0001104659-03-004998.txt : 20030326 0001104659-03-004998.hdr.sgml : 20030325 20030326135429 ACCESSION NUMBER: 0001104659-03-004998 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 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: 03617802 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 j8813_10k.htm 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

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

For the fiscal year ended December 31, 2002
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12431

Unity Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

Common Stock, no par value per share
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, 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-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes o No ý

As of June 28, 2002, the aggregate market value of the registrant’s Common Stock, no par value per share, held by non-affiliates of the registrant was $25,117,249 and 3,828,849 shares of the Common Stock were outstanding. As of March 20, 2003, 5,393,441 shares of the registrant’s Common Stock were outstanding.

Documents incorporated by reference:

Portions of Unity Bancorp’s Annual Report to Shareholders for the fiscal year ended December 31, 2002 are incorporated by reference into Parts I, II and IV of this Annual Report on Form 10-K.

Portions of Unity Bancorp’s Proxy Statement for the Annual Meeting of Shareholders to be filed no later than 120 days from December 31, 2002 are incorporated by reference into Part III of this Annual Report on Form 10-K.

Index to Form 10-K

Part I

Item 1.	Business

	a) General

	b) Statistical information

Item 2.	Properties

Item 3.	Legal Proceedings

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

Part II

Item 5.	Market for Registrant’s Common Equity 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.	Quantitative and Qualitative Disclosure About Market Risk

Item 8.	Financial Statements and Supplementary Data

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

Part III

Item 10.	Directors and Executive Officers of the Registrant

Item 11.	Executive Compensation

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

Item 13.	Certain Relationships and Related Transactions

Item 14.	Controls and Procedures

Part IV

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

	Signatures

	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

PART I

Item 1. Business

a) General

Unity Bancorp, Inc. (the “Company” or “Registrant”) is a bank holding company incorporated under the laws of the State of New Jersey to serve as a holding company for Unity Bank (the “Bank”). The Company was originally organized under the laws of the State of Delaware in 1991 and subsequently, in 2002, effected a re-incorporation merger to become a New Jersey corporation. The Company was organized at the direction of the Board of Directors of the Bank for the purpose of acquiring all of the capital stock of the Bank. Pursuant to the New Jersey Banking Act of 1948 (the “Banking Act”), and pursuant to approval of the shareholders of the Bank, the Company acquired the Bank and became its holding company on December 1, 1994. The only significant activity of the Company is ownership and supervision of the Bank. The Company also owns 100% of Unity (NJ) Statutory Trust I. The trust has issued $9.0 million of preferred securities to investors.

The Bank opened for business on September 16, 1991. The Bank received its charter from the New Jersey Department of Banking and Insurance on September 13, 1991. The Bank is a full-service commercial bank, providing a wide range of business and consumer financial services through its main office in Clinton, New Jersey and twelve New Jersey branches located in Clinton, Colonia, Edison, Flemington, Highland Park, Linden, North Plainfield, Scotch Plains, South Plainfield, Springfield, Union and Whitehouse. 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.

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 on the competitive pricing of its loans, deposits and other services as well as its ability to provide local decision making and personal service in order to compete with these larger institutions.

Employees

At December 31, 2002, the Company employed 134 full-time and 25 part-time employees. None of the Company’s employees are represented by any collective bargaining units. The Company believes that its relations with its employees are good.

Executive Officers of Registrant

The following table sets forth certain information as of December 31, 2002 about each executive officer of the Company who is not also a director.

Name, Age and Position	Officer Since	Principal Occupation During Past Five Years

John Kauchack, 49, Chief Operations Officer and First Executive Vice President of the Company and the Bank	2002	Previously, Mr. Kauchack was the head of Deposit Operations for Unity Bank.

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, 40, Chief Lending Officer and Executive Vice President of the Company and Bank	2001	Previously, Mr. Downes was a Commercial Lending Officer for Unity Bank

SUPERVISION AND REGULATION

General Supervision and Regulation

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

General Bank Holding Company Regulation

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

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

The BHCA also generally prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a bank or bank holding company, or (ii) engaging directly or indirectly in activities other than those of banking, managing or

controlling banks, or performing services for its subsidiaries; unless such non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks as to be properly incident thereto. In making such determinations, the FRB is required to weigh the expected benefits to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

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

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

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

The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $150 million or more. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier I,” consisting of common stockholders’ equity and certain preferred stock, 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-weighting. Transaction related contingencies such as standby letters of credit backing non-financial obligations and undrawn commitments (including commercial credit lines with an initial maturity or more than one year) have a 50% risk-weighting. Short-term commercial letters of credit have a 20% risk-weighting and certain short-term unconditionally cancelable commitments have a 0% risk-weighting.

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

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

General Bank Regulation

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

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

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

b) Statistical information

The table below provides a cross-reference to portions of Unity Bancorp. Inc.’s 2002 Annual Report to Shareholders incorporated by reference herein. Information that is not applicable is indicated by (N/A):

Description of Financial Data		Annual Report Pages

I.	Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential
	A. Analysis of Net Interest Earnings	6
	B. Average Balance Sheets	7
	C. Rate/Volume Analysis	8

II	Investment Portfolio
	A. Book value of investment securities	25
	B. Investment securities by range of maturity with corresponding average yields	25
	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	10
	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	12

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	26
	E. Time deposits of $100,000 or more by foreign offices	N/A

VI.	Return on Equity and Assets	5

VII.	Short-term Borrowings	27

Item 2. 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 from which it conducts business as of December 31, 2002.

Location	Leased Or Owned	Date Leased or Acquired	Lease Expiration	2002 Annual Rental Fee
Clinton, NJ	Leased	1996	2006	$	408,329
Colonia, NJ	Leased	1995	2005	34,200
Flemington, NJ	Leased	1995	2003	46,725
Linden, NJ	Owned	1991	—	—
Highland Park, NJ	Leased	1999	2024	71,041
North Plainfield, NJ	Owned	1991	—	—
Scotch Plains, NJ	Leased	1996	2006	73,055
Springfield, NJ	Leased	1995	2003	31,159
South Plainfield, NJ	Leased	1999	2024	85,833
Union, NJ	Owned	2002	—	—
Edison, NJ	Leased	1999	2024	98,846
Whitehouse, NJ	Owned	1998	—	—

Item 3. Legal Proceedings

On February 20, 2003, the Bank was named as a defendant in a lawsuit initiated by Commerce Bank, N.A. and Commerce Bank/Shore, N.A. in the Superior Court of New Jersey, Essex County alleging that the Bank, as payor of certain checks written against certain deposit accounts held at the Bank, improperly refused to honor approximately $4,000,000 of checks. Commerce Bank, N.A. and Commerce Bank/Shore, N.A. have petitioned the Superior Court of New Jersey, Essex County for compensatory and consequential damages of $4,028,584.44, interest, attorney’s fees and costs of suit. The Bank has reviewed the relevant circumstances and believes that it acted properly and that the outcome of the lawsuit will not have a material impact on the consolidated financial position or results of operations of the Company.

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

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

No matters were submitted for a vote of the Company’s shareholders during the fourth quarter of fiscal 2002.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

(A) Market Price

The Company’s Common Stock is quoted on the NASDAQ National Market under the symbol “UNTY”. The following table sets forth the high and low bid prices of the Common Stock as reported on the NASDAQ National Market for the periods indicated.

	High		Low
Year Ended December 31, 2002:
4^th Quarter	$	8.10	$	6.07
3^rd Quarter	6.76		5.82
2^nd Quarter	6.90		5.24
1^st Quarter	8.40		5.79
Year Ended December 31, 2001:
4^th Quarter	$	6.19	$	4.47
3^rd Quarter	5.89		3.81
2^nd Quarter	4.29		2.90
1^st Quarter	3.81		1.90

(B) Approximate Number of Holders of Common Stock

As of March 20, 2003, there were approximately 613 shareholders of record of the Company’s Common Stock.

No dividends were paid on the Company’s Common Stock during fiscal 2002 or 2001.

(D) Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information with respect to the equity securities that are authorized for issuance under the Company’s compensation plans as of December 31, 2002.

	EQUITY COMPENSATION PLAN INFORMATION
	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by security holders	755,637	$	5.02	179,115
Equity compensation plans not approved by security holders	—	—		—
Total	755,637	$	5.02	179,115

Item 6. Selected Financial Data

The information under the caption “Selected Consolidated Financial Data” on page 5 of the Company’s 2002 Annual Report to Shareholders is incorporated by reference herein.

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

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 6 through 16 of the Company’s 2002 Annual Report to Shareholders is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The information under the caption “Market Risk” on pages of 14 and 15 of the Company’s 2002 Annual Report to Shareholders is incorporated by reference herein.

Item 8. Financial Statements and Supplementary Data

The Financial Statements and Notes to Financial Statements on pages 17 through 31 of the Company’s 2002 Annual Report to Shareholders are 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

The information concerning the directors and executive officers of the Company under the caption “Election of Directors” and the information under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2003.

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

Item 11. Executive Compensation

The information concerning executive compensation under the caption “Executive Compensation” (other than the “Board of Directors Report on Executive Compensation” and the “Performance Graph”) in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2003.

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

The information concerning the security ownership of certain beneficial owners and management under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2003.

Item 13. Certain Relationships and Related Transactions

The information concerning certain relationships and related transactions under the caption “Certain Transactions with Management” in the Proxy Statement for the Company’s 2003 Annual Meeting of Shareholders is incorporated by reference herein. It is expected that such Proxy Statement will be filed with the Securities and Exchange Commission no later than April 30, 2003.

Item 14. Controls and Procedures

(a) Evaluation of disclosure controls and proceedings. Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934) within ninety (90) days of the filing date of this Annual Report on Form 10-K, the Company’s principal executive officer and principal financial officer have concluded that such controls and procedures are effective.

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

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

(a) FINANCIAL STATEMENTS.

The following Consolidated Financial Statements of the Company and subsidiaries included in the Company’s 2002 Annual Report of Shareholders are incorporated by reference in Part II, Item 8.

Independent Auditors’ Report (page 17)

Consolidated Balance Sheets (page 18)

Consolidated Statements of Operations (page 19)

Consolidated Statements of Changes in Shareholders’ Equity (page 20)

Consolidated Statements of Cash Flows (page 21)

Notes to Consolidated Financial Statements (pages 22 through 31)

(b) EXHIBITS.

Exhibit Number		Description of Exhibits
3(i)		Certificate of Incorporation of the Company, as amended(2)
3(ii)		Bylaws of the Company
4(i)		Form of Stock Certificate
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)		1999 Stock Option Plan(5)
10(vii)		Employment Agreement with Anthony J. Ferraro(6)
10(viii)		Retention Agreement with James A. Hughes(6)
10(ix)		Change in Control Agreement with Michael T. Bono(6)
10(x)		Change in Control Agreement with Michael F. Downes(6)
10(xi)		2002 Stock Option Plan(7)
13		Portion of Unity Bancorp. Inc. 2002 Annual Report to Shareholders
21		Subsidiaries of the Registrant
23		Consent of KPMG LLP
99		Certification required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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

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

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

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

(6) Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual Report on Form 10-K filed on March 28, 2002.

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

The following reports on Form 8-K were filed during the three months ended December 31, 2002:

On October 25, 2002, the Company filed a Current Report on Form 8-K pursuant to Item 5 (Other Events and Regulation FD Disclosure) to attach the President’s message, dated October 23, 2002.

On October 25, 2002, the Company filed a Current Report on Form 8-K pursuant to Item 5 (Other Events and Regulation FD Disclosure) to attach a press release, dated October 21, 2002, announcing a stock repurchase program.

SIGNATURES

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

				UNITY BANCORP, INC.

				By:	/s/
					James A. Hughes
					Chief Financial Officer

					March 27, 2003
					(Date)

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

NAME	TITLE	DATE
/s/	Chairman of the Board and Director	March 27, 2003
David D. Dallas

/s/	President and Chief Executive Officer (Principal Executive Officer)	March 27, 2003
Anthony J. Feraro

/s/	Chief Financial Officer (Principal Financial and Accounting Officer)	March 27, 2003
James A. Hughes

/s/	Director	March 27, 2003
Frank Ali

/s/	Director	March 27, 2003
Dr. Mark S. Brody

/s/	Director	March 27, 2003
Robert H. Dallas, II

/s/	Director	March 27, 2003
Samuel Stothoff

/s/	Director	March 27, 2003
Donna Butler, Esq.

/s/	Director	March 27, 2003
Charles S. Loring

/s/	Director	March 27, 2003
Peter P. DeTommaso

/s/	Director	March 27, 2003
Allen Tucker

Certifications

I, Anthony Feraro, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003				Name:/s/Anthony Feraro
				Title: Chief Executive Officer and President

Certifications

I, James A. Hughes, certify that:

2. I have reviewed this Annual Report on Form 10-K of Unity Bancorp, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: March 27, 2003				Name:/s/James A. Hughes
				Title: Executive Vice President and Chief Financial Officer

EX-3.II 3 j8813_ex3dii.htm EX-3.II

Exhibit 3(ii)

BY-LAWS

UNITY BANCORP, INC.

ARTICLE I

Offices

The registered agent of Unity Bancorp, Inc. (the “Corporation”) shall be the President/CEO and the Registered Office of the Corporation shall be 64 Old Highway 22, Clinton, NJ 08809. The Corporation also may have offices at such other places, within or without the State of New Jersey, as the Board of Directors (the “Board”) determines from time to time or the business of the Corporation requires.

ARTICLE II

Meeting of Stockholders

Section 1. Place of Meetings, Inc. Except as otherwise provided in these By-laws, all meetings of the stockholders shall be held at such dates, time and places, within or without the State of New Jersey, as shall be determined by the Board or Chief Executive Officer and as shall be stated in the notice of the meeting or in waivers of notice thereof. If the place of any meeting is not so fixed, it shall be held at the registered office of the Corporation in the State of New Jersey.

Section 2. Annual Meeting. The annual meeting of stockholders for the election of directors and the transaction of such other business as properly may be brought before the meeting shall be held on such date after the close of the Corporation’s fiscal year as the Board may from time to time determine.

Section 3. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may be called by the Board or the Chief Executive Officer and shall be called by the Chief Executive Officer or the Secretary upon the written request of a majority of the holders of the outstanding shares of the corporation entitled to vote. The request shall state the date, time, place and purpose or purposes of the proposed meetings.

Section 4. Notice of Meetings. Except as otherwise required or permitted by law, whenever the stockholders are required or permitted to take any action at a meeting, written notice thereof shall be given, stating the place, date and time of the meeting and, unless it is the annual meeting, by or at whose direction it is being issued. The notice also shall designate the place where the list of stockholders provided for in Section 8 of this Article II is available for examination, unless such list is kept at the place where the meeting is to be held. Notice of a special meeting also shall state the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be delivered personally or shall be mailed, not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder of record entitled to vote at the meeting. If mailed, the notice shall be given when deposited in the United States mail, postage prepaid, and shall be directed to each stockholder at his address as it appears on the record of stockholders, or to such other address which such stockholder may have furnished by written request to the Secretary of the Corporation. Notice of any meeting of stockholders shall be deemed waived by any stockholder who attends the meeting, except when the stockholder attends the meeting for the express purpose of objecting at the beginning thereof to the transaction of any business because the meeting is not lawfully called or convened. Notice need not be given to any stockholder who submits, either before or after the meeting, a signed waiver of notice. Unless the Board, after the adjournment of a meeting, shall fix a new record

date for the adjourned meeting, or unless the adjournment is for more than thirty (30) days, notice of an adjourned meeting need not be given if the place, date and time to which the meeting shall be adjourned is announced at the meeting at which the adjournment is taken.

Section 5. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), at all meetings of stockholders the holders of a majority of the outstanding shares of the Corporation entitled to vote at the meeting shall be present in person or by proxy in order to constitute a quorum for the transaction of business.

Section 6. Voting. Except as otherwise provided by the Certificate of Incorporation, at any meeting of the stockholders every stockholder of record having the right to vote thereat shall be entitled to one vote for every share of stock standing in his name as of the record date and entitling him to so vote. A stockholder may vote in person or by proxy. Except as otherwise provided by law or by the Certificate of Incorporation, any corporate action to be taken by a vote of the stockholders, other than the election of directors, shall be authorized by not less than a majority of the votes cast at a meeting by the stockholders present in person or by proxy and entitled to vote thereon. Directors shall be elected as provided in Section 2 of Article III of these By-laws. Written ballots shall not be required for voting on any matter unless ordered by the Chairman of the meeting.

Section 7. Proxies. Every proxy shall be executed in writing by the stockholder or by his attorney-in-fact.

Section 8. List of Stockholders. At least ten (10) days before every meeting of stockholders, a list of stockholders (including their addresses) entitled to vote at the meeting and their record holdings as of the record date shall be open for examination by any stockholder, for

any purpose germane to the meeting, during ordinary business hours, at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list also shall be kept at and throughout the meeting.

Section 9. Conduct of Meetings. At each meeting of the stockholders, the Chairman of the Board, or, in his absence, the President, shall act as Chairman of the meeting. The Secretary or, in his absence, any person appointed by the Chairman of the meeting shall act as Secretary of the meeting and shall keep the minutes thereof. The order of business at all meetings of the stockholders shall be as determined by the Chairman of the meeting.

Section 10. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed, in person or by proxy, by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take the action at a meeting at which all shares entitled to vote thereon were present and voted in person or by proxy and shall be delivered to the Corporation in accordance with the laws of the State of New Jersey. Every written consent shall bear the date of signature of each stockholder signing the consent. In no event shall any corporate action referred to in any consent be effective unless written consents signed by a sufficient number of stockholders to take action are duly delivered to the Corporation within sixty (60) days of the earliest dated consent delivered in accordance with the laws of the State of New Jersey. Prompt notice of the taking of the corporate action without a meeting by

less than unanimous written consent shall be given to those stockholders who have not consented in writing, but who were entitled to vote on the matter.

ARTICLE III

Board of Directors

Section 1. Number of Board Members. The Board shall consist of not less than one nor more than 15 directors. The number of directors may be reduced or increased from time to time by action of a majority of the entire Board, but no decrease may shorten the term of an incumbent director. When used in these By-laws, the phrase “entire Board” means the total number of directors which the Corporation would have if there were no vacancies.

Section 2. Election and Term. The first Board shall be elected by the incorporator or incorporators of the Corporation and the directors shall hold office until their respective successors are duly elected and qualified or until their earlier death, resignation or removal. Thereafter, except as otherwise provided by law or by the By-laws, the directors shall be elected at the annual meeting of the stockholders and the person receiving a plurality of the votes cast shall be so elected. Subject to his earlier death, resignation or removal as provided in Section 3 of this Article III, each director shall hold office until his successor shall have been duly elected and shall have qualified.

Section 3. Removal. A director may be removed at any time, with or without cause, by action of the Board or the stockholders.

Section 4. Resignations. Any director may resign at any time by giving written notice of his resignation to the Corporation. A resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified herein, immediately

upon its receipt, and, unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective.

Section 5. Vacancies. Any vacancy in the Board arising from an increase in the number of directors or otherwise may be filled by the vote of a majority of the directors then in office, though less than a quorum, or by a sole remaining director. Subject to his earlier death, resignation or removal as provided in Section 3 of this Article III, each director so elected shall hold office until his successor shall have been duly elected and shall have qualified.

Section 6. Place of Meetings. Except as otherwise provided in these By-laws, all meetings of the Board shall be held at such places, within or without the State of New Jersey, as the Board determines from time to time.

Section 7. Annual Meeting. The annual meeting of the Board shall be held either (a) without notice immediately after the annual meeting of stockholders and in the same place, or (b) as soon as practicable after the annual meeting of stockholders on such date and at such time and place as the Board determines.

Section 8. Regular Meetings. Regular meetings of the Board shall be held on such dates and at such places and times as the Board determines. Notice of regular meetings need not be given, except as otherwise required by law.

Section 9. Special Meetings. Special meetings of the Board may be called by or at the direction of the Chief Executive Officer, and shall be called by the Chief Executive Officer or the Secretary upon the written request of a majority of the directors. The request shall state date, time, place and purpose or purposes of the proposed meeting.

Section 10. Notice of Meetings. Notice of each special meeting of the Board (and of each annual meeting held pursuant to subdivision (b) of Section 7 of this Article III) shall be

given, not later than 24 hours before the meeting is scheduled to commence, by the Chief Executive Officer or the Secretary and shall state the place, date and time of the meeting. Notice of each meeting may be delivered to a director by hand or given to a director orally (whether by telephone or in person) or mailed or telegraphed to a director at his residence or usual place of business, provided, however, that if notice of less than 72 hours is given it may not be mailed. If mailed, the notice shall be deemed to have been given when deposited in the United States mail, postage prepaid, and if telegraphed, the notice shall be deemed to have been given when the contents of the telegram immediately be dispatched. Notice of any meeting need not be given to any director who shall submit, either before or after the meeting, a singed waiver of notice or who shall attend the meeting, except if such director shall attend for the express purpose of objecting at the beginning thereof to the transaction of any business because the meeting is not lawfully called or convened. Notice of any adjourned meeting, including the place, date and time of the new meeting, shall be given to all directors not present at the time of the adjournment, as well as to the other directors unless the place, date and time of the new meeting is announced at the adjourned meeting.

Section 11. Quorum. Except as otherwise provided by law or in these By-laws, at all meetings of the Board a majority of the entire Board shall constitute a quorum for the transaction of business, and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another place, date and time.

Section 12. Conduct of Meetings. At each meeting of the Board, the Chief Executive Officer or, in his absence, a director chosen by a majority of the directors present, shall act as Chairman of the meeting. The Secretary of, in his absence, any person appointed by the

Chairman of the meeting, shall act as Secretary of the meeting and keep the minutes thereof. The order of business at all meetings of the Board shall be as determined by the Chairman of the meeting.

Section 13. Committee of the Board. The Board, by resolution adopted by a majority of the entire Board, may designate an executive committee and other committees, each consisting of one (1) or more directors. Each committee (including the members thereof) shall serve at the pleasure of the Board and shall keep minutes of its meetings and report the same to the Board. The Board may designate one or more directors as alternate members of any committee. Alternate members may replace any absent or disqualified member or members at any meeting of a committee. In addition, in the absence or disqualification of a member of a committee, if no alternate member has been designated by the Board, the members present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of the absent or disqualified member.

Section 14. Operation of Committees. A majority of all the members of a committee shall constitute a quorum for the transaction of business, and the vote of a majority of all the members of the committee present at a meeting at which a quorum is present shall be the act of the committee. Each committee shall adopt whatever other rules of procedure it determines for the conduct of its activities.

Section 15. Compensation. Directors shall be entitled to such compensation for their services as directors and to such reimbursement for any reasonable expenses incurred in attending directors’ meetings as from time to time be fixed by the Board. The compensation of directors may be on such basis as is determined by the Board. Any director may waive

compensation for any meeting. Any director may waive compensation for any meeting. Any director receiving compensation under these provisions shall not be barred from serving the Corporation in any other capacity and receiving compensation and reimbursement from reasonable expenses for such other services.

Section 16. Written Consent to Action in Lieu of a Meeting. Any action required or permitted to be taken at any meeting of the Board or of any committee may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

Section 17. Meetings Held Other Than in Person. Members of the Board or any committee may participate in a meeting of the Board or committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting.

ARTICLE IV

Officers

Section 1. Executive Officers, etc. The executive officers of the Corporation shall be a President, a Secretary and a Treasurer. The Board also may elect or appoint a Chairman of the Board, one or more Vice Presidents (any of whom may be designated as Executive Vice Presidents or otherwise), and any other officers it deems necessary or desirable for the conduct of the business of the Corporation, each of whom shall have such powers and duties as the Board determines.

Section 2. Duties.

(a) The Chairman of the Board of Directors. The Chairman of the Board, if any, shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall preside at all meetings of the stockholders and the Board, and shall be ex officio a member of all committees established.

(b) The President. The President shall be the chief operating officer of the Corporation. The President shall have general management of the business and affairs of the Corporation, subject to the control of the Board, and shall have such other powers and duties as the Board assigns to him. If there is no Chairman, the President shall be the chief executive officer of the Corporation and, as such shall preside at all meetings of the stockholders and the Board and shall be ex officio a member of all committees established.

(c) The Vice President. The Vice President or, if there shall be more than one, the Vice Presidents, if any, in the order of their seniority or in any other order determined by the Board, shall perform, in the absence or disability of the President, the duties and exercise the powers of the President and shall have such other powers and duties as the Board or the President assigns to him or to them.

(d) The Secretary. Except as otherwise provided in these By-laws or as directed by the Board, the Secretary shall attend all meetings of the stockholders and the Board; shall record the minutes of all proceedings in books to be kept for that purpose; shall give notice of all meetings of the stockholders and special meetings of the Board; and shall keep in safe custody the seal of the Corporation and, when authorized by the Board, shall affix the same to any corporate instrument. The Secretary shall have such other powers and duties as the Board or the President assigns to him.

(e) The Treasurer. Subject to the control of the Board, the Treasurer shall have the care and custody of the corporate funds and the books relating thereto; shall perform all other duties incident to the office of Treasurer; and shall have such other powers and duties as the Board or the President assigns to him.

(f) Election; Removal. Subject to his earlier death, resignation or removal as hereinafter provided, each officer shall hold his office until his successor shall have been duly elected and shall have qualified. Any officer may be removed at any time, with or without cause, by the Board.

Section 3. Resignations. Any officer may resign at any time by giving written notice of his resignation to the Corporation. A resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified herein, immediately upon its receipt, and, unless otherwise specified therein, the acceptance of a resignation shall not be necessary to make it effective.

Section 4. Vacancies. If an office becomes vacant for any reason, the Board or the stockholders may fill the vacancy, and each officer so elected shall serve for the remainder of his predecessor’s term.

ARTICLE V

Provisions Relating to Stock Certificates and Stockholders

Section 1. Certificates. Certificates for the Corporation’s capital stock shall be in such form as required by law and as approved by the Board. Each certificate shall be signed in the name of the Corporation by the Chairman, if any, or the President or any Vice President and by the Secretary, the Treasurer or any Assistant Secretary or any Assistant Treasurer and shall bear the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a

transfer agent or registered by a registrar, other than the Corporation or its employees, the signature of any officer of the Corporation may be a facsimile signature. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature was placed on any certificate shall be issued it may nevertheless be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

Section 2. Lost Certificates, etc. The Corporation may issue a new certificate for shares in place of any certificate theretofore issued by it, alleged to have been lost, mutilated, stolen or destroyed and the Board may require the owner of the lost, mutilated, stolen or destroyed certificate, or his legal representatives, to make an affidavit of that fact and to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation on account of the alleged loss, mutilation, theft or destruction of the certificate or the issuance of a new certificate.

Section 3. Transfers of Shares. Transfers of shares shall be registered on the books of the Corporation maintained for that purpose after due presentation of the stock certificates therefor appropriately indorsed or accompanied by proper evidence of succession, assignment or authority to transfer.

Section 4. Record Date.

The Board may fix a record date for the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof. The record date fixed for such purpose shall not precede the date upon which the resolution fixing the record date is adopted by the Board and shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting. If the Board does not fix a record date for such purpose, the record date for such purpose shall be at the close of business on the day next preceding the

day on which notice is given and, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

The Board may fix a record date for the purpose of determining stockholders entitled to consent to action in writing in lieu of a meeting. The record date fixed for such purpose shall not precede the date upon which the resolution fixing the record date is adopted by the Board and shall not be more than ten (10) days after the adoption of such resolution fixing the record date. If the Board does not fix a record date, the record date for the purpose of determining stockholders entitled to consent to action in writing in lieu of a meeting when no prior action by the Board is required by the laws of the State of New Jersey or these By-laws, the record date for such purpose shall be the first date on which a signed written consent with respect to the action taken or proposed to be taken is delivered to the Corporation in accordance with the laws of the State of New Jersey. If the Board does not fix a record date and prior action by the Board is required by the laws of the State of New Jersey or these By-laws, the date for determining stockholders entitled to consent to action in writing in lieu of a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action.

The Board may fix a record date for the purpose of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or the purpose of any other action. The record date fixed for such purpose shall not precede the date upon which the resolution fixing the record date is adopted and shall be no more than sixty (60) days prior to such action. If the Board does not fix a record date, the record date for determining the stockholders for any such purpose shall at the close of business on the date on which the Board adopts the resolution relating thereto.

ARTICLE VI

General Provisions

Section 1. Dividends, etc. To the extent permitted by law, the Board shall have full power and discretion, subject to the provisions of the Certificate of Incorporation and the terms of any other corporate document or instrument binding upon the Corporation, to determine what, if any, dividends or distributions shall be declared and paid or made.

Section 2. Seal. The Corporation’s seal shall be in such form as is required by law and as shall be approved by the Board.

Section 3. Fiscal Year. The fiscal year of the Corporation shall be determined by the Board.

Section 4. Voting Shares in Other Corporations. Unless otherwise directed by the Board, shares in other corporations which are held by the Corporation shall be represented and voted only by the Chief Executive Officer or by a proxy or proxies appointed by him.

ARTICLE VII

Amendments

These By-laws may be made, altered or repealed by the Board, subject to the right of the stockholders to alter or repeal any by-law made by the Board.

EX-4.I 4 j8813_ex4di.htm EX-4.I

Exhibit 4(i)
 
UBI
 
(LOGO inserted here)
 
INCORPORATED UNDER THE
LAWS OF THE STATE OF NEW JERSEY
 
 
CUSIP 913290 10 2
 
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
 
This is to Certify that
 
is the owner of
 
FULLY PAID AND
NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
 
Unity Bancorp, Inc.
 
a corporation
incorporated under the laws of the State of New Jersey. The shares evidenced by
this certificate are transferable only on the stock transfer books of Unity
Bancorp, Inc. by the holder hereof, in person or by attorney, upon surrender of
this certificate properly endorsed.
                This certificate is not valid unless countersigned by
the Transfer Agent and registered by the Registrar.
                WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
 
Dated:
 
(signature)
Secretary
 
(SEAL inserted here)
 
(signature)
Chairman of the Board
 
Countersigned and
Registered:
REGISTRAR AND TRANSFER
COMPANY
By
Transfer Agent
and Registrar
Authorized Signature
 








 
Unity Bancorp, Inc.
 
The following
abbreviations, when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full according to
applicable laws or regulations:
 
TEN COM _ as tenants in
common
UNIF GIFT MIN ACT _ . . .
.. . . . . . . Custodian . . . . . . . . .
 
(Cust)                        (Minor)
TEN ENT  _ as tenants by the entireties
under Uniform Gifts to
Minors
 
JT TEN _ as joint
tenants with right
of survivorship and not
as
 tenants in common
 Act . . . . . . . . . . . . . . . . . . . . .
..
                (State)
Additional abbreviations
may also be used though not in the above list.
 
 For value received, ________   hereby sell, assign and transfer unto
 
PLEASE INSERT SOCIAL
SECURITY OR OTHER
    IDENTIFYING NUMBER OF ASSIGNEE
 
PLEASE PRINT OR
TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE.
 
Shares
represented by the
within Certificate, and do hereby irrevocably constitute and appoin
 Attorney to transfer the said Shares on the
books  of  the  within named
corporation with full power of substitution in the premises.
 
Dated:
In the presence of
Signature
 
Signature
 
Note: The signature to
this assignment must correspond with the name of the stockholders(s) as written
upon the face of the certificate in every particular, without alteration or
enlargement, or any change whatever.
 

EX-13 5 j8813_ex13.htm EX-13

Exhibit 13

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

SELECTED CONSOLIDATED FINANCIAL DATA

	At or for the Years Ended December 31st
(In thousands, except per share data)	2002			(1)2001			2000			1999			1998

Selected Results of Operations
Interest income	$	24,295		$	23,892		$	28,017		$	23,688		$	17,480
Interest expense	8,572			11,702			16,322			12,738			7,165
Net interest income	15,723			12,190			11,695			10,950			10,315
Provision for loan losses	2,350			1,400			716			1,743			804
Other income	7,991			5,391			7,666			5,606			4,407
Other expenses	15,544			14,522			23,718			20,578			10,499
Tax expense (benefit)	2,111			(382		)	839			(2,387		)	1,282
Net income (loss)	3,709			2,041			(5,912		)	(3,378		)	2,137
Per Share Data
Net income (loss) per common share (basic)	0.67			0.00			(1.63		)	(0.86		)	0.64
Net income (loss) per common share (diluted)	0.63			0.00			(1.63		)	(0.86		)	0.61
Book value per common share	5.03			4.57			4.11			5.60			6.84
Cash dividend on common shares	—			—			—			0.24			0.20
Selected Balance Sheet Data
Total assets	432,874			379,232			356,003			438,969			254,612
Loans	311,794			272,559			226,140			322,532			166,792
Allowance for loan losses	4,094			3,165			2,558			2,173			1,825
Investment securities	81,754			80,696			70,837			74,349			40,929
Deposits	382,585			339,954			320,318			357,538			226,860
Borrowings	19,000			10,000			10,000			53,000			—
Shareholders’ equity	27,103			24,836			21,314			21,792			26,346
Common shares outstanding	5,393			5,369			3,892			3,890			3,851
Performance Ratios
Return on average assets	0.91		%	0.56		%	(1.44		)%	(0.94		)%	0.93		%
Return on average common equity	13.95		%	(0.11		)%	(33.43		)%	(14.33		)%	10.17		%
Efficiency ratio	66.18		%	82.60		%	N/M			N/M			71.32		%
Net interest margin	4.09		%	3.56		%	3.19		%	3.49		%	4.91		%
Net interest spread	3.59		%	2.84		%	2.61		%	3.01		%	3.99		%
Asset Quality Ratios
Allowance for loan losses to loans	1.31		%	1.16		%	1.13		%	0.67		%	1.09		%
Allowance for loan losses to non-performing loans	115.10		%	99.40		%	88.12		%	153.90		%	79.45		%
Non-performing loans to total loans	1.14		%	1.17		%	1.28		%	0.44		%	1.38		%
Non-performing assets to total loans and OREO	1.20		%	1.26		%	1.35		%	0.90		%	2.04		%
Net charge-offs to average loans	0.48		%	0.33		%	0.12		%	0.59		%	0.21		%
Capital Ratios – Company
Leverage ratio	8.38		%	6.62		%	5.50		%	4.35		%	10.87		%
Tier 1 risk-based capital ratio	11.05		%	9.53		%	9.61		%	6.17		%	13.89		%
Total risk-based capital ratio	12.32		%	10.75		%	10.76		%	6.88		%	14.85		%
Capital Ratios – Bank
Leverage ratio	6.96		%	6.25		%	5.24		%	4.01		%	7.09		%
Tier 1 risk-based capital ratio	9.16		%	9.00		%	9.12		%	5.62		%	8.84		%
Total risk-based capital ratio	10.41		%	10.22		%	10.26		%	6.33		%	9.80		%

(1) 2001 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

All share amount have been restated to include the effect of the 5% stock distribution paid on March 12, 2003.

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

Overview

Unity Bancorp, Inc. (the “Parent Company”) is a bank holding company incorporated in New Jersey under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank,” or when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance. The Bank provides a full range of commercial and retail banking services through the internet and its 12 branch offices located in Hunterdon, Middlesex, Somerset 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.

Results of Operations

Net income for the year ended December 31, 2002, was $3.7 million, an 81.7% increase compared to $2.0 million for 2001. The prior year earnings benefited from the reversal of tax valuation reserves of approximately $1.0 million. Earnings before taxes for 2002 were $5.8 million, a 250.8% increase over the $1.7 million pre-tax earnings in 2001.

Earnings per basic and diluted share for the year ended December 31, 2002 were $0.67 and $0.63, respectively. In 2001, the Company reported an extraordinary $1.8 million one-time preferred dividend. Excluding the one-time preferred dividend in 2001, earnings per basic and diluted share would have been approximately $0.40. The increase in earnings from the prior year is primarily the result of increased revenue due to the improvement in net interest margin and higher levels of non-interest income, partially offset by increases in non-interest expense and income tax expense.

Net interest income for the year ended December 31, 2002, was $15.7 million compared to $12.2 million in 2001, an increase of $3.5 million, or 29.0%. The increase in net interest income is attributed to an increase in net interest spread and higher levels of net earnings assets. Net interest spread increased to 3.59% in 2002 from 2.84% in 2001. As a result of the increase in net interest spread, net interest margin increased to 4.09% in 2002, up from 3.56% in 2001. The primary cause of the increase in both net interest spread and margin was the repricing of higher cost time deposits in a lower rate environment.

Non-interest income for 2002 was $8.0 million, a 48.2% increase over the $5.4 million recorded in 2001. The primary reason for the increase was a $1.6 million increase in gains on sale of SBA loans, with additional increases in all other categories of non-interest income.

Non-interest expenses increased 7.0% in 2002, to $15.5 million, from $14.5 million in 2001. Salaries and benefits increased due to increased head count and higher medical insurance premiums. Processing costs also increased due to higher levels of transactions associated with the growth in deposit and loan balances. Excluding the reduction in deposit insurance due to the improved capital condition of the Company, there were no material changes in the other categories of noninterest expenses from the prior year.

In 2002, the Company recorded income tax expense of $2.1 million, resulting in a 36.3% effective tax rate. In 2001, the Company recorded a net tax benefit of $382 thousand as a result of the reversal of tax valuation reserves. Without the benefit of the valuation reserves recorded in 2001, earnings for 2001 would have been reduced by approximately $1.0 million.

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 average cost of interest-bearing liabilities.

Interest income was $24.3 million in 2002, a slight increase over the $23.9 million realized in 2001. The increase is due to a higher level of earning assets, partially offset by the lower yield earned on those assets. Interest-earning assets averaged $384.4 million in 2002, a 12.2% increase over the $342.6 million in 2001. The increase in average earning assets occurred as a result of a $58.5 million increase in average loans, somewhat offset by a reduction in other interest-earning investments.

As a result of the lower interest rate environment, the rate earned on interest-earning assets decreased 65 basis points to 6.32% in 2002. Of the $403 thousand increase in interest income in 2002, $4.0 million can be attributed to the increase in average interest earning assets partially offset by a $3.6 million reduction related to yield.

Interest expense was $8.6 million in 2002, a decrease of $3.1 million, or 26.8%, compared to $11.7 million in 2001. Interest-bearing liabilities averaged $313.6 million in 2002, an increase of $30.4 million, or 10.7%, compared to 2001. The increase in average interest-bearing liabilities can be attributed to core deposit growth in the Company’s 12 retail branches. The rate paid on interest-bearing liabilities decreased 140 basis points to 2.73%, primarily due to higher cost deposits repricing in a lower interest rate environment. Of the $3.1 million decline in interest expense in 2002, $3.5 million is attributed to the rate paid on these liabilities, partially offset by a $343 thousand increase in interest bearing liabilities.

Net interest income amounted to $15.7 million in 2002, an increase of $3.5 million, or 29.0%, compared to 2001. The increase in net interest income was the result of a 75 basis points increase in net interest spread which averaged 3.59% in 2002. Net interest margin was 4.09% for 2002, an increase of 53 basis points compared to 3.56% in 2001. As a result of the low interest rate environment, and the 50 basis point decline in the Prime rate in November 2002, net interest margin is not expected to increase in 2003, unless there is an increase in interest rates.

For 2001, net interest income was $12.2 million, a $495 thousand increase from the $11.7 million earned in 2000. This increase was due to the growth in net interest-earning assets and the improvement in net interest spread as higher costing deposits repriced in a lower rate environment. Both interest-earning assets and interest-bearing liabilities declined in 2001 from the prior year as a result of the Company’s planned reduction in financial assets, which included the selling of loan and deposit portfolios.

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.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operation” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2002, contains a summary of the Company’s significant accounting policies. Management believes the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates

about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is periodically reviewed with the Audit Committee and the Board of Directors.

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

Consolidated Average Balance Sheets

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

	2002							2001							2000
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	$	9,838		161		1.64	%	$	22,857		$	1,007	4.41	%	$	19,531		$	1,380		7.07	%
Securities:
Available for sale	53,277			2,522		4.73		55,674			3,327		5.98		38,663			2,602			6.73
Held to maturity	24,099			1,440		5.98		25,307			1,549		6.12		33,736			2,010			5.96
Total securities	77,376			3,962		5.12		80,981			4,876		6.02		72,399			4,612			6.37
Loans, net of unearned discount:
SBA loans	57,808			3,750		6.49		40,454			3,565		8.81		24,581			2,535			10.31
Commercial	145,031			10,842		7.48		93,925			7,870		8.38		99,677			8,877			8.91
Residential mortgage	67,470			4,030		5.97		76,560			4,640		6.06		82,296			4,842			5.88
Consumer	26,873			1,550		5.77		27,776			1,934		6.96		71,703			5,878			8.20
Total loans	297,182			20,172		6.79		238,715			18,009		7.54		278,257			22,132			7.96
Total interest-earning assets	384,396			24,295		6.32		342,553			23,892		6.97		370,187			28,124			7.60
Noninterest-earning assets:
Cash and due from banks	13,879							11,463							17,666
Allowance for loan losses	(3,680		)					(2,785		)					(2,434		)
Other assets	12,317							13,075							26,157
Total noninterest-earning assets	22,516							21,753							41,389
Total Assets	$	406,912						$	364,306						$	411,576
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Interest-bearing demand	$	151,115		2,731		1.81		$	109,444		3,093		2.83		$	116,541		5,129			4.40
Savings deposits	34,000			760		2.24		30,837			734		2.38		35,491			782			2.20
Time deposits	112,799			4,175		3.70		130,063			7,095		5.46		162,736			9,675			5.95
Total interest-bearing deposits	297,914			7,666		2.57		270,344			10,922		4.04		314,768			15,586			4.95
Other debt	15,719			906		5.76		12,911			780		6.04		12,095			736			6.09
Total interest-bearing liabilities	313,633			8,572		2.73		283,255			11,702		4.13		326,863			16,322			4.99
Noninterest-bearing liabilities:
Demand deposits	64,900							56,967							59,885
Other liabilities	1,714							1,670							2,212
Total noninterest-bearing liabilities	66,614							58,637							62,097
Shareholders’ equity	26,665							22,414							22,616
Total Liabilities and Shareholders’ Equity	$	406,912						$	364,306						$	411,576
Net interest spread				15,723		3.59	%				12,190		2.84	%				11,802			2.61	%
Tax-equivalent basis adjustment				—							—							(107		)
Net interest income				$	15,723						$	12,190						$	11,695
Net interest margin						4.09	%						3.56	%							3.19	%

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%.

Year ended December 31 (Dollar amounts in thousands on a tax equivalent basis)	2002 versus 2001 Increase (Decrease) Due to Change in									2001 versus 2000 Increase (Decrease) Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
Interest Income:
Net loans	$	4,569		$	(2,406	)	$	2,163		$	(2,562	)	$	(1,561	)	$	(4,123	)
Investment securities	(211		)	(703		)	(914		)	547			(399		)	148
Federal funds sold and Interest-bearing deposits	(402		)	(444		)	(846		)	191			(448		)	(257		)
Total interest income	$	3,956		$	(3,553	)	$	403		$	(1,824	)	$	(2,408	)	$	(4,232	)
Interest Expense:
Interest-bearing deposits	961			(1,323		)	(362		)	$	(297	)	$	(1,739	)	$	(2,036	)
Savings deposits	71			(45		)	26			(108		)	60		)	(48		)
Time deposits	(852		)	(2,068		)	(2,920		)	(1,830		)	(750		)	(2,580		)
Total deposits	$	180		$	(3,436	)	$	(3,256	)	$	(2,235	)	$	(2,429	)	$	(4,664	)
Other debt	163			(37		)	126			50			(6		)	44		)
Total interest expense	$	343		$	(3,473	)	$	(3,130	)	$	(2,185	)	$	(2,435	)	$	(4,620	)
Net interest income-FTE	$	3,613		$	(80	)	$	3,533		$	(361	)	$	(27	)	$	388
Increase (decrease) in tax-equivalent adjustment							—									107
Net interest income							$	3,533								$	495

Provision for Loan Losses

The provision for loan losses is determined based on management’s evaluation of the adequacy of the allowance for loan losses which is maintained at a level that we believe is sufficient to absorb estimated probable losses in the loan portfolio as of the balance sheet date. The provision for loan losses totaled $2.4 million for 2002, an increase of $950 thousand, compared with $1.4 million for 2001. Net loan chargeoffs for 2002 were $1.4 million compared to $793 thousand in 2001. The increase in the provision for loan losses for 2002 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 results of 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. Management believes the current provision is appropriate based on its assessment of the adequacy of the allowance for loan losses.

The provision for loan losses totaled $1.4 million for 2001, compared to $716 thousand in 2000. In 2001, the Company recorded $793 thousand of net charge-offs, compared to $331 thousand of net charge-offs in 2000. The increase in the provision from 1999 to 2000 was attributed primarily to the increase level of net chargeoffs, increases in the loan portfolio and 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 $8.0 million for 2002, a $2.6 million, or 48.2% increase compared to $5.4 million for 2001. The increase in non-interest income is primarily attributable to the increase in gains on sales of SBA loans.

The following table shows the components of Non-interest income for 2002, 2001 and 2000.

Non-Interest Income

(In thousands)	2002		2001		2000
Service charges on deposit accounts	$	1,547	$	1,262	$	1,174
Service and loan fee income	1,497		1,261		1,140
Gain on SBA loan sales	3,627		2,014		2,142
Net securities gains	228		157		3
Other income	1,092		697		690
Loss on loan sales	—		—		(960		)
Gain on sale of deposits	—		—		3,477
Total non-interest income	$	7,991	$	5,391	$	7,666

Service charges on deposits was $1.5 million for 2002, an increase of $285 thousand, or 22.6%, from 2001. The increase in deposit service charges over the last two years was the result of improved collection of deposit fees and account charges such as non-sufficient funds, increased fees, and the increase in the number of deposit accounts.

Service and loan fee income amounted to $1.5 million for 2002, an increase of $236 thousand, or 18.7%, from 2001. 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 $130.5 million, $100 million and $86.5 million at December 31, 2002, 2001 and 2000, respectively.

Gains on the sale of SBA loans was $3.6 million in 2002, an 80.1% increase over 2001. The increase in gains on the sale of SBA loans is due to higher volume of SBA loans sold. In 2001, the Company retained a portion of SBA loans to enhance net interest income. Gains on SBA loan sales in 2001 were $2.0 million relatively flat from 2000. Gains on SBA loan sales reflect the participation in the SBA’s guaranteed loan program. Under the SBA program, the SBA guarantees up to 75% 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 $45.5 million, $30.0 million and $31.7 million for 2002, 2001 and 2000, respectively.

Other income was $1.1 million in 2002, compared to $697 thousand in 2001. The increase in other income is attributable to commissions paid by other institutions for referring loans. There was an increased level of referred loans in 2002 over prior years. Referral fees are recorded when all contingencies on the referral have been satisfied. In 2000, non interest income included a $3.5 million gain on the sale of five branches with related deposits, and a $960 loss on the sale of loans in conjunction with the Bank’s capital restoration plan.

Non-Interest Expense

Total non-interest expense was $15.5 million for 2002, a 7% or $1 million increase over 2001. Non-interest expense for 2000 includes the operations of CMA, a wholly-owned subsidiary that originated and sold residential mortgages that ceased operations in the fourth quarter of 2000, and five additional branches.

The following table presents a breakdown of non-interest expense for the years ended December 31, 2002, 2001 and 2000:

Non-Interest Expense

(In thousands)	2002		2001		2000
Compensation and benefits	$	7,498	$	6,814	$	9,198
Occupancy, net	1,671		1,648		2,230
Processing & communications	2,236		2,071		2,314
Furniture & equipment	1,075		1,100		1,227
Professional services	668		690		1,471
Deposit insurance	161		501		311
Loan servicing	436		270		707
Write-off of CMA goodwill	—		—		3,208
Amortization of goodwill	—		—		387
Other expenses	1,799		1,428		2,665
Total non-interest expense	$	15,544	$	14,522	$	23,718

Compensation and benefits expense was $7.5 million for 2002, a $684 thousand, or 10% increase, compared to 2001. The increase in compensation and benefits is related to the increased head count, merit increases, increases in incentives as a result of increased earnings and increased medical and benefit premiums. At December 31, 2002, there were 159 employees as compared to 146 employees at the prior year-end.

Compensation and benefits expense for 2000 were higher than in 2002 and 2001 and reflected an average of approximately 170 employees due to the operation of both CMA and five additional operating branches. The majority of the reduction in employees took place in the fourth quarter of 2000 due to the sale of five branches and the dissolution of CMA.

Occupancy expense was $1.7 million for 2002, a 1.4% increase over the prior year. The decrease in the occupancy expense from 2000 to 2001 is due to the sale of five branches in December 2000 and the dissolution of CMA in the fourth quarter of 2000.

Processing and communications expense amounted to $2.2 million for 2002, a $165 thousand or 8.0% increase from the prior year. The increase is due to the increased number of accounts being serviced and increased postage expenses. The decline in processing and communications expense in 2001 from the prior year is due to the reduction in branches and the dissolution of CMA.

Furniture and equipment expense amounted to $1.1 million for 2002, flat from the prior year. The decline in 2001 from the prior year was again due to the reduced number of branches and the dissolution of CMA.

Professional service fees was $668 thousand for 2002, flat from the prior year. The significant decrease from 2000 is due to the additional legal and audit fees in 2000 as a result of the Company’s Regulatory Cease and Desist Order and capital restoration plan, and increased litigation costs.

As a result of improvement in the Company’s regulatory composite ratings, deposit insurance expense declined in 2002 to $161 thousand, a 67.9% decline from the $501 thousand a year ago.

Loan servicing expense amounted to $436 thousand for 2002, a 61.5% increase from 2001 due to the increased legal costs associated with the higher level of non-performing loans. The decrease in loan servicing expenses in 2001 is a result of the Company’s billing the SBA for their share of collection costs when services were performed. In prior periods, the collection costs were billed upon liquidation of collateral.

Other expenses amounted to $1.8 million for 2002, a 26% increase from the $1.4 million in the prior period. The increase in other expense is a result of increased advertising and travel and expense costs, as well as system conversion expenses. Other expenses were higher in 2000 as a result of the expenses associated with the wind down of CMA and the sale of the branches.

Income Tax Expense

For 2002, the Company reported income tax expense of $2.1 million for an effective 36.3% effective tax rate. As a result of losses in 1999 and 2000, the Company recorded tax valuation reserves against deferred tax assets dependent on future taxable income. As a result of taxable earnings in 2001, these tax valuation reserves were reversed resulting in a net $382 thousand benefit. All federal tax valuation reserves were utilized in 2001. The Company anticipates a 38% effective income tax rate in 2003.

Financial Condition

Total assets increased $53.6 million, or 14.1%, to $432.9 million at December 31, 2002, compared to $379.2 million at December 31, 2001. Total loans increased $39.2 million, or 14.4%, to $311.8 million at December 31, 2002, compared to $272.6 million at December 31, 2001. The securities portfolio, including securities held to maturity and available for sale, increased $1.1 million, or 1.3%, to $81.8 million at December 31, 2002, compared to $80.7 million at December 31, 2001. On average for the year ended December 31, 2002, total assets were $406.9 million, a $42.6 million increase from the prior years $364.3 million average balance. The increase in average assets is due to the growth in the loan portfolio.

Deposits amounted to $382.6 million at December 31, 2002, an increase of $42.6 million, or 12.5%, from $340.0 million in December 30, 2001. On average, deposits increased $35.5 million to $362.8 million in 2002. The Company does not have any brokered deposits. Total borrowings increased $9.0 million from December 31, 2001as a result of the Company’s participation in a pooled Trust Preferred issuance.

Shareholders’ equity increased $2.3 million, or 9.1%, to $27.1 million at December 31, 2002 compared to $24.8 million at December 31, 2001. This increase was primarily the result of $3.7 million net retained profits, $2.8 million from the exercise of stock warrants, partially offset by the $4.3 million repurchase and retirement of common stock. In addition, the remaining $300 thousand of Series A Preferred Stock was redeemed in October 2002. As of December 31, 2002 and 2001 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, 10.6 shares of common stock and 10.6 common stock purchase warrants were issued for each share of Series A Preferred Stock. Each warrant allowed the holder to purchase one share of common stock at an exercise price of $5.24 per share for a fifteen-month period ended 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 1.2 million shares of common stock and 1.2 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 2002, the remaining $285,000 of Series A preferred stock was redeemed.

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 sale of 282 thousand common shares. The shares issued in the private placement were restricted from sale for one year and were issued at $3.92 per share.

Loan Portfolio

The Company’s 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 $39.2 million, or 14.4% to $311.8 million at December 31, 2002, from year-end 2001. Growth in the loan portfolio was generated by increases of $10.7 million in SBA loans and $44.6 million in commercial loans partially offset by a decline of $16.8 million in residential mortgages. Consumer loans were flat from a year ago.

Average loans increased $58.5 million, or 24.5%, from $238.7 million in 2001, to $297.2 million in 2002. The increase in average loans is due to growth in the SBA and commercial loan portfolios, partially offset by declines in average residential mortgages and consumer loans. The yield on the loan portfolio was 6.79% in 2002 compared to 7.54% in 2001. The decline in the yield on the loan portfolio was due to a lower interest rate environment.

The SBA provides guarantees of up to 75% of the principal amount of SBA loans. 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 $49.8 million at December 31, 2002, an increase of $14.0 million from December 31, 2001. SBA loans held for sale, carried at the lower of cost or market, amounted to $14.4 million at December 31, 2002, a $3.3 million decline from the $17.7 million from December 31, 2001. 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 $163.8 million at December 31, 2002, an increase of $44.6 million from year-end 2001. The commercial portfolio is expected to continue to increase in 2003 due to continued loan demand.

Residential mortgage loans consist of loans secured by 1-4 family residential properties. These loans amounted to $56.3 million at December 31, 2002, a decline of $16.8 million from December 31, 2001. In 2001 the Company purchased $11.6 million of 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 2003.

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 $27.5 million at December 31, 2002, flat from year-end December 2001. The Company does not anticipate a material change in the level of outstanding consumer loans in 2003.

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:

	2002				2001				2000				1999				1998
(In thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
SBA held for sale	$	14,396	4.6	%	$	17,719	6.5	%	$	6,741	3.0	%	$	3,745	1.2	%	$	3,569	2.2	%
SBA held to maturity	49,784		16.0	%	35,754		13.1	%	23,436		10.3	%	12,735		3.9	%	15,124		9.1	%
Commercial	163,813		52.5	%	119,262		43.8	%	88,375		39.1	%	105,096		32.6	%	110,313		66.1	%
Residential mortgage	56,297		18.0	%	73,144		26.8	%	76,924		34.0	%	107,447		33.3	%	8,551		5.1	%
Consumer	27,504		8.9	%	26,680		9.8	%	30,664		13.6	%	93,509		29.0	%	29,235		17.5	%
Total Loans	$	311,794	100.0	%	$	272,559	100.0	%	$	226,140	100.0	%	$	322,532	100.0	%	$	166,792	100.0	%

There are no concentrations of loans to any borrowers or group of borrowers exceeding 10% 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, 2002.

Loan Maturities

(In thousands)	Within 1 Year		1 – 5 Years		After 5 Years		Total
SBA	$	63,474	$	706	$	—	$	64,180
Commercial	69,186		85,185		9,442		163,813
Residential mortgage	13,137		34,535		8,625		56,297
Consumer	20,040		4,481		2,983		27,504
Total	$	165,837	$	124,907	$	21,050	$	311,794
Amount of loans based upon:
Fixed interest rates							$	153,614
Floating or adjustable interest rates							158,180
Total							$	311,794

Asset Quality

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

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

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 application for a loan by 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:

(In thousands)	2002			2001			2000			1999			1998
Non-performing by category
Commercial & SBA	$	2,882		$	3,004		$	2,064		$	692		$	—
Real Estate	461			—			807			720			2,297
Consumer	214			180			32			—			—
Total non-performing loans	$	3,557		$	3,184		$	2,903		$	1,412		$	2,297
OREO	196			258			142			1,505			—
Other asset(1)	—			—			—			—			1,131
Total non-performing assets	$	3,753		$	3,442		$	3,045		$	2,917		$	3,428
Past due 90 days or more and still accruing interest
Commercial & SBA	$	365		$	13		$	578		$	—		$	803
Real Estate	—			—			694			159			790
Consumer	1			56			—			7			7
Total	$	366		$	69		$	1,272		$	166		$	1,600
Non-performing loans to total loans	1.14		%	1.17		%	1.28		%	0.44		%	1.38		%
Non-performing assets to total loans and OREO	1.20		%	1.26		%	1.21		%	0.70		%	1.97		%
Allowance for loans losses as a percentage of non-performing loans	115.10		%	99.40		%	88.12		%	153.90		%	79.45		%

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

Non-performing loans were $3.6 million at December 31, 2002, a $373 thousand increase from $3.2 million at year-end 2001. The increase in non-performing loans is due primarily to increased levels of non-performing commercial accounts. Included in non-performing loans are $1.4 million of loans that are guaranteed by the SBA. Loans past due 90 days or more and still accruing increased to $366 thousand at December 31, 2002, from $69 thousand at the

prior year end. Other real estate owned (OREO) properties totaled $196 thousand at year-end 2002, flat from a year ago. Total non-performing assets amounted to $3.8 million at December 31, 2002, an increase of $311 thousand compared with $3.4 million at yearend 2001.

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 products, were $0.4 million and $0.3 million at December 31, 2002 and 2001, respectively.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that we believe is 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 for loan losses are made by provisions charged to expense whereas the allowance is reduced by net charge-offs (i.e., loans judged to be not collectable are charged against the reserve, less any recoveries on such loans). Although management attempts to maintain the allowance at a level deemed adequate to provide for 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 $4.1 million at December 31, 2002, compared to $3.2 million at year-end 2001. The increase in the allowance for loan losses was due to the provision for loan losses of $2.4 million exceeding $1.4 million of net charge-offs. The increase in the provision for loan losses was primarily attributable to the increase and change in the composition of the loan portfolio, the specific and general reserve factors used to determine reserve levels on certain types of loans, the analysis of the estimated 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:

(In thousands)	2002			2001			2000			1999			1998
Balance at beginning of year	$	3,165		$	2,558		$	2,173		$	1,825		$	1,322
Charge-offs:
Commercial and SBA	1,396			756			278			432			60
Residential mortgage	28			48			19			871			254
Consumer	170			119			75			130			15
Total Charge-offs	1,594			923			372			1,433			329
Recoveries:
Commercial and SBA	145			42			12			16			—
Residential mortgage	—			39			17			2			23
Consumer	28			49			12			20			5
Total recoveries	173			130			41			38			28
Total net charge-offs	$	1,421		$	793		$	331		$	1,395		$	301
Provision charged to expense	$	2,350		$	1,400		$	716		$	1,743		$	804
Balance at end of year	$	4,094		$	3,165		$	2,558		$	2,173		$	1,825
Net charge-offs to average loans	0.48		%	0.33		%	0.12		%	0.59		%	0.21		%
Allowance to total loans	1.31		%	1.16		%	1.13		%	0.67		%	1.09		%

The ratio of allowance for loan losses to total loans at December 31, 2002 and 2001 was 1.31% and 1.16%, respectively. The allowance for loan losses as a percentage of non-performing loans was 115.1% at December 31, 2002, compared to 99.4% at the end of 2001.

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

	2002				2001				2000				1999				1998
(In thousands)	Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans
Balance Applicable to:
SBA	$	1,119	20.6	%	$	776	19.6	%	$	447	13.3	%	$	309	5.1	%	$	237	11.3	%
Commercial	2,463		52.5	%	1,756		43.8	%	1,483		39.1	%	1,222		32.6	%	1,235		66.1	%
Residential mortgage	282		18.1	%	325		26.8	%	296		34.0	%	74		33.3	%	90		5.1	%
Consumer	230		8.8	%	308		9.8	%	332		13.6	%	568		29.0	%	263		17.5	%
Total	$	4,094	100.0	%	$	3,165	100.0	%	$	2,558	100.0	%	$	2,173	100.0	%	$	1,825	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 $55.6 million at December 31, 2002, a $4.2 million decrease, from year-end 2001. During the year 2002, $47.4 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, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings.

The average balance of securities available for sale amounted to $53.3 million in 2002 compared to $55.7 million in 2001. As a result of the lower interest-rate environment, the average yield earned on the available for sale portfolio decreased 125 basis points, from 5.98% in 2001 to 4.73% in 2002. Sales of securities available for sale aggregated $12.4 million in 2002 generating a net gain of $228 thousand. The weighted average repricing of securities available for sale, adjusted for prepayments, amounted to 2.9 years at December 31, 2002.

At December 31, 2002, the portfolio had a net unrealized gain of $462 thousand compared to a net unrealized loss of $8 thousand at the end of the prior year. These unrealized gains and 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 $26.2 million at December 31, 2002, an increase of $5.3 million, or 25.1%, from year-end 2001. As of December 31, 2002 and 2001, the market value of held to maturity securities was $26.9 million and $21.1 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 $24.1 million in 2002 compared to $25.3 million in 2001. The average yield earned on the held to maturity decreased 14 basis points, from 6.12% in 2001 to 5.98% in 2002. The weighted average repricing of held to maturity securities, adjusted for prepayments, amounted to 2.5 years at December 31, 2002.

Approximately 91% 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.

Deposits

Deposits, which include non-interest bearing demand deposits and interest-bearing demand savings and time deposits, are the primary source of the Company’s funds. For 2002, 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,	2002				2001				2000
(In Thousands)	Amount		%		Amount		%		Amount		%
Ending Balance:
Interest-bearing demand deposits	$	176,640	46.2	%	$	119,864	35.3	%	$	106,262	33.1	%
Savings deposits	34,663		9.1	%	30,982		9.1	%	30,634		9.6	%
Time deposits	95,715		25.0	%	124,411		36.6	%	130,314		40.7	%
Demand deposits	75,567		19.7	%	64,697		19.0	%	53,108		16.6	%
Total deposits	$	382,585	100.0	%	$	339,954	100.0	%	$	320,318	100.0	%

Total deposits increased $42.6 million to $382.6 million at December 31, 2002 from $340.0 million at December 31, 2001. The increase in deposits was the result of a $10.8 million increase in demand deposits and $56.8 million increase in interest bearing checking, partially offset by a decline in time deposits. Non-interest bearing demand deposits represented 19.7% of total deposits at December 31, 2002, up from 19.0% in 2001. 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 2002 was 2.57% compared to 4.04% for 2001. The decrease in the cost of deposits can be attributed to the decline in interest rates and the repricing and run-off 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 2002.

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

	2002				2001				2000
(In Thousands)	Amount		%		Amount		%		Amount		%
Average Balance:
Interest-bearing demand deposits	$	151,115	41.6	%	$	109,444	33.5	%	$	116,541	31.1	%
Savings deposits	34,000		9.4	%	30,837		9.4	%	35,491		9.5	%
Time deposits	112,799		31.1	%	130,063		39.7	%	162,736		43.4	%
Demand deposits	64,900		17.9	%	56,967		17.4	%	59,885		16.0	%
Total deposits	$	362,814	100.0	%	$	327,311	100.0	%	$	374,653	100.0	%

Borrowed Funds

Borrowed funds primarily 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, 2002, total borrowings were $10.0 million, flat from the prior year-end. At December 31, 2002, the Company had $7.0 million of additional availability at the FHLB. The $10.0 million in FHLB borrowings bears interest at an annual 4.92%, is callable at any time and due December 2010. Also included in borrowed funds are appproximately $2.8 million of long-term capital lease obligations.

Trust Preferred Securities

On September 26, 2002, Unity (NJ) Statutory Trust I a statutory business trust and wholly-owned subsidiary of Unity Bancorp Inc., issued $9.0 million of floating rate capital trust pass through securities to investors due on September 26, 2032. The capital securities have preference over the common securities with respect to liquidation and other distributions and qualify as Tier I capital. The Subordinate Debentures are redeemable in whole or part, prior to maturity but after September 26, 2007. The floating interest rate at December 31, 2002 was 5.21%. The additional capital was used to bolster the Company’s capital ratios and for general corporate purposes, including among other things, capital contributions to Unity Bank and to fund stock repurchases.

Market Risk

Based on the Company’s business, the two largest risks facing the Company are market risk and credit risk. Market risk, for the Company, is primarily limited to interest rate risk, which is the impact that changes in interest rates would have on future earnings. The Asset/Liability Committee (ALCO) manages this risk. The principal objectives of the ALCO are to establish prudent risk management guidelines, evaluate and control the level of interest rate risk in balance sheet accounts, determine the level of appropriate risk given the business focus, operating environment, capital, and liquidity 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, 2002. 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.

(In thousands)	Under six Months			Six months through one year			More than one year through two years			More than two years through five years			More than five years through ten years			More than ten years and not repricing			Total
Assets
Cash & due from banks	$	—		$	—		$	—		$	—		$	—		$	12,237		$	12,237
Federal Funds sold	18,000						—			—			—			—			18,000
Investment Securities	18,133			12,253			17,508			23,355			4,520			5,985			81,754
Loans	150,870			14,966			52,420			72,489			9,360			11,689			311,794
Other assets	—			—			—			—			—			9,089			9,089
Total Assets	$	187,003		$	27,219		$	69,928		$	95,844		$	13,880		$	39,000		$	432,874
Liabilities and shareholders’ equity
Non interest demand	$	—		$	—		$	—		$	—		$			$	75,567		$	75,567
Savings and checking	67,722			10,060			8,622			94,950			29,949			—			211,303
Time deposits	39,866			26,303			19,066			10,319			161			—			95,715
Other borrowings	9,000			—						10,000			—			2,768			21,768
Other liabilities	—						—			—			—			1,415			1,415
Shareholders’ equity				—			—			—			—			27,106			27,106
Liabilities and shareholders’ equity	$	116,588		$	36,363		$	27,688		$	115,269		$	30,110		$	106,856		$	432,874
Gap	$	70,415		$	(9,144	)	$	42,240		$	(19,425	)	$	(16,230	)	$	67,856		—
Cumulative Gap	$	70,415		$	61,271		$	103,511		$	84,086		$	67,856		—			—
Cumulative Gap to total assets	16.27		%	14.15		%	23.91		%	19.43		%	15.68		%	15.68		%	—

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, 2002, there was a six-month asset-sensitive gap of $61.3 million and a one-year asset gap of $103.5 million, as compared to liability-sensitivity gaps of $549 thousand and $23.4 million for the prior year, respectively. The change in the gap position is due to the increased level of interest sensitive loans and non-interest deposits as well as the reduction in term time deposits as more funds moved into “Opportunity Checking” Unity Banks interest bearing checking account.

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, 2002, these simulations show that with a 300 basis point immediate increase in interest rates, net interest income would increase by approximately $0.9 million, or 5.5%. An immediate decline of 300 basis points in interest rates would decrease net interest income by approximately $0.4 million or 2.3%. These variances in net interest income are within the board-approved guidelines of +/- 7 percent.

Finally, to measure the impact of longer-term asset and liability mismatches beyond two years, the Company utilizes Modified Duration of Equity and Economic Value of Portfolio Equity (“EVPE”) models. The modified duration of equity measures the potential price risk of equity to changes in interest rates. A longer modified duration of equity indicates a greater degree of risk to rising interest rates. Because of balance sheet optionality, an EVPE analysis is also used to dynamically model the present value of asset and liability cash flows, with rate shocks of 200 basis points. The economic value of equity is likely to be different as interest rates change. Like the simulation model, results falling outside prescribed ranges require action by the ALCO. The Company’s variance in the economic value of equity with rate shocks of 200 basis points, is a decline of 12.6% in a rising rate environment and a decline of 12.9% in a falling rate environment. The variance in the EVPE at December 31, 2002 is within board-approved guidelines of +/- 35%.

Operating, Investing and Financing

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At December 31, 2002, the balance of cash and cash equivalents was $30.2 million, an increase of $13.4 million from the end of the prior year.

Net cash provided by operating activities totaled $9.2 million at December 31, 2002, as compared to $3.6 million used by operating activities a year ago. 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 $9.2 million in cash provided by operating activities included $3.3 from the reduction in the portfolio of SBA loans held for sale.

Net cash used in investing activities amounted to $45.6 million in 2002, flat from a year ago. 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 paydowns in the investment portfolio.

Net cash provided by financing activities amounted to $49.8 million for 2002, compared to $20.8 million in 2001. The primary increase in 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 Bank 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 Bank Holding Company. Other than its investment in the Bank, the Bank Holding Company does not actively engage in other transactions or business. As a result the annual expenses of the Bank Holding Company are not material. At December 31, 2002 the Bank Holding Company had $5.8 million in cash and $0.2 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 FHLB borrowings amounted to $10.0 million, as of December 31, 2002. At December 31, 2002, $7.0 million was available for additional borrowings from the FHLB. Pledging additional collateral in the form of 1-4 family residential mortgages or investment securities can increase the line with the FHLB. An additional source of liquidity is the securities available for sale portfolio and SBA loans held for sale portfolio, which amounted to $55.6 million and $14.4 million respectively, at December 31, 2002.

As of December 31, 2002, deposits included $27.3 million of Government deposits, as compared to $33.2 million at year-end 2001. 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 $22.3 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, 2002, the Bank had approximately $84.8 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

The following table summarizes the Company’s and the Bank’s risk-based and leveraged capital ratios at December 31, 2002 and 2001, as well as the required minimum regulatory capital ratios.

Company	Dec. 2002		Dec. 2001		Adequately Capitalized Requirements		Well Capitalized Requirements
Leverage ratio	8.38	%	6.62	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	11.05	%	9.53	%	4.00	%	6.00	%
Total risk-based capital ratio	12.32	%	10.75	%	8.00	%	10.00	%

Bank	Dec. 2002		Dec. 2001		Adequately Capitalized		Well Capitalized Requirements
Leverage ratio	6.96	%	6.25	%	4.00	%	5.00	%
Tier 1 risk-based capital ratio	9.16	%	9.00	%	4.00	%	6.00	%
Total risk-based capital ratio	10.41	%	10.22	%	8.00	%	10.00	%

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

On October 21, 2002, the Company authorized the repurchase of up to 10% of its outstanding common stock. The amount and timing of purchases will be dependent on a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alernate uses of funds. As of December 31, 2002, $4.3 million, or 643,000 shares of common stock were repurchased.

At December 31, 2002, shareholders’ equity was $27.1 million, a $2.2 million increase from year-end 2001. The increase in shareholders’ equity was a result of $3.7 million in retained profit, $2.7 million from the exercise of stock warrants, partially offset by $4.3 million of common stock repurchases. The ratio of total equity to assets at December 31, 2002 and 2001 was 6.26% and 6.55%, 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 subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

		In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unity Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

	/s/ KPMG LLP

	Short Hills , New Jersey
	January 23, 2003

Consolidated Balance Sheets
(in thousands)

December 31,	2002			2001
Assets
Cash and due from banks	$	12,237		$	16,832
Federal funds sold	18,000			—
Securities
Available for sale	55,570			59,773
Held to maturity (fair value of $26,856 and $21,113 in 2002 and 2001, respectively)	26,184			20,923
Total securities	81,754			80,696

Loans
SBA held for sale	14,396			17,719
SBA held to maturity	49,784			35,754
Commercial	163,813			119,262
Residential mortgage	56,297			73,144
Consumer	27,504			26,680
Total loans	311,794			272,559
Less: Allowance for loan losses	4,094			3,165
Net loans	307,700			269,394

Premises and equipment, net	8,669			8,567
Accrued interest receivable	2,579			2,261
Other assets	1,935			1,482
Total Assets	$	432,874		$	379,232

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing demand deposits	$	75,567		$	64,697
Interest bearing demand and saving deposits	211,303			150,846
Certificates of deposit, under $100,000	75,883			83,644
Certificates of deposit, $100,000 and over	19,832			40,767
Total deposits	382,585			339,954

Borrowed funds	12,768			12,853
Trust preferred securities	9,000			—
Accrued interest payable	280			366
Accrued expenses and other liabilities	1,135			1,223
Total liabilities	405,768			354,396
Commitments and contingencies (Note 9)	—			—
Shareholders’ Equity:
Preferred stock class A, 10% cumulative and convertible, 6 shares issued and outstanding in 2001	—			285
Common stock, no par value, 12,500 shares authorized, 5,393 shares issued and outstanding in 2002; 5,369 shares issued and outstanding in 2001;	31,827			33,248
Retained deficit	(5,006		)	(8,692		)
Accumulated other comprehensive gain (loss)	285			(5		)
Total shareholders’ equity	27,106			24,836
Total Liabilities and Shareholders’ Equity	$	432,874		$	379,232

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

Consolidated Statements of Operations
(in thousands, except per share amounts)

For the years ended December 31,	2002		2001			2000

Interest Income
Federal funds sold and interest on deposits	$	161	$	1,007		$	1,380
Securities
Available for sale	2,522		3,327			2,495
Held to maturity	1,440		1,549			2,010
Total securities	3,962		4,876			4,505

Loans
SBA loans	3,750		3,565			2,535
Commercial loans	10,842		7,870			8,877
Mortgage loans	4,030		4,640			4,842
Consumer loans	1,550		1,934			5,878
Total loan interest income	20,172		18,009			22,132
Total interest income	24,295		23,892			28,017

Interest Expense
Interest bearing demand deposits	2,731		3,093			5,129
Savings deposits	760		734			782
Time deposits	4,175		7,095			9,675
Other debt	906		780			736
Total interest expense	8,572		11,702			16,322
Net interest income	15,723		12,190			11,695
Provision for loan losses	2,350		1,400			716
Net interest income after provision for loan losses	13,373		10,790			10,979
Non-interest income
Service charges on deposit accounts	1,547		1,262			1,174
Service and loan fee income	1,497		1,261			1,140
Gain on sale of SBA loans, net	3,627		2,014			2.142
Net securities gains	228		157			3
Other income	1,092		697			3,207
Total non-interest income	7,991		5,391			7,666

Non-interest expense
Salaries and employee benefits	7,498		6,814			9,198
Occupancy expense	1,671		1,648			2,230
Processing and communications	2,236		2,071			2,314
Furniture and equipment	1,075		1,100			1,227
Professional services	668		690			1,471
Deposit insurance	161		501			311
Loan servicing	436		270			707
Other expenses	1,799		1,428			6,260
Total non-interest expense	15,544		14,522			23,718
Income (loss) before provision (benefit) for income taxes	5,820		1,659			(5,073		)
Provision (benefit) for income taxes	2,111		(382		)	839
Net income (loss)	$	3,709	$	2,041		$	(5,912	)
Preferred stock dividends	23		2,062			413
Net income (loss) to common shareholders	$	3,686	$	(21	)	$	(6,325	)

Income (loss) per share – Basic	$	0.67	$	0.00		$	(1.63	)
Diluted	$	0.63	$	0.00		$	(1.63	)

Weighted average common shares outstanding – Basic	5,483		4,512			3,891
Diluted	5,816		4,512			3,891

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

Consolidated Statements of Changes in Shareholders’ Equity
(in thousands)

	Preferred Stock			Common Stock			Retained (Deficit)			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

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: 109 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 283 shares				504			(1,045		)	1,648						1,107
Employee benefit plans 27 shares				81			(65		)	114						130
Preferred stock conversion 1,167 shares	(4,644		)	6,429			(1,785		)							—

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

Comprehensive income:
Net income							3,709									3,709
Unrealized holding gains on securities arising during the period, net of tax of $285													427
Less: reclassification adjustment for gains included in net income, net of tax of $91													137
Net unrealized holding gain on securities arising during the period, net of tax of $193													290			290
Total comprehensive income																3,999
Cash redemption of preferred stock	(285		)													(285		)
Preferred stock dividends paid							(23		)							(23		)
Repurchase of common stock 643 shares				(4,268		)										(4,268		)
Issuance of common stock:
Warrants exercised 649 shares				2,752												2,752
Employee benefit plans 18 shares				95												95

Balance, December 31, 2002	$	—		$	31,827		$	(5,006	)	$	—		$	285		$	27,106

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

Consolidated Statements of Cash Flows
(in thousands)

For the years ended December 31,	2002			2001			2000

Operating activities
Net income (loss)	$	3,709		$	2,041		$	(5,912	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Write-off of intangibles	—			—			3,208
Provision for loan losses	2,350			1,400			716
Depreciation, amortization and accretion, net	1,199			1,216			1,639
Deferred income taxes	(566		)	476			(1,252		)
Gain on sale of securities	(228		)	(157		)	(3		)
Gain on sale of SBA loans held for sale	(3,627		)	(2,014		)	(2,142		)
Loss (gain) on sale of other loans	—			—			960
Gain on sale of deposits	—			—			(3,477		)
(Gain) loss on sale of OREO	—			(36		)	112
Origination of SBA loans held for sale, net	(42,135		)	(41,001		)	(37,745		)
Proceeds of loans held for sale, net	49,085			32,037			33,886
Net change in other assets and liabilities	(602		)	2,427			3,427
Net cash provided by (used in) operating activities	9,185			(3,611		)	(6,583		)
Investing activities
Purchases of securities held to maturity	(13,671		)	(9,292		)	—
Purchases of securities available for sale	(47,361		)	(60,217		)	(145		)
Maturities and principal payments on securities held to maturity	8,410			21,397			1,222
Maturities and principal payments on securities available for sale	39,638			25,341			2,449
Proceeds from sale of securities available for sale	12,605			13,534			509
Purchases of loans	(10,373		)	(11,610		)	—
Proceeds from sale of other loans, net	—			—			79,058
Net (increase) decrease in loans	(33,829		)	(25,005		)	22,044
Purchases of premises and equipment	(1,016		)	(150		)	(825		)
Proceeds from the sale of fixed assets	—			—			775
Proceeds from the sale of OREO Property	—			423			1,251
Redemption of bank owned life insurance	—			—			2,203
Net cash (used in) provided by investing activities	(45,597		)	(45,579		)	108,541
Financing activities
Increase in deposits	42,631			19,636			10,821
Sale of deposits	—			—			(44,564		)
Decrease in borrowings	(85		)	(46		)	(43,000		)
Issuance of trust preferred securities	9,000			—			—
Proceeds from issuance of common stock	2,847			130			—
(Retirement) proceeds from preferred stock offering, net	(285		)	—			4,929
Proceeds from issuance of private placement offering	—			1,107			—
Purchase of common stock	(4,268		)	—			—
Cash dividends on preferred stock	(23		)	(45		)	(25		)
Net cash provided by (used in) financing activities	49,817			20,782			(71,839		)
Increase (Decrease) in cash and cash equivalents	13,405			(28,408		)	30,119
Cash and cash equivalents at beginning of year	16,832			45,240			15,121
Cash and cash equivalents at end of year	$	30,237		$	16,832		$	45,240
Supplemental disclosures
Cash
Interest paid	$	8,658		$	12,003		$	16,854
Income taxes paid (received)	2,178			(2,338		)	(143		)
Non-cash investing activities:
Transfer to other real estate owned from loans, net of charge offs	53			545			299

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 subsidiaries, Unity Bank and Unity (NJ) Statutory trust I (or when consolidated with the Parent Company, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Unity Bancorp, Inc. is a bank holding company incorporated in New Jersey under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank”, or when consolidated with the Parent Company, the “Company”) is chartered by the New Jersey Department of Banking and Insurance. The Bank provides a full range of commercial and retail banking services through 12 branch offices located in Hunterdon, Middlesex, Somerset 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.

Unity (NJ) Statutory Trust I is a statutory Business Trust and wholly-owned subsidiary of Unity Bancorp Inc. On September 26, 2002, the trust issued $9.0 million of capital securities to investors. These floating rate securities are treated as long-term debt on the financial statements, however, they qualify as Tier I Capital.

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 recognized in income. The non-guaranteed portion is generally held in the portfolio.

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

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.

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. The amounts reported reflect the impact of the 5% stock distribution declared on January 27, 2003.

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.

Stock-Based Compensation

In December, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company elected to remain on its historic accounting method related to stock-based awards. The Company has provided the expanded disclosures required by SFAS No. 148 in the December 31, 2002 consolidated financial statements.

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

SFAS 148 Proforma Restatement

(In thousands, except per share amounts)	2002		2001			2000

Net income (loss)
As reported	$	3,709	$	(21	)	$	(6,325	)
Pro forma	3,255		$	(708	)	$	(6,631	)

Income (Loss) per share-
Diluted as reported	$	0.63	$	(0.00	)	$	(1.63	)
Pro forma	$	0.56	$	(0.16	)	$	(1.71	)

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 2002, 2001 and 2000 respectively; dividend yields of 0.0%, 0.0% and 0.0% respectively, expected volatility of 37%, 80.0% and 90.0% respectively, risk-free interest rates of 2.00%, 4.56% and 5.55% respectively, and expected lives of 3.5, 3.5 and 3.4, respectively. The estimated fair value of each award option was $3.03, $2.20 and $4.37 in 2002, 2001 and 2000, respectively.

Recent Accounting Pronouncements

In October, 2002, the FASB issued SFAS No. 147,”Acquisitions of Certain Financial Institutions – an amendment to FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” This Statement removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those

transactions be accounted for in accordance with SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The provisions of SFAS No. 147 that relate to the application of the purchase method of accounting apply to all acquisitions of financial institutions, except transactions between two or more mutual enterprises.

SFAS No. 147 clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The provisions of SFAS No. 147 are effective October 1, 2002. This Statement will have no effect on the Company.

In July, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The initial adoption of this Statement is not expected to have a significant impact on the Company’s financial statements.

In April, 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The Statement, among other things, rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt.” Under SFAS No. 4, gains and losses from the extinguishment of debt were required to be classified as an extraordinary item, if material. Under SFAS No. 145, gains or losses from the extinguishment of debt are to be classified as a component of operating income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies must reclassify prior period amounts previously classified as an extraordinary item. Management does not anticipate that the initial adoption of SFAS No. 145 will have a significant impact on the Company’s consolidated financial statements.

In October, 2001, the FASB issued SFAS No. 144, “Accounting 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 consolidated 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.

In July, 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and periodically reviewed for impairment.

The Company adopted the provisions of SFAS No. 142 on January 1, 2002. The Company currently has no recorded goodwill and the adoption of SFAS No. 142 had no effect on the Company’s finances.

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,

	2002									2001
(In thousands)	Gross Amortized Cost		Gross Unrealized Gains		Estimated Unrealized Losses			Fair Value		Gross Amortized Cost		Gross Unrealized Gains		Estimated Unrealized Losses			Fair Value

Securities Available for Sale
US Treasury securities	$	250	$	—	$	—		$	250	$	348	$	1	$	—		$	349
US Government Agencies	7,995		178		—			8,173		2,000		55		(22		)	2,033
Mortgage backed securities	39,987		515		(66		)	40,436		50,686		358		(128		)	50,916
Corporate debt securities	5,451		40		(168		)	5,323		5,440		—		(217		)	5,223
Equity securities	1,425		35		(72		)	1,388		1,307		—		(55		)	1,252
Total securities available for sale	$	55,108	$	768	$	(306	)	$	55,570	$	59,781	$	414	$	(422	)	$	59,773

Securities Held to Maturity
US Government Agencies	$	7,249	$	268	$	—		$	7,517	$	2,750	$	97	$	—		$	2,847
Mortgage backed securities	15,917		374		(5		)	16,286		15,143		102		(17		)	15,228
Corporate debt securities	3,018		45		(10		)	3,053		3,030		10		(2		)	3,038
Total securities held to maturity	$	26,184	$	687	$	(15	)	$	26,856	$	20,923	$	209	$	(19	)	$	21,113

The table below provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at December 31, 2002 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.

	Within one year				After one year through five years				After five years through ten years				After ten years				Total carrying
(In thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Value		Yield
Available for Sale at Fair Value:
US Government and Federal agencies	$	250	1.49	%	$	2,005	4.79	%	$	3,107	5.33	%	$	3,061	5.34	%	$	8,423	5.20	%
Other Securities
Mortgage-Backed	—		—		471		4.65	%	10,371		3.29	%	29,594		4.37	%	40,436		4.10	%
Other Debt	—		—		2,008		6.41	%	—		—		3,315		4.77	%	5,323		5.37	%
Equities, net	1,388		—		—		—		—				—		—		1,388		—
Total Other	1,388		—		2,479		6.08	%	10,371		3.29	%	32,909		4.41	%	47,147		4.25	%
	$	1,638	1.49	%	$	4,484	5.50	%	$	13,478	3.76	%	$	35,970	4.49	%	$	55,570	4.39	%

Held to Maturity at Cost:
US Government and Federal agencies	$	1,500	6.86	%			—		$	3,249	5.42	%	$	2,500	6.90	%	$	7,249	6.23	%
Mortgage-Backed	—		—				—		2,098		4.18	%	13,819		5.28	%	15,917		5.13	%
Other Debt	—		—		1,009		6.43	%	—		—		2,009		6.66	%	3,018		6.58	%
	$	1,500	6.86	%	$	1,009	6.43	%	$	5,347	4.93	%	$	18,328	5.65	%	$	26,184	5.60	%

Gross realized gains on securities available for sale amounted to $228,000, $202,000 and $4,600, while gross realized losses amounted to $0.0, $45,000 and $2,100 for the years 2002, 2001 and 2000, 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 $15,508,000 and $19,461,000 at December 31, 2002 and 2001, 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:

(In thousands)	2002		2001
SBA held for sale	$	14,396	$	17,719
SBA held to maturity	49,784		35,754
Commercial	163,813		119,262
Residential mortgage	56,297		73,144
Consumer	27,504		26,680
Total loans	$	311,794	$	272,559

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 $130,492,000 and $99,992,000 at December 31, 2002 and 2001, respectively.

As of December 31, 2002 and 2001, the Bank’s recorded investment in impaired loans, defined as nonaccrual loans, was $3,557,000 and $3,184,000, respectively, and the related valuation allowance was $720,732 and $437,000 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 $207,000, $288,000, and $313,000 for 2002, 2001 and 2000, respectively. Average impaired loans for 2002 and 2001 were $3,134,000 and $2,856,000 respectively. At December 31, 2002, $365,000 of loans were past due greater than 90 days but still accruing interest as compared to $69,000 at December 31, 2001. Management has evaluated these loans and determined that they are well collateralized or in the process of collection.

As of December 31, 2002, approximately 79% 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, 2002, $16.7 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:

(In thousands)	2002
Loans to officers, directors or their associates at December 31, 2001	$	2,442
New loans	4,230
Repayments	2,197
Loans to officers, directors or their associates at December 31, 2002	$	4,475

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 2000 through 2002 is as follows:

(In thousands)	2002		2001		2000
Balance at beginning of year	$	3,165	$	2,558	$	2,173
Provision charged to expense	2,350		1,400		716
	5,515		$	3,958	$	2,889
Charge-offs	1,594		923		372
Recoveries	173		130		41
Net charge-offs	1,421		793		331
Balance at end of year	$	4,094	$	3,165	$	2,558

5. Premises and Equipment

The detail of premises and equipment as of December 31, 2002 and 2001 is as follows:

(In thousands)	2002			2001
Land and buildings	$	3,785		$	2,798
Capital leases	2,448			2,603
Furniture, fixtures and equipment	3,752			5,312
Leasehold improvements	1,940			2,129
Gross premises and equipment	11,925			12,842
Less: Accumulated depreciation and amortization	(3,256		)	(4,275		)
Net premises and equipment	$	8,669		$	8,567

Amounts charged to non-interest expense for depreciation of premises and equipment amounted to $914,000 in 2002, $914,000 in 2001 and $963,000 in 2000.

6. Other Assets

The detail of other assets as of December 31, 2002 and 2001 is as follows:

(In thousands)	2002			2001
Deferred tax asset	$	1,635		$	762
Prepaid expenses	245			248
Other real estate owned	196			258
Other	(141		)	214
Total Other Assets	$	1,935		$	1,482

7. Deposits

The following schedule details the maturity distribution of time deposits:

(In thousands)	Within 1 year		1 to 2 years		2 to 3 years		3 to 4 years		Over 4 years		Total
At December 31, 2002
$ 100,000 or more	$	13,539	$	3,742	$	257	$	623	$	1,671	$	19,832
Less than $100,000	$	52,539	$	15,325	$	3,127	$	1,797	$	3,095	$	75,883

8. Borrowed Funds and Trust Preferred Securities

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

(In thousands)	2002				2001
FHLB Borrowings	Amount		Rate		Amount		Rate
At December 31,	$	10,000	4.92	%	$	10,000	4.92	%
Year-to-date average	$	10,662	4.92	%	$	10,023	4.92	%

Capital Lease Obligations
At December 31,	$	2,768	9.62	%	$	2,853	9.58	%
Year-to-date average	$	2,807	9.62	%	$	2,888	9.58	%

Trust Preferred Securities
At December 31,	$	9,000	5.21	%	$	—	—
Year-to-date average	$	2,250	5.21	%	$	—	—

The FHLB ten year borrowings are callable at any time and mature December 2010.

Trust Preferred Securities

9. Commitments and Contingencies

Facility Lease Obligations

The Company operates twelve branches, four branches under operating leases, including its headquarters, four branches under capital leases and four branches are owned. In addition, the Company has long term leases on four other locations which are subleased to 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.

(In thousands)	Operating Lease Rental Payments		Capital Lease Rental Payments		Rent From Sublet Locations		Net Rent Obligation
2003	$	523	$	695	$	360	$	858
2004	424		721		376		769
2005	436		740		385		791
2006	86		696		394		388
2007			693		403		290
Thereafter			1618		1242		376

Total rent expense including the payments made under the capital leases totaled $904,000 and $917,000 and $915,000 for 2002, 2001 and 2000, 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 and results of operations of the Company will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments.

The Bank has been named as a defendant in a lawsuit initiated by Commerce Bank, N.A. and Commerce Bank/Shore, N.A. in the Superior Court of New Jersey, Essex County alleging that the Bank, as payor of certain checks written against certain deposit accounts held at the Bank, improperly refused to honor approximately $4,000,000 of checks. Commerce Bank, N.A. and Commerce Bank/Shore, N.A. has petitioned the Superior Court of New Jersey, Essex County for compensatory and consequential damages of $4,028,584.44, interest, attorney’s fees and costs of suit. The Bank has reviewed the relevant circumstances and believes that it acted properly and that the outcome of the lawsuit will not have a material impact on the consolidated financial position or results of operations of the Company.

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 $84,823,000 to its borrowers as of December 31, 2002, compared to $85,946,000 at December 31, 2001. At December 31, 2002, $15,287,000 of these commitments expire after one year,compared to $15,364,000 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 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, 10.6 shares of common stock and 10.6 common stock purchase warrants were issued for each share of Series A Preferred Stock. Each warrant allowed the holder to purchase one share of common stock at an exercise price of $5.24 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 1.2 million shares of common stock and 1.2 million warrants were issued, for 97.5 thousand shares of tendered Series A Preferred Stock and the related unpaid dividends. 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 full year of 2001.

In the fourth quarter of 2001, the Company redeemed the remaining $285,000 of Series A preferred stock.

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

On October 21, 2002, the Company authorized the repurchase of up 10% of the outstanding common stock. The amount and timing of purchases will be dependent on a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alernate uses of funds. As of December 31, 2002, $4.3 million or 643,000 shares of common stock were repurchased.

11. Other Income

The other income components for the years ended December 31, 2000 through 2002 are as follows:

(In thousands)	2002		2001		2000
Non-deposit account transaction charges	$	201	$	174	$	225
Loan referral fees	606		253		369
Income from cash surrender value of life insurance	—		—		108
Gain on the sale of deposits	—		—		3,477
Loss of sale of loans	—		—		(960		)
Other	285		270		(12		)
Total other income	$	1,092	$	697	$	3,207

12. Other Operating Expenses

The other operating expense components for the years ended December 31, 2000 through 2002 are as follows:

(In thousands)	2002		2001		2000
Advertising	$	463	$	375	$	815
Travel, entertainment, training & recruiting	346		337		434
Amortization of intangible assets*	—		—		3,595
Other expense	990		716		1,416
Total other operating expenses	$	1,799	$	1,428	$	6,260

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

13. Income Taxes

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

(In thousands)	2002			2001			2000
Income Taxes
Federal - Current provision (benefit)	$	2,543		$	—		$	—
Federal - Deferred provision (benefit)	(448		)	404			(936		)
Total Federal provision (benefit)	$	2,095		$	404		$	(936	)

State - Current provision	615			101			181
State - Deferred provision (benefit)	(112		)	72			(316		)
Total State provision (benefit)	$	503		$	173		$	(135	)
Valuation Allowance	(487		)	(959		)	1,910
Total provision (benefit) for income taxes	$	2,111		$	(382	)	$	839

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

(In thousands)	2002			2001			2000
Federal income taxes at statutory rate	$	1,979		$	564		$	(1,725	)
State income taxes, net of Federal income tax effect	336			114			95
Other, net	283			(101		)	559
Valuation allowance	(487		)	(959		)	1,910
Provision (benefit) for income taxes	$	2,111		$	(382	)	$	839

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 31,2002 and 2001 are as follows:

(In thousands)	2002			2001
Allowance for loan losses	$	1,372		$	1,000
Unrealized (gain) loss on securities available for sale	(177		)	3
Deferred loan costs	(61		)	(260		)
Operating loss carry-forward	684			726
Other, net	281			244
Net deferred tax asset	2,099			1,713
Less: valuation allowance	(464		)	(951		)
Net deferred tax asset	$	1,635		$	762

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 balance of the valuation allowance at December 31, 2002 was $464,000, which reduced the deferred tax asset to $1,635,000.

At December 31, 2002, the Company had available for federal and state tax purposes, pre tax net operating loss carryforwards of approximately $93,000 and $10.0 million, respectively. The net operating loss carryforwards for federal and state purposes expire 2021 and 2008, respectively.

14. Income (Loss) per Common Share

The following is a reconciliation of the calculation of basic and dilutive income (loss) per share. All share amounts have been restated to include the effect of a 5% stock distribution paid on March 14, 2003.

	2002		2001			2000
Net Income (Loss)	$	3,709	$	2,041		$	(5,912	)
Less: Preferred stock dividends	23		276			413
Preferred stock exchange dividend	—		1,786			—
Net loss to common shareholders	$	3,686	$	(21	)	$	(6,325	)
Weighted average common shares outstanding	5,483		4,512			3,891
Plus: Potential dilutive common stock	333		—			—
Diluted average common shares outstanding	5,816		4,512			3,891
Net Income (loss) per common share -
Basic	$	0.67	$	0.00		$	(1.63	)
Diluted	$	0.63	$	0.00		$	(1.63	)

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.

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

	Actual				For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
(In thousands)	Amount		Ratio		Amount			Ratio			Amount			Ratio
As of December 31, 2002
Leverage ratio	$	35,688	8.38	%	>	$	17,038	4.00		%	>	$	21,298	5.00	%
Tier I risk-based ratio	$	35,688	11.05	%	>	$	12,919		4.00	%	>	$	19,379	6.00	%
Total risk-based capital ratio	$	39,789	12.32	%	>	$	25,839		8.00	%	>	$	32,299	10.00	%
As of December 31, 2001
Leverage ratio	$	24,786	6.62	%	>	$	14,977		4.00	%	>	$	18,721	5.00	%
Tier I risk-based ratio	$	24,786	9.53	%	>	$	10,405		4.00	%	>	$	15,607	6.00	%
Total risk-based capital ratio	$	27,951	10.75	%	>	$	20,810		8.00	%	>	$	26,012	10.00	%

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

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(In thousands)	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of December 31, 2002
Leverage ratio	$	29,509	6.96	%	>	$	16,956	4.00	%	>	$	21,195	5.00	%
Tier I risk-based ratio	$	29,509	9.16	%	>	$	21,893	4.00	%	>	$	19,339	6.00	%
Total risk-based capital ratio	$	33,541	10.41	%	>	$	25,786	8.00	%	>	$	32,232	10.00	%
As of December 31, 2001
Leverage ratio	$	23,384	6.25	%	>	$	14,970	4.00	%	>	$	18,713	5.00	%
Tier I risk-based ratio	$	23,384	9.00	%	>	$	10,394	4.00	%	>	$	15,591	6.00	%
Total risk-based capital ratio	$	26,549	10.22	%	>	$	20,788	8.00	%	>	$	25,986	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 20% of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $85,906, $44,000 and $42,000 to the Plan in 2002, 2001 and 2000, respectively.

The Bank does not currently provide any other post retirement or post employment benefits to its employees other than the 401(k) plan.

The Company has several stock option Plans. These Plans allow 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, 2002, 1,009,969 shares have been reserved for issuance, of which 755,637 are outstanding, 75,217 have exercised leaving 179,115 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, 1999	554,631		$	5.88	—	$	13.04	$	10.07
Options granted	92,925		2.68		—		7.62	6.01
Options exercised	—				—			—
Options expired	(331,657	)	5.60		—		12.86	9.94
Outstanding, December 31, 2000	315,899		$	2.68	—	$	13.04	$	9.00
Options granted	467,250		2.90		—		4.05	3.80
Options exercised	—				—			—
Options expired	(129,500	)	2.90		—	13.04		7.94
Outstanding, December 31, 2001	653,648		$	2.68	—	$	13.04	$	5.49
Options granted	249,926					6.44		6.44
Options exercised	(9,276	)	5.69		—		6.91	6.38
Options expired	(138,661	)	3.44		—		13.04	9.71
Outstanding, December 31, 2002	755,637		$	2.68	—		10.66	$	5.02

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. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans has an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation.

(In thousands, except per share amounts)	2002		2001			2000
Net income (loss)
As reported	$	3,709	$	(21	)	$	(6,325	)
Pro forma	3,255		$	(708	)	$	(6,631	)

Income (Loss) per share-
Diluted as reported	$	0.63	$	(0.00	)	$	(1.63	)
Pro forma	$	0.56	$	(0.16	)	$	(1.71	)

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 2002, 2001 and 2000 respectively; dividend yields of 0.0%, 0.0% and 0.0% respectively, expected volatility of 37%, 80.0% and 90.0% respectively, risk-free interest rates of 2.00%, 4.56% and 5.55% respectively, and expected lives of 3.5, 3.5 and 3.4, respectively. The estimated fair value of each award option was $3.03, $2.20 and $4.37 in 2002, 2001 and 2000, respectively.

The following table summarizes information about stock options outstanding at December 31, 2002:

Exercise Price							Shares Outstanding at December 31, 2002		Remaining Contractual Life		Shares Exercisable at December 31, 2002
			<	$	4.00			197,715		8.07 years		67,173
	$	4.01	-	$	5.00			264,521		8.55 years		221,152
	$	5.01	-	$	7.00			249,664		9.79 years		47,773
	$	7.01	-	$	11.99			43,737		3.11 years		11,655
				$	5.02	*		755,637				347,753

* 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. No shares were granted in 2001 or 2002. As of December 31, 2002, the Company has 50,027 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, 2002, the Bank had standby letters of credit outstanding of $137,000, as compared to $197,500 at December 31, 2001. The fair value of these commitments is nominal.

Below are the Company’s estimated financial instruments fair value as of December 31, 2002 and 2001:

	2002				2001
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets-
Cash and Federal funds sold	$	30,237	$	30,237	$	16,832	$	16,832
Securities held to maturity	26,184		26,856		20,923		21,113
Securities available for sale	55,570		55,570		59,773		59,773
Loans, net of allowance for possible loan losses	307,700		312,427		269,394		270,943
Financial liabilities- Total deposits	382,585		384,166		339,954		341,930
Financial liabilities- Borrowings	19,000		20,462		10,000		11,111

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

Balance Sheets	December 31
(in thousands)	2002		2001
Assets:
Cash	$	5,849	$	1,267
Securities available for sale	226		123
Investment in Bank subsidiary	29,818		23,413
Other assets	397		92
Total assets	$	36,290	$	24,895
Liabilities and Shareholders’ Equity:
Other liabilities	$	184	$	59
Other borrowings	9,000		—
Shareholders’ equity	27,106		24,836
Total Liabilities and Shareholders’ equity	$	36,290	$	24,895

Statements of Operations	December 31
(in thousands)	2002			2001			2000
Interest income	$	46		$	34		$	97
Interest expense	127			—			15
Net interest income	(81			34			82
Gain on sale of available for sale securities	—			53			4
Total income	(81		)	87			86
Compensation	—			—			79
Other expenses	80			236			594
Loss before income tax benefit and equity in undistributed loss of subsidiary	(161		)	(149		)	(587		)
Income tax benefit	—			—			(199		)
Loss before equity in undistributed loss of subsidiary	(161		)	(149		)	(388		)
Equity in undistributed net income (loss) of subsidiary	3,870			2,190			(5,524		)
Net income (loss)	$	3,709		$	2,041		$	(5,912	)

Statements of Cash Flows	December 31
(in thousands)	2002			2001			2000
Operating Activities:
Net income (loss)	$	3,709		$	2,041		$	(5,912	)
Adj to reconcile net income (loss) to net cash (used in) provided by operating activities:
Equity in undistributed (earnings) loss of subsidiary	(3,870		)	(2,190		)	5,524
Stock grants	—			—			10
Gain on sale of securities available for sale	—			(53		)	(4		)
Decrease (increase) in other assets	(305		)	4			605
(Decrease) increase in other liabilities	112			(46		)	35
Net cash (used in) provided by operating activities	(354		)	(244		)	258
Investing Activities:
Sales and maturities of securities available for sale	—			398			62
Purchases of securities available for sale	(85		)	—			—
Additional equity investment in bank subsidiary	(2,250		)	(800		)	(5,109		)
Net cash used in investing activities	(2,335		)	(402		)	(5,047		)
Financing Activities:
Proceeds from issuance of preferred stock, net	—			—			4,929
Proceeds from issuance of common stock, net	2,847			1,237			—
Proceeds for issuance of long term debt	9,000			—			—
Payment to repurchase common stock, net	(4,268		)	—			—
Redemption of preferred stock	(285		)	—			—
Cash dividends paid on preferred stock	(23		)	(45		)	(25		)
Net cash provided by financing activities	$	7,271		$	1,192		$	(4,904	)
Net increase in cash and cash equivalents	4,582			546			115
Cash beginning of year	1,267			721			606
Cash end of year	$	5,849		$	1,267		$	721
Supplemental disclosures: Interest paid	$	121		$	—		$	15

19. Quarterly Financial Information (Unaudited)

The following quarterly financial information for the years ended December 31,2002 and 2001 is unaudited. However, in the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the results of operations for the periods, are reflected. Results of operations for the periods are not necessarily indicative of the results of the entire year or any other interim period.

(In thousands, except per share data)	March 31			June 30		September 30			December 31
2002
Total interest income	$	5,748		$	6,127	$	6,227		$	6,193
Total interest expense	2,118			2,184		2,145			2,125
Net interest income	3,630			3,943		4,082			4,068
Provision for loan losses	600			975		375			400
Net interest income after provision for loan losses	3,030			2,968		3,707			3,668
Total non-interest income	1,891			2,362		1,622			2,116
Total non-interest expense	3,652			3,900		3,830			4,162
Net income before tax	1,269			1,430		1,499			1,622
Income tax provision	447			514		537			613
Net income from operations	822			916		962			1,009
Preferred stock dividends	8			7		8			—
Net income to common shareholders	814			909		954			1,009
Basic income per common share	$	0.15		$	0.17	$	0.17		$	0.19
Diluted income per commmon share	$	0.14		$	0.16	$	0.16		$	0.18

2001	March 31			June 30		September 30			December 31

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	$	(0.22	)	$	0.18

Products and Services

Working With You. For You. Unity.

800.618.BANK

unitybank.com

[GRAPHICS]

R e t a i l F i n a n c i a l S e r v ice C e n t e r s
Clinton	Highland Park	South Plainfield
64 Old Highway 22	104 Raritan Avenue	2426 Plainfield Avenue
908.730.7300	732.418.0330	908.412.9393
Colonia	Linden	Springfield
1379 St. Georges Avenue	628 North Wood Avenue	733 Mountain Avenue
732.815.1177	908.925.8353	973.258.0111
Edison	North Plainfield	Union
1746 Oak Tree Road	450 Somerset Street	952 Stuyvesant Avenue
732.205.0044	908.769.0303	908.851.9700
Flemington	Scotch Plains	Whitehouse
110 Main Street	2222 South Avenue	370 Route 22 West
908.782.2000	908.233.8009	908.823.0555

Quarter	High		Low		Close
2002
Fourth	$	8.10	$	6.07	$	7.85
Third	6.76		5.82		6.27
Second	6.90		5.24		6.25
First	8.48		5.79		6.19
2001
Fourth	$	6.19	$	4.47	$	6.20
Third	5.89		3.81		4.81
Second	4.29		2.90		3.81
First	3.81		1.90		3.33

Dated: March 27, 2003			/s/ Anthony Feraro
			Anthony Feraro
			Chief Executive Officer

Dated: March 27, 2003			/s/ James A. Hughes
			James A. Hughes
			Chief Financial Officer