The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2008 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as "believe", "expect", "anticipate", "should", "planned", "estimated" and "potential". Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company's Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent Quarterly Report on Form 10-Q, the following: changes in general, economic, and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Unity Bancorp, Inc.'s interest-rate spread or other income anticipated from operations and investments.

Overview

Unity Bancorp, Inc., (the "Parent Company"), is incorporated in New Jersey and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when consolidated with the Parent Company, the "Company") was granted a charter by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through 16 branch offices located in Hunterdon, Somerset, Middlesex, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration and other commercial credits. Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank's investment portfolio. Unity Participation Company, Inc., a wholly-owned subsidiary of the Bank is used for holding and administering certain loan participations.

Unity (NJ) Statutory Trust II is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. Unity (NJ) Statutory Trust III is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On December 19, 2006, the Trust issued $5.0 million of trust preferred securities to investors. These floating rate securities are treated as subordinated debentures on the Company's financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes, subject to certain limitations. In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of any of its business trust subsidiaries.

Earnings Summary

The last three months of 2008 were a period of unprecedented financial, credit and capital market stress. Factors such as lack of liquidity in the credit markets, financial institution failures, continued fall-out from the subprime mortgage crisis, asset "fair market" value write-downs, capital adequacy and credit quality concerns resulted in a lack of confidence by the markets in the financial industry. Consumer sentiment remained low and consumer spending contracted due to concerns over employment, housing and stock market values.

The plight of the financial, credit and capital markets carried over into the first quarter of 2009 and will likely exist throughout the remainder of the year. Corporate layoffs, hiring freezes and bankruptcies persist and capital spending plans have been postponed. Consumer confidence remains low as individual's uncertainties regarding the labor market have re-prioritzed their spending habits and have curbed discretionary spending. The financial sector continues to trade at a discount to book value due to credit concerns and negative publicity by the news media. Secondary markets for many types of financial assets, including the guaranteed portion of SBA loans, remain very restrictive. In addition, during the quarter, the FDIC announced it would be assessing a special one-time fee on all FDIC insured institutions to help recapitalize its depleted reserve fund. Despite this challenging operating environment, the Company believes that it is well-positioned.

Our performance during the first quarter of 2009 included the following accomplishments:

? Continued market share expansion as total loans increased 11.1 percent from one year ago,

? Total deposits increased 9.5 percent from one year ago,

? The Company remained well-capitalized, and ? The Company remained profitable, albeit at a reduced level of profitability.

For the three months ended March 31, 2009, the Company reported net income of $731 thousand, a decrease of $513 thousand from net income of $1.2 million reported for the same period of 2008. Net income available to common shareholders, which includes the impact of dividends and accretion of discount on the Company's outstanding preferred stock, was $352 thousand for the three months ended March 31, 2009. The Company had no outstanding preferred stock in the first quarter of 2008. The earnings per share and return on average common equity ratios shown below are calculated on net income available to common shareholders.

                                          Three Months ended March 30,
(In thousands, except per share data)       2009               2008
Net Income per Common share:
Basic                                   $        0.05      $        0.18
Diluted                                          0.05               0.17
Return on average assets                         0.33   %           0.65 %
Return on average common equity                  2.90   %          10.50 %
Efficiency ratio                                73.02   %          71.95 %

Our results reflect:
? Increased net interest income from growth in earning assets and a lower cost of funds,
? An increased provision for loan losses in response to increased credit risk due to continued weakness in the economy, ? A lower level of noninterest income due to significantly reduced net gains on SBA loan sales, and
? Lower operating expenses related to the closure of our SBA loan production offices, partially offset by substantial hikes in FDIC insurance assessment rates.

Net Interest Income

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

Since March 31, 2008, the Federal Open Market Committee has lowered interest rates 200 basis points in an attempt to stimulate economic activity. These actions have resulted in a Fed Funds target rate of 0.25 percent and a Prime rate of 3.25 percent. These interest rate levels in turn have generated lower yields on earning assets as well as lower funding costs for financial institutions.

For the three months ended March 31, 2009, tax-equivalent interest income decreased $65 thousand or 0.5 percent to $12.6 million. This decrease was driven by the lower average yield on these assets despite a higher volume of interest-earning assets:

º Of the $65 thousand decrease in interest income on a tax-equivalent basis, $2.0 million can be attributed to the reduced yields on the interest-earning assets, partially offset by a $1.9 million increase due to a higher volume of earning assets.
º The yield on interest-earning assets decreased 106 basis points to 5.87 percent for the quarter-ended March 31, 2009 due to the lower overall interest rate environment compared to 2008. Yields on all loan products fell with the SBA, SBA 504, and consumer loan portfolios repricing 332, 135, and 112 basis points lower, respectively.
º The average volume of interest-earning assets increased $132.0 million to $866.8 million in the first three months of 2009 compared to $734.8 million in 2008. This was due primarily to a $75.5 million increase in average loans across all product lines and a $67.4 million increase in average securities. As loan demand began to subside with the economic downturn, excess liquidity was invested in the securities portfolio as a favorable alternative to federal funds sold.

Total interest expense was $5.8 million for the first three months of 2009, a decrease of $184 thousand or 3.1 percent compared to the comparable period in 2008. This decrease was driven by the lower overall interest rate environment in 2009 despite the shift in deposit mix toward higher priced products:

º Of the $184 thousand decrease in interest expense in the first quarter of 2009, $1.4 million was attributed to a decrease in the rates paid on interest-bearing liabilities, partially offset by a $1.2 million increase due to a higher volume of these liabilities.
º The average cost of interest-bearing liabilities decreased 63 basis points to 3.10 percent, primarily due to the repricing of deposits and borrowings in a lower interest rate environment. The cost of interest-bearing deposits decreased 61 basis points to 3.03 percent in 2009 as all product lines repriced lower. The cost of borrowed funds and subordinated debentures decreased 89 basis points to 3.36 percent due to the use of low cost overnight line of credit funding.
º Interest-bearing liabilities averaged $762.0 million in the first quarter of 2009, an increase of $115.1 million, or 17.8 percent, compared to the prior year's quarter. The increase in interest-bearing liabilities was a result of increases in time deposits, interest-bearing demand deposits and borrowed funds, offset in part by a decline in savings deposits. Average borrowed funds and subordinated debentures increased $41.3 million to $142.1 million in 2009 compared to $100.9 million in 2008 as these funding sources provided favorable pricing compared to alternative sources of funds as market rates began to fall.
º The lower costs of funding were offset somewhat by the shift in the mix of deposits from lower cost savings deposits to higher cost time deposits. Our deposit concentration shifted from 35 percent savings and 51 percent time deposits at March 31, 2008 to 24 percent savings and 63 percent time at March 31, 2009.

During the quarter-ended March 31, 2009, tax-equivalent net interest income increased $119 thousand or 1.8 percent to $6.8 million. Net interest margin decreased 50 basis points to 3.14 percent for 2009 compared to 3.64 percent in 2008. The net interest spread was 2.77 percent, a 43 basis point decrease from 3.20 percent in 2008. The net interest margin and net interest spread are expected to expand in 2009 as higher cost time deposits reprice in the current low rate environment.

                              Unity Bancorp, Inc.
     Consolidated Average Balance Sheets with Resultant Interest and Rates
                                  (Unaudited)
                  (Tax-equivalent basis, dollars in thousands)


                                                             Three Months Ended
                                      March 31, 2009                                 March 31, 2008
                           Average                                          Average
                           Balance         Interest       Rate/Yield        Balance       Interest       Rate/Yield
ASSETS
Interest-earning
assets:
 Federal funds sold and
interest-bearing
deposits with banks       $   10,324     $       13             0.51 %   $   22,925     $      180             3.16 %
 Federal Home Loan Bank
stock                          5,936              -                -          4,174            100             9.64
 Securities:
  Available for sale         138,302          1,692             4.89         70,757            908             5.13
  Held to maturity            33,984            404             4.76         34,147            455             5.33
   Total securities (a)      172,286          2,096             4.87        104,904          1,363             5.20
 Loans, net of unearned
discount:
  SBA                        105,044          1,607             6.12         98,614          2,328             9.44
  SBA 504                     76,882          1,231             6.49         74,345          1,450             7.84
  Commercial                 305,148          5,016             6.67        297,998          5,285             7.13
  Residential mortgage       129,045          1,864             5.78         74,341          1,079             5.81
  Consumer                    62,148            794             5.18         57,482            901             6.30
   Total loans (a),(b)       678,267         10,512             6.26        602,780         11,043             7.36
   Total
interest-earning assets      866,813         12,621             5.87        734,783         12,686             6.93
Noninterest-earning
assets:
 Cash and due from
banks                         19,627                                         14,991
 Allowance for loan
losses                       (10,939 )                                       (8,690 )
 Other assets                 33,179                                         30,304
   Total
noninterest-earning
assets                        41,867                                         36,605
Total Assets              $  908,680                                     $  771,388

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
 Interest-bearing
demand deposits           $   85,064            270             1.29     $   78,999            366             1.86
 Savings deposits            147,260            644             1.77        190,574          1,349             2.85
 Time deposits               387,554          3,723             3.90        276,426          3,220             4.69
   Total
interest-bearing
deposits                     619,878          4,637             3.03        545,999          4,935             3.64
Borrowed funds and
subordinated debentures      142,109          1,179             3.36        100,850          1,065             4.25
   Total
interest-bearing
liabilities                  761,987          5,816             3.10        646,849          6,000             3.73
Noninterest-bearing
liabilities:
 Demand deposits              75,546                                         74,709
 Other liabilities             3,879                                          2,191
   Total
noninterest-bearing
liabilities                   79,425                                         76,900
    Shareholders'
equity                        67,268                                         47,639
      Total Liabilities
and Shareholders'
Equity                    $  908,680                                     $  771,388

    Net interest spread                       6,805             2.77 %                       6,686             3.20 %
   Tax-equivalent basis
adjustment                                      (31 )                                          (51 )
    Net interest income                  $    6,774                                     $    6,635
    Net interest margin                                         3.14 %                                         3.64 %

(a) Yields related to securities and loans exempt from federal income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent.
(b) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

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 fully tax-equivalent basis, assuming a federal income tax rate of 34.0 percent.

Rate Volume Table                                Amount of Increase (Decrease)
(In thousands)                                Three months ended March 31, 2009
                                                    versus March 31, 2008
                                         Due to change in:
                                      Volume                     Rate                    Total
Interest Income
SBA                           $          143           $         (864 )         $         (721 )
    SBA 504                               47                     (266 )                   (219 )
Commercial                               111                     (380 )                   (269 )
Residential mortgage                     791                       (6 )                    785
Consumer                                  66                     (173 )                   (107 )
Total Loans                            1,158                   (1,689 )                   (531 )

Available for sale
securities                               828                      (44 )                    784
Held to maturity
securities                                (2 )                    (49 )                    (51 )
Federal funds sold and
interest-bearing
deposits                                 (66 )                   (101 )                   (167 )
Federal Home Loan Bank
stock                                     29                     (129 )                   (100 )
Total interest-earning
assets                        $        1,947           $       (2,012 )         $          (65 )

Interest Expense
Interest-bearing
checking                      $           25           $         (121 )         $          (96 )
  Savings deposit                       (263 )                   (442 )                   (705 )
Time deposits                          1,113                     (610 )                    503
Total interest-bearing
deposits                                 875                   (1,173 )                   (298 )
Borrowings                               372                     (258 )                    114
Total interest-bearing
liabilities                            1,247                   (1,431 )                   (184 )
Tax equivalent net
interest income               $          700           $         (581 )         $          119
Tax equivalent
adjustment                                                                                  20
Increase in net
interest income                                                                 $          139

Provision for Loan Losses

The provision for loan losses was $1.5 million for the three months ended March 31, 2009, an increase of $1.0 million, compared to a provision of $450 thousand for the same period a year ago. This increase is directly related to the increase in nonperforming loans and net charge-offs experienced as a result of the continued weakness in the economy both nationally and in our trade area.

Each period's loan loss provision is the result of management's analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies and current economic environment factors. Additional information may be found under the caption, "Financial Condition-Allowance for Loan Losses." The current provision is considered appropriate under management's assessment of the adequacy of the allowance for loan losses.

Noninterest Income

Historically, Unity has had a strong source of noninterest income in the form of gains on the sale of SBA loans. However, during 2008, pricing in the secondary market for SBA loans began to deteriorate in response to the credit crisis. Consequently, as a result of the economic conditions, Unity elected to cease offering SBA loans as a line of business, and closed its SBA loan production offices outside of its New York, New Jersey and Pennsylvania primary trade areas. Unity will continue to offer these products in its trade area as an additional credit product for banking customers. This decision resulted in lower levels of noninterest income during the first quarter of 2009 and will likely reduce noninterest income for the foreseeable future.

Noninterest income was $1.3 million for the three months ended March 31, 2009, a decrease of $107 thousand or 7.4 percent compared with the same period in 2008. The components of noninterest income are as follows:

                                                       For the three months ended March 31,
(In thousands)                                         2009               2008         Percent Change
Service charges on deposit accounts            $        330       $        320                    3.1   %
Service and loan fee income                             252                300                  (16.0 )
Gain on sale of mortgage loans                           64                 21                  204.8
Gain on sale of SBA loans held for sale, net             29                576                  (95.0 )
Bank owned life insurance                                55                 51                    7.8
Net securities gains                                    515                 70                     NM
Other income                                            103                117                  (12.0 )
Total noninterest income                       $      1,348       $      1,455                   (7.4 ) %
NM = Not meaningful

Service charges on deposit accounts increased 3.1 percent for the three months ended March 31, 2009, when compared to the same period a year ago due to slight increases in overdraft fees and commercial analysis fees.

Service and loan fee income decreased $48 thousand for the three month period ended March 31, 2009 when compared to the same period a year ago. The decrease in loan and servicing fees quarter over quarter was the result of lower levels of loan processing fee income and loan prepayment fees, partially offset by increased levels of letter of credit fees.

Net gains on mortgage loan sales increased $43 thousand to $64 thousand for the quarter-ended March 31, 2009 due to an increased volume of loans sold. Mortgage loan sales totaled $5.2 million for the three months ended March 31, 2009 compared to $1.3 million for the prior year's period.

Net gains on SBA loan sales decreased significantly to $29 thousand for the quarter compared to $576 thousand for the three months ended March 31, 2008, as a result of a substantially lower volume of loans sold and lower premiums on these sales due to market conditions. SBA loan sales totaled $838 thousand for the three months ended March 31, 2009, compared to $12.1 million for three months ended March 30, 2008. Management believes that net gains on SBA loans will remain at this lower level for the foreseeable future.

Bank owned life insurance income totaled $55 thousand and $51 thousand for the three months ended March 31, 2009 and 2008, respectively.

Net security gains of $515 thousand were realized during the current quarter, compared to $70 thousand during the prior period. The gains during the current quarter were the result of the sale of approximately $20 million of fixed income securities.

Other noninterest income decreased $14 thousand for the three months ended March 31, 2009 compared to the prior year, due to lower loan referral fees and annuity commissions.

Noninterest Expense

In response to the challenging economic environment which began in 2008, the Company took several steps to reduce its operating expenses. The primary cost reduction mechanism was the significant reduction in staffing related to closing our SBA loan production offices outside of our primary trade areas in the fourth quarter of 2008. The effect of this reduction in head-count may be seen in the 18.5 percent decrease in compensation and benefits expense quarter over quarter. Unfortunately, this and other cost cutting strategies were partially offset by the large increase in FDIC insurance premiums during the quarter. Total noninterest expense decreased $215 thousand or 3.7 percent to $5.6 million for the three months ended March 31, 2009 compared to a year ago. The components of noninterest expense are detailed below:

                                        For the three months ended March 31,
(In thousands)                         2009              2008          Percent Change
Compensation and benefits       $     2,624       $     3,220             (18.5 ) %
Occupancy                               687               701              (2.0 )
Processing and communications           541               570              (5.1 )
Furniture and equipment                 495               388              27.6
Deposit insurance                       301                63             377.8
Professional services                   246               198              24.2
Loan collection costs                   198               102              94.1
Advertising                              75                62              21.0
Other                                   388               466             (16.7 )
Total noninterest expense       $     5,555       $     5,770              (3.7 ) %

Compensation and benefits expense, the largest component of noninterest expense, decreased $596 thousand for the three months ended March 31, 2009 compared to the same period a year ago. The decrease in compensation and benefits expense was a result of the fourth quarter 2008 staffing reductions undertaken at our SBA loan production offices. Full-time equivalent employees fell to 162 at March 31, 2009, compared to 188 at March 31, 2008.

Occupancy expense decreased $14 thousand for the three months ended March 31, 2009 compared to the same period a year ago due to reduced lease and leasehold improvement related expenses due to the closure of our Bridgewater, NJ location during the second quarter 2008.

Processing and communications expense decreased $29 thousand for the three months ended March 31, 2009 compared to the same period a year ago. This was the result of cost savings initiatives put in place over the last twelve months in telephone and data procesing line costs, partially offset by increased data processing expenses.

. . .