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 Reports 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

Beginning in 2008, we have seen 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 half of 2009 and will likely persist 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 majority of 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. Despite this challenging operating environment, the Company believes that it is well-positioned.

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

? Continued market share expansion as total loans increased 3.5 percent from one year ago,

? Total deposits increased 8.9 percent from one year ago, and

? The Company remained well-capitalized.

For the three months ended June 30, 2009, the Company reported a net loss of $1.2 million, a decrease of $2.3 million from net income of $1.1 million reported for the same period of 2008. Net loss available to common shareholders, which includes the impact of dividends and accretion of discount on the Company's outstanding preferred stock, was $1.6 million for the three months ended June 30, 2009. The Company had no outstanding preferred stock in the first half of 2008. For the six months ended June 30, 2009, the Company reported a net loss of $469 thousand, a decrease of $2.8 million from net income of $2.3 million reported for the same period of 2008. Net loss available to common shareholders, which includes the impact of dividends and accretion of discount on the Company's outstanding preferred stock, was $1.2 million for the six months ended June 30, 2009.

Our results reflect:
? 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 a $1.7 million other-than-temporary impairment charge on securities, and
? Higher operating expenses due to the FDIC special assessment.

The earnings (loss) per share and return (loss) on average common equity ratios shown below are calculated on net income (loss) available to common shareholders.

                                               Three Months ended June 30,             Six Months ended June 30,
(In thousands, except per share data)           2009                  2008             2009                 2008
Net Income (Loss) per Common share:
Basic                                      $        (0.22 )       $       0.16     $      (0.17 )       $       0.33
Diluted                                             (0.22 )               0.15            (0.17 )               0.32
Return (loss) on average assets                     (0.54 )%              0.56 %          (0.11 )%              0.60 %
Return (loss) on average common equity             (12.97 )%              9.29 %          (5.07 )%              9.87 %
Efficiency ratio                                    80.58 %              69.59 %          76.89 %              70.76 %

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 June 30, 2008, the Federal Open Market Committee has lowered interest rates 175 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 June 30, 2009, tax-equivalent interest income increased of $248 thousand or 2.0 percent to $12.6 million compared to the same period a year ago. This increase was driven by a higher volume of interest-earning assets, despite the lower yield on these assets.

º Of the $248 thousand increase in interest income on a tax-equivalent basis, $2.8 million can be attributed to a higher volume of earning assets, partially offset by a $2.6 million decrease due to the reduced yields on the interest-earning assets.
º The yield on interest-earning assets decreased 66 basis points to 5.91 percent for the quarter-ended June 30, 2009 due to the lower overall interest rate environment compared to 2008. Yields on all loan products fell during the period, with the largest declines in the SBA and consumer loan portfolios, repricing 191 and 76 basis points lower, respectively.
º The average volume of interest-earning assets increased $99.0 million to $851.9 million in the second quarter of 2009 compared to $752.9 million for the second quarter of 2008. This was due primarily to a $49.6 million increase in average loans across all product lines, except commercial loans which declined $5.5 million, and a $57.0 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.
º There was a shift in the concentration of commercial loans and residential mortgages to the total loan portfolio from the second quarter of 2008 to the second quarter of 2009. The average balances shifted from 50 percent commercial loans and 13 percent residential mortgages in 2008 to 46 percent commercial loans and 19 percent residential mortgages in 2009. The Company anticipates the slowdown of SBA and commercial lending to continue throughout 2009.

Total interest expense was $5.7 million for the second quarter of 2009, an increase of $244 thousand or 4.5 percent compared to the same period in 2008. This increase was primarily driven by a large increase in average time deposits, partially offset by the decline in the overall interest rate environment in 2009.

º Of the $244 thousand increase in interest expense in the second quarter of 2009, $2.4 million was attributed to a higher volume of interest-bearing liabilities, partially offset by a $2.2 million decrease due to the lower rates paid on these liabilities.
º The average cost of interest-bearing liabilities decreased 26 basis points to 3.05 percent, primarily due to the repricing of deposits and borrowings in a lower interest rate environment. The cost of interest-bearing deposits decreased 24 basis points to 2.89 percent for the second quarter of 2009 as all product lines repriced lower. The cost of borrowed funds and subordinated debentures decreased 20 basis points to 4.01 percent due to the use of low cost overnight line of credit funding.
º Interest-bearing liabilities averaged $743.3 million in the second quarter of 2009, an increase of $82.8 million, or 12.5 percent, compared to the prior year's quarter. The increase in interest-bearing liabilities was a result of increases in all types of interest-bearing deposits, offset in part by a decline in borrowed funds. The largest increase was to time deposits, which increased $78.7 million or 27.9 percent from the second quarter of 2008 to the second quarter of 2009. Average borrowed funds and subordinated debentures decreased $3.3 million to $107.2 million in 2009 compared to $110.5 million in 2008 due to the maturity of a $10.0 million repurchase agreement in 2009.

During the quarter-ended June 30, 2009, tax-equivalent net interest income remained relatively flat compared to the same period in 2008, with an increase of $4 thousand or 0.1 percent. Net interest margin decreased 42 basis points to 3.24 percent for 2009 compared to 3.66 percent in 2008. The net interest spread was 2.85 percent, a 41 basis point decrease from 3.26 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 and more customers shift from time deposits to the Loyalty savings product.

º Of the $183 thousand increase in interest income on a tax-equivalent basis, $4.5 million can be attributed to a higher volume of earning assets, partially offset by a $4.3 million decrease due to the reduced yields on the interest-earning assets.
º The yield on interest-earning assets decreased 86 basis points to 5.89 percent for the six months ended June 30, 2009 due to the lower overall interest rate environment compared to 2008. Yields on all loan products fell during the period, with the largest declines in SBA, SBA 504 and consumer loan portfolios repricing 261, 87 and 93 basis points lower, respectively.
º The average volume of interest-earning assets increased $115.5 million to $859.3 million for the first six months of 2009 compared to $743.8 million for the comparable period in 2008. This was due primarily to a $62.5 million increase in average loans across all product lines and a $62.2 million increase in average securities, partially offset by a $10.4 million decrease in federal funds sold and interest-bearing deposits. 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. The majority of the increase in average loans was to the residential mortgage portfolio, wihch increased $49.5 million or 64.1 percent during the period. Growth in the SBA, SBA 504 and commercial portfolios slowed during the period, accounting for only 13.4 percent of the overall increase in average loans. This slowdown is expected to continue throughout 2009.

Total interest expense was $11.5 million for the six months ended June 30, 2009, an increase of $60 thousand or 0.5 percent compared to the six months ended June 30, 2008. This increase was primarily driven by an increase in average interest-bearing liabilities, offset almost entirely by the decline in the overall interest rate environment in 2009:

º Of the $60 thousand increase in interest expense, $3.8 million was attributed to a higher volume of interest-bearing liabilities, offset almost entirely by a $3.7 million decrease due to the lower rates paid on these liabilities.
º The average cost of interest-bearing liabilities decreased 45 basis points to 3.07 percent, primarily due to the repricing of deposits and borrowings in a lower interest rate environment. The cost of interest-bearing deposits decreased 42 basis points to 2.96 percent for the first six months of 2009 as all product lines repriced lower. The cost of borrowed funds and subordinated debentures decreased 62 basis points to 3.61 percent due to the use of low cost overnight line of credit funding.
º Interest-bearing liabilities averaged $752.6 million for the six months ended June 30, 2009, an increase of $98.9 million, or 15.1 percent, compared to the same period in the prior year. The increase in interest-bearing liabilities was a result of increases in interest-bearing checking, time deposits, and borrowed funds, offset in part by a decline in savings deposits. Average borrowed funds and subordinated debentures increased $18.9 million to $124.5 million in 2009 compared to $105.7 million in 2008 as these funding sources provided favorable pricing compared to alternate sources of funds as market rates fell.

During the six months ended June 30, 2009, tax-equivalent net interest income increased $123 thousand or 0.9 percent. Net interest margin decreased 44 basis points to 3.21 percent for 2009 compared to 3.65 percent in 2008. The net interest spread was 2.82 percent, a 41 basis point decrease from 3.23 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 and more customers shift from time deposits to the Loyalty savings product.

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



                                                           Three Months Ended
                                        June 30, 2009                                June 30, 2008
                           Average                                        Average                       Rate/
                           Balance        Interest       Rate/Yield       Balance       Interest        Yield
Assets
Interest-earning
assets:
  Federal funds sold
and interest-bearing
deposits with banks      $    14,153      $      29             0.82 %   $  22,351      $     111          2.00 %
 Federal Home Loan
Bank stock                     4,972            122             9.84         4,400             76          6.95
 Securities:
  Available for sale         130,751          1,522             4.66        76,613            961          5.02
  Held to maturity            34,457            409             4.75        31,547            416          5.27
   Total securities
(a)                          165,208          1,931             4.68       108,160          1,377          5.09
 Loans, net of
unearned discount:
  SBA loans                  102,255          1,564             6.12       101,006          2,028          8.03
   SBA 504 loans              74,209          1,285             6.95        69,308          1,260          7.31
  Commercial                 303,589          5,051             6.67       309,081          5,407          7.04
  Residential
mortgages                    124,227          1,783             5.74        79,985          1,209          6.05
  Consumer                    63,280            797             5.05        58,608            846          5.81
   Total loans (a),(b)       667,560         10,480             6.29       617,988         10,750          6.99
Total interest-earning
assets                     $ 851,893     $   12,562             5.91 %   $ 752,899     $   12,314          6.57 %
Noninterest-earning
assets:
 Cash and due from
banks                         18,397                                        14,377
 Allowance for loan
losses                       (11,095 )                                      (8,814 )
 Other assets                 32,770                                        31,262
   Total
noninterest-earning
assets                        40,072                                        36,825
Total Assets             $   891,965                                     $ 789,724

Liabilities and Shareholders' Equity
Interest-bearing
deposits:
 Interest-bearing
checking                 $    85,313      $     267             1.26 %   $  82,195     $      350          1.71 %
 Savings deposits            189,977            912             1.93       185,674            918          1.99
 Time deposits               360,885          3,409             3.79       282,182          3,006          4.28
   Total
interest-bearing
deposits                     636,175          4,588             2.89       550,051          4,274          3.13
Borrowed funds and
subordinated
debentures                   107,163          1,085             4.01       110,464          1,155          4.21
   Total
interest-bearing
liabilities                  743,338          5,673             3.05       660,515          5,429          3.31
Noninterest-bearing
liabilities:
 Demand deposits              77,630                                        78,879
 Other liabilities             4,148                                         2,553
   Total
noninterest-bearing
liabilities                   81,778                                        81,432
 Shareholders' equity         66,849                                        47,777
Total Liabilities and
Shareholders' Equity     $   891,965                                     $ 789,724

Net interest spread                       $   6,889             2.86 %                 $    6,885          3.26 %
Tax-equivalent basis                                                                              )
adjustment                                      (31 )                                         (47
Net interest income                       $   6,858                                    $    6,838
Net interest margin                                             3.24 %                                     3.66 %

(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.

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


                                                                      Six Months Ended
                                            June 30, 2009                                       June 30, 2008
                               Average
                               Balance        Interest        Rate/Yield       Average Balance       Interest        Rate/Yield
Assets
Interest-earning assets:
  Federal funds sold and
interest-bearing deposits
with banks                   $    12,249      $       46             0.76 %   $          22,638      $      291             2.59 %
 Federal Home Loan Bank
stock                              5,451             118             4.37                 4,287             176             8.26
 Securities:
  Available for sale             134,506           3,214             4.78                73,685           1,869             5.07
  Held to maturity                34,221             813             4.75                32,847             871             5.30
   Total securities (a)          168,727           4,027             4.77               106,532           2,740             5.14
 Loans, net of unearned
discount:
  SBA loans                      103,641           3,171             6.12                99,810           4,356             8.73
   SBA 504 loans                  75,538           2,516             6.72                71,827           2,710             7.59
  Commercial                     304,365          10,067             6.67               303,539          10,692             7.08
  Residential mortgages          126,623           3,646             5.76                77,163           2,288             5.93
  Consumer                        62,717           1,592             5.12                58,045           1,747             6.05
   Total loans (a),(b)           672,884          20,992             6.27               610,384          21,793             7.17
   Total interest-earning
assets                           859,311      $   25,183             5.89 %   $         743,841     $    25,000             6.75 %
Noninterest-earning
assets:
 Cash and due from banks          19,009                                                 14,684
 Allowance for loan losses       (11,017 )                                               (8,752 )
 Other assets                     32,928                                                 30,783
   Total
noninterest-earning assets        40,920                                                 36,715
Total Assets                 $   900,231                                      $         780,556

Liabilities and Shareholders' Equity
Interest-bearing deposits:
 Interest-bearing checking   $    85,189      $      537             1.27 %   $          80,597     $       716             1.79 %
 Savings deposits                168,736           1,556             1.86               188,124           2,267             2.42
 Time deposits                   374,147           7,133             3.84               279,304           6,226             4.48
   Total interest-bearing
deposits                         628,072           9,226             2.96               548,025           9,209             3.38
Borrowed funds and
subordinated debentures          124,540           2,263             3.61               105,657           2,220             4.23
   Total interest-bearing
liabilities                      752,612          11,489             3.07               653,682          11,429             3.52
Noninterest-bearing
liabilities:
 Demand deposits                  76,594                                                 76,794
 Other liabilities                 3,967                                                  2,372
   Total
noninterest-bearing
liabilities                       80,561                                                 79,166
 Shareholders' equity             67,058                                                 47,708
Total Liabilities and
Shareholders' Equity         $   900,231                                      $         780,556

Net interest spread                           $   13,694             2.82 %                         $    13,571             3.23 %
Tax-equivalent basis                                                                                            )
adjustment                                           (62 )                                                  (98
Net interest income                           $   13,632                                            $    13,473
Net interest margin                                                  3.21 %                                                 3.65 %

(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)
. . .