2000 was 1.16 percent and 1.13 percent, respectively. The allowance for loan losses as a percentage of non-performing loans was 99.4 percent at December 31, 2001, compared to 88.12 percent at the end of 2000.

The following table sets forth for each of the major lending areas, the amount of the allowance for loan losses allocated to each category and the percentage of total loans represented by such category, as of December 31 of each year. The allocated allowance is the total of identified specific and general reserves by loan. 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.

	2001					2000				1999				1998				1997
	Amount			% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
			(In thousands)
Balance Applicable to:
SBA	$	776		19.6	%	$	447	13.3	%	$	309	5.1	%	$	237	11.3	%	$	396	13.3	%
Commercial	1,756			43.8	%	1,483		39.1	%	1,222		32.6	%	1,235		66.1	%	741		71.2	%
Residential mortgage	325			26.8	%	296		34.0	%	74		33.3	%	90		5.1	%	26		7.7	%
Consumer	308			9.8	%	332		13.6	%	568		29.0	%	263		17.5	%	159		7.8	%
Total	$	3,165		100.0	%	$	2,558	100.0	%	$	2,173	100.0	%	$	1,825	100.0	%	$	1,322	100.0	%

Investment Security Portfolio

Securities available for sale are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Securities available for sale were $59.8 million at December 31, 2001, an increase of $22.0 million, or 58.1 percent from year-end 2000. During the year 2001, $60.2 million of securities available for sale were purchased. Securities available for sale consist primarily of mortgage-backed securities, U.S. Government and Federal agency securities, corporate bonds and equity securities. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create economically more attractive returns and as an additional source of earnings.

The average balance of securities available for sale amounted to $55.7 million in 2001 compared to $38.7 million in 2000. As a result of the lower interest-rate environment, the average yield earned on the available for sale portfolio decreased 105 basis points, from 7.03 percent in 2000 to 5.98 percent in 2001. Sales of securities available for sale aggregated $13.4 million in 2001 generating a gain of $157 thousand. The weighted average repricing of securities available for sale, adjusted for prepayments, amounted to 3.2 years at December 31, 2001.

At December 31, 2001, the portfolio had net unrealized losses of $8 thousand compared to a net unrealized loss of $474 thousand at the end of the prior year. These unrealized losses are reflected net of tax in shareholders’ equity as other comprehensive income.

Securities held to maturity, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is comprised of U.S. Treasury securities, obligations of U.S. Government and government sponsored agencies and corporate securities. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. Securities held to maturity were $20.9 million at December 31, 2001, a decrease of $12.1 million or 36.7 percent from year-end 2000. The decline in held to maturity securities was a result of calls and maturities, and their reinvestment in the securities available for sale portfolio. As of December 31, 2001 and 2000, the market value of held to maturity securities was $21.1 million and $32.2 million, respectively. The improvement in the market value of the investment portfolios was due to the declining interest rate environment. The average balance of securities held to maturity amounted to $25.3 million in 2001 compared to $33.7 million in 2000. As a result of the maturity of lower yielding investments the average yield earned on the held to maturity increased 16 basis points, from 5.96 percent in 2000 to 6.12 percent in 2001. The weighted average repricing of held to maturity securities, adjusted for prepayments, amounted to 4.4 years at December 31, 2001.

Approximately 85 percent of the total investment portfolio had a fixed rate of interest. In the normal course of business, the Company accepts government deposits, for which investment securities are required as collateral. As of December 31, 2001, $19.5 million of securities were pledged.

Deposits

Deposits, which include non-interest bearing demand deposits and interest-bearing savings and time deposits, are the primary source of the Company’s funds. For the year, the Company realized continued growth in deposits. This growth was achieved through the emphasis on customer service, competitive rate structures and selective marketing through the Company’s twelve-branch network. The Company attempts to establish 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,	2001				2000				1999
	Amount		%		Amount		%		Amount		%
	(In Thousands)
Ending Balance:
Interest-bearing
demand deposits	$	119,864	35.3	%	$	106,262	33.1	%	$	106,712	29.9	%
Savings deposits	30,982		9.1	%	30,634		9.6	%	35,541		9.9	%
Time deposits	124,411		36.6	%	130,314		40.7	%	150,206		42.0	%
Demand deposits	64,697		19.0	%	53,108		16.6	%	65,079		18.2	%
Total deposits	$	339,954	100.0	%	$	320,318	100.0	%	$	357,538	100.0	%

Total deposits increased $19.6 million to $340.0 million at December 31, 2001 from $320.3 million at December 31, 2000. The increase in deposits was primarily the result of a $11.6 million increase in demand deposits and $13.6 million increase in interest bearing checking, offset by a decline in time deposits. Non-interest bearing demand deposits represented 19.0 percent of total deposits

at December 31, 2001, up from 16.6 percent in 2000. The increase in non-interest bearing deposits can be attributed to the increase in commercial accounts due to lending relationships. The average cost of interest bearing deposits in 2001 was 4.04 percent compared to 4.95 percent for 2000. The decrease in the cost of deposits can be attributed to the decline in interest rates and the repricing and runoff of higher costing promotional deposits. The decrease in the cost of deposits was the primary cause of the increase in the Company’s net interest margin in 2001.

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

	2001					2000				1999
	Amount			%		Amount		%		Amount		%
	(In Thousands)
Average Balance:
Interest-bearing
demand deposits	$		109,444	33.5	%	$	116,541	31.1	%	$	87,952	28.1	%
Savings deposits	30,837			9.4	%	35,491		9.5	%	35,245		11.3	%
Time deposits	130,063			39.7	%	162,736		43.4	%	139,187		44.4	%
Demand deposits	56,967			17.4	%	59,885		16.0	%	50,663		16.2	%
Total deposits	$	327,311		100.0	%	$	374,653	100.0	%	$	313,047	100.0	%

On average, total deposits declined 12.6 percent, or $47.3 million, for 2001, to average $327.3 million. The decreases in average deposits is attributed to the $48.0 million of deposit sales in 2000.

Borrowed Funds

Borrowed funds consist of advances from the Federal Home Loan Bank (“FHLB”) of New York. These borrowings are used as a source of liquidity or to fund asset growth not supported by deposit generation. Residential mortgages collateralize the borrowings from the FHLB. As of December 31, 2001, total borrowings were $10.0 million, flat from the prior year-end. At December 31, 2001, the Company had $13.0 million of additional availability at the FHLB. The 4.92 percent $10.0 million FHLB borrowing at December 31, 2001 is callable at any time and due December 2010.

Asset/Liability Management

Based on the Company’s business, the two largest risks facing the Company are credit risk and market 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. This risk is managed by the Asset/Liability Committee (ALCO). The principal objectives of the ALCO are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity requirements, and actively manage risk within Board approved guidelines. The ALCO reviews the maturities and repricing of loans, investments, deposits and borrowings, cash flow needs, current market conditions, and interest rate levels.

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

The following table sets forth the gap ratio at December 31, 2001. 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 demand interest, savings, and money market deposits, are allocated based on their expected repricing in relation to changes in market interest rates.

	Under six Months			Six months through one year			More than one year through two years			More than two years through five years			More than five years through ten years			More than ten years and not repricing			Total



	(In thousands)
Assets
Cash & due from banks	$	5,516		$	—		$	—		$	—		$	—		$	11,316		$	16,832
Federal Funds sold	—			—			—			—			—			—			—
Investment Securities	19,183			7,489			13,254			25,459			8,372			6,939			80,696
Loans	108,769			16,391			20,884			115,591			5,646			5,278			272,559
Other assets	—			—			—			—			—			9,145			9,145
Total Assets	$	133,468		$	23,880		$	34,138		$	141,050		$	14,018		$	32,678		$	379,232
Liabilities and shareholders’ equity
Non interest demand	$	—		$	—		$	—		$	—		$	—		$	64,697		$	64,697
Savings and checking	76,652			5,537			6,350			49,134			13,173			—			150,846
Time deposits	56,267			42,247			13,873			11,877			147			—			124,411
Other debt	—			—			—			10,000			—			—			10,000
Other liabilities	—			—			—			—			—			4,442			4,442
Shareholders’ equity	—			—			—			—			—			24,836			24,836
Liabilities and shareholders’ equity	$	132,919		$	47,784		$	20,223		$	71,011		$	13,320		$	93,975		$	379,232
Gap	$	549		$	(23,904	)	$	13,915		$	70,039		$	698		$	(61,297	)	—
Cumulative Gap	$	549		$	(23,355	)	$	(9,440	)	$	60,599		$	61,297		—			—
Cumulative Gap to total assets	0.14		%	(6.16		)%	(2.49		)%	15.98		%	16.16		%	—			—

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 next call date, the maturity date, market volatility and current rate levels. Fixed rate loans are allocated based on expected amortization.

At December 31, 2001, there was a six-month liability-sensitive gap of $549 thousand and a one-year liability gap of $23.4 million, as compared to $33.2 million and $59.9 million for the prior year, respectively. The improvement in the liability gap is primarily a result of the reduction in certificate of deposits and the increase in adjustable rate SBA loans.

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 interests rate scenarios and balance sheets are combined to produce a range of potential income results. Net interest income is managed within guideline ranges for interest rates rising or falling by 300 basis points. Results outside of guidelines require action by the ALCO to correct the imbalance. Simulations are typically created over a 12-24 month time horizon. At December 31, 2001, these simulations show that with a 300 basis point immediate increase in interest rates, net interest income would decrease by approximately $0.2 million, or 1.3 percent. An immediate decline of 300 basis points in interest rates would decrease net interest income by approximately $0.7 million or 4.6 percent. These variances in net interest income are within the board-approved guidelines of +/- 7 percent.

Finally, to measure the impact of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Like the simulation model, results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity, as a percentage of assets with rate shocks of 200 basis points, is a decline of 1.4 percent in a rising rate environment and an increase of 0.14 percent in a falling rate environment. The variance in the EVPE is within board-approved guidelines of +/- 3.00 percent.

Operating, Investing and Financing

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2001, the balance of cash and cash equivalents was $16.8 million, a decrease of $28.4 million from the end of the prior year.

Net cash used in operating activities totaled $3.6 million at December 31, 2001 compared to a $6.6 million in 2000. The primary source of funds is net income from operations adjusted for: provision for loan losses, depreciation expenses, originations of SBA loans held for sale and proceeds of SBA loans held for sale. The $3.6 million in cash used was primarily the result of the Company increasing the amount of SBA loans held for sale.

Net cash used in investing activities amounted to $45.6 million in 2001 compared to net cash provided by investing activities of $108.5 million in 2000. The cash used in investing activities was primarily a result of funding of the loan and securities portfolios and the purchase of loans offset by sales, maturities and pay downs in the investment portfolio.

Net cash provided by financing activities amounted to $20.8 million for 2001, compared to a use of cash of $71.8 million in 2000. The cash provided by financing activities was due to growth in the Company’s deposit base.

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.

Bank Holding Company

The principal sources of funds for the holding company are dividends paid by the Bank. Excluding the payment of preferred dividends to shareholders, the Bank Holding Company only pays expenses that are specifically for the benefit of the Holding Company. Other than its investment in the Bank the Holding Company does not actively engage in other transactions or business. As a result the annual expenses of the Holding Company are not material. At December 31, 2001 the Bank Holding Company had $1.3 million in cash and $0.1 million in marketable securities, valued at fair market value.

Consolidated Bank

Liquidity is a measure of the ability to fund loans, withdrawals or maturities of deposits and other cash outflows in a cost-effective manner. The principal sources of funds are deposits, scheduled amortization and prepayments of loan 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 deposits and borrowings amounted to $350.0 million, as of December 31, 2001. The Company has augmented its liquidity with $10.0 million in borrowings from the FHLB of New York. At December 31, 2001, $13.0 million was available for additional borrowings from the FHLB of New York. Pledging additional collateral in the form of 1-4 family residential mortgages or investment securities can increase the line with the FHLB. An additional source of liquidity is the securities available for sale portfolio and SBA loans held for sale portfolio, which amounted to $59.8 million and $17.7 million respectively, at December 31, 2001.

As of December 31, 2001, deposits included $33.2 million of Government deposits, as compared to $31.7 million at year-end 2000. These deposits are generally short in duration and are very sensitive to price competition. The Company has significantly reduced its reliance on these deposits as a source of funds and believes the current portfolio of these deposits to be appropriate. Included in the portfolio were $29.6 million of deposits from two municipalities. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company. At

December 31, 2001, the Bank had approximately $85.9 million of loan commitments, which will either expire or be funded, generally within one year. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded. In addition, approximately one half of these commitments are for SBA Loans, which may be sold into the secondary market.

Capital

In 2001, the Company concluded its exchange offer for shares of its Series A Preferred Stock. Under the terms of the exchange offer, 10.1 shares of common stock and 10.1 common stock purchase warrants were issued for each share of Series A Preferred Stock. Under the terms of the exchange offer, approximately 1.1 million shares of common stock and 1.1 million warrants were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and the related unpaid dividends. Six thousand shares of Series A Preferred Stock remained outstanding at December 31, 2001. In 2001, the Company undertook a private placement of its common stock, raising a total of $1.1 million through the issuance of 269 thousand shares of common stock. The majority of the proceeds of the offering were contributed to the Bank.

The following table summarizes the Company’s and the Bank’s risk based and leveraged capital ratios at December 31, 2001 and 2000, as well as the required minimum regulatory capital ratios.

Company	Dec. 2001		Dec. 2000		Adequately Capitalized		Well Capitalized Requirements
Leverage ratio	6.62	%	5.50	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	9.53	%	9.61	%	4.00	%	6.00	%
Total risk-based capital ratio	10.75	%	10.76	%	8.00	%	10.00	%

Bank	Dec. 2001		Dec. 2000		Adequately Capitalized		Well Capitalized Requirements
Leverage ratio	6.25	%	5.24	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	9.00	%	9.12	%	4.00	%	6.00	%
Total risk-based capital ratio	10.22	%	10.26	%	8.00	%	10.00	%

At December 31, 2001, shareholders’ equity was $24.8 million, a $3.5 million increase from year-end 2000. The increase in shareholder’s equity was a result of $2.0 million in operating income, $1.1 million from a private placement offering and $289 thousand related to the appreciation in the securities portfolios. Total equity to assets at December 31, 2001 and 2000 was 6.55 percent and 5.99 percent, respectively.

Forward-Looking Statements

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

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

Independent Auditors’ Report

To the Shareholders and

Board of Directors of

Unity Bancorp, Inc:

We have audited the accompanying consolidated balance sheets of Unity Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Unity Bancorp, Inc. and subsidiary as of December 31,2001 and 2000 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Short Hills, New Jersey

January 25, 2002

Consolidated Balance Sheets

December 31,	2001			2000
	(in thousands)
Assets
Cash and due from banks	$	16,832		$	13,740
Federal funds sold	—			31,500
Securities
Available for sale	59,773			37,809
Held to maturity (fair value of $21,113 and $32,153 in 2001 and 2000, respectively)	20,923			33,028
Total securities	80,696			70,837

Loans
SBA held for sale	17,719			6,741
SBA held to maturity	35,754			23,436
Commercial	119,262			88,375
Residential mortgage	73,144			76,924
Consumer	26,680			30,664
Total loans	272,559			226,140
Less: Allowance for loan losses	3,165			2,558
Net loans	269,394			223,582

Premises and equipment, net	8,567			9,380
Accrued interest receivable	2,261			2,836
Other assets	1,482			4,128
Total Assets	$	379,232		$	356,003

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing demand deposits	$	64,697		$	53,108
Interest bearing demand and saving deposits	150,846			136,896
Certificates of deposit, under $100,000	83,644			95,112
Certificates of deposit, $100,000 and over	40,767			35,202
Total deposits	339,954			320,318

Borrowed funds	10,000			10,000
Obligation under capital leases	2,853			2,899
Accrued interest payable	366			667
Accrued expenses and other liabilities	1,223			805
Total liabilities	354,396			334,689
Commitments and contingencies (Note 9)	—			—
Shareholders’ Equity:
Preferred stock class A,10% cumulative and convertible, 6 shares issued and outstanding in 2001,104 shares issued and outstanding in 2000	285			4,929
Common stock, no par value, 7,500 shares authorized, 5, 113 shares issued and outstanding in 2001; 3,864 shares issued and 3,707 shares outstanding in 2000	33,248			26,234
Treasury stock, at cost, 157 shares in 2000	—			(1,762		)
Retained deficit	(8,692		)	(7,793		)
Accumulated other comprehensive loss	(5		)	(294		)
Total shareholders’ equity	24,836			21,314
Total Liabilities and Shareholders’ Equity	$	379,232		$	356,003

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

Consolidated Statements of Operations

For the years ended December 31,	2001				2000				1999
	(in thousands, except per share amounts)
Interest Income
Federal funds sold and interest on deposits	$	1,007			$		1,380		$	824
Securities
Available for sale	3,327				2,495				2,003
Held to maturity	1,549				2,010				1,794
Total securities	4,876				4,505				3,797
Loans
SBA loans	3,565				2,535				1,972
Commercial loans	7,870				8,877				9,596
Mortgage loans	4,640				4,842				2,400
Consumer loans	1,934				5,878				5,099
Total loan interest income	18,009				22,132				19,067
Total interest income	23,892				28,017				23,688
Interest Expense
Interest bearing demand deposits	3,093				5,129				3,210
Savings deposits	734				782				1,075
Time deposits	7,095				9,675				7,212
Other debt	780				736				1,241
Total interest expense	11,702				16,322				12,738
Net interest income	12,190				11,695				10,950
Provision for loan losses	1,400				716				1,743
Net interest income after provision for loan losses	10,790				10,979				9,207
Non-interest income
Service charges on deposit accounts	1,262				1,174				778
Service and loan fee income	1,261				1,140				1,065
Gain on sale of loans, net	2,014				1,182				3,063
Net securities gains	157				3				193
Other income	697				4,167				507
Total non-interest income	5,391				7,666				5,606

Non-interest expense
Salaries and employee benefits	6,814				9,198				8,710
Occupancy expense	1,648				2,230				2,383
Processing and communications	2,071				2,314				1,841
Furniture and equipment	1,100				1,227				1,332
Professional services	690				1,471				1,386
Deposit insurance	501				311				192
Loan servicing	270				707				672
Other expenses	1,428				6,260				4,062
Total non-interest expense	14,522				23,718				20,578
Income (loss) before (benefit) provision for income taxes	1,659				(5,073			)	(5,765			)
(Benefit) provision for income taxes	(382			)	839				(2,387			)
Net income (loss)	$	2,041			$		(5,912	)	$	(3,378		)
Preferred stock dividends	2,062				413				—
Net Loss to common shareholders	$	(21		)	$		(6,325	)	$	(3,378		)

Loss per share — Basic and diluted	$		0.00		$	(1.71		)	$		(0.91	)

Weighted average common shares outstanding — Basic and diluted	4,297				3,706				3,723

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

Consolidated Statements of Changes in Shareholders’ Equity

	Preferred Stock			Common Stock			Retained Earnings (Deficit)			Treasury Stock			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	(in thousands, except per share amounts)
Balance, December 31, 1998	$	—		$	23,146		$	4,534		$	(1,202	)	$	(132	)	$	26,346
Comprehensive loss:
Net loss							(3,378		)							(3,378		)

Unrealized holding losses on securities arising during the period, net of tax of $491													(562		)
Less: reclassification adjustment for gains included in net income, net of tax of $73													(120		)
Net unrealized holding loss on securities arising during the period, net of tax of $418													(682		)	(682		)
Total comprehensive loss																(4,060		)
Common stock — cash dividends: $0.24 per share							(854		)							(854		)
Common stock — stock dividend				2,158			(2,158		)
Issuance of common stock
CMA acquisition, 102 shares				1,100												1,100
Warrants and Grants, 27 shares				(180		)				423						243
Purchase of treasury stock, 93 shares										(983		)				(983		)

Balance, December 31, 1999	$	—		$	26,224		$	(1,856	)	$	(1,762	)	$	(814	)	$	21,792

Comprehensive loss:
Net loss							(5,912		)							(5,912		)
Unrealized holding losses on securities arising during the period, net of tax of $320													522
Less: reclassification adjustment for gains included in net income, net of tax of $1													2
Net unrealized holding gain on securities arising during the period, net of tax of $319													520			520
Total comprehensive loss																(5,392		)
Preferred stock dividends paid							(25		)							(25		)
Issuance of common stock: 2 shares				10												10
Issuance of preferred stock: 104 shares	4,929															4,929

Balance, December 31, 2000	$	4,929		$	26,234		$	(7,793	)	$	(1,762	)	$	(294	)	$	21,314

Comprehensive income:
Net income							2,041									2,041
Unrealized holding losses on securities arising during the period, net of tax of $237													386
Less: reclassification adjustment for gains included in net income, net of tax of $60													97
Net unrealized holding gain on securities arising during the period, net of tax of $177													289			289
Total comprehensive income																2,330
Preferred stock dividends paid							(45		)							(45		)
Issuance of common stock:
Private placement 269 shares				504			(1,045		)	1,648						1,107
Employee benefit plans 25 shares				81			(65		)	114						130
Preferred stock conversion 1,111 shares	(4,644		)	6,429			(1,785		)							—

Balance, December 31, 2001	$	285		$	33,248		$	(8,692	)	$	—		$	(5	)	$	24,836

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

Consolidated Statements of Cash Flows

For the years ended December 31,	2001			2000			1999
	(in thousands)
Operating activities
Net income (loss)	$	2,041		$	(5,912	)	$	(3,378	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Write-off of intangibles	—			3,208			—
Provision for loan losses	1,400			716			1,743
Depreciation, amortization and accretion, net	1,216			1,639			1,590
Deferred income tax	476			(1,252		)	496
Gain on sale of securities	(157		)	(3		)	(193		)
Gain on sale of SBA loans held for sale	(2,014		)	(2,142		)	(1,324		)
Loss (gain) on sale of other loans	—			960			(1,739		)
Gain on sale of deposits	—			(3,477		)	—
(Gain) loss on sale of OREO	(36		)	112			—
Origination of SBA loans held for sale, net	(41,001		)	(37,745		)	(24,380		)
Proceeds of loans held for sale, net	32,037			33,886			27,343
Net change in other assets and liabilities	2,427			3,427			(3,724		)
Net cash used in operating activities	(3,611		)	(6,583		)	(3,566		)

Investing activities
Purchases of securities held to maturity	(9,292		)	—			(17,494		)
Purchases of securities available for sale	(60,217		)	(145		)	(39,596		)
Maturities and principal payments on securities held to maturity	21,397			1,222			2,683
Maturities and principal payments on securities available for sale	25,341			2,449			5,175
Proceeds from sale of securities available for sale	13,534			509			14,899
Purchases of loans	(11,610		)	—			(56,070		)
Proceeds from sale of other loans, net	—			79,058			—
Net (increase) decrease in loans	(25,005		)	22,044			(102,143		)
Purchases of premises and equipment	(150		)	(825		)	(5,291		)
Proceeds from the sale of fixed assets	—			775			—
Proceeds from the sale of OREO Property	423			1,251			—
CMA acquisition	—			—			(1,700		)
Redemption of bank owned life insurance	—			2,203			3,895
Net cash (used in) provided by investing activities	(45,579		)	108,541			(195,642		)

Financing activities
Increase in deposits	19,636			10,821			130,678
Sale of deposits	—			(44,564		)	—
(Decrease) increase in borrowings	(46		)	(43,000		)	53,000
Proceeds from issuance of common stock	130			—			—
Proceeds from preferred stock offering, net	—			4,929			—
Proceeds from issuance of private placement offering	1,107			—			—
Purchase of treasury stock	—			—			(983		)
Cash dividends on preferred stock	(45		)	(25		)	—
Cash dividends on common stock	—			—			(854		)
Net cash provided by (used in) financing activities	20,782			(71,839		)	181,841
(Decrease) increase in cash and cash equivalents	(28,408		)	30,119			(17,367		)
Cash and cash equivalents at beginning of year	45,240			15,121			32,488
Cash and cash equivalents at end of year	$	16,832		$	45,240		$	15,121

Supplemental disclosures
Cash
Interest paid	$	12,003		$	16,854		$	11,947
Income taxes (received) paid	(2,338		)	(143		)	775
Non-cash investing activities:
Transfer to other real estate owned from loans, net of charge offs	545			299			759

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

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 (the “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 Delaware 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 12 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 the fourth quarter of 2000, the Bank closed Certified Mortgage Associates, Inc (“CMA”) which it had acquired in the first quarter of 1999 and accounted for under the purchase method of accounting. This wholly-owned subsidiary of the Bank originated and sold residential mortgages.

Use of Estimates in the Preparation of Financial Statements

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

Reclassifications

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

Cash and Cash Equivalents

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

Securities

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

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 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.

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

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

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

The Company originates loans to customers under a SBA program that generally provides for SBA guarantees up to 85% 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 guaranteed portion of SBA loans is recoginzed in income. The non-guaranteed portion is generally held in the portfolio.

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

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs. The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area. Credit reviews of the loan portfolio, designed to identify potential charges to the allowance, are made during the year by management and a loan review consultant. A risk rating system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and the appropriate level of loss reserves. Along with the risk system, management further evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrowers, past and expected

loan loss experience, and other factors management feels deserve recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known. Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses. These agencies may require the Company to make additional provisions based on their judgments about information available to them at the time of their examination.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets, not to exceed 20 years.

Other Real Estate Owned

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

Amortization of Intangible Assets

The Company recorded $3.9 million of intangible assets, associated with the 1999 acquisition of Certified Mortgage Associates, Inc., (CMA). In 2000, the CMA’s operations were discontinued and as a result, the intangible asset, net of accumulated amortization, was written-off. As of December 31, 2001 and 2000, the Company had no intangible assets.

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 bases. 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 the collectibility of the deferred tax assets cannot be reasonably assured. Increases or decreases in the valuation reserve are charged or credited to income tax provision (benefit).

Income (loss) Per Share

Basic income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding for the period presented adjusted for the effect of the stock options and warrants outstanding, under the treasury stock method. In periods where there is a net loss, diluted loss per share equals basic loss per share as inclusion of options and warrants outstanding would cause an anti-dilutive effect.

Comprehensive Income (Loss)

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

Recent Accounting Pronouncements

On October 3, 2001, The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ”, it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not have a significant impact on the Company’s financial statements.

In August, 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. The Company is required to adopt the provisions of SFAS No. 143 for fiscal years beginning after June 15, 2002. The Company does not anticipate that SFAS No. 143 will significantly impact the Company’s consolidated financial statements.

On July 20, 2001, the FASB issued Statement No. 142, “Goodwill and Other Intangible Assets”. Statement 142 requires that goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination will not be amortized, but will continue to be evaluated periodically for impairment. The Company is required to adopt Statement 142 effective January 1, 2002. The Company currently has no recorded goodwill or intangible assets, therefore the initial adoption of Statement 142 did not have an impact the Company’s consolidated financial statements.

On July 20, 2001, the FASB issued Statement No. 141, “Business Combinations”. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. The Company was required to adopt the provisions of Statement 141 July 1, 2001. The initial adoption of Statement 141 had no impact on the Company’s consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement of FASB Statement 125).” SFAS No. 140 supersedes and replaces the guidance in SFAS No. 125 and, accordingly, provides guidance on the following topics: securitization transactions involving financial assets; sales of financial assets such as receivables, loans and securities; factoring transactions; wash sales; servicing assets and liabilities; collateralized borrowing arrangements; securities lending transactions; repurchase agreements; loan participations; and extinguishment of liabilities. The provisions of SFAS No. 140 are effective for transactions entered into after March 31, 2001, companies with calendar year fiscal year ends that hold beneficial interest from previous securizations were required to make additional disclosures in their December 31, 2000 financial statements. The adoption of SFAS No. 140 did not have a material impact on the Company’s consolidated financial statements.

2. Securities

This table provides the major components of securities available for sale and held to maturity at amortized cost and fair value at December 31,

	2001									2000
	Gross Amortized Cost		Gross Unrealized Gains		Estimated Unrealized Losses			Fair Value		Gross Amortized Cost		Gross Unrealized Gains		Estimated Unrealized Losses			Fair Value
	(In thousands)
Securities Available for Sale
US Treasury securities	$	348	$	1	$	—		$	349	$	7,097	$	—	$	(22	)	$	7,075
US Government Agencies	2,000		55		(22		)	2,033		9,067		24		(39		)	9,052
Mortgage backed securities	50,686		358		(128		)	50,916		17,912		5		(275		)	17,642
States & political securities	—		—		—			—		—		—		—			—
Corporate debt securities	5,440		—		(217		)	5,223		964		—		(56		)	908
Equity securities	1,307		—		(55		)	1,252		3,243		—		(111		)	3,132
Total securities available for sale	$	59,781	$	414	$	(422	)	$	59,773	$	38,283	$	29	$	(503	)	$	37,809

Securities Held to Maturity
US Government Agencies	$	2,750	$	97	$	—		$	2,847	$	20,246	$	—	$	(620	)	$	19,626
Mortgage backed securities	15,143		102		(17		)	15,228		12,782		—		(255		)	12,527
Corporate debt securities	3,030		10		(2		)	3,038		—		—		—			—
Total securities held to maturity	$	20,923	$	209	$	(19	)	$	21,113	$	33,028	$	—	$	(875	)	$	32,153

The table below provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at December 31, 2001 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.

Securities

	Within one year				After one year through five years				After five years through ten years				After ten years				Total carrying
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Value		Yield
	(In thousands)
Available for Sale at Fair Value:
US Government and Federal agencies	$	394	3.23	%	$	—	—		$	2,033	5.99	%	$	—	—		$	2,382	5.58	%
Other Securities
Mortgage-Backed	3		3.88	%	2,925		5.33	%	5,864		5.27	%	42,124		5.97	%	50,916		5.85	%
Other Debt	—		—		975		5.85	%	895		6.64	%	3,353		5.09	%	5,223		5.50	%
Equities, net	1,252		—		—		—		—		—		—		—		1,252		—
Total Other	1,255		3.93	%	3,900		5.46	%	6,759		5.45	%	45,477		5.91	%	57,391		5.82	%
	$	1,604	3.24	%	$	3,900	5.46	%	$	8,792	5.57	%	$	45,477	5.91	%	$	59,773	5.81	%

Held to Maturity at Cost:
US Government and Federal agencies	$	—	—		$	1,500	5.44	%	$	1,250	5.17	%	$	—	—		$	2,750	5.31	%
Mortgage-Backed	—		—		—		—		276		5.99	%	14,867		6.54	%	15,143		6.53	%
Other Debt	—		—		1,011		6.44	%	—		—		2,019		6.68	%	3,030		6.60	%
	$	—	—		$	2,511	5.84	%	$	1,526	5.31	%	$	16,886	6.56	%	$	20,923	6.38	%

Gross realized gains on securities available for sale amounted to $202,000, $4,600 and $287,000, while gross realized losses amounted to $45,000, $2,100 and $94,000 for the years 2001, 2000 and 1999, respectively. These net amounts are included in non-interest income as securities gains in the Consolidated Statements of Operations. The carrying value of investment securities pledged to secure public funds amounted to $19,461,000 and $30,737,000 at December 31, 2001 and 2000, respectively.

3. Loans

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

	2001		2000
	(In thousands)
SBA held for sale	$	17,719	$	6,741
SBA held to maturity	35,754		23,436
Commercial	119,262		88,375
Residential mortgage	73,144		76,924
Consumer	26,680		30,664
Total loans	$	272,559	$	226,140

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 $99,992,000 and $86,544,000 at December 31, 2001 and 2000, respectively.

As of December 31, 2001 and 2000, the Bank’s recorded investment in impaired loans, defined as nonaccrual loans, was $3,184,000 and $2,903,000, respectively, and the related valuation allowance was $437,000 and $417,000 respectively. This valuation allowance is included in the allowance for loan losses in the accompanying balance sheets. Interest income that would have been recorded had these impaired loans performed under the original contract terms was $288,000 in 2001 as compared to $313,000 in 2000. Average impaired loans for 2001 and 2000 were $2,856,000 and $2,326,000 respectively. At December 31, 2001, $69,000 of loans were past due greater than 90 days but still accruing interest as compared to $1,272,000 at December 31, 2000. Management has evaluated these loans and determined that they are well collateralized or in the process of collection.

As of December 31, 2001, approximately 71 percent of the Company’s loans were secured by real estate. A portion of the Company’s SBA loans are located outside the Company’s lending area.

As of December 31, 2001,$23.0 million in residential mortgages were pledged to secure borrowed funds.

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:

	2001
	(In thousands)
Loans to officers, directors or their associates at December 31, 2000	$	2,001
New loans	1,313
Reductions through resignations	—
Repayments	(872		)
Loans to officers, directors or their associates at December 31, 2001	$	2,442

4. Allowance for Loan Losses

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

An analysis of the change in the allowance for loan losses during years 1999 through 2001 is as follows:

	2001		2000		1999
	(In thousands)
Balance at beginning of year	$	2,558	$	2,173	$	1,825
Provision charged to expense	1,400		716		1,743
	$	3,958	$	2,889	$	3,568
Charge-offs	923		372		1,433
Recoveries	130		41		38
Net charge-offs	793		331		1,395
Balance at end of year	$	3,165	$	2,558	$	2,173

5. Premises and Equipment

The detail of premises and equipment as of December 31, 2001 and 2000 is as follows:

	2001			2000
	(In thousands)
Land and buildings	$	2,798		$	2,793
Capital leases	2,603			2,714
Furniture, fixtures and equipment	5,312			5,079
Leasehold improvements	2,129			2,119
Gross premises and equipment	12,842			12,705
Less: Accumulated depreciation and amortization	(4,275		)	(3,325		)
Net premises and equipment	$	8,567		$	9,380

Amounts charged to non-interest expense for depreciation of premises and equipment amounted to $963,000 in 2001, $1,251,000 in 2000 and $956,000 in 1999.

6. Other Assets

The detail of other assets as of December 31, 2001 and 2000 is as follows:

	2001		2000
	(In thousands)
Income taxes receivable	$	—	$	2,591
Net deferred tax asset	762		456
Prepaid expenses	248		589
Other real estate owned	258		142
Other	214		350
Total Other Assets	$	1,482	$	4,128

7. Deposits

The following schedule details the maturity distribution of time deposits:

	Within 1 year		1 to 2 years		2 to 3 years		3 to 4 years		Over 4 years		Total
	Within 1 year		1 to 2 years		2 to 3 years		3 to 4 years		Over 4 years		Total
	(In thousands)
At December 31, 2001
$ 100,000 or more	$	37,091	$	2,510	$	856	$	310	$	—	$	40,767
Less than $100,000	$	61,424	$	11,363	$	8,726	$	842	$	1,289	$	83,644

8. Borrowings

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

	2001				2000
	(In thousands)
FHLB Borrowings	Amount		Rate		Amount		Rate
At December 31,	$	10,000	4.92	%	$	10,000	4.92	%
Year-to-date average	$	10,023	4.92	%	$	8,289	6.16	%

The ten year borrowings at December 31,2001 are callable at any time by the FHLB and mature December 2010.

9. Commitments and Contingencies

Facility Lease Obligations

The Company operates twelve branches, five branches under operating leases, including its headquarters, four branches under capital leases and three branches are owned. In addition, the Company has long term leases on four other locations which are third parties, with the third party paying rent in equal amounts as per the lease agreement between the Company and the lessor. The leases contractual expiration range is between the years 2006 and 2013. The following schedule summarizes the contractual rent payments for the future years.

	Operating Lease Rental Payments		Capital Lease Rental Payments		Rent From Sublet Locations		Net Rent Obligation
	(In thousands)
2002	$	605	$	676	$	352	$	929
2003	609		695		360		944
2004	512		721		376		857
2005	527		740		385		882
2006	86		703		394		395
Thereafter	—		2,646		1,654		992

Total rent expense including the payments made under the capital leases totaled $917,000 and $915,000 and $1,290,000 for 2001, 2000 and 1999, respectively.

Litigation

The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business. In the best judgement of management, based upon consultation with counsel, the consolidated financial position or 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 request of the borrower. The Company was committed to advance approximately $85,946,000 to its borrowers as of December 31, 2001, as compared to $42,193,000 at December 31, 2000. At December 31, 2001, $15,364,000 of these commitments expire after one year, as compared to $13,580,000 a year earlier. 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 one half of these commitments are for SBA loans which may be sold in the secondary market.

10. Shareholders’ Equity

On March 13, 2000, the Company completed an offering of shares of a newly created class of Series A preferred stock. The offering was undertaken without registration with the Securities and Exchange Commission to a limited number of sophisticated investors. The preferred stock bears a cumulative dividend rate of 10 percent, and is convertible into shares of the Company’s common stock at an assumed value of $7.25 per common share. The Company also has rights to force conversion of its preferred stock into common stock starting in March 2002 at an assumed common stock price of $7.25 per share. The Company obtained $5.2 million in proceeds from this offering. The Company issued 103.5 thousand shares of the preferred stock.

On July 13, 2001, the Company concluded an exchange offer for shares of its Series A Preferred Stock, with 94 percent of the 103.5 thousand shares converting to common stock. Under the terms of the exchange offer, 10.1 shares of common stock and 10.1 common stock purchase warrants were issued for each share of Series A Preferred Stock. Each warrant allows the holder to purchase one share of common stock at an exercise price of $5.50 for a fifteen-month period ending October 16, 2002. In addition, one share of common stock and one common purchase warrant were issued in full satisfaction of each $4.95 of accrued but unpaid dividends on each share of Series A Preferred Stock tendered. Approximately $627 thousand of unpaid dividends were settled in the exchange offer. Under the terms of the exchange offer, approximately 1.1 million shares of common stock and 1.1 million warrants were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and the related unpaid dividends. Six thousand shares of Series A Preferred Stock remain outstanding. As a result of the exchange, the Company recorded a $1.8 million non-cash dividend, representing the value of the additional consideration transferred in the transaction over the fair value of securities issuable pursuant to the original terms of the agreement. This dividend had no impact on total capital, but significantly reduced earnings per common share for the third quarter and full year of 2001.

In September 2001, a private placement common stock offering was undertaken to raise additional capital to support asset growth and to increase regulatory capital. The offering raised $1.1 million in capital through the issuance of 269 thousand common shares. The shares issued in the private placement are restricted from sale for one year.

11. Other Income

The other income components for the years ended December 31, 1999 through 2001 are as follows:

	2001		2000		1999
	(In thousands)
Non-deposit account transaction charges	$	174	$	225	$	144
Income from cash surrender value of life insurance	—		108		248
Gain on the sale of deposits	—		3,477		—
Other income	523		357		115
Total other income	$	697	$	4,167	$	507

12. Other Operating Expenses

The other operating expense components for the years ended December 31,1999 through 2001 are as follows:

	2001		2000		1999
	(In thousands)
Advertising	$	375	$	815	$	881
Travel, entertainment, training & recruiting	337		434		373
Amortization of intangible assets**	—		3,595		393
Other expense*	716		1,416		2,415
Total other operating expenses	$	1,428	$	6,260	$	4,062

* 1999 includes a $786 thousand write-down of uncollected assets associated with a check-kiting scheme.

** 2000 includes a $3.2 million write-down of intangibles, associated with closing CMA.

13. Income Taxes

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

	2001			2000			1999
	(In thousands)
Income Taxes
Federal — Current provision (benefit)	$	—		$	—		$	(2,239	)
Federal — Deferred provision (benefit)	404			(936		)	496
Total Federal provision (benefit)	404			$	(936	)	$	(1,743	)
State — Current provision (benefit)	101			181			(644		)
State — Deferred provision (benefit)	72			(316		)	—
Total State provision (benefit)	$	173		$	(135	)	$	(644	)
Valuation Allowance	(959		)	1,910			—
Total (benefit) provision for income taxes	$	(382	)	$	839		$	(2,387	)

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:

	2001			2000			1999
	(In thousands)
Federal income taxes at statutory rate	$	564		$	(1,725	)	$	(1,960	)
State income taxes, net of Federal income tax effect	114			95			(425		)
Other, net	(101		)	559			(2		)
Valuation allowance	(959		)	1,910			—
(Benefit) provision for income taxes	$	(382	)	$	839		$	(2,387	)

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, 2001 and 2000 are as follows:

	2001			2000
	(In thousands)
Allowance for loan losses	$	1,000		$	818
Unrealized loss on securities available for sale	3			180
Deferred loan costs	(260		)	(370		)
Operating loss carry-forward	726			1,606
Mark to market valuation — loans held for sale	—			—
Other, net	244			132
Net deferred tax asset	1,713			$	2,366
Less: valuation allowance	(951		)	(1,910		)
Net deferred tax asset	$	762		$	456

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.

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company provided a valuation allowance of $1.9 million in 2000. The balance of the valuation allowance at December 31, 2001 was $951 thousand which reduced the deferred tax asset to $762 thousand.

At December 31, 2001, the Company had available for federal and state tax purposes, pre tax net operating loss carryforwards of approximately $373 thousand and $10.0 million, respectively. The net operating loss carryforwards for federal and state purposes expire 2021 and 2008, respectively.

14. Loss per Common Share

The following is a reconciliation of the calculation of basic and dilutive loss per share. All share amounts have been restated to include the effect of a 5% stock dividend paid on January 8,1999.

	2001			2000			1999
Net Income (Loss)	$	2,041		$	(5,912	)	$	(3,378	)
Less: Preferred stock dividends	276			413			—
Preferred stock exchange dividend	1,786			—			—
Net loss to common shareholders	$	(21	)	$	(6,325	)	$	(3,378	)

Weighted average common shares outstanding	4,297			3,706			3,723
Plus: Potential dilutive common stock	—			—			—
Diluted average common shares outstanding	4,297			3,706			3,723

Net loss per common share - basic and diluted	0.00			$	(1.71	)	$	(0.91	)

15. 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 and qualifying preferred stock, and (2) tier 2 capital, which includes a portion of the allowance for loan losses subject to limitations, certain qualifying long-term debt and preferred stock which does not qualify for tier 1 capital. Minimum capital levels are regulated by risk-based capital 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 to the risk-based guidelines, regulators require that a bank which meets the regulator’s highest performance and operation standards maintain a minimum leverage ratio (tier 1 capital as a percentage of tangible assets) of 3 percent. For those banks with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be proportionately increased. Minimum leverage ratios for each bank are evaluated through the ongoing regulatory examination process.

The Company and the Bank entered into stipulations and agreements with each of their respective regulators on July 18,2000, due to among other things, operating losses, failure to meet minimum federal risk-based capital requirements and the New Jersey Department of Banking and Insurance’s required 6.0 percent leverage ratio.

In accordance with the capital plan, in 2000, the Company raised a net $4.9 million of a newly created class of preferred stock, without Securities and Exchange Commission registration, and reduced its financial assets through sales of loan and deposit portfolios. The Company and the Bank have met the federal minimum risk-based capital requirements since the March 2000 preferred stock offering. Both the Company and the Bank believe that they are in compliance with all provisions of the agreements and were well capitalized as of December 31, 2001.

At December 31, 2001, the Bank is required by the New Jersey Department of Banking and Insurance to maintain a Tier 1 leverage ratio of 6 percent in order for the Bank to pay dividends to the Company and the Company to pay dividends on its common and perferred stock.

As of December 31, 2001, the Bank’s Tier 1 leverage ratio was 6.25 percent. The Regulatory Cease and Desist Orders were lifted in the first quarter of 2002. The lifting of the Orders was a direct result of the increase in capital and the improvement in the Company’s financial performance.

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
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(In thousands)
As of December 31, 2001
Leverage ratio	$	24,786	6.62	%	$	³14,977	4.00	%	$	³18,721	5.00	%
Tier I risk-based ratio	$	24,786	9.53	%	$	³10,405	4.00	%	$	³15,607	6.00	%
Total risk-based capital ratio	$	27,951	10.75	%	$	³20,810	8.00	%	$	³26,012	10.00	%

As of December 31, 2000
Leverage ratio	$	21,539	5.50	%	$	³15,670	4.00	%	$	³19,588	5.00	%
Tier I risk-based ratio	$	21,539	9.61	%	$	³8,961	4.00	%	$	³13,442	6.00	%
Total risk-based capital ratio	$	24,097	10.76	%	$	³17,922	8.00	%	$	³22,403	10.00	%

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

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(In thousands)
As of December 31, 2001
Leverage ratio	$	23,384	6.25	%	$	³14,970	4.00	%	$	³18,713	5.00	%
Tier I risk-based ratio	$	23,384	9.00	%	$	³10,394	4.00	%	$	³15,591	6.00	%
Total risk-based capital ratio	$	26,549	10.22	%	$	³20,788	8.00	%	$	³25,986	10.00	%

As of December 31, 2000
Leverage ratio	$	20,394	5.24	%	$	³15,579	4.00	%	$	³19,474	5.00	%
Tier I risk-based ratio	$	20,394	9.12	%	$	³8,946	4.00	%	$	³13,419	6.00	%
Total risk-based capital ratio	$	22,952	10.26	%	$	³17,892	8.00	%	$	³22,365	10.00	%

16. Employee Benefit Plans

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 15 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $43,794, $42,000 and $39,000 to the Plan in 2001, 2000 and 1999, 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 five stock option Plans. These Plans allow the Board of Directors to grant options to officers, employees and members of the Board. Option prices are determined by the Board, provided however, that the option price may not be less than 85 percent of the fair market value of the shares at the date of the grant. The period during which the option is vested varies, but no option may be exercised after 10 years from the date of the grant. As of December 31, 2001, 811,876 shares have been reserved for issuance under the Plans, 685,316 shares have been issued, leaving 126,560 shares available.

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

	Number of Shares		Exercise Price Per Share	Weighted Average Exercise Price
Outstanding, December 31, 1998	422,110		$6.17 - $15.24	$	10.38
Options granted	143,100		9.88 - 13.50	11.21
Options exercised	—		—	—
Options expired	(36,990	)	9.88 - 15.24	10.95
Outstanding, December 31, 1999	528,220		$6.17 - $13.69	$	10.57
Options granted	88,500		2.81 - 8.00	6.31
Options exercised	—		—	—
Options expired	(315,864	)	5.88 - 13.50	10.44
Outstanding, December 31, 2000	300,856		$2.81 - $13.69	$	9.45
Options granted	445,000		3.05 - 4.25	3.98
Options exercised	—		—	—
Options expired	(123,333	)	3.05 - 13.69	8.34
Outstanding, December 31, 2001	622,523		$2.81 - $11.21	$	5.76

The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its Option Plans. Under APB Opinion 25, compensation costs for the stock option is not recognized. The Company’s net (loss) income and (loss) income per share would have been reduced to the pro forma amounts indicated in the following schedule had there been compensation costs for the Company’s stock option plans, based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No.123. The estimated fair value of each award option was $2.31, $4.59 and $6.19 in 2001, 2000 and 1999, respectively.

SFAS 123 Proforma Restatement

	2001			2000			1999
	(In thousands, except per share amounts)
Net loss-
As reported	$	(21	)	$	(6,325	)	$	(3,378	)
Pro forma	$	(708	)	$	(6,631	)	$	(3,602	)

Loss per share-
Basic and diluted as reported	$	(0.00	)	$	(1.71	)	$	(0.91	)
Pro forma	$	(0.16	)	$	(1.79	)	$	(0.97	)

The fair value of each option grant under the Plans is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2001, 2000 and 1999 respectively; dividend yields of 0.0%, 0.0% and 0.0% respectively, expected volatility of 80.0%, 90.0% and 90.0% respectively, risk-free interest rates of 4.56%, 5.55% and 5.75% respectively, and expected lives of 3.5, 3.4 and 3.8, respectively.

The following table summarizes information about stock options outstanding at December 31, 2001:

Exercise Price		Shares Outstanding at December 31, 2001	Remaining Contractual Life	Shares Exercisable at December 31, 2001
<$3.99		191,750	9.1 years	3,333
$4.00 - $5.99		264,000	9.5 years	194,417
$6.00 - $7.99		1,681	2.4 years	1,515
$8.00 - $9.99		18,750	1.3 years	17,084
$10.00 - $11.99		146,342	2.2 years	120,113
$5.76	*	622,523		336,462

* Weighted average exercise price

Select key employees and Board members are eligible to participate in the Company’s two Stock Bonus Plans. Under the Plans, the Company may award stock grants to those employees and Board members at its discretion. The Company records an expense equal to the number of shares granted multiplied by the fair market value of the stock at the date of grant. The company granted 26,894 shares to employees and Board members in 1999, resulting in approximately $289,000 in expense. No shares were granted in 2000 or 2001. As of December 31, 2001, the Company has 47,646 shares reserved for issuance under the Stock Bonus Plans.

17. Fair Value of Financial Instruments

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

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

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

Cash and Federal Funds Sold-

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

Securities-

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

Loans-

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

Deposit Liabilities-

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

Borrowings-

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

Unrecognized Financial Instruments

At December 31, 2001, the Bank had standby letters of credit outstanding of $197,500, as compared to $282,000 at December 31, 2000. The fair value of these commitments is nominal.

Below are the Company’s estimated financial instruments fair value as of December 31, 2001 and 2000:

	2001				2000
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets-
Cash and Federal funds sold	$	16,832	$	16,832	$	45,240	$	45,240
Securities held to maturity	20,923		21,113		33,028		32,153
Securities available for sale	59,773		59,773		37,809		37,809
Loans, net of allowance for possible loan losses	269,394		270,943		223,582		221,124
Financial liabilities- Total deposits	339,954		341,930		320,318		320,579
Financial liabilities- Borrowings	10,000		11,111		10,000		10,040

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

	December 31
Balance Sheets	2001		2000
	(in thousands)
Assets:
Cash	$	1,267	$	721
Securities available for sale	123		412
Investment in Bank subsidiary	23,413		20,169
Other assets	92		117
Total assets	$	24,895	$	21,419
Liabilities and Shareholders’ Equity:
Other liabilities	$	59	$	105
Shareholders’ equity	24,836		21,314
Total Liabilities and Shareholders’ equity	$	24,895	$	21,419

	December 31
Statements of Operations		2001			2000				1999
	(in thousands)
Interest income		$	34		$		97		$	187
Interest expense		—			15				—
Net interest income		34			82				187
Gain on sale of available for sale securities		53			4				205
Total income		87			86				392
Compensation		—			79				431
Other expenses		236			594				618
Loss before income tax benefit and equity in undistributed loss of subsidiary		(149		)	(587			)	(657		)
Income tax benefit		—			(199			)	(223		)
Loss before equity in undistributed loss of subsidiary		(149		)	(388			)	(434		)
Equity in undistributed net income (loss) of subsidiary		2,190			(5,524			)	(2,944		)
Net income (loss)		$	2,041		$	(5,912		)	$	(3,378	)

	December 31
Statements of Cash Flows	2001			2000			1999
	(in thousands)
Operating Activities:
Net income (loss)	$	2,041		$	(5,912	)	$	(3,378	)
Adj to reconcile net income (loss) to net cash (used in) prov by operating activities:
Equity in undistributed (earnings) loss of subsidiary	(2,190		)	5,524			2,944
Depreciation and amortization	—			—			13
Stock grants	—			10			—
Gain on sale of securities available for sale	(53		)	(4		)	(205		)
Decrease (increase) in other assets	4			605			(454		)
(Decrease) increase in other liabilities	(46		)	35			(5		)
Net cash (used in) provided by operating activities	(244		)	258			(1,085		)
Investing Activities:
Sales and maturities of securities available for sale	398			62			2,834
Purchases of securities available for sale	—			—			(2,803		)
Additional equity investment in bank subsidiary	(800		)	(5,109		)	(3,640		)
Cash payment — CMA acquisition	—			—			(1,700		)
Net cash used in investing activities	(402		)	(5,047		)	(5,309		)
Financing Activities:
Proceeds from issuance of preferred stock, net	—			4,929			—
Proceeds from issuance of common stock, net	1,237			—			—
Payment to repurchase common stock, net	—			—			(983		)
Cash dividends paid on preferred stock	(45		)	(25		)	—
Cash dividends on common stock	—			—			(854		)
Net cash provided by (used in) financing activities	$	1,192		$	4,904		$	(1,837	)
Net increase (decrease) in cash and cash equivalents	546			115			(8,231		)
Cash beginning of year	721			606			8,837
Cash end of year	$	1,267		$	721		$	606
Supplemental disclosures: Interest paid	$	—		$	15		$	—

19. Quarterly Financial Information (Unaudited)

The following quarterly financial information for the years ended December 31, 2001 and 2000 is unaudited. However, in the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the results of operations for the periods, are reflected. Results of operations for the periods are not necessarily indicative of the results of the entire year or any other interim period.

2001	March 31			June 30			September 30			December 31
	(In thousands, except per share data)
Total interest income	$	6,016		$	5,945		$	5,963		$	5,968
Total interest expense	3,353			3,132			2,791			2,426
Net interest income	2,663			2,813			3,172			3,542
Provision for loan losses	150			150			275			825
Net interest income after provision for loan losses	2,513			2,663			2,897			2,717
Total non-interest income	1,161			1,440			1,333			1,457
Total non-interest expense	3,540			3,896			3,501			3,585
Net income before tax	134			207			729			589
Income tax provision (benefit)	6			5			3			(396		)
Net income from operations	$	128		$	202		$	726		$	985
Preferred stock dividends	129			131			1,795			7
Net (loss) income to common shareholders	$	(1	)	$	71		$	(1,069	)	$	978
Basic and diluted income (loss) per common share	$	0.00		$	0.02		$	(0.23	)	$	0.19

2000
Total interest income	$	7,101		$	6,968		$	7,057		$	6,891
Total interest expense	4,225			4,046			4,114			3,937
Net interest income	2,876			2,922			2,943			2,954
Provision for loan losses	246			90			90			290
Net interest income after provision for loan losses	2,630			2,832			2,853			2,664
Total non-interest income	544			2,437			554			4,131
Total non-interest expense	4,899			5,681			7,484			5,654
Net loss before tax	(1,725		)	(412		)	(4,077		)	1,141
Income tax (benefit) provision	(709		)	(173		)	(757		)	2,478
Net loss from operations	$	(1,016	)	$	(239	)	$	(3,320	)	$	(1,337	)
Preferred stock dividends	25			131			132			125
Net loss to common shareholders	$	(1,041	)	$	(370	)	$	(3,452	)	$	(1,462	)
Basic and diluted loss per common share	$	(0.27	)	$	(0.11	)	$	(0.93	)	$	(0.39	)

Products & Services

Company Information

Unity Bancorp, Inc.

Company Headquarters

Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809

Counsel

Windels Marx Lane & Mittendorf, LLP
New Brunswick, New Jersey

Auditors

KPMG LLP
Short Hills, New Jersey

Registrar & Transfer Agent

Shareholder address changes or inquires regarding shareholder accounts and stock transfers should be directed to:

First City Transfer Company
P. O. Box 170
Iselin, New Jersey 08837-0170
732.906.9227

Investor and Media Inquiries

Analysts, institutional investors, individual shareholders and media representatives should contact:

James A. Hughes Unity Bancorp, Inc.
64 Old Highway 22
Clinton, New Jersey 08809
908.713.4306
james.hughes@unitybank.com

Web Info

Information on financial results, products and services, and branch locations is available on the internet at: www.unitybank.com or email us at: info@unitybank.com.

Financial Information

Copies of the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission may be obtained:

• by writing to James A. Hughes, CFO at Company headquarters or email james.hughes@unitybank.com.

• electronically at the SEC’s home page at www.sec.gov.

Stock Listing

Unity Bancorp, Inc. common stock is traded on the NASDAQ under the symbol “UNTY”.

Common Stock Prices

The table below sets forth by quarter the range of high, low and quarter-end closing sale prices for Unity Bancorp, Inc’s common stock. No dividends were paid on common stock in 2001 or 2000.

Quarter	High		Low		Close
2001
Fourth	$	6.50	$	4.69	$	6.50
Third	6.18		4.00		5.05
Second	4.50		3.05		4.00
First	4.00		2.00		3.50

2000
Fourth	$	4.38	$	2.00	$	2.00
Third	4.94		3.44		3.44
Second	6.25		3.50		3.88
First	6.68		5.25		6.00

Annual Meeting of Shareholders

Shareholders are cordially invited to the Annual Meeting of Shareholders. The Meeting will convene at 6:00 pm, Thursday, May 16, 2002, at the Holiday Inn Select of Clinton, NJ.

64 Old Highway 22

Clinton, New Jersey 08809

800.618.BANK

unitybank.com

EX-21 8 j3027_ex21.htm EX-21 EXHIBIT 21

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

The Registrant has one subsidiary, Unity Bank.

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

EX-23.A 9 j3027_ex23da.htm EX-23.A EXHIBIT 23a

EXHIBIT 23a

INDEPENDENT ACCOUNTANTS’ CONSENT

The Board of Directors

Unity Bancorp, Inc.:

We consent to incorporation by reference in registration statements Nos. 33-20687, 333-64612 and 333-64614 on Form S-8, and No. 333-61498 on Form S-4 as amended by post-effective amendment No. 1 of Unity Bancorp, Inc., of our report dated January 25, 2002, relating to the consolidated balance sheets of Unity Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report is incorporated by reference in the December 31, 2001 Annual Report on Form 10-K of Unity Bancorp, Inc.

KPMG LLP

Short Hills, New Jersey

March 26, 2002

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Part I

Part II

Part III

Part IV

EMPLOYMENT AGREEMENT

RETENTION AGREEMENT