UNITY BANCORP INC /DE/, 10QSB, 2000-08-14

UNITY BANCORP INC /DE/
10QSB, 2000-08-14
STATE COMMERCIAL BANKS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

( ) 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)

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

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

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

Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--- ---

The number of shares outstanding of each of the registrant's classes of common
equity stock, as of August 12, 2000: Common stock, no par value: 3,706,708
shares outstanding

Transitional Small Business Disclosure Format:

Yes No X
--- ---

<PAGE>

UNITY BANCORP, INC.

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999

(IN THOUSANDS, EXCEPT SHARE AMOUNTS) (unaudited)
June 30, December 31,
ASSETS 2000 1999
------ -------- --------

Cash and due from banks .................................. $ 26,245 $ 15,121
Federal funds sold ....................................... 8,000 0
-------- --------
Total cash and cash equivalents ............... 34,245 15,121
-------- --------
Securities :
Available for sale, at fair value ..................... 38,322 40,099
Held to maturity, at amortized cost (aggregate fair
value of $31,946 and $32,270 in 2000 and 1999,
respectively) ....................................... 33,670 34,250
-------- --------
Total securities .............................. 71,992 74,349
-------- --------
Loans held for sale - SBA loans .......................... 6,796 3,745
Loans held for sale - Home Equity loans .................. 50 0
Loans held for sale - ARM loans .......................... 0 36,362
Loans held to maturity ................................... 278,209 281,376
-------- --------
Total loans .......................................... 285,055 321,483
Plus: Deferred Costs, net ........................... 1,192 1,049
Less: Allowance for loan losses ..................... 2,466 2,173
-------- --------
Net loans ..................................... 283,781 320,359
-------- --------
Premises and equipment, net .............................. 11,612 12,370
Accrued interest receivable .............................. 3,139 2,862
Cash surrender value of insurance policies ............... 2,242 2,203
Other real estate owned .................................. 757 1,505
Other assets ............................................. 9,938 10,200
-------- --------
Total Assets .................................. $417,706 $438,969
======== ========

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

<PAGE>

UNITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999

(IN THOUSANDS, EXCEPT SHARE AMOUNTS) (unaudited)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------------ ------------
<S> <C> <C>
LIABILITIES:
Deposits
Demand:
Non-interest bearing ............................................................... $ 60,993 $ 65,079
Interest bearing ................................................................... 124,871 104,343
Savings .............................................................................. 36,528 37,910
Time, $100,000 and over ............................................................. 55,930 71,102
Time, under $100,000 ................................................................. 106,486 79,104
-------- ---------
Total time ....................................................................... 162,416 150,206
-------- ---------
Total Deposits ................................................................. 384,808 357,538
-------- ---------

Borrowed funds ....................................................................... 0 53,000
Obligation under capital lease ....................................................... 3,854 4,096
Accrued interest payable ............................................................. 1,187 1,199
Accrued expenses and other liabilities ............................................... 2,549 1,344
-------- ---------
Total liabilities .............................................................. 392,398 417,177
-------- ---------

Shareholders' Equity:
Common stock, no par value 7,500,000 shares authorized, 3,863,568 shares
issued and 3,706,708 outstanding in 2000
3,861,568 shares issued and 3,704,708 outstanding in 1999 ............................ 26,233 26,224
Treasury stock, at cost, 156,860 shares outstanding
in 2000 and 1999, respectively ...................................................... (1,762) (1,762)
Preferred Stock Class A, 10% cumulative and convertible,
103,500 and 0 shares issued and outstanding in 2000 and 1999,
respectively ........................................................................ 4,929 0
Retained Deficit ....................................................................... (3,136) (1,856)
Accumulated other comprehensive loss, net of tax benefit ............................... (956) (814)
-------- ---------
Total Shareholders' Equity ..................................................... 25,308 21,792
-------- ---------
Total Liabilities and Shareholders' Equity ..................................... $417,706 $ 438,969
======== =========

</TABLE>

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

<PAGE>

UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (unaudited)

(IN THOUSANDS, EXCEPT SHARE AND SHARE AMOUNTS) For the three months ended For the six months ended
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans ......................................... $ 5,696 $ 3,975 $ 11,624 $ 7,725
Interest on securities .................................... 1,153 1,051 2,316 1,721
Interest on Federal funds sold ............................ 119 335 129 504
-------- -------- -------- --------
Total interest income ................................... 6,968 5,361 14,069 9,950

Interest Expense on deposits ................................. 3,955 2,873 7,596 4,822
Interest Expense on borrowings ............................... 91 78 675 121
-------- -------- -------- --------
Total Interest Expense ....................................... 4,046 2,951 8,271 4,943
-------- -------- -------- --------
Net Interest Income ..................................... 2,922 2,410 5,798 5,007
Provision for loan losses .................................... 90 600 336 661
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses ..... 2,832 1,810 5,462 4,346
Other Income:
Service charges on deposits ............................... 273 177 541 346
Gain on sale of loans ..................................... 1,523 2,242 1,390 3,358
Net gain on sale of securities ............................ 4 106 5 227
Other income .............................................. 638 315 1,045 599
-------- -------- -------- --------
Total Other Income ...................................... 2,438 2,840 2,981 4,530
Other Expenses:
Salaries and employee benefits ............................ 2,644 2,733 4,945 4,535
Occupancy, furniture and equipment expense ............... 677 584 1,361 1,035
Other operating expenses .................................. 2,361 2,017 4,274 3,196
-------- -------- -------- --------
Total Other Expenses .................................... 5,682 5,334 10,580 8,766
-------- -------- -------- --------
(Loss) income before income taxes ..................... (412) (684) (2,137) 110
Benefit for income taxes ..................................... (173) (309) (882) (16)
-------- -------- -------- --------
Net (loss) income ................................ $ (239) $ (375) $ (1,255) $ 126
-------- -------- -------- --------
Preferred stock dividends - Paid and Unpaid .................. (131) 0 (156) 0
-------- -------- -------- --------
Net (loss) income available to common shareholders .... $ (370) $ (375) $ (1,411) $ 126
======== ======== ======== ========
Per Common Share:
Basic (Loss) earnings per Share .............................. $ (0.10) $ (0.10) $ (0.38) $ 0.03
Diluted (Loss) earnings per Share ............................ $ (0.10) $ (0.10) $ (0.38) $ 0.03

Weighted Average Shares Outstanding - Basic .................. 3,706,048 3,751,846 3,705,378 3,738,398
Weighted Average Shares Outstanding - Diluted ................ 3,706,048 3,751,846 3,705,378 3,762,788

</TABLE>

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

<PAGE>

UNITY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30

For the six months ended
JUNE 30,
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------------
<S> <C> <C>
Net (loss) income ...................................................... $ (1,280) $ 126
Adjustments to reconcile net loss to net cash
used in operating activities
Provision for loan losses ............................................ 336 661
Depreciation and amortization ........................................ 629 776
Net gain on sale of securities ....................................... (5) (227)
Gain on sale of loans ................................................ (1,390) (3,358)
Contractual stock grants ............................................. 10 205
Increase in accrued interest receivable .............................. (277) (729)
Increase in cash surrender value of life insurance ................... (39) (157)
Loss on sale of fixed assets ......................................... 8 0
Other Real Estate Owned Writedown .................................... 142 0
Decrease (increase) in other assets .................................. 644 (2,838)
Increase (decrease) in accrued interest payable ...................... (12) 216
Increase (decrease) in accrued expenses and other liabilities ........ 988 (305)
-------- -------
Net cash used in operating activities ........................... (246) (5,630)
======== =======
Investing activities:
Purchases of securities held to maturity ............................... 0 (16,334)
Purchases of securities available for sale ............................. (45) (47,658)
Maturities and principal payments on securities held to maturity ....... 580 946
Maturities and principal payments on securities available for sale ..... 1,546 13,756
Proceeds from sale of securities available for sale .................... 52 2,922
Proceeds from sale of loans ............................................ 54,075 12,544
Purchase of loans ...................................................... 0 (25,746)
Net increase in loans .................................................. (16,585) (43,612)
Increase in capital expenditures ....................................... (185) (3,364)
Cash payment - CMA acquisition ......................................... 0 (1,700)
Proceeds from sale of ORE property ..................................... 747 0
Proceeds from sale of equipment ........................................ 11 0
-------- -------
Net cash provided by (used in) investing activities .................. 40,196 (108,246)
======== =======
Financing activities:
Increase in deposits ................................................... 27,270 99,879
Decrease (increase) in borrowings ...................................... (53,000) 2,000
Proceeds from Preferred Stock Offering, net ............................ 4,929 0
Treasury stock purchases ............................................... 0 (761)
Cash dividends on preferred stock ...................................... (25) 0
Cash dividends on common stock ......................................... 0 (409)
-------- -------
Net cash (used in) provided by financing activities .................. (20,826) 100,709
======== =======
Increase (decrease) in cash and cash equivalents .......................... 19,124 (13,167)
======== =======
Cash and cash equivalents at beginning of year ............................ 15,121 32,488
-------- -------
Cash and cash equivalents at end of period ................................ $ 34,245 $19,321
======== =======

Supplemental disclosures : Interest paid ................................. $ 8,259 $ 4,727
Income taxes paid ............................. 15 596
Transfer of loans to Other Real Estate Owned .. 141 0
(Decrease) increase in capital lease assets ... (295) 3,045

</TABLE>

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

<PAGE>

UNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND DECEMBER 31,1999

(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the
accounts of Unity Bancorp, Inc. (the "Parent Company") and its
wholly-owned subsidiary, Unity Bank (the "Bank", or when consolidated
with the Parent Company, the "Company"), and reflect all adjustments and
disclosures, which are, in the opinion of management, necessary for a
fair presentation of interim results. All significant intercompany
balances and transactions have been eliminated in consolidation. The
financial information has been prepared in accordance with generally
accepted accounting principles and has not been audited.

Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed or omitted
pursuant to the SEC rules and regulations. These interim financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31,
1999, included in the Company's annual report on Form 10-KSB.

The results of operations for the period presented are not
necessarily indicative of the results of operations to be expected for
the year.

RECLASSIFICATIONS

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

(2) COMPREHENSIVE INCOME

Total comprehensive loss for the three months ended June 30, 2000 and
1999 was $390 thousand and $723 thousand. Total comprehensive loss for
the six months ended June 30, 2000 and 1999 was $1.4 million and $289
thousand.

(3) LOANS

Loans outstanding, net of deferred cost, by classification as of
June 30, 2000 and December 31, 1999 are as follows:

(IN THOUSANDS) June 30, 2000 December 31, 1999
------------- -----------------
Commercial & industrial ............ $ 59,373 $ 43,441
Loans secured by real estate:
Non-residential properties ..... 51,770 52,312
Residential properties ......... 140,580 178,132
Construction ................... 10,108 17,818
Consumer loans ..................... 23,224 29,780
--------- ---------
Total loans ........................ $ 285,055 $ 321,483
========= =========

SBA loans held-for-sale, totaling $6.8 million at June 30, 2000 and $3.7
million at December 31, 1999, respectively, are included in the commercial and
industrial totals. Home equity loans held-for-sale, included in residential
loans, totaled $50 thousand at June 30, 2000 and $0 at December 31, 1999. ARM
loans held-for-sale totaled $0 at June 30, 2000 and $36.4 million at December
31, 1999 and are included in residential loans at December 31, 1999.

As of June 30, 2000 and December 31, 1999, the Bank's recorded investment
in impaired loans, defined as nonaccrual loans, was $2,131,000 and $1,412,000,
respectively, and the related valuation allowance was $321,000 and $219,000,
respectively. This valuation allowance is included in the allowance for loan
losses in the accompanying balance sheets. The average impaired loans, defined
as non-accrual loans, for the three months ended June 30, 2000 was $2,166,000,
for the six months ended June 30, 2000 was $1,891,000, and $1,472,000 for the
year-ended December 31,1999 respectively. At June 30, 2000, $921,000 in loans
was past due greater than 90 days but still accruing interest as compared to
$166,000 at December 31, 1999. Management has evaluated the loans 90 days or
more past due and still accruing interest and determined that they are both well
collateralized and in the process of collection.

<PAGE>

(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 for the
six months ended June 30, 2000 and 1999 and the year ended 1999 is as
follows:

(in thousands) Six Months Ended Six Months Ended The Year Ended
June 30, 2000 June 30, 1999 December 31, 1999
----------------- ------------------ -----------------
<S> <C> <C> <C>
Balance at beginning of year .................. $ 2,173 $ 1,825 $ 1,825
Provision charged to expense .................. 336 661 1,743
Loans charged-off ............................. (73) (263) (1,433)
Recoveries on loans previously charged-off .... 30 12 38
------- ------- -------
Balance at end of year ........................ $ 2,466 $ 2,235 $ 2,173
======= ======= =======
</TABLE>

(5) EARNINGS PER SHARE

The following is a reconciliation of the calculation of basic and
diluted (loss) earnings per share.

Weighted Earnings
Net Average Per
(IN THOUSANDS, EXCEPT SHARE DATA AMOUNTS) Income Shares Share
--------- ---------- ---------
<S> <C> <C> <C>
For the quarter ended June 30, 2000
Net Income .......................................................... $ (239)
Unpaid preferred stock dividends in arrears ......................... (131)
-------
Basic loss per share -
Loss available to common shareholders .......................... $ (370) 3,706,048 $(0.10)
Effect of dilutive securities- stock options, warrants, and
convertible preferred stock *
Diluted loss per share - Loss available to
------- --------- -----
Common shareholders plus assumed conversions .................. $ (370) 3,706,048 $(0.10)
======= ========= =====
* DILUTIVE EPS DOES NOT INCLUDE THE EFFECT OF STOCK OPTIONS
OR THE EFFECT OF CONVERTIBLE PREFERRED STOCK, DUE TO THE NET
LOSS POSITION. INCLUSION WOULD BE ANTI-DILUTIVE.

For the six-months ended June 30, 2000
Net Loss ............................................................ $(1,255)
Distribution of preferred stock dividends ........................... (25)
Unpaid preferred stock dividends in arrears ......................... (131)
-------
Basic loss per share -
Loss available to common shareholders .......................... $(1,411) 3,705,378 $(0.38)
Effect of dilutive securities- stock options, warrants, and
convertible preferred stock *
Diluted loss per share - Loss available to
Common shareholders plus assumed conversions ................... $(1,411) 3,705,378 $(0.38)
======= ========= ======
For the quarter ended June 30, 1999
Basis loss per share -
Loss available to common shareholders .......................... $ (375) 3,751,846 $(.010)
------- --------- ------
Effect of dilutive securities - stock options and warrants
Diluted loss per share - Loss available to
Common shareholders plus assumed conversions ................... $ (375) 3,751,846 $(.010)
======= ========= ======

For the six months ended June 30, 1999
Basic earnings per share -
Income available to common shareholders ........................ $ 126 3,738,398 $0.03
Effect of dilutive securities- stock options and warrants ........... 24,390
Diluted earnings per share - Income available to
------- --------- -----
Common shareholders plus assumed conversions .................. $ 126 3,762,788 $0.03
======= ========= =====
</TABLE>

The conversion of the preferred stock into 713,793 share of common stock will be
considered dilutive and included in the calculation of diluted earnings per
share under the treasury stock

<PAGE>

when the Company records a quarterly basic earnings per share in excess of
$0.18. The conversion of preferred stock into 713,793 shares of common stock
will be assumed for purposes of computing diluted EPS whenever the amount of the
dividend declared in or accumulated for the current period per common share
obtainable on conversion is less than basic EPS.

(6) REGULATORY CAPITAL AND PREFERRED DIVIDENDS IN ARREARS
-----------------------------------------------------
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, 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% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.

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
4%. For those banks with higher levels of risk or that are experiencing or
anticipating significant growth, the minimum leverage ratio will be
proportionately increased. Minimum leverage ratios for each bank are evaluated
through the ongoing regulatory examination process.

In connection with the Company's 1999 branch expansion, the New Jersey
Department of Banking and Insurance imposed a tier 1 capital to total assets
ratio of 6%. Due to losses incurred during 1999, the Company and the Bank failed
to meet their federal minimum regulatory capital ratios at both September 30,
1999 and December 31, 1999 and the Bank failed to meet the New Jersey Department
of Banking and Insurance's 6% leverage requirement at June 30, 1999. Because the
Bank failed to satisfy the federal minimum total risk-based capital requirement
of 8% at September 30, it was deemed to be "undercapitalized" under the Prompt
Corrective Action provisions of the Federal Deposit Insurance Act and the
regulations of the FDIC. Because the Bank failed to meet these minimum
requirements among other things, in the fourth quarter of 1999, the Company and
the Bank entered into memoranda of understanding with the state and federal
regulators.

On March 13, 2000, the Company completed an offering of shares of a
newly-created class of preferred stock. The offering was undertaken without
registration with the Securities and Exchange Commission to a limited number of
sophisticated investors. The preferred stock bears a cumulative dividend rate of
10%, and is convertible into shares of the Company's common stock at an assumed
value of $7.25 per common share. The Company also has rights to force conversion
of its preferred stock into common stock starting in March 2002 at an assumed
common stock price of $7.25 per share. The Company obtained $5.2 million in
proceeds from this offering. The Company issued 103,500 shares of the preferred
stock, which are convertible into 713,793 shares of the Company's common stock
at a conversion rate of 6.8966. The accounting, legal and consulting costs to
issue the preferred stock totaled $.3 million and were applied against the
proceeds. The Bank received $4.2 million of the proceeds from the Company in
March 2000.

On March 7, 2000, the Bank sold servicing released and without recourse
$36.4 million in adjustable rate one-to-four family mortgages (ARM's) assets,
realizing $35.6 million in net proceeds.

As a result of the preferred stock offering and the reduction of assets
through the ARM loan sale, both the Company and the Bank exceed the minimum
federal capital adequacy requirements at June 30, 2000. However, the Bank does
not exceed the New Jersey Department of Banking and Insurance's 6% leverage
requirement at June 30, 2000.

<PAGE>

with regard to the resolution of certain criticized assets, and providing
ongoing reporting to the various regulatory agencies with regard to the Bank's
and Company's progress in meeting the requirements of the agreements. The
agreements also require the Bank to establish a compliance committee to oversee
the Bank's and Company's efforts in meeting all of the requirements of the
agreements, and prohibit the Bank from paying dividends to the Company and the
Company from paying dividends, on either its common or its preferred shares,
without prior regulatory approval. The Company had previously suspended dividend
payments on its common shares, and failed to make the July 15, 2000 $131,000
dividend payment on shares of its Class A Preferred Stock.

The COMPANY'S actual capital amounts and ratios are presented in the
following table.

<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- ------------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Total capital
(to Risk Weighted Assets) ........ $ 25,504 8.97% => $ 22,736 8.00% < $ 28,421 10.00%
Tier I Capital
(to Risk Weighted Assets) ........ $ 23,038 8.11% => $ 11,368 4.00% => $ 17,052 6.00%
Tier I Capital
(to Average Assets) .............. $ 23,038 5.60% => $ 16,443 4.00% => $ 20,554 5.00%
AS OF DECEMBER 31, 1999
Total capital
(to Risk Weighted Assets) ......... $ 21,056 6.88% < $ 24,481 8.00% < $ 30,602 10.00%
Tier I Capital
(to Risk Weighted Assets) ....... $ 18,883 6.17% => $ 12,241 4.00% => $ 18,361 6.00%
Tier I Capital
(to Average Assets) .............. $ 18,883 4.35% => $ 17,348 4.00% < $ 21,685 5.00%

</TABLE>

The BANK'S actual capital amounts and ratios are presented in the
following table.

To Be Well Capitalized
Actual For Capital Under Prompt Corrective
Adequacy Purposes Action Provisions
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 2000-
Total capital
(to Risk Weighted Assets) ... $ 23,321 8.20% => $ 22,742 8.00% < $ 28,427 10.00%
Tier I Capital
(to Risk Weighted Assets) ... $ 20,855 7.34% => $ 11,371 4.00% => $ 17,056 6.00%
Tier I Capital (a)
(to Average Assets) .......... $ 20,855 5.10% => $ 16,370 4.00% => $ 20,463 5.00%
AS OF DECEMBER 31, 1999-
Total capital
(to Risk Weighted Assets) ... $ 19,388 6.33% < $ 24,520 8.00% < $ 30,651 10.00%
Tier I Capital
(to Risk Weighted Assets) .... $ 17,215 5.62% => $ 12,260 4.00% < $ 18,390 6.00%
Tier I Capital (a)
(to Average Assets) .......... $ 17,215 4.01% => $ 17,181 4.00% < $ 21,476 5.00%

</TABLE>

(a) In connection with the branch expansion the New Jersey Department of
Banking and Insurance imposed a tier 1 capital to total assets ratio of 6%.

<PAGE>

(7) OTHER INCOME

The other income components for the six months and quarters ended June 30, 2000
and 1999 are as follows:

OTHER INCOME Three Months Three Months Six Months Six Months
(IN THOUSANDS) Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SBA Fees ......................................... $ 201 $144 $ 401 $ 279
Loan fees ........................................ 116 3 198 36
Income from cash surrender value of
life insurance .................................. 31 75 63 157
Non-deposit account transaction charges .......... 68 36 117 57
Miscellaneous .................................... 222 56 266 70
----- ---- ------ -----
Total other income ............................... $ 638 $315 $1,045 $ 599
===== ==== ====== =====

(8) OTHER OPERATING EXPENSES

The other operating expense components for the six months and quarters
ended June 30, 2000 and 1999 are as follows:

OTHER OPERATING EXPENSES Three Months Three Months Six Months Six Months
(IN THOUSANDS) Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Professional Services ........................ $ 375 $ 289 $ 663 $ 456
Office Expense ............................... 578 479 814 845
Advertising Expense .......................... 168 200 445 313
Communication Expense ........................ 231 172 472 276
Bank Services ................................ 224 208 492 361
FDIC Insurance ............................... 44 33 91 64
Director Fees ................................ 38 91 74 179
Non-Loan Losses .............................. 7 8 (7) 30
Loan Processing and Collection Expense ....... 334 314 622 357
Amortization of Intangibles .................. 120 120 239 154
Other Expense ................................ 242 103 369 161
------- ------- ------- -------
Total Other Operating Expenses ............... $ 2,361 $ 2,017 $ 4,274 $ 3,196
======= ======= ======= =======

</TABLE>

(9) 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.

An officer of Certified Mortgage Associates, Inc., the Bank's mortgage
banking subsidiary, previously commenced an action alleging, among other things,
that he has been constructively terminated following his suspension and
subsequent reinstatement to his current position. The individual has returned to
work and is performing his duties in accordance with his Employment Agreement.
The complaint seeks damages for breach of his Employment Agreement that would
arise only if he had been terminated "without cause", in the amount of $5.4
million and for unspecified damages for mental distress he has suffered as a
result of the alleged change of his employment status. The complaint also seeks
unspecified damages for defamation unrelated to the employment claims and
damages in the amount of $272,000 representing the diminution in value of his
stock in the Company, plus interest, arising from an alleged late registration
of shares delivered to the individual in connection with the sale of his
interest in CMA to the Bank in 1999.

Based upon information and documents provided to it by the Bank, CMA, and
their respective officers and employees in the course of its investigation to
date, the Bank's counsel believes (i) that the claims against the Bank for
constructive termination and for termination without cause are without merit and
that the Bank has various affirmative defenses against these claims; and (ii)
that the Bank has affirmative claims against the individual arising from the
performance of his duties.

Before the Bank filed its response to these claims, the employee
voluntarily dismissed the complaint without prejudice. Counsel has not yet
determined whether these claims are likely to be reasserted at a future time and
cannot predict the outcome of any litigation in the event that they are
reasserted. However, the Bank, based upon the opinion of its counsel believes it
is not probable that the outcome of the employment-related claims will result in
a material loss to the Bank, based upon the facts and information that have been
provided to it to date. The Bank has not been able to determine whether the
claims for defamation and the loss in the value of the stock are probable of
having any materially adverse impact upon the Bank until further investigation
has been completed.

<PAGE>

(10) RECENT ACCOUNTING PRONOUNCEMENTS

In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". The interpretation
clarifies certain issues with respect to the application of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). The interpretation results in a number of changes in the
application of APB Opinion No. 25 including, the accounting for modifications to
equity awards as well as extending APB Opinion No. 25 accounting treatment to
options granted to outside directors for their services as directors. The
provisions of the interpretation were effective July 1, 2000 and apply
prospectively, except for certain modifications to equity awards made after
December 15, 1998. The initial adoption of the interpretation did not have a
significant impact on the company's financial statements.

In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment to FASB Statement No. 133". Statement No 138 amends
certain aspects of Statement No. 133 to simplify the accounting for derivatives
and hedges under Statement No. 133. Statement No 138 is effective upon the
company's adoption of Statement 133 (January 1, 2001). The initial adoption of
Statement No.138 is not expected to have a material impact on the company's
financial statements.

UNITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW AND STRATEGY

Unity Bancorp, Inc. (the "Parent Company") is incorporated in Delaware and
is 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 17 branch offices located in Hunterdon, Somerset,
Middlesex, and Union counties in New Jersey. These services include the
acceptance of demand, savings, and time deposits; extension of consumer, real
estate, Small Business Administration and other commercial credits, as well as
personal investment advisory services through the Bank's wholly-owned
subsidiary, Unity Financial Services, Inc. Unity Investment Company, Inc. is
also a wholly owned subsidiary of the Bank, used to hold part of the Bank's
investment portfolio. In the first quarter of 1999, the Bank acquired Certified
Mortgage Associates, Inc. ("CMA") under the purchase accounting method and,
accordingly, the results of operations for the first quarter of 1999 contains
only income and expenses realized and incurred after the CMA acquisition date of
February 18, 1999. This wholly-owned subsidiary of the Bank originates loans
funded by investors and simultaneously transfers the residential mortgages to
the investors.

As a result of the Company's and the Bank's federal capital ratios falling
below required levels during 1999 and a liquidity situation that began in 1999,
the Company and the Bank entered into Memoranda of Understanding with their
primary regulatory agencies. However, due to continued losses through the first
two quarters of 2000, among other reasons, the Company and the Bank entered into
stipulations and agreements with each of their respective regulators as of July
18, 2000. Under these agreements, the Bank and the Company are each required to
take a number of affirmative steps, including hiring an outside consulting firm
to undertake review of their management structures, adopting strategic and
capital plans which will increase the Bank's leverage ratio to 6% or above,
reviewing and adopting various updated policies and procedures, adopting
programs with regard to the resolution of certain criticized assets, and

<PAGE>

providing ongoing reporting to the various regulatory agencies with regard to
the Bank's and Company's progress in meeting the requirements of the agreements.
The agreements also require the Bank and Company to establish a compliance
committee to oversee the efforts in meeting all requirements of the agreements,
and prohibit the Bank from paying a dividend to the Company and the Company from
paying dividends on its common and preferred stock, without regulatory approval.

Due the Company's capital and regulatory needs, the Company's emphasis in
the first quarter of 2000 was to restore its capital ratios to acceptable levels
and to stabilize its liquidity. To accomplish this, the Company sold $36.4
million of adjustable rate mortgages, realizing a loss of $733 thousand (after
tax of $439 thousand), and raised $4.9 million of capital in the first quarter
of 2000 through the issuance of preferred shares. This reduction of assets and
raising of capital restored the federal capital ratios to above minimum
requirements. The proceeds of the loan sale were applied against other
borrowings, and with an increase in deposits through offering higher rates, the
borrowings were paid-off in the first quarter of 2000.

In the second quarter, the Company focused its efforts on achieving
profitable results, while maintaining its objective to continue to increase its
capital ratios and to maintain positive liquidity. Although the second quarter
was not profitable, the second quarter after tax operating loss of $239 thousand
was $777 thousand better than the first quarter's $1,016 thousand loss. Capital
ratios improved in all categories for the quarter, with the leverage ratio
increasing to 5.10% from 4.88% for the Bank and to 5.60% from 5.42% for the
Company. Liquidity remained positive for the quarter with no FHLB borrowings,
ending the period with $19 million more in cash and equivalents than at year-end
December 31, 1999.

Although incurring a six month loss of $1.3 million, as a result of the
first quarter's capital offering and loan sale, the Company and the Bank exceeds
the "well capitalized" designation in all federal capital ratios except for
total capital to risk weighted average assets at June 30, 2000. The Bank is
still subject to an order from the New Jersey Commissioner of Banking and
Insurance, under which it is required to maintain a leverage capital ratio of 6%
or else it is prohibited from paying dividends to the Company. The Bank does not
meet this 6% requirement at June 30, 2000.

RESULTS OF OPERATIONS

The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest earned on its
interest-earning assets and the interest paid on funds borrowed to support those
assets, such as deposits. Net interest margin is a function of the difference
between the weighted average rate received on interest-earning assets as
compared with that of interest-bearing liabilities. Net income is also affected
by the amounts of non-interest income, which includes gains on sales of loans
including loans originated under the Small Business Administration's Guaranteed
Loan Program, and loans originated and simultaneously sold by CMA, and
non-interest expenses.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999

NET INCOME

The Company incurred a net operating loss of $1.3 million or $0.38 loss per
basic and diluted common share for the first six months of 2000 compared to net
income of $126 thousand, or $0.03 earnings per basic and diluted share for the
first six months of 1999. Basic and diluted loss per share for June 30, 2000 was
based on the net loss available to common shareholders, equaling the net loss
for the period less the paid and unpaid preferred stock dividends.

The $1.3 million loss largely reflects the $439 thousand after tax loss on
the sale of the mortgage loans, related to the capital plan that occurred in the
first quarter of 2000. The loss also reflects the growth in non-interest expense
due to the opening of nine new branches over the course of 1999, the decrease in
net interest margin and spread, the costs of administering the expanding loan
portfolios, and the costs to monitor non-performing loans. Partially offsetting
these losses was a $180 thousand after tax settlement with a vendor that reduced
non-interest expense in the first quarter of 2000.

<PAGE>

The changes in the components of net income, comparing the six months ended
June 30, 2000 to June 30, 1999, included a $.8 million increase in net interest
income, a $.3 million decrease in the provision for loan losses, a $1.5 million
decrease in noninterest income, a $1.8 million increase in noninterest expense,
and a $.9 million decrease in the provision for income taxes.

NET INTEREST INCOME

Net interest income increased $.8 million (15.8%) to $5.8 million for the
first six months of 2000 from $5.0 million for the first six months of 1999.

The $.8 million net interest income increase was the result of an increase
in interest income in excess of interest expense. The growth in interest income
was primarily attributable to an increase of $117.2 million (45.1%) in average
earning assets for the first six months of 2000 totaling $377.1 million compared
to the prior year's $260.0 million. The increases in average earning assets
occurred across the entire balance sheet, with most increases in the loan and
investment portfolios. Average loans increased $118.4 million (65.3%) to $299.6
million in the first six months of 2000 from the $181.2 million recorded in the
first six months of 1999. Growth in the loan portfolio was primarily comprised
of $101.9 million of residential adjustable rate mortgages (ARM) originated
between April 30, 1999 and December 31, 1999 by the Bank's CMA subsidiary and
$56.0 million of purchased home equity loans, of which $25.7 million were
purchased on May 27, 1999 and $30.3 million were purchased on July 12, 1999,
partially offset by $37.0 million in ARM mortgages sold in the first six months
of 2000. These ARM and home equity loans have a lower yield than commercial
loans causing the loan portfolio yield to decrease to 7.76% in the first six
months of 2000 from 8.52% in the first six months of 1999. The offsetting
benefit to these lower rates is that the ARM loans have a lower risk-based
capital risk factor of 50% as compared to 100% for commercial loans. This
reduced the Bank's risk-based capital needs by approximately $2.6 million.
Average investments increased $18.5 million (33.9%) to $73.2 million in the
first six months of 2000 from the $54.7 million recorded in the first six months
of 1999. Growth in the investment portfolio was the result of increased deposits
from the Top Banana product introduced at the end of the first six months of
1999. The yield on investments increased from 5.92% for the six months ended
June 30, 1999 to 6.46% for the six months ended June 30, 2000. As a result of
the increase in mortgages and home equity loans at lower yields exceeding
investments at a higher yield, the first six months of 2000 yield on earning
assets decreased to 7.49% for the first six months of 2000 from 7.67% for the
first six months of 1999, partially offsetting the volume related gains in
interest income.

Increases in interest-earning assets were primarily funded through an
increase of $121.7 million (44.5%) in average deposits and borrowings to $395.4
million for the first six months of 2000 from $273.7 million for the first six
months of 1999. Average deposits increased $104.4 million (38.5%) to $375.2
million for the first six months of 2000 from $270.8 million in the first six
months of 1999. Average other borrowed funds increased $17.3 million to $20.1
million for the first six months of 2000 from $2.8 million in the first six
months of 1999. There were no borrowings at June 30, 2000, down $53.0 million
from December 31, 1999 as a result of the borrowings being re-paid from the
proceeds from the March 7, 2000 held-for-sale ARM loan sale and increased
deposits.

The cost of interest bearing liabilities increased to 4.94% for the first
six months of 2000 from 4.36% for the first six months of 1999 and the total
cost of funds, including non-interest bearing deposits, increased to 4.18% for
the first six months of 2000 from 3.61% for the first six months of 1999. The
increase in average interest-bearing liabilities and the cost of funds reflects
the Company's decision to offer higher, promotional rates of interest to attract
new customers to the new branch locations and the cost of the Federal Home Loan
Bank of New York borrowings, which were paid-off in March 2000. The promotional
rates of interest were offered both on time deposits and through the Top Banana
premium money market product, which paid an introductory rate of 6.05%. These
higher rate products and the first quarter's liquidity needs caused a shift in
the deposit portfolio toward higher rate deposit products and away from
non-interest bearing deposits. Although the average balance of non-interest
bearing deposits increased $13.7 million (29.2%) to a total of

<PAGE>

$60.6 million for the first six months of 2000 from $47.0 million for the first
six months of 1999, non-interest bearing deposits as a percentage of the deposit
portfolio decreased to 16.2% for the first six months of 2000 from 17.3% for the
first six months of 1999. As a result of these factors, net interest margin
declined to 3.10% during the first six months of 2000 from 3.87% in the first
six months of 1999. The net interest spread, being the difference between
interest earning assets and interest paying liabilities decreased to 2.55% from
3.31% for the six month period ending June 30, 2000 and June 30, 1999
respectively. (Refer to the section titled Deposits and Borrowings for the
average balance deposit schedule.)

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%.

COMPARATIVE AVERAGE BALANCE SHEETS

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

<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
--------------------------- ---------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
--------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
-----------------------
Taxable loans
(net of unearned income) ................................... $ 299,598 $ 11,624 7.76% $181,225 $ 7,725 8.52%
Tax-exempt securities ...................................... 3,355 159 9.48% 1,589 71 8.96%
Taxable investment securities .............................. 69,919 2,206 6.31% 53,137 1,547 5.83%
Interest-bearing deposits .................................. 116 5 8.62% 2,935 128 8.72%
Federal funds sold ......................................... 4,126 129 6.25% 21,067 504 4.78%
--------- -------- -------- -------
Total Interest-earning assets .............................. $ 377,114 $ 14,123 7.49% $259,953 $ 9,975 7.67%
Non-interest earning assets ................................ 47,066 43,637
Allowance for loan losses .................................. (2,321) (1,750)
--------- --------
TOTAL AVERAGE ASSETS ....................................... $ 421,859 $301,840
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
----------------------------
NOW deposits ............................................... $ 114,255 $ 2,486 4.35% $ 73,696 $ 1,450 3.93%
Savings deposits ........................................... 19,176 180 1.88% 15,520 149 1.92%
Money market deposits ...................................... 17,287 243 2.81% 17,855 268 3.00%
Time deposits .............................................. 163,849 4,687 5.72% 116,818 2,955 5.06%
Other debt ................................................. 20,129 675 6.71% 2,873 121 8.42%
--------- ------- -------- -------
Total interest-bearing liabilities ......................... $ 334,696 $ 8,271 4.94% $226,762 $ 4,943 4.36%
Other non-interest bearing liabilities ..................... 2,465 4,442
Demand deposits ............................................ 60,661 46,953
Shareholders' equity ....................................... 24,037 23,683
--------- --------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 421,859 ------- $301,840 -------
Net interest income ........................................ $ 5,852 ----- $ 5,033 -----
Net interest rate spread ................................... 2.55% 3.31%
----- -----
Net interest income/margin on average earning assets ....... 3.10% 3.87%

</TABLE>

PROVISION FOR LOAN LOSSES

The provision for loan losses totaled $336 thousand for the first six
months of 2000, compared with the first six months of 1999's provision of $661
thousand. The decrease in the provision is primarily attributable to 1999's
growth in the loan portfolio, as compared to 2000's decrease in the portfolio,
offset by an increase in non-performing loans in 2000. Also contributing to the
decrease was 1999's increase in the specific reserve factors used to determine
reserve levels on certain types of loans (for 2000, the specific

<PAGE>

reserve factors have remained the same as 1999's), offset by a shift in the
composition of the loan portfolio toward loans secured by residential properties
and away from commercial and commercial mortgage loans. Residential loans are
generally considered less risky than commercial and commercial mortgage loans.
Residential loans increased to 49.3% of total loans at June 30, 2000 as compared
to 33.1% at June 30, 1999. In addition, the ratio of non-performing loans to
total loans decreased to 1.07% at June 30, 2000 from 1.22% at June 30, 1999 and
increased from 0.49% at December 31, 1999. The changes in the non-performing
loan totals were the primary reason for the ratio changes. The non-performing
loan totals $3.051 million, $2.769 million and $1.578 million at June 30, 2000,
June 30, 1999 and December 31, 1999 respectively. The allowance for loan losses,
as a percent of non-performing loans are 80.83%, 80.72% and 137.71% at June 30,
2000, June 30, 1999 and December 31, 1999 respectively.

NON-INTEREST INCOME

Non-interest income, consisting of service charges on deposits, gains on
sales of securities and loans and other non-interest income decreased $1.5
million, or 34.2%, to $3.0 million for the first six months of 2000 from $4.5
million for the first six months of 1999. This $1.5 million decrease is
primarily a result of a $2.0 million decrease in loan sale gains. The decrease
in loan sale gain is primarily from the $1.7 million decrease in mortgage loan
sales, the $.7 million loss on sale of held-for-sale ARM loans and a $.5 million
increase in the gain on SBA loan sales, totaling $1.4 million for the first six
months of 2000 compared to $3.4 million for the first six months of 1999. The
mortgage loan sale gains are the result of loans simultaneously funded by
purchasing investors at the time of closing by the Bank's mortgage subsidiary,
CMA. The decline in mortgage loan sale gains are the result of a decline in
originations due to a rising rate environment. During a rising rate environment,
re-financings are less likely to occur.

GAIN ON LOAN SALES, six months ended June 30, 2000 June 30, 1999
(IN THOUSANDS) Gain (Loss) Gain (Loss)
-------------------------------------------
<S> <C> <C>
Mortgage loan sales .............................. $ 918 $ 2,577
SBA guaranteed portion of loan sales ............. 1,203 706
Held for sale - (loss) ........................... (731) 0
Commercial Loan Sales ............................ 0 75
------ -------
Total gain (loss) on loan sales .................. $1,390 $ 3,358
====== =======
</TABLE>

The gain on sale of SBA loans reflects the participation in the SBA's
guaranteed loan program. Under the SBA program, the SBA guarantees between 75%
to 90% of the principal of a qualifying loan. The guaranteed portion of the loan
is then sold into the secondary market. SBA loan sales, all without recourse,
totaled $16.6 million for the first six months of 2000, compared to $12.0
million for the first six months of 1999.

During the first quarter of 2000, the Bank sold adjustable rate mortgage
loans with a then-current book value of $36.4 million to a third party investor,
servicing released and without recourse, for a purchase price of $35.6 million.
These loans had been classified as held-for-sale at year-end 1999 and resulted
in a $733 thousand loss, $439 thousand after tax, at time of sale.

In addition to the loan sales, other income, increased $446 thousand (74.5%)
to $1.0 million for the first six months of 2000 compared to $599 thousand for
the first six months of 1999. The increases were $122.3 thousand (43.7%) in SBA
fees, $162 thousand (450.0%) in loan fees, $60 thousand (105.3%) in non-deposit
account transaction charges, $196 thousand (280.0%) in miscellaneous income, and
a $94 thousand (59.8%) decrease in income on cash surrender value of insurance.
The loan fees are primarily associated with mortgage originations, the
non-deposit account transaction charges are primarily the result of automated
teller machine charges to non-customers of the Bank, miscellaneous income is
primarily the result of loan referral fees and fees associated with the new
debit card product. The decrease in cash surrender value income is the result of
the cancellation of $3.8 million of policies during the fourth quarter of
1999.The following is a summary of other income for the six months ended June
30, 2000 and 1999:

<PAGE>

OTHER INCOME Six Months Ended Six Months Ended
June 30,2000 June 30,1999
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
SBA Fees ............................................... $ 401 $279
Loan fees .............................................. 198 36
Income from cash surrender value of life insurance ..... 63 157
Non-deposit account transaction charges ................ 117 57
Miscellaneous .......................................... 266 70
------ ----
Total other income ..................................... $1,045 $599
====== ====

</TABLE>

Service charges on deposits increased $195 thousand (56.4%) to $541 thousand
for the first six months of 2000 compared to $346 thousand for the first six
months of 1999. The additional deposit service charges were primarily the result
of a service charge rate increase enacted in January 2000.

Security gains decreased $222 thousand from the first six months of 1999's
$227 thousand to the first six months of 2000's $5 thousand. The decrease is the
result of the Company having nominal security sales during the first six months
of 2000, as compared to the first six months of 1999.

NON-INTEREST EXPENSE

Other non-interest expense increased $1.8 million (20.7%), to $10.6 million
for the first six months of 2000 from $8.8 million for the first six months of
1999. The increase consisted of a $410 thousand (9.04%) salaries and benefits
increase to $4.9 million from $4.5 million, a $326 thousand (32.5%) occupancy,
furniture, and equipment expenses increase to $1.4 million from $1.0 million,
and a $1.1 million (33.7%) other operating expenses increase to $4.3 million
from $3.2 million for the first six months of 2000 compared to the first six
months of 1999, respectively. Included in occupancy, furniture, and equipment
expense was a $300 thousand settlement received from a vendor in the first
quarter of 2000.

The following table presents a breakdown of other operating expenses for the
six months ended June 30, 2000 and 1999:

OTHER OPERATING EXPENSES Six months Ended Six months Ended
June 30,2000 June 30,1999
---------------- ----------------
<S> <C> <C>
(IN THOUSANDS)
Professional Service ..................... $ 663 $ 456
Office Expense ........................... 814 845
Advertising Expense ...................... 445 313
Communication Expense .................... 472 276
Bank Services ............................ 492 361
FDIC Insurance ........................... 91 64
Director Fees ............................ 74 179
Non-Loan Losses .......................... (7) 30
Loan Expense ............................. 622 357
Amortization of Intangibles .............. 239 154
Other Expense ............................ 369 161
------ ------
Total Other Expense ...................... $4,274 $3,196
====== ======

</TABLE>

These other operating expense increases in professional services, office
expense, communication expense, bank services and FDIC insurance are the result
of the growth in the branch network and total deposits as six additional
branches were opened after March 31, 1999 and expenses incurred in operating the
Bank's mortgage subsidiary, CMA, which was acquired during February 1999. The
increase in loan expense is related to the cost of administering the expanding
loan portfolio. Goodwill amortization expenses relating to the acquisition of
CMA totaled $232.7 thousand in the first six months of 2000 and $147.7 thousand
in the first six months of 1999. There were $6.3 thousand in goodwill
amortization expenses incurred in the both first six months of 2000 and 1999,
relating to the acquisition of the Bank's first branch from the Resolution Trust
Corporation. CMA was acquired under the purchase accounting method and,
accordingly, the prior period only reflects expenses incurred after the February
18, 1999

<PAGE>

acquisition. The increase in advertising expense is the result of increased
marketing efforts to support the seventeen branch network.

INCOME TAX EXPENSE

For the first six months of 2000, a tax benefit of $882 thousand was
recognized relating to the first six months of 2000 loss as compared to a $16
thousand tax benefit for federal and state taxes in the first six months of
1999. This represents an effective tax rate of 41.3% and 14.5% for the first six
months of 2000 and the first six months of 1999. The effective tax rates are the
result of applicable tax rates computed against each legal entity's taxable net
income before taxes. For the first six months June 30, 1999, $157 thousand of
the $110 thousand income before taxes was tax-free income associated with the
cash surrender value of life insurance.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000
COMPARED TO THE QUARTER ENDED JUNE 30, 1999

NET INCOME

The Company incurred a loss of $264 thousand or $0.11 loss per basic and
diluted common share for the second quarter of 2000 compared to a net loss of
$375 thousand, or $0.10 loss per basic and diluted common share for the second
quarter of 1999. Basic and diluted loss per common share for June 30, 2000 were
based on the net loss available to common shareholders, equaling the net
operating loss for the period less the unpaid preferred stock dividend.

The $239 thousand operating loss largely reflects the growth in
non-interest expense due to the opening of nine new branches over the course of
1999, the decrease in net interest margin and spread, the costs of administering
the expanding loan portfolios, and the costs to monitor non-performing loans.

The changes in the components of net income included a $.5 million increase
in net interest income, a $.5 million decrease in the provision for loan losses,
a $.4 million decrease in non-interest income, a $.3 million increase in
non-interest expense, and a $.1 million decrease in the provision for income
taxes.

NET INTEREST INCOME

Net interest income increased $.5 million (21.2%) to $2.9 million for the
second quarter of 2000 compared to $2.4 million for the second quarter of 1999.

The $.5 million net interest income increase was the result of an increase
in interest income in excess of interest expense. The growth in interest income
was primarily attributable to an increase of $80.6 million (27.9%) in average
earning assets for the second quarter of 2000 totaling $369.7 million over the
prior year's $289.1 million. The increases in average earning assets occurred
across the entire balance sheet, with most increases in the loan and investment
portfolios. Average loans increased $97.7 million (51.1%) to $288.9 million in
the second quarter of 2000 from the $191.2 million recorded in the second
quarter of 1999. Growth in the loan portfolio was primarily comprised of $111.7
million of residential adjustable rate mortgages (ARM) originated between April
30, 1999 and June 30, 2000 by the Bank's CMA subsidiary, and $56.0 million of
purchased home equity loans, of which $25.7 million were purchased on May 27,
1999 and $30.3 million were purchased on July 12, 1999, partially offset by
$37.0 million in mortgages sold in the first quarter of 2000. These ARM and home
equity loans have a lower yield than commercial loans causing the loan portfolio
yield to decrease to 7.89% in the second quarter of 2000 from 8.32% in the
second quarter of 1999. The offsetting benefit to these lower rates is that the
ARM loans have a lower risk-based capital risk factor of 50% as compared to 100%
for commercial loans. This reduced the Bank's risk-based capital needs by
approximately $2.5 million. Average investments increased $6.3 million (9.5%) to
$73.1 million in the second quarter of 2000 from the $66.7 million recorded in
the second quarter of 1999. Growth in the investment portfolio was the result of
increased deposits from the Top Banana product introduced at the end of the
first quarter of 1999. The yield on investments increased from 5.82% for the
three months ended June 30, 1999 to 6.45% for the three months ended June 30,
2000. The yield on Federal Funds Sold (FFS)

<PAGE>

increased from 4.71% to 6.31% for the three months ending June 30, 1999 and 2000
respectively. As a result of the increases on FFS and investments at higher
yields exceeding mortgages and home equity loans at lower yields, the second
quarter of 2000 yield on earning assets increased to 7.57% for the second
quarter of 2000 from 7.44% for the second quarter of 1999, augmenting the volume
related gains in interest income.

Increases in interest-earning assets were primarily funded through an
increase of $75.2 million (24.3%) in average deposits and borrowings to $384.5
million for the second quarter of 2000 from $309.3 million for the second
quarter of 1999. Average deposits increased $76.7 million (25.2%) to $380.6
million for the second quarter of 2000 from $303.9 million in the second quarter
of 1999. Average borrowings decreased $1.5 million to $3.9 million for the
second quarter of 2000 from $5.4 million in the second quarter of 1999. There
were no borrowings at June 30, 2000, down $53.0 million from December 31, 1999
as a result of the borrowings being re-paid from the proceeds from the March 7,
2000 held-for-sale ARM loan sale and increased deposits. The average borrowings
at both June 30 periods represents the capital lease obligations.

The cost of interest bearing liabilities increased to 5.01% for the second
quarter of 2000 from 4.52% for the second quarter of 1999 and the total cost of
funds, including non-interest bearing deposits, increased to 4.25% for the
second quarter of 2000 from 3.88% for the second quarter of 1999. The increase
in average interest-bearing liabilities and the cost of funds reflects the
Company's decision to offer higher, promotional rates of interest to attract new
customers to the new branch locations. The promotional rates of interest were
offered both on time deposits and through the Top Banana premium money market
product, which paid an introductory rate of 6.05%. Although this money market
product was discontinued at September 30, 1999, the product was again offered in
December 1999 in order to ease liquidity and provide funding for committed
loans. These higher rate products and the liquidity needs caused a shift in the
deposit portfolio toward higher rate deposit products and away from non-interest
bearing deposits. Although the average balance of non-interest bearing deposits
increased $13.2 million (27.6%) to a total of $61.3 million for the second
quarter of 2000 from $48.1 million for the second quarter of 1999, average
non-interest bearing deposits as a percentage of the deposit portfolio increased
to 16.1% for the second quarter of 2000 from 15.8% for the second quarter of
1999. As a result of these factors, net interest margin declined to 3.19% during
the second quarter of 2000 from 3.36% in the second quarter of 1999. The net
interest spread, being the difference between interest earning assets and
interest paying liabilities, decreased to 2.56% at June 30, 2000 from 2.92% at
June 30, 1999. (Refer to the section titled Deposits and Borrowings for the
average balance deposit schedule.)

<PAGE>

COMPARATIVE AVERAGE BALANCE SHEETS

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

Quarter Ended Quarter Ended
June 30 June 30
2000 1999
-------------------------------------------------------------
Average Rate/ Average Rate/
Balance Interest Yield Balance Interest Yield
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS

Interest earning assets:
------------------------
Taxable loans, (net of unearned income) .................... $ 288,936 $ 5,696 7.89% $ 191,211 $ 3,976 8.32%
Tax-exempt securities ...................................... 3,338 79 9.44% 1,606 42 10.57%
Taxable investment securities .............................. 69,735 1,099 6.30% 65,134 930 5.71%
Interest-bearing deposits .................................. 122 2 6.56% 2,697 95 14.09%
Federal funds sold ......................................... 7,546 119 6.31% 28,479 335 4.71%
--------- ------- --------- -------
Total Interest-earning assets .............................. $ 369,677 $ 6,995 7.57% $ 289,127 $ 5,378 7.44%
Non-interest earning assets ................................ 46,186 50,803
Allowance for loan losses .................................. (2,377) (1,676)
--------- ---------
TOTAL AVERAGE ASSETS ....................................... $ 413,486 $ 338,254

LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
----------------------------
NOW deposits ............................................... $ 119,619 $ 1,348 4.51% $ 97,317 $ 1,045 4.30%
Savings deposits ........................................... 18,903 91 1.93% 16,265 77 1.89%
Money market deposits ...................................... 16,456 115 2.80% 16,723 124 2.97%
Time deposits .............................................. 164,269 2,401 5.85% 125,451 1,627 5.19%
Other debt ................................................. 3,902 91 9.33% 5,419 78 5.76%
--------- ------- --------- -------
Total interest-bearing liabilities ......................... $ 323,149 $ 4,046 5.01% $ 261,175 $ 2,951 4.52%
Non-interest-bearing liabilities ........................... 3,224 5,322
Demand deposits ............................................ 61,374 48,102
Shareholders' equity ....................................... 25,739 23,655
--------- ---------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 413,486 ------- $ 338,254 -------
Net interest income ........................................ $ 2,949 $ 2,428
----- -----
Net interest rate spread ................................... 2.56% 2.92%
Net interest income/margin on average earning assets ....... 3.19% 3.36%

</TABLE>

PROVISION FOR LOAN LOSSES

The provision for loan losses totaled $90 thousand for the second
quarter of 2000, compared with the second quarter of 1999's provision of $600
thousand. The decrease in the provision is primarily attributable to 1999's
growth in the loan portfolio as well as the 1999 increase in the specific
reserve factors used to determine reserve levels on certain types of loans, and
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 1999 increase in the specific
reserve factors was offset by a shift in the composition of the loan portfolio
toward loans secured by residential properties and away from commercial and
commercial mortgage loans. Residential loans are generally considered less risky
than commercial and commercial mortgage loans. Residential loans increased to
49.3% of total loans at June 30, 2000 as compared to 33.1% at June 30, 1999. In
addition, the ratio of non-performing loans to total loans decreased to 1.07% at
June 30, 2000 from 1.22% at June 30, 1999 and increased from 0.49% at December
31, 1999. The changes in the non-performing loan totals were the primary reason
for the ratio changes. The non-performing loan totals $3.051 million, $2.769
million and $1.578 million at June 30, 2000, June 30, 1999 and December 31, 1999
respectively. The allowance for loan losses, as a percent of non-performing
loans are 80.83%, 80.72% and 137.71% at June 30, 2000, June 30, 1999 and
December 31, 1999 respectively

<PAGE>

NON-INTEREST INCOME

Non-interest income, consisting of service charges on deposits, gains on
sales of securities and loans and other non-interest income decreased $.4
million, or 14.2%, to $2.4 thousand for the second quarter of 2000 from $2.8
million for the second quarter of 1999. This $.4 million decrease is primarily a
result of a $.7 million decrease in loan sale gains. The decrease in loan sale
gain is primarily from the $985 thousand decrease in the gain on mortgage loan
sales partially offset by a $341 thousand increase in the gain on SBA guaranteed
portion of loan sales. Mortgage loan sale gains totaled $687 thousand compared
to $1.7 million and SBA guaranteed portion loan sales totaled $836 thousand
compared to $495 thousand for the second quarters of 2000 and 1999 respectively.
The mortgage loan sale gains are the result of loans simultaneously funded by
purchasing investors at the time of closing by the Bank's mortgage subsidiary,
CMA. The decline in mortgage loan sale gains is the result of a decline in
originations due to a rising rate environment. During a rising rate environment,
re-financings are less likely to occur. The increase in SBA sale gains is the
result of increased volume of loans sold at a higher premium.

GAIN ON LOAN SALES Quarter Ended Quarter Ended
June 30, 2000 June 30, 1999
(IN THOUSANDS) Gain Gain
------------- --------------
<S> <C> <C>
Mortgage loan sales ................................. $ 687 $1,672
SBA guaranteed portion of loan sales ................ 836 495
Commercial loan sales ............................... 0 75
------ ------
Total gain (loss) on loan sales ..................... $1,523 $2,242
====== ======
</TABLE>

The gain on sale of SBA loans reflects the participation in the SBA's
guaranteed loan program. Under the SBA program, the SBA guarantees between 75%
to 90% of the principal of a qualifying loan. The guaranteed portion of the loan
is then sold into the secondary market. SBA loan sales, all without recourse,
totaled $11.5 million in the second quarter of 2000, compared to $7.1 million in
the second quarter of 1999.

In addition to the loan sales, other income, increased $323 thousand
(102.5%) to $638 thousand for the second quarter of 2000 compared to $315
thousand for the second quarter of 1999. The increases were $55.8 thousand in
SBA fees, $112.1 thousand in loan fees, $32.4 thousand in non-deposit account
transaction charges, $166.1 thousand in miscellaneous income, and a $43.8
thousand decrease in income on cash surrender value of insurance. The loan fees
are primarily associated with mortgage originations, the non-deposit account
transaction charges are primarily the result of automated teller machine charges
to non-customers of the Bank, miscellaneous income is primarily the result of
loan referral fees and fees associated with the new debit card product. The
decrease in cash surrender value income is the result of the cancellation of
$3.8 million of policies during the fourth quarter of 1999.

The following is a summary of other income for the quarters ended March 31,
2000 and 1999:

OTHER INCOME Quarter Ended Quarter Ended
June 30,2000 June 30,1999
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
SBA Fees ................................................. $ 201 $145
Loan fees ................................................ 116 3
Income from cash surrender value of life insurance ....... 31 75
Non-deposit account transaction charges .................. 68 36
Miscellaneous ............................................ 222 56
------ ----
Total other income ....................................... $ 638 $315
====== ====
</TABLE>

<PAGE>

Service charges on deposits increased $96 thousand (54.2%) to $273 thousand
for the second quarter of 2000 compared to $177 thousand for the second quarter
of 1999. The additional deposit service charges were primarily the result of a
service charge rate increase enacted in January 2000.

Security gains decreased $102 thousand from the second quarter 1999's $106
thousand to the second quarter 2000's $4 thousand. The decrease is the result of
the Company having nominal security sales during the second quarter of 2000, as
compared to the second quarter of 1999.

NON-INTEREST EXPENSE

Other non-interest expense increased $.4 million (6.5%), to $5.7 million
for the second quarter of 2000 from $5.3 million for the second quarter of 1999.
The $.4 million non-interest expense increase consisted of a $89 thousand (3.3%)
salaries and benefits decrease to $2.6 million from $2.7 million, a $93 thousand
(15.9%) occupancy, furniture, and equipment expenses increase to $.7 million
from $.6 million, and a $344 thousand (17.1%) other operating expenses increase
to $2.4 million from $2.0 million for the second quarter of 2000 compared to the
second quarter of 1999, respectively.

The following table presents a breakdown of other operating expenses for
the quarter ended June 30, 2000 and 1999:

OTHER OPERATING EXPENSES Quarter Ended Quarter Ended
June 30,2000 June 30,1999
------------- --------------
(IN THOUSANDS)
Professional Service ................ $ 375 $ 289
Office Expense ...................... 578 479
Advertising Expense ................. 168 200
Communication Expense ............... 231 172
Bank Services ....................... 224 208
FDIC Insurance ...................... 44 33
Director Fees ....................... 38 91
Non-Loan Losses ..................... 7 8
Loan Expense ........................ 334 314
Amortization of Intangibles ......... 120 120
Other Expense ....................... 242 103
------ -------
Total Other Expense ................. $2,361 $2,017
====== =======

INCOME TAX EXPENSE

For the second quarter of 2000, a tax benefit of $173 thousand was
recognized relating to the second quarter of 2000 loss as compared to a $309
thousand tax benefit for federal and state taxes in the second quarter of 1999.
This represents an effective tax rate of 41.9% and 45.2% for the second quarter
of 2000 and the second quarter of 1999. The effective tax rates are the result
of applicable tax rates computed against each legal entity's taxable net income
before taxes.

FINANCIAL CONDITION AT JUNE 30, 2000

Total assets decreased $21.3 million (4.8%) to $417.7 million at June 30,
2000 compared to total assets of $439.0 million at December 31, 1999. Net loans
decreased $36.5 million (11.4%) to $283.8 million at June 30, 2000 compared to
$320.3 million at December 31,1999. Cash and equivalents increased $19.1 million
(126.5%) to $34.2 million at June 30, 2000 from $15.1 million at December 31,
1999. The securities portfolio, including securities held-to-maturity and
available-for-sale, decreased $2.3 million (3.1%) to $72.0 million at June 30,
2000, compared to $74.3 million at December 31, 1999. Other real estate owned
decreased $748 thousand as one property with a $747 thousand carrying value was
sold during the first quarter of 2000 without incurring any additional loss,
another property was written down $143

<PAGE>

thousand during the second quarter of 2000, and another property was added
during the second quarter with a $142 thousand carrying value.

Total deposits and borrowings decreased $25.7 million (6.3%) to $384.8
million at June 30, 2000 from $410.5 million at December 31,1999. The decrease
was the result of paying-off the $53 million of borrowings with the proceeds
from the sale of the held-for-sale ARM loans and $27.3 million (7.6%) increase
in deposits totaling $384.8 million at June 30, 2000 compared to $357.5 million
at December 31, 1999. These deposit increases primarily reflect increases in the
Top Banana premium rate money market account, increases in certificates of
deposits through a new campaign, and a decrease in jumbo certificates of deposit
from municipalities in the Bank's market area. Deposits were obtained primarily
from the Company's market areas. The Company did not have any brokered deposits
and, as such, neither solicited nor offered premiums for such deposits.

LOAN PORTFOLIO

Net loans decreased $36.5 million (11.4%) to $283.8 million at June 30,2000
compared to $320.3 million at December 31,1999. The decrease in the loan
portfolio is primarily the result of the sale of $36.4 million of adjustable
rate one-to-four family residential mortgages (ARMs). (See the following tables
for major category classification and changes for the first quarter of 2000.)
$7.4 million of the $15.9 million increase in the commercial and industrial
category is due to the growth in the SBA portfolio. The SBA portfolio is
increasing as the Bank has identified that the increasing competition makes
commercial and non-residential loans difficult to grow at desired rates of
return. The increase in the SBA portfolio reflects the non-guaranteed portion of
these loans that the Bank does not generally sell into the secondary market.

The loan portfolio consists of commercial and industrial loans, real estate
loans and consumer loans. Commercial and industrial loans are made for the
purpose of providing working capital, financing the purchase of equipment or
inventory and for other business purposes. Included in the commercial and
industrial loans are the SBA loans. Real estate loans consist of loans secured
by commercial or residential property and loans for the construction of
commercial or residential property. Consumer loans are made 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. The
Company originates loans under SBA programs that generally provides for SBA
guarantees between 75% and 90% of the principal of a qualifying loan. The
guaranteed portion of the SBA loan is sold in the secondary market and the
non-guaranteed portion generally remains in the portfolio. The loans are
primarily to businesses and individuals located in the trade area. The Company
has not made loans to borrowers outside of the United States. Commercial lending
activities are focused primarily on lending to small business borrowers.

The following tables sets forth (a) the classification of loans by major
category, excluding unearned, deferred costs, and the allowance for loan loss
for June 30, 2000 and 1999 and December 31, 1999, (b) the changes in the major
categories comparing June 30, 2000 to December 31, 1999, and (c) the contractual
maturities at June 30, 2000 and December 31, 1999:

CLASSIFICATION BY June 30, 2000 June 30, 1999 December 31, 1999
--------------------------- -------------------------- ---------------------------
MAJOR CATEGORY % of % of % of
(IN THOUSANDS) Amount Total Amount Total Amount Total
--------------------------- -------------------------- ---------------------------

<S> <C> <C> <C> <C> <C> <C>
Commercial & industrial ........... $ 59,373 40.5% $ 44,157 54.6% $ 43,441 13.5%
Real Estate
Non-residential ................. 51,770 25.4% 60,046 16.5% 52,312 16.3%
properties
Residential properties .......... 140,580 19.8% 74,766 7..2% 178,132 55.4%
Construction .................... 10,108 5.2% 16,825 10.2% 17,818 5.5%
Consumer .......................... 23,224 9.1% 30,600 11.5% 29,780 9.3%
--------- ----- --------- ----- -------- -----
Total Loans ....................... $ 285,054 100.0% $ 226,394 100.0% $321,483 100.0%
========= ===== ========= ===== ======== =====

</TABLE>

<PAGE>

ASSET QUALITY

The principal earning assets are loans. Inherent in the lending function is
the possibility a customer may not perform in accordance with the contractual
terms of the loan. A borrower's inability to repay the loan can create the risk
of past due loans, restructured loans, nonaccrual loans, and potential problem
loans.

Non-performing loans are (a) 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 and that are not well collateralized and (b) loans
past due 90 days or greater, still accruing interest that are well
collateralized. Well collateralized means that the collateral is equal to the
outstanding loan principal and interest due amounts. Management has evaluated
these loans past due 90 days or greater, still accruing interest and determined
that they are both well collateralized and in the process of collection. When a
loan is classified as nonaccrual, interest accruals discontinue and all past due
interest previously recognized as income is reversed and charged against current
period income. Until the loan becomes current, any payments received from the
borrower are applied totally 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.

Credit risk is minimized by ensuring loan diversification and adhering to
credit administration policies and procedures. Due diligence on loans begins at
the initial time of discussion of the origination of a loan with a borrower.
Documentation, including a borrower's credit history, materials establishing the
value and liquidity of potential collateral, the purpose of the loan, 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 also subject to periodic
internal review for credit quality and an outside firm is used to conduct
internal reviews.

The following table sets forth information concerning non-accrual loans and
non-performing assets at June 30, 2000 and 1999, along with December 31, 1999:

NONPERFORMING LOANS, IN THOUSANDS JUNE 30, 2000 JUNE 30, 1999 DECEMBER 31, 1999
------------- ------------- -----------------
<S> <C> <C> <C>
NONACCRUAL BY CATEGORY
Real Estate ............................................ $ 217 $1,413 $ 720
Consumer ............................................... 0 0 0
Commercial ............................................. 1,914 32 692
------ ------ ------
Total nonaccrual loans ................................. $2,131 $1,445 $1,412
------ ------ ------
PAST DUE 90 OR MORE AND STILL ACCRUING INTEREST
Real Estate ............................................ $ 498 $ 457 $ 159
Consumer ............................................... 25 14 7
Commercial ............................................. 397 853 0
------ ------ ------
Total past due 90 or more and still accruing ........... $ 920 $1,324 $ 166
------ ------ ------
TOTAL NON PERFORMING LOANS ............................. $3,051 $2,769 $1,578
====== ====== ======
OREO Property .......................................... 757 0 1,505
Other Asset - (1) ...................................... 0 1,131 0
------ ------ ------
TOTAL NON-PERFORMING ASSETS ............................ $3,808 $3,900 $3,083
====== ====== ======

NON-PERFORMING LOANS TO TOTAL LOANS .................... 1.07% 1.22% 0.49%

NON-PERFORMING ASSETS TO TOTAL ASSETS .................. .91% 1.09% 0.70%

ALLOWANCE FOR LOANS LOSSES AS A
PERCENTAGE OF NON-PERFORMING LOANS ................... 80.83% 80.72% 137.71%

</TABLE>

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

Nonaccrual loans increased $0.7 million from $1.4 million at year-end 1999
to $2.1 million at June 30, 2000. The loans past due 90 days or more and still
accruing interest are well collateralized and in the process of collection.
Loans past due 90 days or more increased $.7 million from $166 thousand at
December 31, 1999 to $920 thousand at June 30, 2000.

<PAGE>

The $757.0 thousand OREO property at June 30, 2000 consists of a nonaccrual
loan that was foreclosed upon in the fourth quarter of 1999 and a nonaccrual
loan that was foreclosed upon in the second quarter of 2000. OREO is carried at
the lower of cost or market, less estimated selling costs. The other asset,
related to an unauthorized overdraft that occurred in the fourth quarter of 1998
was a part of the OREO property balance at December 31, 1999 with a carrying
value of $746 thousand. This $746.0 thousand asset represented equity in a house
owned by the spouse of the debtor, who had turned the residence over to the
Bank. This property was subsequently sold in March 2000 without the Bank
incurring any additional loss.

At June 30, 2000, there were no concentrations of loans to any borrowers or
group of borrowers exceeding 10% of the total loan portfolio and there were no
foreign loans. There were no other loans, other than those identified as
non-performing, that causes management to be uncertain as to the ability of the
borrowers to comply with the present loan repayment terms as of June 30, 2000.

ALLOWANCE FOR LOAN LOSSES

The Company attempts to maintain an allowance for loan losses at a
sufficient level to provide for probable losses in the loan portfolio. Loan
losses are charged directly to the allowance for loan losses when they occur and
any subsequent recovery is credited to the allowance for loan losses. Risks
within the loan portfolio are analyzed on a continuous basis by management, by
an independent loan review function (provided by an outside firm) and by the
audit committee. A risk 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 and anticipated 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.
Additions to the allowance for loan losses are made by provisions charged to
expense and the allowance for loan losses 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 for loan loss at a level deemed adequate to provide for potential
losses, future additions to the allowance for loan losses may be necessary based
upon certain factors including changes in market conditions. 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 totaled $2.5 million, $2.2 million, and $2.2
million at June 30, 2000, December 31, 1999, and June 30, 1999, respectively.

During 1999, the specific reserve factors on certain loan types that were
used to determine reserve levels were increased. This increase of specific
reserve factors on certain loans were offset during 1999 by a shift in the
composite of the portfolios toward loans secured by residential properties and
away from commercial and commercial mortgage loans. Residential loans are
generally considered less risky than commercial and commercial mortgage loans.
Residential mortgage loans have a general reserve rate of .25% and, as a result,
decreased the overall ratio of allowance to loans. In addition, purchased loans,
totaling $47.4 million, are carried at the amount of undiscounted estimated
future cash collections and have an allowance for loan loss allocated to them,
resulting in a 75 basis point effective reserve. Residential loans increased to
49.3% of total loans at June 30, 2000 as compared to 33.1% at June 30, 1999. In
addition, the ratio of non-performing loans to total loans decreased to 1.07% at
June 30, 2000 from 1.22% at June 30, 1999 and increased from .49% at December
31, 1999. The June 30, 2000 decrease from June 30, 1999 is due to the increase
in the loan portfolio. The June 30, 2000 increase from December 31, 1999 is due
to the increase in non-performing loans and decrease in loans outstanding.

The following is a reconciliation summary of the allowance for loan losses
for June 30, 2000 and 1999 and December 31, 1999:

<PAGE>

ALLOWANCE FOR LOAN LOSS ACTIVITY Six Months Ended Six Months Ended Year Ended
(IN THOUSANDS) June 30,2000 June 30, 1999 December 31, 1999
----------------- ---------------- -----------------
<S> <C> <C> <C>
Balance at beginning of year ................................ $ 2,173 $ 1,825 $ 1,825
Charge-offs:
Real estate ............................................. 19 31 871
Consumer ................................................ 15 2 130
Commercial and industrial ............................... 39 230 432
------- ------- -------
Total Charge-offs ........................................... 73 263 1,433
Recoveries:
Real estate ............................................ 14 1 2
Consumer ............................................... 11 11 20
Commercial and industrial .............................. 5 0 16
Total recoveries ............................................ 30 12 38
------- ------- -------
Total net charge-offs ....................................... 43 251 1,395
------- ------- -------
Provision charged to expense ................................ 336 661 1,743
------- ------- -------
Balance of allowance at end of year ......................... $ 2,466 $ 2,235 $ 2,173
------- ------- -------
Ratio of net charge-offs to average loans outstanding ....... 0.01% 0.14% 0.59%
Ratio of allowance to total loans,
net of guaranteed SBA loans held for sale ............... 0.88% 1.00% 0.68%

</TABLE>

The ratio of allowance to total loans decreased to 0.88% for the first six
months of 2000 compared to 1.00% for the first six months of 1999 and increased
as compared to the 0.68% for the year ended 1999. The decrease of the ratio of
allowance to total loans between quarters is because of the growth in the loan
portfolio, primarily experienced in the second half of 1999. The increase in the
allowance for loan loss over year-end 1999 is due to a net increase of $293
thousand, as a result of provisions totaling $336 thousand and net charge-offs
totaling $43 thousand.

INVESTMENT SECURITY PORTFOLIO

The investment security portfolio is maintained for asset-liability risk
control purposes and to provide an additional source of funds. The portfolio is
comprised of U.S. Treasury securities, obligations of U.S. Government and
government sponsored agencies, selected state and municipal obligations,
corporate securities and equity securities. Management determines the
appropriate security classification of available-for-sale or held-to-maturity at
the time of purchase.

At the end of the second quarter of 2000, the investment portfolio decreased
$2.3 million from monthly payments and maturities and totaled $72.0 million,
comprised of $38.3 million in securities available for sale and $33.7 million in
securities held-to-maturity. At June 30, 2000, no investment securities were
classified as trading securities.

DEPOSITS AND BORROWINGS

Deposits are the primary source of funds. Total deposits and borrowings
decreased $25.7 million (6.3%) to $384.8 million at June 30, 2000 from $410.5
million at December 31, 1999. This decrease was the result of paying-off the $53
million of borrowings with the proceeds from the held-for-sale ARM loans sold in
the first quarter of 2000 and increasing deposits $19.8 million during the first
quarter and $7.4 million during the second quarter. These deposit increases
primarily reflect increases in the Top Banana premium rate money market account,
increases in certificates of deposits through a new campaign, and a decrease in
jumbo certificates of deposit from municipalities in the Bank's market area.
Time deposits increased $12.2 million (8.1%) to $162.4 million from $150.2
million, interest-bearing demand deposits, which include the Top Banana premium
rate money market account, increased $20.5 million (19.7%) to $124.9 million
from $104.3 million, noninterest-bearing demand deposits decreased $4.1 million
(6.3%) to $61.1 million from $65.1 million, and savings deposits decreased $1.4
million (3.7%) to $36.6 million from $37.9 million at March 31, 2000 compared to
December 31, 1999.

INTEREST RATE SENSITIVITY

The principal objectives of the asset and liability management function 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 the Board approved
guidelines. The Company seeks

<PAGE>

to reduce the vulnerability of the operations to changes in interest rates, and
actions in this regard are taken under the guidance of the Asset/Liability
Management Committee ("ALCO") of the Board of Directors. 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 utilizes Modified Duration of Equity and Economic Value of
Portfolio Equity ("EVPE") models to measure the impact of longer-term asset and
liability mismatches beyond two years. The modified duration of equity measures
the potential price risk of equity to changes in interest rates. A longer
modified duration of equity indicates a greater degree of risk to rising
interest rates. Because of balance sheet optionality, an EVPE analysis is also
used to dynamically model the present value of asset and liability cash flows,
with rate shocks of 200 basis points. The economic value of equity is likely to
be different as interest rates change. Like the simulation model, results
falling outside prescribed ranges require action by the ALCO. The Company's
variance in the economic value of equity, as a percentage of assets with rate
shocks of 200 basis points continues to improve as it is a decline of 2.37% in a
rising rate environment and an increase of 1.64% in a falling rate environment.
Both variances are within the board approved guidelines of +/- 3.00%. This is an
improvement from December 31, 1999 where the economic value of equity with rate
shocks of 200 basis points was not within the board's approved guidelines of +/-
3.00%. At December 31, 1999, there was a decline of 3.16% in a rising rate
environment and an increase of 2.68% in a falling rate environment. This is also
an improvement from March 31, 2000 where there was a decline of 2.88% in a
rising rate environment and an increase of 2.06% in a falling rate environment.

The continued improvement in the market risk reduction with a +2% rate shock
this quarter has been achieved through a shorter asset structure and the
addition of longer-term deposits. The continued increase in prepayments on
purchased fixed rate home equity loans is reducing the expected average life and
market risk in flat and rising rate environments. The Company has continued to
allow the investment portfolio duration to shorten, further reducing market risk
in a rising rate environment. Fixed rate commercial loans declined in the
quarter and were replaced with floating rate SBA loans. Finally, an increase in
9 month consumer certificates of deposits, as a result of the new 11 month CD
campaign started in early June 2000, and demand deposits replaced shorter term
public funds, lengthening the liability duration.

OPERATING, INVESTING, AND FINANCING CASH

Cash and cash equivalents increased $14.9 million to $34.2 million at June
30, 2000 from $19.3 million at June 30, 1999. Net cash used in operating
activities decreased $5.4 million, totaling $.2 million at June 30, 2000
compared to $5.6 million at June 30, 1999. This was primarily due to the $1.4
million increase in net losses, a $2.0 million decrease in the gain on loan
sales, and a $4.8 million decrease in net other assets and liabilities . Net
cash used in investing activities increased $148.4 million to $40.2 million in
the first six months of 2000, compared to $(108.2) million during the prior
year. This was primarily from an increase in the proceeds of loan sales of $41.5
million, a decrease in purchased and net loans of $52.8 million, a net decrease
in securities investing activities of $48.5 million, a decrease in capital
expenditures of $3.2 million and a decrease in acquisition purchases of $1.7
million. The capital expenditures of 1999 were related to the new branches and
the acquisition was of CMA. Net cash provided by financing activities decreased
$121.5 million to ($20.8) million at June 30, 2000, compared to $100.7 million a
year earlier. This was primarily attributed to a $53.0 million borrowing payoff,
a $72.6 million deposit decrease and $4.9 million in preferred stock proceeds.

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 source for funds for the holding company are dividends paid by
the Bank. The Bank is currently restricted from paying dividends to the holding
company because its tier 1 capital to average assets

<PAGE>

ratio is less than six percent. At June 20, 2000 the Bank Holding Company had
$1.7 million in cash. Marketable securities, valued at fair market value,
totaled $316 thousand.

CONSOLIDATED BANK

Liquidity is a measure of the ability to fund loans, withdrawals or
maturities of deposits and other cash outflows in a cost-effective manner. The
principal sources of funds are deposits, scheduled amortization and prepayments
of loan principal, sales and maturities of investment securities and funds
provided by operations. While scheduled loan payments and maturing investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition.

Total deposits amounted to $384.8 million, as of June 30, 2000. The Company
has paid-off the $53.0 million in borrowings from the FHLB of New York that were
outstanding at December 31, 1999. These borrowings at December 31, 1999
augmented the Company's liquidity. At June 30, 2000, $27.9 million was available
for borrowing from the FHLB of New York.

As of June 30, 2000, deposits included $32.4 million from two
municipalities. These deposits are of short duration, and are very sensitive to
price competition. If these deposits were to be withdrawn, in whole or in part,
it would negatively impact liquidity. At June 30, 2000, the Bank had $2.4
million in commitments to fund residential mortgage loans through the CMA
subsidiary. To reduce the Bank's interest rate sensitivity and potential
negative liquidity associated with municipal deposits, a new eleven month
certificate of deposit product was introduced in early June 2000 bringing $14
million of these deposits into the Bank to augment liquidity and diminish
interest rate sensitivity through longer deposit duration.

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, 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% and combined tier 1 and
tier 2 capital as a percentage of risk-adjusted assets of 8.0%.

<PAGE>

On March 7, 2000, the Bank sold servicing released and without recourse
$36.4 million in adjustable rate one-to-four family mortgages (ARM's) assets,
realizing $35.6 million in proceeds.

Because of the Bank's and Company's continued losses through the first two
quarters of 2000, among other things, both the Bank and Company entered into
stipulations and agreements with each of their respective primary regulators,
i.e. the Board of Governors of the Federal Reserve System with regard to the
Company and the FDIC and the New Jersey Department of Banking and Insurance with
regard to the Bank, on July 18, 2000. Under these agreements, the Bank and the
Company are required to take a number of affirmative steps, including the hiring
of an outside consulting firm to undertake a review of each of their management
structures, adopting strategic and capital plans which will increase the Bank's
Tier 1 capital ratio to at least 6% as required by the New Jersey Department of
Banking and Insurance order, reviewing and adopting various updated policies and
procedures, adopting programs with regard to the resolution of certain
criticized assets, and providing ongoing reporting to the various regulatory
agencies with regard to the Bank's and Company's progress in meeting the
requirements of the agreements. The agreements also require the Bank to
establish a compliance committee to oversee the Bank's and Company's efforts in
meeting all of the requirements of the agreements, and prohibit the Bank from
paying dividends to the Company and the Company from paying dividends, on either
its common or its preferred shares, without prior regulatory approval. The
Company had previously suspended dividend payments on its common shares, and
failed to make the July 15, 2000 $131,000 dividend payment on shares of its
Class A Preferred Stock.

<PAGE>

The COMPANY'S actual capital amounts and ratios are presented in the following
table.

To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Total capital
(to Risk Weighted Assets) ....... $ 25,504 8.91% => $ 22,736 8.00% < $ 28,421 10.00%
Tier I Capital
(to Risk Weighted Assets) ....... $ 23,038 8.11% => $ 11,368 4.00% => $ 17,052 6.00%
Tier I Capital
(to Average Assets) ............. $ 23,038 5.60% => $ 16,443 4.00% => $ 20,554 5.00%
AS OF DECEMBER 31, 1999
Total capital
(to Risk Weighted Assets) ........ $ 21,056 6.88% < $ 24,481 8.00% < $ 30,602 10.00%
Tier I Capital
(to Risk Weighted Assets) ...... $ 18,883 6.17% => $ 12,241 4.00% => $ 18,361 6.00%
Tier I Capital
(to Average Assets) ............. $ 18,883 4.35% => $ 17,348 4.00% < $ 21,685 5.00%

The BANK'S actual capital amounts and ratios are presented in the
following table.

To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------------
(IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 2000
Total capital
(to Risk Weighted Assets) ...... $ 23,321 8.20% => $ 22,742 8.00% < $ 28,427 10.00%
Tier I Capital
(to Risk Weighted Assets) ...... $ 20,855 7.34% => $ 11,371 4.00% => $ 17,056 6.00%
Tier I Capital (a)
(to Average Assets) ............. $ 20,855 5.10% => $ 16,370 4.00% < $ 20,463 5.00%
AS OF DECEMBER 31, 1999-
Total capital
(to Risk Weighted Assets) ...... $ 19,388 6.33% < $ 24,520 8.00% < $ 30,651 10.00%
Tier I Capital
(to Risk Weighted Assets) ....... $ 17,215 5.62% => $ 12,260 4.00% < $ 18,390 6.00%
Tier I Capital (a)
(to Average Assets) ............. $ 17,215 4.01% => $ 17,181 4.00% < $ 21,476 5.00%

</TABLE>

(a) In connection with the branch expansion the New Jersey Department of
Banking and Insurance imposed a tier 1 capital to total assets ratio of 6%.

Shareholders' equity increased $3.5 million (16.1%) to $25.3 at June 30,
2000 compared to $21.8 million at December 31, 1999. This increase was the
result of the $4.929 million net preferred stock offering proceeds, the $1.255
million net operating loss for the first six months of 2000, contractual stock
grants of $9 thousand, preferred stock dividends paid of $25 thousand, and the
$142 thousand accumulated other comprehensive loss for the first six months of
2000.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the operations. Unlike most industrial
companies, nearly all the assets and liabilities are monetary. As a result,
interest rates have a greater impact on performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned, hereunto duly authorized.

UNITY BANCORP, INC.
Dated: August 14, 2000
By: /s/ Kevin Killian
-----------------------------
KEVIN KILLIAN,
Chief Financial Officer
(Principal Financial and Accounting Officer)