UNITY BANCORP INC /NJ/ - Quarter Report: 2012 March (Form 10-Q)

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2012

( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____.

Commission file number 1-12431

Unity Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey	22-3282551
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

64 Old Highway 22, Clinton, NJ	08809
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (908) 730-7630

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

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated filer (as defined in Exchange Act Rule 12b-2):

Large accelerated filer o Accelerated filer o Nonaccelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act:

Yes o No x

The number of shares outstanding of each of the registrant’s classes of common equity stock, as of May 1, 2012 common stock, no par value: 7,462,572 shares outstanding

Table of Contents

					Page #
PART I	CONSOLIDATED FINANCIAL INFORMATION

	ITEM 1		Consolidated Financial Statements (Unaudited)

			Consolidated Balance Sheets at March 31, 2012, December 31, 2011, and March 31, 2011		1

			Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011		2

			Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011		3

			Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011		4

			Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011		5

			Notes to the Consolidated Financial Statements		6

	ITEM 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

	ITEM 3		Quantitative and Qualitative Disclosures about Market Risk		43

	ITEM 4		Controls and Procedures		43

PART II	OTHER INFORMATION				43

	ITEM 1			Legal Proceedings	43

	ITEM 1A			Risk Factors	43

	ITEM 2			Unregistered Sales of Equity Securities and Use of Proceeds	43

	ITEM 3			Defaults upon Senior Securities	43

	ITEM 4			Mine Safety	43

	ITEM 5			Other Information	43

	ITEM 6			Exhibits	43

SIGNATURES					44

EXHIBIT INDEX					45

		Exhibit 31.1			46
		Exhibit 31.2			47
		Exhibit 32.1			48

PART I - CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Unity Bancorp, Inc.

Consolidated Balance Sheets

At March 31, 2012, December 31, 2011 and March 31, 2011

(Unaudited)

(In thousands)	March 31, 2012			December 31, 2011			March 31, 2011
ASSETS
Cash and due from banks	$	17,986		$	17,688		$	15,478
Federal funds sold and interest-bearing deposits		53,831			64,886			39,880
Cash and cash equivalents		71,817			82,574			55,358
Securities:
Securities available for sale, at fair value		110,181			88,765			103,238
Securities held to maturity (fair value of $18,934, $19,879, and $17,774, respectively)		17,880			18,771			17,577
Total securities		128,061			107,536			120,815
Loans:
SBA held for sale		8,015			7,668			9,933
SBA held to maturity		62,251			64,175			74,657
SBA 504		47,651			55,108			60,092
Commercial		284,861			283,104			283,135
Residential mortgage		132,192			134,090			132,512
Consumer		47,782			48,447			54,193
Total loans		582,752			592,592			614,522
Less: Allowance for loan losses		16,339			16,348			15,275
Net loans		566,413			576,244			599,247

Premises and equipment, net		12,321			11,350			10,782
Bank owned life insurance ("BOLI")		9,179			9,107			8,885
Deferred tax assets		7,115			6,878			7,833
Federal Home Loan Bank stock		4,088			4,088			4,206
Accrued interest receivable		3,672			3,703			3,725
Other real estate owned ("OREO")		1,625			3,032			2,602
Prepaid FDIC insurance		2,386			2,545			2,994
Goodwill and other intangibles		1,526			1,530			1,541
Other assets		1,995			2,259			2,845

Total Assets	$	810,198		$	810,846		$	820,833

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	108,618		$	101,193		$	91,247
Interest-bearing demand deposits		103,018			104,749			101,878
Savings deposits		281,535			278,603			293,750
Time deposits, under $100,000		94,513			102,809			110,050
Time deposits, $100,000 and over		55,417			56,617			59,851
Total deposits		643,101			643,971			656,776

Borrowed funds		75,000			75,000			75,000
Subordinated debentures		15,465			15,465			15,465
Accrued interest payable		498			523			569
Accrued expenses and other liabilities		2,132			2,329			2,642
Total liabilities		736,196			737,288			750,452

Commitments and contingencies		-			-			-

Shareholders' equity:
Cumulative perpetual preferred stock		19,683			19,545			19,146
Common stock		53,846			53,746			52,842
Accumulated deficit		(345	)		(854	)		(2,006	)
Accumulated other comprehensive income		818			1,121			399
Total Shareholders' Equity		74,002			73,558			70,381

Total Liabilities and Shareholders' Equity	$	810,198		$	810,846		$	820,833

Preferred shares		21			21			21
Issued common shares		7,463			7,459			7,222
Outstanding common shares		7,463			7,459			7,222

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Page 1 of 48

Unity Bancorp

Consolidated Statements of Operations

For the three months ended March 31, 2012 and 2011

(Unaudited)

	For the three months ended March 31,
(In thousands, except per share amounts)		2012		2011
INTEREST INCOME
Federal funds sold and interest-bearing deposits	$	32	$	11
Federal Home Loan Bank stock		51		66
Securities:
Available for sale		721		864
Held to maturity		173		287
Total securities		894		1,151
Loans:
SBA		924		1,236
SBA 504		759		955
Commercial		4,183		4,306
Residential mortgage		1,655		1,831
Consumer		560		686
Total loans		8,081		9,014
Total interest income		9,058		10,242
INTEREST EXPENSE
Interest-bearing demand deposits		136		139
Savings deposits		354		581
Time deposits		913		1,097
Borrowed funds and subordinated debentures		847		950
Total interest expense		2,250		2,767
Net interest income		6,808		7,475
Provision for loan losses		1,200		2,500
Net interest income after provision for loan losses		5,608		4,975
NONINTEREST INCOME
Branch fee income		386		344
Service and loan fee income		302		243
Gain on sale of SBA loans held for sale, net		157		111
Gain on sale of mortgage loans, net		411		169
BOLI income		73		73
Net security gains		224		125
Other income		162		190
Total noninterest income		1,715		1,255
NONINTEREST EXPENSE
Compensation and benefits		3,182		3,057
Occupancy		609		720
Processing and communications		534		507
Furniture and equipment		362		384
Professional services		190		202
Loan collection costs		180		224
OREO expenses		124		222
Deposit insurance		171		319
Advertising		146		118
Other expenses		461		405
Total noninterest expense		5,959		6,158
Income before provision (benefit) for income taxes		1,364		72
Provision (benefit) for income taxes		459		(148	)
Net income		905		220
Preferred stock dividends & discount accretion		396		384
Income available (loss attributable) to common shareholders	$	509	$	(164	)

Net income (loss) per common share - Basic	$	0.07	$	(0.02	)
- Diluted	$	0.07	$	(0.02	)

Weighted average common shares outstanding - Basic		7,460		7,219
- Diluted		7,792		7,219

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Page 2 of 48

Unity Bancorp

Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2012 and 2011

(Unaudited)

	For the three months ended March 31,
(In thousands)		2012			2011

Net income	$	905		$	220

Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		(180	)		275
Less: Reclassification adjustment for gains included in net income		149			83
Total unrealized gains (losses) on securities		(329	)		192
Unrealized gains on cash flow hedge derivatives:
Unrealized holding gains arising during the period		26			84
Total other comprehensive income (loss)		(303	)		276

Total comprehensive income	$	602		$	496

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Page 3 of 48

Unity Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2012 and 2011

(Unaudited)

	Preferred		Common Stock					Accumulated			Treasury			Accumulated Other Comprehensive		Total Shareholders'
(In thousands)	Stock		Shares		Amount			Deficit			Stock			Income		Equity
Balance, December 31, 2010	$	19,019		7,211	$	55,884		$	(772	)	$	(4,169	)	$	123	$	70,085
Net income									220								220
Unrealized holding gains on securities and cash flow derivatives															276		276
Accretion of discount on preferred stock		127							(127	)							-
Dividends on preferred stock (5% annually)									(259	)							(259	)
Retire Treasury stock						(3,101	)		(1,068	)		4,169					-
Common stock issued and related tax effects (a)				11		59											59
Balance, March 31, 2011	$	19,146		7,222	$	52,842		$	(2,006	)	$	-		$	399	$	70,381

	Preferred		Common Stock				Accumulated			Accumulated Other Comprehensive			Total Shareholders'
(In thousands)	Stock		Shares		Amount		Deficit			Income			Equity
Balance, December 31, 2011	$	19,545		7,459	$	53,746	$	(854	)	$	1,121		$	73,558
Net income								905						905
Unrealized holding losses on securities and cash flow derivatives											(303	)		(303	)
Accretion of discount on preferred stock		138						(138	)					-
Dividends on preferred stock (5% annually)								(258	)					(258	)
Common stock issued and related tax effects (a)				4		100								100
Balance, March 31, 2012	$	19,683		7,463	$	53,846	$	(345	)	$	818		$	74,002

(a) Includes the issuance of common stock under employee benefit plans, which includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Page 4 of 48

Unity Bancorp, Inc.

Consolidated Statements of Cash Flows

For the three months ended March 31, 2012 and 2011

(Unaudited)

	For the three months ended March 31,
(In thousands)	2012			2011
OPERATING ACTIVITIES
Net income	$	905		$	220
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,200			2,500
Net amortization of purchase premiums and discounts on securities		217			146
Depreciation and amortization		270			302
Deferred income tax benefit		(36	)		(467	)
Net security gains		(224	)		(125	)
Stock compensation expense		83			35
Loss on sale of OREO		117			-
Gain on sale of SBA loans held for sale, net		(157	)		(111	)
Gain on sale of mortgage loans, net		(411	)		(169	)
Origination of mortgage loans held for sale		(21,242	)		(9,671	)
Origination of SBA loans held for sale		(2,240	)		(601	)
Proceeds from sale of mortgage loans held for sale, net		21,653			9,840
Proceeds from sale of SBA loans held for sale, net		2,050			1,177
Loss on sale or disposal of premises and equipment		17			-
Net change in other assets and liabilities		244			257
Net cash provided by operating activities		2,446			3,333
INVESTING ACTIVITIES:
Purchases of securities available for sale		(32,108	)		(10,953	)
Maturities and principal payments on securities held to maturity		855			3,584
Maturities and principal payments on securities available for sale		7,363			9,922
Proceeds from sale of securities available for sale		2,824			5,172
Proceeds from sale of OREO		1,600			-
Net decrease (increase) in loans		8,596			(1,246	)
Purchases of premises and equipment		(1,222	)		(112	)
Net cash provided by (used in) investing activities		(12,092	)		6,367
FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(870	)		1,988
Proceeds from exercise of stock options		17			2
Dividends on preferred stock		(258	)		(258	)
Net cash provided by (used in) financing activities		(1,111	)		1,732
Increase (decrease) in cash and cash equivalents		(10,757	)		11,432
Cash and cash equivalents, beginning of period		82,574			43,926
Cash and cash equivalents, end of period	$	71,817		$	55,358
SUPPLEMENTAL DISCLOSURES:
Cash:
Interest paid	$	2,275		$	2,755
Income taxes paid		389			334
Noncash investing activities:
Transfer of loans to other real estate owned		350			605

The accompanying notes to the Consolidated Financial Statements are an integral part of these statements.

Page 5 of 48

Unity Bancorp, Inc.

Notes to the Consolidated Financial Statements (Unaudited)

March 31, 2012

NOTE 1. Significant Accounting Policies

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 generally routine and recurring in nature, and in the opinion of management, necessary for a fair presentation of interim results. Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current year presentation, with no impact on current earnings. The financial information has been prepared in accordance with U.S. generally accepted accounting principles and has not been audited. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

Estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the valuation of deferred income tax assets and the fair value of financial instruments. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire year. As used in this Form 10-Q, “we” and “us” and “our” refer to Unity Bancorp, Inc., and its consolidated subsidiary, Unity Bank, depending on the context. Certain information and financial disclosures required by generally accepted accounting principles have been condensed or omitted from interim reporting pursuant to SEC rules. Interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Stock Transactions

The Company has incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors. In addition, restricted stock is issued under the stock bonus program to reward employees and directors and to retain them by distributing stock over a period of time.

Stock Option Plans

Grants under the Company’s incentive and nonqualified option plans generally vest over 3 years and must be exercised within 10 years of the date of grant. The exercise price of each option is the market price on the date of grant. As of March 31, 2012, 1,720,529 shares have been reserved for issuance upon the exercise of options, 638,140 option grants are outstanding, and 960,398 option grants have been exercised, forfeited or expired, leaving 121,991 shares available for grant.

No options were granted during the three months ended March 31, 2012 or 2011.

Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options totaled $40 thousand and $19 thousand for the three months ended March 31, 2012 and 2011, respectively. The related income tax benefit was approximately $14 thousand and $8 thousand for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $324 thousand. That cost is expected to be recognized over a weighted average period of 2.3 years.

Transactions under the Company’s stock option plans for the three months ended March 31, 2012 are summarized in the following table:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2011		642,647		$	6.80		5.3	$	517,867
Options granted		-			-
Options exercised		(3,841	)		4.44
Options forfeited		(333	)		3.98
Options expired		(333	)		3.98
Outstanding at March 31, 2012		638,140		$	6.81		5.1	$	466,713
Exercisable at March 31, 2012		493,889		$	6.98		3.9	$	427,726

Page 6 of 48

The following table summarizes information about stock options outstanding at March 31, 2012:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Options Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
$	0.00 - 4.00		123,083		7.1	$	3.87		105,832	$	3.86
	4.01 - 8.00		336,799		5.5		6.06		209,799		5.77
	8.01 - 12.00		121,617		1.9		9.22		121,617		9.22
	12.01 - 16.00		56,641		4.7		12.54		56,641		12.54
Total			638,140		5.1	$	6.81		493,889	$	6.98

The following table presents information about options exercised during the three months ended March 31, 2012 and 2011:

	For the three months ended March 31,
	2012		2011
Number of options exercised		3,841		40,472
Total intrinsic value of options exercised	$	6,055	$	81,347
Cash received from options exercised		17,046		2,364
Tax deduction realized from options exercised		513		32,490

Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options.

Restricted Stock Awards

Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. As of March 31, 2012, 221,551 shares of restricted stock were reserved for issuance, of which 45,162 shares are available for grant.

There were no restricted stock awards granted during the three months ended March 31, 2012 and 2011.

Compensation expense related to the restricted stock awards totaled $43 thousand and $16 thousand for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was approximately $471 thousand of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s stock incentive plans. That cost is expected to be recognized over a weighted average period of 3.3 years.

The following table summarizes nonvested restricted stock activity for the three months ended March 31, 2012:

	Shares			Average Grant Date Fair Value
Nonvested restricted stock at December 31, 2011		93,684		$	6.06
Granted		-			-
Vested		(1,971	)		7.62
Forfeited		-			-
Nonvested restricted stock at March 31, 2012		91,713		$	6.02

Income Taxes

The Company follows FASB ASC Topic 740, “Income Taxes,” which prescribes a threshold for the financial statement recognition of income taxes and provides criteria for the measurement of tax positions taken or expected to be taken in a tax return. ASC 740 also includes guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that ultimately would be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are recognized in income tax expense on the income statement.

Page 7 of 48

Derivative Instruments and Hedging Activities

The Company may use derivative instruments, such as interest rate swaps, to manage interest rate risk. The Company recognizes all derivative instruments at fair value as either assets or liabilities in other assets or other liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as an accounting hedge, the gain or loss is recognized in trading noninterest income. The Company had no derivative instruments at March 31, 2012, and all of the Company's derivative instruments qualified as hedging instruments at December 31, 2011.

For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based on the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in a foreign operation. The Company does not have any fair value hedges or hedges of foreign operations.

The Company formally documents the relationship between the hedging instruments and hedged item, as well as the risk management objective and strategy before undertaking a hedge. To qualify for hedge accounting, the derivatives and hedged items must be designated as a hedge. For hedging relationships in which effectiveness is measured, the Company formally assesses, both at inception and on an ongoing basis, if the derivatives are highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued.

For derivatives that are designated as cash flow hedges, the effective portion of the gain or loss on derivatives is reported as a component of other comprehensive income or loss and subsequently reclassified in interest income in the same period during which the hedged transaction affects earnings. As a result, the change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.

The Company will discontinue hedge accounting when it is determined that the derivative is no longer qualifying as an effective hedge; the derivative expires or is sold, terminated or exercised; or the derivative is de-designated as a fair value or cash flow hedge or it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If the Company determines that the derivative no longer qualifies as a cash flow or fair value hedge and therefore hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings.

Loans Held To Maturity and Loans Held For Sale

Loans held to maturity are stated at the unpaid principal balance, net of unearned discounts and net of deferred loan origination fees and costs. Loan origination fees, net of direct loan origination costs, are deferred and are recognized over the estimated life of the related loans as an adjustment to the loan yield utilizing the level yield method.

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

Loans are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet. Loans qualify for charge-off when, after thorough analysis, all possible sources of repayment are insufficient. These include: 1) potential future cash flows, 2) value of collateral, and/or 3) strength of co-makers and guarantors. All unsecured loans are charged off upon the establishment of the loan’s nonaccrual status. Additionally, all loans classified as a loss or that portion of the loan classified as a loss are charged off. All loan charge-offs are approved by the Board of Directors.

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

The Company evaluates its loans for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company has defined impaired loans to be all troubled debt restructurings and nonperforming loans. Impairment is evaluated in total for smaller-balance loans of a similar nature (consumer and residential mortgage loans), and on an individual basis for other loans. Troubled debt restructurings ("TDRs") occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Interest income on accruing TDRs is credited to operations primarily based upon the principal amount outstanding, as stated in the paragraphs above. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. Impairment can also be measured based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge or credit to the provision for loan losses.

Loans held for sale are SBA loans and are reflected at the lower of aggregate cost or market value. The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale.

The Company originates loans to customers under an SBA program that historically has provided for SBA guarantees of up to 90 percent of each loan. The Company generally sells the guaranteed portion of its SBA loans to a third party and retains the servicing, holding the nonguaranteed portion in its portfolio. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income.

Serviced loans sold to others are not included in the accompanying consolidated balance sheets. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

For additional information see the section titled "Loan Portfolio" under Item 2. Management's Discussion and Analysis.

Page 8 of 48

Allowance for Loan Losses and Unfunded Loan Commitments

The allowance for loan losses is maintained at a level management considers adequate to provide for probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to expense and is reduced by net charge-offs.

The level of the allowance is based on management’s evaluation of probable losses in the loan portfolio, after consideration of prevailing economic conditions in the Company’s market area, the volume and composition of the loan portfolio, and historical loan loss experience. The allowance for loan losses consists of specific reserves for individually impaired credits and troubled debt restructurings, reserves for nonimpaired loans based on historical loss factors and reserves based on general economic factors and other qualitative risk factors such as changes in delinquency trends, industry concentrations or local/national economic trends. This risk assessment process is performed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known.

Although management attempts to maintain the allowance at a level deemed adequate to provide for probable losses, future additions to the allowance may be necessary based upon certain factors including changes in market conditions and underlying collateral values. In addition, various regulatory agencies periodically review the adequacy of the Company’s allowance for loan losses. These agencies may require the Company to make additional provisions based on their judgments about information available to them at the time of their examination.

The Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the allowance are made through other expenses and applied to the allowance which is maintained in other liabilities.

For additional information, see the sections titled "Asset Quality" and "Allowance for Loan Losses and Unfunded Loan Commitments" under Item 2. Management's Discussion and Analysis.

Other-Than-Temporary Impairment

The Company has a process in place to identify debt securities that could potentially incur credit impairment that is other-than-temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. This evaluation considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; (3) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (4) for fixed maturity securities, our intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, our ability and intent to hold the security for a forecasted period of time that allows for the recovery in value.

Management assesses its intent to sell or whether it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired with no intent to sell and no requirement to sell prior to recovery of its amortized cost basis, the amount of the impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

The present value of expected future cash flows is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds and structural support, including subordination and guarantees. The corporate bond cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond specific facts and circumstances including timing, security interests and loss severity.

Page 9 of 48

NOTE 2. Litigation

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

NOTE 3. Net Income per Share

Basic net income per common share is calculated as net income available to common shareholders divided by the weighted average common shares outstanding during the reporting period. Net income available to common shareholders is calculated as net income less accrued dividends and discount accretion related to preferred stock.

Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options and warrants, were issued during the reporting period utilizing the Treasury stock method. However, when a net loss rather than net income is recognized, diluted earnings per share equals basic earnings per share.

The following is a reconciliation of the calculation of basic and diluted income per share.

	For the three months ended March 31,
(In thousands, except per share amounts)		2012		2011
Net income	$	905	$	220
Less: Preferred stock dividends and discount accretion		396		384
Income available to common shareholders	$	509	$	(164	)
Weighted average common shares outstanding - Basic		7,460		7,219
Plus: Potential dilutive common stock equivalents		332		-
Weighted average common shares outstanding - Diluted		7,792		7,219
Net income per common share -
Basic	$	0.07	$	(0.02	)
Diluted		0.07		(0.02	)
Stock options and common stock excluded from the income per share computation as their effect would have been anti-dilutive		506		361

The "potential dilutive common stock equivalents" and the "stock options and common stock excluded from the income per share calculation as their effect would have been anti-dilutive" shown in the table above include the impact of 764,778 common stock warrants issued to the U.S. Department of Treasury under the Capital Purchase Program in December 2008, as applicable. These warrants were dilutive for the three months ended March 31, 2012 and 2011.

NOTE 4. Income Taxes

For the quarter ended March 31, 2012, the Company reported income tax expense of $459 thousand for an effective tax rate of 33.7 percent, compared to an income tax benefit of $148 thousand for the prior year’s quarter.

The Company did not recognize or accrue any interest or penalties related to income taxes during the three months ended March 31, 2012 and 2011. The Company does not have an accrual for uncertain tax positions as of March 31, 2012 or December 31, 2011, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2008 and thereafter are subject to future examination by tax authorities.

Page 10 of 48

NOTE 5. Other Comprehensive Income

The following table shows the changes in other comprehensive income (loss) for the three months ended March 31, 2012 and 2011:

		For the three months ended March 31, 2012								For the three months ended March 31, 2011
(In thousands)	Pre-tax			Tax			After-tax			Pre-tax		Tax		After-tax
Net unrealized gains (losses) on securities:
Balance, beginning of period							$	1,147						$	423
Unrealized holding gains (losses) on securities arising during the period	$	(324	)	$	(144	)		(180	)	$	446	$	171		275
Less: Reclassification adjustment for gains included in net income		224			75			149			125		42		83
Net unrealized gains (losses) on securities arising during the period		(548	)		(219	)		(329	)		321		129		192
Balance, end of period							$	818						$	615

Net unrealized gains (losses) on cash flow hedges:
Balance, beginning of period							$	(26	)					$	(300	)
Unrealized holding gains on cash flow hedges arising during the period	$	43		$	17			26		$	139	$	55		84
Balance, end of period							$	-						$	(216	)

Total Accumulated Other Comprehensive Income							$	818						$	399

Page 11 of 48

NOTE 6. Fair Value

Fair Value Measurement

The Company follows FASB ASC Topic 820, “Fair Value Measurement and Disclosures,” which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed as follows:

Level 1 Inputs

·	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Generally, this includes debt and equity securities and derivative contracts that are traded in an active exchange market (i.e. New York Stock Exchange), as well as certain U.S. Treasury, U.S. Government and sponsored entity agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 Inputs

·	Quoted prices for similar assets or liabilities in active markets.

·	Quoted prices for identical or similar assets or liabilities in inactive markets.

·	Inputs other than quoted prices that are observable, either directly or indirectly, for the term of the asset or liability (i.e., interest rates, yield curves, credit risks, prepayment speeds or volatilities) or “market corroborated inputs.”

·	Generally, this includes U.S. Government and sponsored entity mortgage-backed securities, corporate debt securities and derivative contracts.

Level 3 Inputs

·	Prices or valuation techniques that require inputs that are both unobservable (i.e. supported by little or no market activity) and that are significant to the fair value of the assets or liabilities.

·	These assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis:

Securities Available for Sale

The fair value of available for sale ("AFS") securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). If listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

As of March 31, 2012, the fair value of the Company's AFS securities portfolio was $110.2 million. Approximately 54 percent of the portfolio was made up of residential mortgage-backed securities, which had a fair value of $60.0 million at March 31, 2012. Approximately $58.4 million of the residential mortgage-backed securities are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). The underlying loans for these securities are residential mortgages that are geographically dispersed throughout the United States. All AFS securities were classified as Level 2 assets at March 31, 2012. The valuation of AFS securities using Level 2 inputs was primarily determined using the market approach, which uses quoted prices for similar assets or liabilities in active markets and all other relevant information. It includes model pricing, defined as valuing securities based upon their relationship with other benchmark securities.

Interest Rate Swap Agreements

Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of Level 1 markets. These markets do, however, have comparable, observable inputs in which an alternative pricing source values these assets or liabilities in order to arrive at a fair value. The fair values of any interest swaps are measured based on the difference between the yield on the existing swaps and the yield on current swaps in the market (i.e. The Yield Book); consequently, they are classified as Level 2 instruments.

Page 12 of 48

There were no changes in the inputs or methodologies used to determine fair value during the period ended March 31, 2012, as compared to the periods ended December 31, 2011 and March 31, 2011. The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

	As of March 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Securities available for sale:
U.S. government sponsored entities	$	-	$	4,282	$	-	$	4,282
State and political subdivisions		-		17,072		-		17,072
Residential mortgage-backed securities		-		59,966		-		59,966
Commercial mortgage-backed securities		-		8,168		-		8,168
Corporate and other securities		-		20,693		-		20,693
Total securities available for sale		-		110,181		-		110,181

	As of December 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Securities available for sale:
U.S. government sponsored entities	$	-	$	5,376	$	-	$	5,376
State and political subdivisions		-		17,878		-		17,878
Residential mortgage-backed securities		-		57,924		-		57,924
Commercial mortgage-backed securities		-		210		-		210
Corporate and other securities		-		7,377		-		7,377
Total securities available for sale		-		88,765		-		88,765
Financial Liabilities:
Interest rate swap agreements	$	-	$	43	$	-	$	43

Page 13 of 48

Fair Value on a Nonrecurring Basis

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of the valuation methodologies used for instruments measured at fair value on a nonrecurring basis:

Other Real Estate Owned ("OREO")

The fair value was determined using appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs). All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice ("USPAP"). Appraisals are certified to the Company and performed by appraisers on the Company’s approved list of appraisers. Evaluations are completed by a person independent of Company management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”.

The Company requires current real estate appraisals on all loans that become OREO or in-substance foreclosure, loans that are classified substandard, doubtful or loss, or loans that are over $100,000 and nonperforming. Prior to each balance sheet date, the Company values impaired collateral-dependent loans and OREO based upon a third party appraisal, broker's price opinion, drive by appraisal, automated valuation model, updated market evaluation, or a combination of these methods. The amount is discounted for the decline in market real estate values (for original appraisals), for any known damage or repair costs, and for selling and closing costs. The amount of the discount is dependent upon the method used to determine the original value. The original appraisal is generally used when a loan is first determined to be impaired. When applying the discount, the Company takes into consideration when the appraisal was performed, the collateral’s location, the type of collateral, any known damage to the property and the type of business. Subsequent to entering impaired status and the Company determining that there is a collateral shortfall, the Company will generally, depending on the type of collateral, order a third party appraisal, broker's price opinion, automated valuation model or updated market evaluation. Subsequent to receiving the third party results, the Company will discount the value 6-10% for selling and closing costs.

Partially charged-off loans are measured for impairment based upon an appraisal for collateral-dependant loans. When an updated appraisal is received for a nonperforming loan, the value on the appraisal is discounted in the manner discussed above. If there is a deficiency in the value after the Company applies these discounts, management applies a specific reserve and the loan remains in nonaccrual status. The receipt of an updated appraisal would not qualify as a reason to put a loan back into accruing status. The Company removes loans from nonaccrual status when the borrower makes six months of contractual payments and demonstrates the ability to service the debt going forward. Charge-offs are determined based upon the loss that management believes the Company will incur after evaluating collateral for impairment based upon the valuation methods described above and the ability of the borrower to pay any deficiency.

Impaired Collateral-Dependent Loans

The fair value of impaired collateral-dependent loans is derived in accordance with FASB ASC Topic 310, “Receivables.” Fair value is determined based on the loan’s observable market price or the fair value of the collateral. The valuation allowance for impaired loans is included in the allowance for loan losses in the consolidated balance sheets. At March 31, 2012, the valuation allowance for impaired loans was $3.9 million, a decrease of $568 thousand from $4.4 million at December 31, 2011.

The following tables present the assets and liabilities carried on the balance sheet by caption and by level within the hierarchy (as described above) as of March 31, 2012 and December 31, 2011:

	Fair value at March 31, 2012								Gains (losses) from fair value changes
(In thousands)	Level 1		Level 2		Level 3		Total		For the three months ended March 31, 2012
Financial Assets:
Other real estate owned ("OREO")	$	-	$	-	$	566	$	566		$	(156	)
Impaired collateral-dependent loans		-	-			11,851		11,851			568

	Fair value at March 31, 2011								Losses from fair value changes
(In thousands)	Level 1		Level 2		Level 3		Total		For the three months ended March 31, 2011
Financial Assets:
Other real estate owned ("OREO")	$	-	$	-	$	1,702	$	1,702		$	(404	)
Impaired collateral-dependent loans		-	-			6,886		6,886			(320	)

Page 14 of 48

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments, including those financial instruments for which the Company did not elect the fair value option. These estimated fair values as of March 31, 2012 and December 31, 2011 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value. The methodology for estimating the fair value of financial assets and liabilities that are measured on a recurring or nonrecurring basis are discussed above. The following methods and assumptions were used to estimate the fair value of other financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents

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

Securities Held to Maturity

For securities held to maturity, the carrying value is a reasonable estimate of fair value, as it is not expected that the securities would settle at a price significantly less than the par value of the investment.

SBA loans held for sale

The fair value of SBA loans held for sale is estimated by using a market approach that includes significant other observable inputs.

Loans

The fair value of loans is estimated by discounting the future cash flows using current market rates that reflect the interest rate risk inherent in the loan, except for previously discussed impaired loans.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is carried at cost. Carrying value approximates fair value based on the redemption provisions of the issues.

SBA Servicing Assets

SBA servicing assets do not trade in an active, open market with readily observable prices. The Company estimates the fair value of SBA servicing assets using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including market discount rates and prepayment speeds.

Deposit Liabilities

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

Borrowed Funds & Subordinated Debentures

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

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Standby Letters of Credit

At March 31, 2012, the Bank had standby letters of credit outstanding of $1.3 million, as compared to $1.8 million at December 31, 2011. The fair value of these commitments is nominal.

The table below presents the carrying amount and estimated fair values of the Company’s financial instruments not previously presented as of March 31, 2012 and December 31, 2011:

		March 31, 2012				December 31, 2011
(In thousands)	Fair Value Level	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	71,817	$	71,817	$	82,574	$	82,574
Securities held to maturity	Level 2		17,880		18,934		18,771		19,879
SBA loans held for sale	Level 2		8,015		8,671		7,668		8,192
Loans, net of allowance for loan losses	Level 2		558,398		559,340		568,576		572,165
Federal Home Loan Bank stock	Level 2		4,088		4,088		4,088		4,088
SBA servicing assets	Level 3		396		396		418		418
Accrued interest receivable	Level 2		3,672		3,672		3,703		3,703
Financial liabilities:
Deposits	Level 2		643,101		645,938		643,971		647,281
Borrowed funds and subordinated debentures	Level 2		90,465		101,764		90,465		102,533
Accrued interest payable	Level 2		498		498		523		523

Page 15 of 48

Note 7.Securities

This table provides the major components of securities available for sale (“AFS”) and held to maturity (“HTM”) at amortized cost and estimated fair value at March 31, 2012 and December 31, 2011:

	March 31, 2012									December 31, 2011
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities Available for sale:
US Government sponsored entities	$	4,203	$	79	$	-		$	4,282	$	5,274	$	102	$	-		$	5,376
State and political subdivisions		16,574		559		(61	)		17,072		17,031		856		(9	)		17,878
Residential mortgage-backed securities		58,882		1,375		(291	)		59,966		56,546		1,655		(277	)		57,924
Commercial mortgage-backed securities		8,200		4		(36	)		8,168		208		2		-			210
Corporate and other securities		20,963		163		(433	)		20,693		7,799		5		(427	)		7,377
Total securities available for sale	$	108,822	$	2,180	$	(821	)	$	110,181	$	86,858	$	2,620	$	(713	)	$	88,765

Securities Held to maturity:
State and political subdivisions	$	2,990	$	253	$	-		$	3,243	$	2,992	$	192	$	-		$	3,184
Residential mortgage-backed securities		12,200		360		(22	)		12,538		13,083		329		(31	)		13,381
Commercial mortgage-backed securities		2,690		463		-			3,153		2,696		618		-			3,314
Total securities held to maturity	$	17,880	$	1,076	$	(22	)	$	18,934	$	18,771	$	1,139	$	(31	)	$	19,879

This table provides the remaining contractual maturities and yields of securities within the investment portfolios. The carrying value of securities at March 31, 2012 is primarily distributed by contractual maturity. Mortgage-backed securities and other securities, which may have principal prepayment provisions, are distributed based on contractual maturity. Expected maturities will differ materially from contractual maturities as a result of early prepayments and calls. The total weighted average yield excludes equity securities.

	Within one year					After one year through five years					After five years through ten years					After ten years					Total carrying value
(In thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale at fair value:
US Government sponsored entities	$	-		-	%	$	1,865		1.47	%	$	1,511		2.15	%	$	906		3.68	%	$	4,282		2.18	%
State and political subdivisions		-		-			147		6.50			8,619		2.92			8,306		3.62			17,072		3.29
Residential mortgage-backed securities		72		3.87			209		3.53			1,436		4.52			58,249		2.92			59,966		2.96
Commercial mortgage-backed securities		-		-			-		-			-		-			8,168		2.75			8,168		2.75
Corporate and other securities		-		-			2,344		2.77			4,941		3.55			13,408		2.35			20,693		2.69
Total securities available for sale	$	72		3.87	%	$	4,565		2.39	%	$	16,507		3.18	%	$	89,037		2.89	%	$	110,181		2.91	%
Held to maturity at cost:
State and political subdivisions	$	-		-	%	$	-		-	%	$	-		-	%	$	2,990		4.58	%	$	2,990		4.58	%
Residential mortgage-backed securities		-		-			728		4.57			1,497		4.92			9,975		3.00			12,200		3.33
Commercial mortgage-backed securities		-		-			-		-			-		-			2,690		5.40			2,690		5.40
Total securities held to maturity	$	-		-	%	$	728		4.57	%	$	1,497		4.92	%	$	15,655		3.72	%	$	17,880		3.85	%

Page 16 of 48

The fair value of securities with unrealized losses by length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011 are as follows:

	March 31, 2012
			Less than 12 months					12 months and greater					Total
(In thousands)	Total Number in a Loss Position		Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Avaliable for sale:
State and political subdivisions		6	$	3,321	$	(61	)	$	-	$	-		$	3,321	$	(61	)
Residential mortgage-backed securities		13		16,732		(132	)		1,590		(159	)		18,322		(291	)
Commercial mortgage-backed securities		6		5,786		(36	)		-		-			5,786		(36	)
Corporate and other securities		9		9,421		(127	)		1,233		(306	)		10,654		(433	)
Total temporarily impaired investments		34	$	35,260	$	(356	)	$	2,823	$	(465	)	$	38,083	$	(821	)
Held to maturity:
Residential mortgage-backed securities		2	$	957	$	(11	)	$	413	$	(11	)	$	1,370	$	(22	)
Total temporarily impaired investments		2	$	957	$	(11	)	$	413	$	(11	)	$	1,370	$	(22	)

	December 31, 2011
			Less than 12 months					12 months and greater					Total
(In thousands)	Total Number in a Loss Position		Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Available for sale:
State and political subdivisions		2	$	424	$	(9	)	$	-	$	-		$	424	$	(9	)
Residential mortgage-backed securities		6		4,512		(80	)		871		(197	)		5,383		(277	)
Corporate and other securities		8		5,038		(173	)		1,334		(254	)		6,372		(427	)
Total temporarily impaired securities available for sale		16	$	9,974	$	(262	)	$	2,205	$	(451	)	$	12,179	$	(713	)
Held to maturity:
Residential mortgage-backed securities		3	$	2,545	$	(4	)	$	542	$	(27	)	$	3,087	$	(31	)
Total temporarily impaired securities held to maturity		3	$	2,545	$	(4	)	$	542	$	(27	)	$	3,087	$	(31	)

Unrealized Losses

The unrealized losses in each of the categories presented in the tables above are discussed in the paragraphs that follow:

State and political subdivision securities: The unrealized losses on investments in this type of security were caused by the increase in interest rate spreads. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider these investments to be other-than temporarily impaired as of March 31, 2012 or December 31, 2011.

Residential and commercial mortgage-backed securities: The unrealized losses on investments in mortgage-backed securities were caused by increases in interest rate spreads or faster prepayment speeds. The majority of contractual cash flows of these securities are guaranteed by Fannie Mae, Ginnie Mae and the Federal Home Loan Mortgage Corporation. It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of March 31, 2012 or December 31, 2011.

Corporate and other securities: Included in this category are corporate debt securities, stock of other financial institutions, Community Reinvestment Act (“CRA”) investments, asset-backed securities, and trust preferred securities. The unrealized losses on corporate debt securities were due to widening credit spreads and the unrealized losses on stock of other financial institutions and CRA investments were caused by decreases in the market prices of the shares. The Company evaluated the prospects of the issuers and forecasted a recovery period; therefore it did not consider these investments to be other-than-temporarily impaired as of March 31, 2012 or December 31, 2011. The unrealized losses on asset-backed securities were caused by increases in interest rate spreads. The majority of contractual cash flows of these securities are guaranteed by Sallie Mae as part of the Federal Family Education Loan ("FFEL") Program. It is expected that the securities would not be settled at a price significantly less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of March 31, 2012 or December 31, 2011. The unrealized losses on trust preferred securities were caused by an inactive trading market and changes in market credit spreads. At March 31, 2012 and December 31, 2011, this category consisted of one single-issuer trust preferred security. The contractual terms do not allow the security to be settled at a price less than the par value. Because the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, which may be at maturity, the Company did not consider this security to be other-than-temporarily impaired as of March 31, 2012 or December 31, 2011.

Page 17 of 48

Realized Gains and Losses and Other-Than-Temporary Impairment

Gross realized gains (losses) on securities for the three months ended March 31, 2012 and 2011 are detailed in the table below:

	For the three months ended March 31,
(In thousands)		2012			2011
Available for sale:
Realized gains	$	228		$	126
Realized losses		(4	)		(1	)
Net gains on sales of securities	$	224		$	125

The net realized gains are included in noninterest income in the Consolidated Statements of Operations as net security gains. For the three months ended March 31, 2012, there were gross realized gains of $228 thousand and gross realized losses of $4 thousand. The net realized gains during 2012 were a result of the following:

·	The Company sold approximately $2.6 million in book value of available for sale mortgage-backed and municipal securities, resulting in pre-tax gains of approximately $228 thousand, partially offset by

·	Losses of $4 thousand on the partial call of approximately $60 thousand in book value of one available for sale municipal security.

For the three months ended March 31, 2011, there were gross realized gains of $126 thousand and gross realized losses of $1 thousand. The net realized gains during 2011 were a result of the following:

·	The Company sold approximately $5.0 million in book value of available for sale mortgage-backed securities, resulting in pre-tax gains of approximately $126 thousand, partially offset by

·	Losses of $1 thousand on the sale of approximately $30 thousand in book value of two mortgage-backed securities.

Pledged Securities

Securities with a carrying value of $68.2 million and $81.1 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure Government deposits, secure other borrowings and for other purposes required or permitted by law. Included in these figures was $15.1 million and $27.7 million pledged against Government deposits at March 31, 2012 and December 31, 2011, respectively.

Page 18 of 48

Note 8. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of March 31, 2012 and December 31, 2011:

(In thousands)	March 31, 2012		December 31, 2011
SBA loans	$	70,266	$	71,843
SBA 504 loans		47,651		55,108
Commercial loans
Commercial other		22,838		26,542
Commercial real estate		252,093		246,824
Commercial real estate construction		9,930		9,738
Residential mortgage loans
Residential mortgages		122,079		123,843
Residential construction		2,169		2,205
Purchased mortgages		7,944		8,042
Consumer loans
Home equity		45,705		46,935
Consumer other		2,077		1,512
Total	$	582,752	$	592,592

Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk, excluding SBA loans, tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. As a preferred SBA lender, a portion of the SBA portfolio is to borrowers outside the Company’s lending area. However, during late 2008, the Company withdrew from SBA lending outside of its primary trade area, but continues to offer SBA loan products as an additional credit product within its primary trade area. A description of the Company's different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The Company’s SBA loans are generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses' major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

SBA 504 Loans: The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. SBA 504 loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans will generally be guaranteed in full or for a meaningful amount by the businesses' major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding 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 then subject to on-going internal reviews for credit quality, as well as independent credit reviews by an outside firm.

The Company's extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company's loans. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings:

For SBA 7(a), SBA 504 and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. A loan’s internal risk rating is updated at least annually and more frequently if circumstances warrant a change in risk rating. The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

Pass: Risk ratings of 1 through 6 are used for loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments. These performing loans are termed “Pass”.

Special Mention: Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s collateral and position. While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated. As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification. Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in start up or deteriorating industries, or borrowers with a poor market share in an average industry. "Special Mention" loans may include an element of asset quality, financial flexibility, or below average management. Management and ownership may have limited depth or experience. Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Substandard: Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”. A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt. The loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

Page 19 of 48

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Partial charge-offs are likely.

Loss: Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss”, and charged-off immediately. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be affected in the future.

For residential mortgage and consumer loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of March 31, 2012:

	March 31, 2012
	SBA, SBA 504 & Commercial Loans - Internal Risk Ratings
(In thousands)	Pass		Special Mention		Substandard		Total
SBA loans	$	50,511	$	10,706	$	9,049	$	70,266
SBA 504 loans		34,613		4,098		8,940		47,651
Commercial loans
Commercial other		17,297		788		4,753		22,838
Commercial real estate		195,503		45,891		10,699		252,093
Commercial real estate construction		8,648		882		400		9,930
Total commercial loans		221,448		47,561		15,852		284,861
Total SBA, SBA 504 and Commercial loans	$	306,572	$	62,365	$	33,841	$	402,778

	March 31, 2012
	Residential Mortgage & Consumer Loans - Performing/Nonperforming
(In thousands)	Performing		Nonperforming		Total
Residential mortgage loans
Residential mortgages	$	120,193	$	1,886	$	122,079
Residential construction		-		2,169		2,169
Purchased residential mortgages		5,992		1,952		7,944
Total residential mortgage loans		126,185		6,007		132,192
Consumer loans
Home equity		45,369		336		45,705
Consumer other		2,064		13		2,077
Total consumer loans	$	47,433	$	349	$	47,782
Total loans					$	582,752

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2011:

	December 31, 2011
	SBA, SBA 504 & Commercial Loans - Internal Risk Ratings
(In thousands)	Pass		Special Mention		Substandard		Total
SBA loans	$	49,568	$	8,900	$	13,375	$	71,843
SBA 504 loans		39,566		5,543		9,999		55,108
Commercial loans
Commercial other		20,921		1,160		4,461		26,542
Commercial real estate		187,680		49,231		9,913		246,824
Commercial real estate construction		8,255		883		600		9,738
Total commercial loans		216,856		51,274		14,974		283,104
Total SBA, SBA 504 and commercial loans	$	305,990	$	65,717	$	38,348	$	410,055

	December 31, 2011
	Residential Mortgage & Consumer Loans - Performing/Nonperforming
(In thousands)	Performing		Nonperforming		Total
Residential mortgage loans
Residential mortgages	$	122,012	$	1,831	$	123,843
Residential construction		36		2,169		2,205
Purchased residential mortgages		6,005		2,037		8,042
Total residential mortgage loans		128,053		6,037		134,090
Consumer loans
Home equity		46,676		259		46,935
Consumer other		1,503		9		1,512
Total consumer loans	$	48,179	$	268	$	48,447
Total loans					$	592,592

Page 20 of 48

Nonperforming and Past Due Loans:

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal, until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well collateralized and in a continuing process expected to result in repayment or restoration to current status.

The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The current state of the economy and the downturn in the real estate market have resulted in increased loan delinquencies and defaults. In some cases, these factors have also resulted in significant impairment to the value of loan collateral. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market. In response to the credit risk in its portfolio, the Company has increased staffing in its credit monitoring department and increased efforts in the collection and analysis of borrowers’ financial statements and tax returns.

The following tables set forth an aging analysis of past due and nonaccrual loans by loan class as of March 31, 2012 and December 31, 2011:

	March 31, 2012
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days and Still Accruing		Nonaccrual (1)		Total Past Due		Current		Total Loans
SBA loans	$	4,713	$	841	$	355	$	4,132	$	10,041	$	60,225	$	70,266
SBA 504 loans		1,786		1,320		-		2,715		5,821		41,830		47,651
Commercial loans
Commercial other		183		2		3		1,159		1,347		21,491		22,838
Commercial real estate		5,688		2,017		923		7,444		16,072		236,021		252,093
Commercial real estate construction		-		-		-		400		400		9,530		9,930
Residential mortgage loans
Residential mortgages		3,868		-		1,884		1,886		7,638		114,441		122,079
Residential construction		-		-		-		2,169		2,169		-		2,169
Purchased residential mortgages		146		-		-		1,952		2,098		5,846		7,944
Consumer loans
Home equity		697		125		-		336		1,158		44,547		45,705
Consumer other		1		3		-		13		17		2,060		2,077
Total loans	$	17,082	$	4,308	$	3,165	$	22,206	$	46,761	$	535,991	$	582,752

(1) At March 31, 2012, nonaccrual loans included $2.3 million of troubled debt restructurings ("TDRs") and $555 thousand of loans guaranteed by the SBA. The remaining $21.0 million of TDRs are in accrual status because they are performing in accordance with their restructured terms.

	December 31, 2011
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days and Still Accruing		Nonaccrual (1)		Total Past Due		Current		Total Loans
SBA loans	$	881	$	225	$	246	$	5,859	$	7,211	$	64,632	$	71,843
SBA 504 loans		2,006		-		-		2,086		4,092		51,016		55,108
Commercial loans
Commercial other		1,158		-		192		815		2,165		24,377		26,542
Commercial real estate		2,493		3,119		949		7,104		13,665		233,159		246,824
Commercial real estate construction		-		-		-		600		600		9,138		9,738
Residential mortgage loans
Residential mortgages		3,519		1,310		-		1,831		6,660		117,183		123,843
Residential construction		-		-		36		2,169		2,205		-		2,205
Purchased residential mortgages		149		-		-		2,037		2,186		5,856		8,042
Consumer loans
Home equity		338		199		988		259		1,784		45,151		46,935
Consumer other		1		3		-		9		13		1,499		1,512
Total loans	$	10,545	$	4,856	$	2,411	$	22,769	$	40,581	$	552,011	$	592,592

(1) At December 31, 2011, nonaccrual loans included $3.6 million of TDRs and $939 thousand of loans guaranteed by the SBA. The remaining $17.4 million of TDRs are in accrual status because they are performing in accordance with their restructured terms.

Page 21 of 48

Impaired Loans:

The Company has defined impaired loans to be all nonperforming loans and troubled debt restructurings. Management considers a loan impaired when, based on current information and events, it is determined that the company will not be able to collect all amounts due according to the loan contract. Impairment is evaluated in total for smaller-balance loans of a similar nature, (consumer and residential mortgage loans), and on an individual basis for other loans.

The following tables provide detail on the Company’s impaired loans with the associated allowance amount, if applicable, as of March 31, 2012 and December 31, 2011:

	March 31, 2012
(In thousands)	Outstanding Principal Balance		Specific Reserves		Net Exposure (balance less specific reserves)
With no related allowance:
SBA loans (1)	$	1,880	$	-	$	1,880
SBA 504 loans		7,073		-		7,073
Commercial loans
Commercial other		4,269		-		4,269
Commercial real estate		6,925		-		6,925
Commercial real estate construction		400		-		400
Total commercial loans		11,594		-		11,594
Total impaired loans with no related allowance	$	20,547	$	-	$	20,547

With an allowance:
SBA loans(1)	$	3,036	$	975	$	2,061
Commercial loans
Commercial other		115		115		-
Commercial real estate		12,581		2,791		9,790
Total commercial loans		12,696		2,906		9,790
Total impaired loans with a related allowance	$	15,732	$	3,881	$	11,851

Total individually evaluated impaired loans:
SBA loans (1)	$	4,916	$	975	$	3,941
SBA 504 loans		7,073		-		7,073
Commercial loans
Commercial other		4,384		115		4,269
Commercial real estate		19,506		2,791		16,715
Commercial real estate construction		400		-		400
Total commercial loans		24,290		2,906		21,384
Total individually evaluated impaired loans	$	36,279	$	3,881	$	32,398

Homogeneous collectively evaluated impaired loans:
Residential mortgage loans
Residential mortgages	$	1,886	$	-	$	1,886
Residential construction		2,169				2,169
Purchased mortgages		1,952		-		1,952
Total residential mortgage loans		6,007		-		6,007
Consumer loans
Home equity		336		-		336
Consumer other		13		-		13
Total consumer loans		349		-		349
Total homogeneous collectively evaluated impaired loans	$	6,356	$	-	$	6,356

Total impaired loans	$	42,635	$	3,881	$	38,754

(1) Balances are reduced by amount guaranteed by the Small Business Administration of $555 thousand at March 31, 2012.

Page 22 of 48

	December 31, 2011
(In thousands)	Outstanding Principal Balance		Specific Reserves		Net Exposure (balance less specific reserves)
With no related allowance:
SBA loans (1)	$	1,553	$	-	$	1,553
SBA 504 loans		5,331		-		5,331
Commercial loans
Commercial other		1,725		-		1,725
Commercial real estate		6,197		-		6,197
Total commercial loans		7,922		-		7,922
Total impaired loans with no related allowance	$	14,806	$	-	$	14,806

With an allowance:
SBA loans(1)	$	4,763	$	1,694	$	3,069
SBA 504 loans		1,127		1		1,126
Commercial loans
Commercial other		75		75		-
Commercial real estate		11,589		2,530		9,059
Commercial real estate construction		600		149		451
Total commercial loans		12,264		2,754		9,510
Total impaired loans with a related allowance	$	18,154	$	4,449	$	13,705

Total individually evaluated impaired loans:
SBA loans (1)	$	6,316	$	1,694	$	4,622
SBA 504 loans		6,458		1		6,457
Commercial loans
Commercial other		1,800		75		1,725
Commercial real estate		17,786		2,530		15,256
Commercial real estate construction		600		149		451
Total commercial loans		20,186		2,754		17,432
Total individually evaluated impaired loans	$	32,960	$	4,449	$	28,511

Homogeneous collectively evaluated impaired loans:
Residential mortgage loans
Residential mortgages	$	1,831	$	-	$	1,831
Residential construction		2,169		-		2,169
Purchased mortgages		2,037		-		2,037
Total residential mortgage loans		6,037		-		6,037
Consumer loans
Home equity		259		-		259
Consumer Other		9		-		9
Total consumer loans		268		-		268
Total homogeneous collectively evaluated for impaired loans	$	6,305	$	-	$	6,305

Total impaired loans	$	39,265	$	4,449	$	34,816

(1) Balances are reduced by amount guaranteed by the SBA of $939 thousand at December 31, 2011.

Page 23 of 48

The following table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the three months ended March 31, 2012 and 2011. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, therefore no interest income is recognized. Any interest income recognized on a cash basis during the three months ended March 31, 2012 and 2011 was immaterial. The interest recognized on impaired loans noted below represents accruing troubled debt restructurings only.

	For the three months ended
	March 31, 2012				March 31, 2011
(In thousands)	Average Recorded Investment		Interest Income Recognized on Impaired Loans		Average Recorded Investment		Interest Income Recognized on Impaired Loans
SBA loans (1)	$	5,754	$	56	$	6,783	$	43
SBA 504 loans		6,463		70		10,255		92
Commercial loans
Commercial other		2,769		21		509		-
Commercial real estate		18,360		130		10,731		57
Commercial real estate construction		533		-		1,051		-
Residential mortgage loans
Residential mortgages		1,650		-		2,217		-
Residential construction		2,169		-		-
Purchased mortgages		2,006		-		2,143		-
Consumer loans
Home equity		285		-		228		-
Consumer other		11		-		-		-
Total	$	40,000	$	277	$	33,917	$	192

(1) Balances are reduced by the average amount guaranteed by the Small Business Administration of $639 thousand and $2.9 million for the three months ended March 31, 2012 and 2011, respectively.

Page 24 of 48

Troubled Debt Restructurings:

The Company's loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (“TDR”). TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, as well as for loans modified as TDRs that subsequently default on their modified terms. Effective September 30, 2011, the Company adopted the amendments in Accounting Standards Update ("ASU") No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, and did not identify any additional TDRs as a result of this adoption.

TDRs of $23.3 million are included in the impaired loan numbers listed above, of which $2.3 million are in nonaccrual status. The remaining TDRs are in accrual status since they continue to perform in accordance with their restructured terms. There are no commitments to lend additional funds on these loans.

The following table details loans modified during the three months ended March 31, 2012, including the number of modifications, the recorded investment at the time of the modification and the quarter-to-date impact to interest income as a result of the modification. There were no loans modified as TDRs within the previous 12 months where a concession was made and the loan subsequently defaulted at some point during the three months ended March 31, 2012. In this case, subsequent default is defined as being transferred to nonaccrual status.

	For the three months ended March 31, 2012
(In thousands, except number of contracts)	Number of Contracts		Recorded Investment at Time of Modification		Impact of Interest Rate Change on Income
Commercial loans
Commercial other		3	$	1,291	$	-
Commercial real estate		3		1,856		-
Total		6	$	3,147	$	-

During the three months ended March 31, 2012, TDRs consisted of interest only periods; there was no principal forgiveness. The following table shows the types of modifications done during the three months ended March 31, 2012, with the respective loan balances as of March 31, 2012:

	March 31, 2012
(In thousands)	Commercial other		Commercial real estate		Total
Type of Modification:
Interest only	$	1,291	$	1,856	$	3,147
Total TDRs	$	1,291	$	1,856	$	3,147

Page 25 of 48

Note 9.Allowance for Loan Losses & Unfunded Loan Commitments

Allowance for Loan Losses:
The Company has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. At a minimum, the adequacy of the allowance for loan losses is reviewed by management on a quarterly basis. For purposes of determining the allowance for loan losses, the Company has segmented the loans in its portfolio by loan type. Loans are segmented into the following pools: SBA 7(a), SBA 504, Commercial, Residential Mortgages, and Consumer loans. Certain portfolio segments are further broken down into classes based on the associated risks within those segments and the type of collateral underlying each loan. Commercial loans are divided into the following three classes: Real Estate, Real Estate Construction and Other. Residential Mortgage loans are divided into the following two classes: Residential Mortgages and Purchased Mortgages. Consumer loans are divided into two classes as follows: Home Equity and Other.

The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The same standard methodology is used, regardless of loan type. Specific reserves are made to individual impaired loans and troubled debt restructurings (see Note 1 for additional information on this term). The general reserve is set based upon a representative average historical net charge-off rate adjusted for the following environmental factors: delinquency and impairment trends, charge-off and recovery trends, restructured loans, volume and loan term trends, risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes. Beginning in the third quarter of 2009, when calculating the five-year historical net charge-off rate, the Company weights the past three years more heavily due to the higher amount of charge-offs experienced during those years. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate, and high risk. Each environmental factor is evaluated separately for each class of loans and risk weighted based on its individual characteristics.

For SBA 7(a), SBA 504 and commercial loans, the estimate of loss based on pools of loans with similar characteristics is made through the use of a standardized loan grading system that is applied on an individual loan level and updated on a continuous basis. The loan grading system incorporates reviews of the financial performance of the borrower, including cash flow, debt-service coverage ratio, earnings power, debt level and equity position, in conjunction with an assessment of the borrower's industry and future prospects. It also incorporates analysis of the type of collateral and the relative loan to value ratio.

For residential mortgage and consumer loans, the estimate of loss is based on pools of loans with similar characteristics. Factors such as credit score, delinquency status and type of collateral are evaluated. Factors are updated frequently to capture the recent behavioral characteristics of the subject portfolios, as well as any changes in loss mitigation or credit origination strategies, and adjustments to the reserve factors are made as needed.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectable. All credits which are 90 days past due must be analyzed for the Company’s ability to collect on the credit. Once a loss is known to exist, the charge-off approval process is immediately expedited. This charge-off policy is followed for all loan types.

The allocated allowance is the total of identified specific and general reserves by loan category. The allocation is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of the portfolio.

The following tables detail the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011.

For the three months ended March 31, 2012
(In thousands)	SBA			SBA 504			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	4,088		$	1,423		$	8,129		$	1,703		$	536		$	469	$	16,348
Charge-offs		(615	)		(227	)		(346	)		(113	)		-			-		(1,301	)
Recoveries		53			28			11			-			-			-		92
Net charge-offs		(562	)		(199	)		(335	)		(113	)		-			-		(1,209	)
Provision for loan losses charged to expense		113			61			567			180			(9	)		288		1,200
Ending balance	$	3,639		$	1,285		$	8,361		$	1,770		$	527		$	757	$	16,339

For the three months ended March 31, 2011
(In thousands)	SBA			SBA 504			Commercial			Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	4,198		$	1,551		$	6,011		$	1,679		$	586		$	339		$	14,364
Charge-offs		(711	)		(300	)		(548	)		(142	)		-			-			(1,701	)
Recoveries		8			-			98			4			2			-			112
Net charge-offs		(703	)		(300	)		(450	)		(138	)		2			-			(1,589	)
Provision for loan losses charged to expense		759			371			1,224			258			(61	)		(51	)		2,500
Ending balance	$	4,254		$	1,622		$	6,785		$	1,799		$	527		$	288		$	15,275

Page 26 of 48

The following table presents loans and their related allowance for loan losses, by portfolio segment, as of March 31, 2012:

	March 31, 2012
(In thousands)	SBA		SBA 504		Commercial		Residential		Consumer		Unallocated		Total
Allowance for Loan Losses ending balance:
Individually evaluated for impairment	$	975	$	-	$	2,906	$	-	$	-	$	-	$	3,881
Collectively evaluated for impairment		2,664		1,285		5,455		1,770		527		757		12,458
Total	$	3,639	$	1,285	$	8,361	$	1,770	$	527	$	757	$	16,339

Loan ending balances:
Individually evaluated for impairment	$	4,916	$	7,073	$	24,290	$	-	$	-	$	-	$	36,279
Collectively evaluated for impairment		65,350		40,578		260,571		132,192		47,782		-		546,473
Total	$	70,266	$	47,651	$	284,861	$	132,192	$	47,782	$	-	$	582,752

The following table presents loans and their related allowance for loan losses, by portfolio segment, as of December 31, 2011:

		December 31, 2011
(In thousands)		SBA		SBA 504		Commercial		Residential		Consumer		Unallocated		Total
Allowance for Loan Losses ending balance:
Individually evaluated for impairment	$	1,694	$	1	$	2,754	$	-	$	-	$	-	$	4,449
Collectively evaluated for impairment		2,394		1,422		5,375		1,703		536		469		11,899
Total	$	4,088	$	1,423	$	8,129	$	1,703	$	536	$	469	$	16,348

Loan ending balances:
Individually evaluated for impairment	$	6,316	$	6,458	$	20,186	$	-	$	-	$	-	$	32,960
Collectively evaluated for impairment		65,527		48,650		262,918		134,090		48,447		-		559,632
Total	$	71,843	$	55,108	$	283,104	$	134,090	$	48,447	$	-	$	592,592

Changes in Methodology:

The Company did not make any changes to its allowance for loan losses methodology in the current period.

Unfunded Loan Commitments:

In addition to the allowance for loan losses, the Company maintains an allowance for unfunded loan commitments that is maintained at a level that management believes is adequate to absorb estimated probable losses. Adjustments to the allowance are made through other expense and applied to the allowance which is maintained in other liabilities. At March 31, 2012, a $93 thousand commitment reserve was reported on the balance sheet as an “other liability”, compared to a $79 thousand commitment reserve at December 31, 2011.

Page 27 of 48

Note 10. New Accounting Pronouncements

ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU will require companies to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope will include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for interim and annual periods beginning on or after January 1, 2012. The amendment is not expected to impact the Company's financial condition, results of operations or cash flows.

ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. In September 2011, the FAS issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU allows companies to use a qualitative approach to test goodwill for impairment. An entity is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The amendment is not expected to impact the Company's financial condition, results of operations or cash flows.

ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued ASU No. 2011-04, with the intent of converging U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities are required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. The Company adopted this amendment effective March 31, 2012 with no impact to the Company’s fair value measurements, financial condition, results of operations or cash flows.

ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued ASU No. 2011-03, which amends the sale accounting requirement concerning a transferor’s ability to repurchase transferred financial assets even in the event of default by the transferee, which typically is facilitated in a repurchase agreement by the presence of a collateral maintenance provision. Specifically, the level of cash collateral received by a transferor is longer relevant in determining whether a repurchase agreement constitutes a sale. As a result of this amendment, more repurchase agreements are treated as secured financings rather than sales. The Company adopted this amendment effective March 31, 2012, however, since all repurchase agreements entered into by the Company are deemed secured financing transactions, this amendment did not impact the Company's financial condition, results of operations or cash flows.

Page 28 of 48

ITEM 2. 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 2011 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated” and “potential”. Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company’s Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent Quarterly Reports on Form 10-Q, the following: changes in general, economic, and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Unity Bancorp, Inc.’s interest-rate spread or other income anticipated from operations and investments.

Overview

Unity Bancorp, Inc. (the “Parent Company”) is incorporated in New Jersey and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the “Bank” or, when consolidated with the Parent Company, the “Company”) was granted a charter by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through 15 branch offices located in Hunterdon, Somerset, Middlesex, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration and other commercial credits. Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank’s investment portfolio.

Unity (NJ) Statutory Trust II is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. Unity (NJ) Statutory Trust III is a statutory business trust and wholly owned subsidiary of Unity Bancorp, Inc. On December 19, 2006, the Trust issued $5.0 million of trust preferred securities to investors. These floating rate securities are treated as subordinated debentures on the Company’s financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes, subject to certain limitations. The Company does not consolidate the accounts and related activity of any of its business trust subsidiaries.

Earnings Summary

Net income available to common shareholders totaled $509 thousand, or $0.07 per diluted share for the quarter ended March 31, 2012, compared to a net loss attributable to common shareholders of $164 thousand, or $0.02 per diluted share for the same period a year ago. The continued improvement in our operating results is the result of our strategic initiatives, including a reduction in the portfolio of loans outside our footprint, expansion of our in-market business relationships and further reduction of our cost of funds. Net interest income has been impacted by the sustained low interest rate environment, which the Federal Open Market Committee (“FOMC”) forecasts will continue into 2014. This rate environment has resulted in a tighter net interest margin as our earning assets continue to re-price at lower rates. Partially offsetting these declines are lower funding costs. However, as the Bank has been steadily reducing rates on its deposit products, the reduction in yield on earning assets is anticipated to exceed the benefits of further declines in the cost of funds.

The Company's accomplishments during the first quarter of 2012 include the following:

·	Noninterest income increased 36.7 percent over the same period in the prior year, due to increased gains on mortgage and SBA loan sales,
·	Core deposits, which exclude time deposits, increased $8.6 million during the quarter, improving our deposit mix,
·	Shareholders' equity increased $444 thousand from year-end 2011, primarily due to the increase in net income,

·	Nonperforming assets decreased $2.0 million during the quarter, and
·	The Company remains well-capitalized.

The Company's quarterly performance ratios may be found in the table below.

	For the three months ended March 31,
		2012			2011
Net income (loss) per common share - Basic (1)	$	0.07		$	(0.02	)
Net income (loss) per common share - Diluted (1)	$	0.07		$	(0.02	)
Return on average assets		0.45	%		0.11	%
Return (loss) on average common equity (2)		3.81	%		(1.31	)%
Efficiency ratio		71.80	%		71.56	%

(1) Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by weighted average shares outstanding.

(2) Defined as net income adjusted for dividends accrued and accretion of discount on perpetual preferred stock divided by average shareholders’ equity (excluding preferred stock).

Page 29 of 48

Net Interest Income

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

Our net interest income has been adversely impacted by the sustained low interest rate environment, which the Federal Open Market Committee (“FOMC”) forecasts will continue into 2014. This rate environment has resulted in a tighter net interest margin as our earning assets continue to re-price at lower rates. Partially offsetting these declines are lower funding costs, however the reduction in yield on earning assets is anticipated to exceed the benefits of further declines in the cost of funds.

During the three months ended March 31, 2012, tax-equivalent interest income decreased $1.2 million or 11.4 percent to $9.1 million when compared to the same period in the prior year. This decrease was driven by the lower average yield on earning assets and a shift in the mix of earning assets as average loans decreased and Federal funds sold and interest-bearing deposits increased:

·	Of the $1.2 million decrease in interest income on a tax-equivalent basis, $777 thousand was attributed to reduced yields on average interest-earning assets and $392 thousand was attributable to the decrease in volume of average interest-earning assets.
·	The average volume of interest-earning assets decreased $697 thousand to $777.4 million for the first quarter of 2012 compared to $778.1 million for the same period in 2011. This was due primarily to a $27.9 million decrease in average loans, a $4.1 million decrease in average investment securities, and a $118 thousand decrease in Federal Home Loan Bank stock, partially offset by a $31.4 million increase in Federal funds sold and interest-bearing deposits.
·	The yield on interest-earning assets decreased 63 basis points to 4.71 percent for the three months ended March 31, 2012 when compared to the same period in 2011, due to continued re-pricing in a lower overall interest rate environment. Yields on most earning assets, particularly those with variable rates, fell due to these lower market rates.

Total interest expense was $2.3 million for the three months ended March 31, 2012, a decrease of $517 thousand or 18.7 percent compared to the same period in 2011. This decrease was driven by the lower overall interest rate environment combined with the shift in deposit mix away from higher priced products and a decrease in the average volume of interest-bearing liabilities:

·	Of the $517 thousand decrease in interest expense, $409 thousand was attributed to a decrease in the rates paid on interest-bearing liabilities and $108 thousand was due to the decrease in the volume of average interest-bearing liabilities.
·	Interest-bearing liabilities averaged $639.7 million for the first quarter of 2012, a decrease of $18.7 million or 2.8 percent, compared to the first quarter of 2011. The decrease in interest-bearing liabilities was a result of a decrease in average time deposits and average savings deposits, partially offset by an increase in interest-bearing demand deposits.
·	The average cost of interest-bearing liabilities decreased 29 basis points to 1.41 percent, primarily due to the repricing of deposits in a lower interest rate environment. The cost of interest-bearing deposits decreased 27 basis points to 1.03 percent for the first quarter of 2012 and the cost of borrowed funds and subordinated debentures decreased 50 basis points to 3.70 percent.
·	The lower cost of funding was also attributed to a shift in the mix of deposits from higher cost time deposits to lower cost savings deposits and interest-bearing demand deposits.

During the quarter ended March 31, 2012, tax-equivalent net interest income amounted to $6.9 million, a decrease of $652 thousand or 8.7 percent when compared to the same period in 2011. Net interest margin decreased 36 basis points to 3.56 percent for the quarter ended March 31, 2012, compared to 3.92 percent for the same period in 2011. The net interest spread was 3.30 percent for the first quarter of 2012, a 34 basis point decrease from 3.64 for the same period in 2011.

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

Page 30 of 48

Consolidated Average Balance Sheets

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

For the three months ended March 31,	2012									2011
	Average						Rate/			Average						Rate/
	Balance			Interest			Yield			Balance			Interest			Yield
ASSETS

Interest-earning assets:
Federal funds sold and interest-bearing deposits	$	64,660		$	32			0.20	%	$	33,252		$	11			0.13	%
Federal Home Loan Bank stock		4,088			51			5.02			4,206			66			6.36
Securities:
Available for sale		102,101			782			3.06			105,027			912			3.47
Held to maturity		18,374			180			3.92			19,516			292			5.98
Total securities (A)		120,475			962			3.19			124,543			1,204			3.87
Loans, net of unearned discount:
SBA		71,760			924			5.15			85,861			1,236			5.76
SBA 504		51,710			759			5.90			61,998			955			6.25
Commercial		284,237			4,183			5.92			282,605			4,306			6.18
Residential mortgage		132,824			1,655			4.98			130,745			1,831			5.60
Consumer		47,608			560			4.73			54,849			686			5.07
Total loans (B)		588,139			8,081			5.52			616,058			9,014			5.91
Total interest-earning assets	$	777,362		$	9,126			4.71	%	$	778,059		$	10,295			5.34	%
Noninterest-earning assets:
Cash and due from banks		15,949									17,764
Allowance for loan losses		(16,788	)								(15,054	)
Other assets		40,287									39,767
Total noninterest-earning assets		39,448									42,477
Total Assets	$	816,810								$	820,536


LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	108,988		$	136			0.50	%	$	103,550		$	139			0.54	%
Savings deposits		283,261			354			0.50			289,805			581			0.81
Time deposits		156,999			913			2.34			174,620			1,097			2.55
Total interest-bearing deposits		549,248			1,403			1.03			567,975			1,817			1.30
Borrowed funds and subordinated debentures		90,465			847			3.70			90,465			950			4.20
Total interest-bearing liabilities	$	639,713		$	2,250			1.41	%	$	658,440		$	2,767			1.70	%
Noninterest-bearing liabilities:
Demand deposits		100,496									88,797
Other liabilities		3,249									3,530
Total noninterest-bearing liabilities		103,745									92,327
Shareholders’ equity		73,352									69,769
Total Liabilities and Shareholders’ Equity	$	816,810								$	820,536
Net interest spread				$	6,876			3.30	%				$	7,528			3.64	%
Tax-equivalent basis adjustment					(68	)								(53	)
Net interest income				$	6,808								$	7,475
Net interest margin								3.56	%								3.92	%

(A)	Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent and applicable state tax rates.

(B)	The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

Page 31 of 48

The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volume and rates over the periods presented. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Amounts have been computed on a tax-equivalent basis, assuming a federal income tax rate of 34 percent.

	Three months ended March 31, 2012 versus March 31, 2011
	Increase (Decrease) Due to Change in
(In thousands on a tax-equivalent basis)	Volume			Rate			Net
Interest Income:
Federal funds sold and interest-bearing deposits	$	13		$	8		$	21
Federal Home Loan Bank stock		(2	)		(13	)		(15	)
Investment securities		(40	)		(202	)		(242	)
Net loans		(363	)		(570	)		(933	)
Total interest income	$	(392	)	$	(777	)	$	(1,169	)
Interest Expense:
Interest-bearing demand deposits	$	7		$	(10	)	$	(3	)
Savings deposits		(13	)		(214	)		(227	)
Time deposits		(102	)		(82	)		(184	)
Total deposits		(108	)		(306	)		(414	)
Borrowed funds and subordinated debentures		-			(103	)		(103	)
Total interest expense		(108	)		(409	)		(517	)
Net interest income – fully tax-equivalent	$	(284	)	$	(368	)	$	(652	)
Increase in tax-equivalent adjustment								(15	)
Net interest income							$	(667	)

Provision for Loan Losses

The provision for loan losses totaled $1.2 million for the three months ended March 31, 2012, compared to $2.5 million for the three months ended March 31, 2011. Each period’s loan loss provision is the result of management’s analysis of the loan portfolio and reflects changes in the size and composition of the portfolio, the level of net charge-offs, delinquencies, current economic conditions and other internal and external factors impacting the risk within the loan portfolio. Additional information may be found under the captions “Financial Condition-Asset Quality” and “Financial Condition - Allowance for Loan Losses and Unfunded Loan Commitments.” The current provision is considered appropriate under management’s assessment of the adequacy of the allowance for loan losses.

Noninterest Income

Our noninterest income consists primarily of branch and loan fee income, gains on the sale of SBA and mortgage loans and BOLI income. For the three months ended March 31, 2012, noninterest income amounted to $1.7 million, an increase of $460 thousand from the prior year period. The increase during the three month-period was primarily due to increased gains on the sale of mortgage loans and securities.

The following table shows the components of noninterest income for the three three months ended March 31, 2012 and 2011:

	For the three months ended March 31,
(In thousands)		2012		2011
Branch fee income	$	386	$	344
Service and loan fee income		302		243
Gain on sale of SBA loans held for sale, net		157		111
Gain on sale of mortgage loans, net		411		169
BOLI income		73		73
Net security gains		224		125
Other income		162		190
Total noninterest income	$	1,715	$	1,255

Changes in our noninterest income for the three months ended March 31, 2012 versus the three months ended March 31, 2011 reflect:

·	Branch fee income, which consists of deposit service charges and overdraft fees, increased 12.2 percent as increased overdraft activity offset reduced deposit account service charges.
·	Service and loan fee income increased $59 thousand due to higher servicing fee income, partially offset by reduced payoff charges and other processing fees.
·	Gains on SBA loan sales amounted to $157 thousand on $1.9 million in sales and $111 thousand on $1.2 million in sales for the three months ended March 31, 2012 and 2011, respectively.
·	Gains on the sale of mortgage loans amounted to $411 thousand, an increase of $242 thousand. This increase is directly related to the volume of mortgage loans originated and sold. Sales of mortgage loans totaled $21.2 million and $9.7 million for the three months ended March 31, 2012 and 2011, respectively.
·	The increase in the cash surrender value of BOLI remained flat at $73 thousand.

·	Net realized gains on the sale of securities amounted to $224 thousand and $125 thousand, respectively. For additional information, see Note 7 - Securities.
·	Other income decreased $28 thousand when compared to the same period in the prior year.

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Noninterest Expense

Total noninterest expense was $6.0 million for the first quarter of 2012, a decrease of $199 thousand or 3.2 percent from the same period a year go. This decrease was due primarily to FDIC deposit insurance savings and reduced occupancy expenses.

The following table presents a breakdown of noninterest expense for the three months ended March 31, 2012 and 2011:

	For the three months ended March 31,
(In thousands)		2012		2011
Compensation and benefits	$	3,182	$	3,057
Occupancy		609		720
Processing and communications		534		507
Furniture and equipment		362		384
Professional services		190		202
Loan collection costs		180		224
OREO expenses		124		222
Deposit insurance		171		319
Advertising		146		118
Other expenses		461		405
Total noninterest expense	$	5,959	$	6,158

Changes in noninterest expense for the three months ended March 31, 2012 versus the three months ended March 31, 2011 reflect:

·	Compensation and benefits expense, the largest component of noninterest expense, increased $125 thousand, due to higher payroll expenses, mortgage origination commissions and equity compensation related costs.
·	Occupancy expense decreased $111 thousand, as the mild winter resulted in lower snow removal costs and prior year branch closures resulted in lower rental and leasehold depreciation expenses.
·	Processing and communications expenses increased $27 thousand. The increase was primarily due to increased ATM charges for card ordering.
·	Furniture and equipment expense decreased $22 thousand. This decrease was primarily due to lower depreciation expenses as a result of lower capital expenditures, partially offset by losses on the disposal of furniture and equipment.
·	Professional service fees decreased $12 thousand. This decrease was primarily due to lower expenses accrued for supervisory exams and legal fees.
·	Loan collection costs decreased $44 thousand, due to lower loan legal, forced placed insurance and other collection related expenses.
·	OREO expenses decreased $98 thousand, due to lower maintenance, utility and legal related expenses, partially offset by losses on the sale of OREO properties.
·	Deposit insurance expense decreased $148 thousand. Effective April 1, 2011, the FDIC modified its assessment calculation method from a deposits-based method to an assets-based method. This resulted in a significantly lower assessment for the Company.
·	Advertising expense increased $28 thousand. This increase is primarily due to heightened promotions related to the Company's opening of the new Washington branch and other increased marketing efforts.
·	Other expenses increased $56 thousand, primarily due to an increased reserve for outstanding loan commitments, and higher NJ sales tax and insurance premiums.

Income Tax Expense

Page 33 of 48

Financial Condition at March 31, 2012

Total assets decreased $648 thousand or 0.1 percent, to $810.2 million at March 31, 2012, compared to $810.8 million at December 31, 2011. This decrease was partially due to a decrease of $10.8 million in cash and cash equivalents, and a decrease of $9.8 million in total loans, partially offset by a $20.5 million increase in securities. Total deposits decreased $870 thousand and there were no changes to borrowed funds and subordinated debentures. Total shareholders’ equity increased $444 thousand over year-end 2011. These fluctuations are discussed in further detail in the paragraphs that follow.

Investment Securities Portfolio

The Company’s securities portfolio consists of available for sale (“AFS”) and held to maturity (“HTM”) investments. Management determines the appropriate security classification of available for sale or held to maturity at the time of purchase. The investment securities portfolio is maintained for asset-liability management purposes, as well as for liquidity and earnings purposes.

AFS securities are investments carried at fair value that may be sold in response to changing market and interest rate conditions or for other business purposes. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk, to take advantage of market conditions that create economically attractive returns and as an additional source of earnings. AFS securities consist primarily of obligations of U.S. Government sponsored entities, obligations of state and political subdivisions, mortgage-backed securities, trust preferred securities, corporate securities, asset-backed securities and equity securities.

HTM securities, which are carried at amortized cost, are investments for which there is the positive intent and ability to hold to maturity. The portfolio is comprised of obligations of state and political subdivisions and mortgage-backed securities.

AFS securities totaled $110.2 million at March 31, 2012, an increase of $21.4 million or 24.1 percent, compared to $88.8 million at December 31, 2011. This net increase was the result of the following:

·	$32.1 million in purchases of mortgage-backed securities, collateralized mortgage obligations ("CMOs") and asset-backed securities,

·	$7.4 million in principal payments, maturities and called bonds,

·	$2.6 million in sales net of realized gains, which consisted primarily of municipal securities,

·	$181 thousand in net amortization of premiums, and

$548 thousand of depreciation in the market value of the portfolio. At March 31, 2012, the portfolio had a net unrealized gain of $1.4 million compared to a net unrealized gain of $1.9 million at December 31, 2011. These net unrealized gains are reflected net of tax in shareholders’ equity as accumulated other comprehensive income.

The average balance of AFS securities amounted to $102.1 million for the three months ended March 31, 2012, compared to $105.0 million for the same period in 2011. The average yield earned on the AFS portfolio decreased 41 basis points, to 3.06 percent for the three months ended March 31, 2012, from 3.47 percent for the same period in the prior year. The weighted average repricing of AFS securities, adjusted for prepayments, amounted to 2.9 years at March 31, 2012 and 2.4 years at December 31, 2011.

HTM securities were $17.9 million at March 31, 2012, a decrease of $891 thousand or 4.7 percent, from year-end 2011. This net decrease was the result of:

·	$855 thousand in principal payments, maturities and called bonds

·	$36 thousand in net accretion of discounts.

As of March 31, 2012 and December 31, 2011, the fair value of HTM securities was $18.9 million and $19.9 million, respectively. The average balance of HTM securities amounted to $18.4 million for the three months ended March 31, 2012, compared to $19.5 million for the same period in 2011. The average yield earned on HTM securities decreased 206 basis points, to 3.92 percent for the three months ended March 31, 2012, from 5.98 percent for the same period in 2011. The weighted average repricing of HTM securities, adjusted for prepayments, amounted to 4.98 years and 5.24 years at March 31, 2012 and December 31, 2011, respectively.

Approximately 85 percent of the total investment portfolio had a fixed rate of interest at March 31, 2012.

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Loan Portfolio

The loan portfolio, which represents the Company’s largest asset group, is a significant source of both interest and fee income. The portfolio consists of SBA, SBA 504, commercial, residential mortgage and consumer loans. Different segments of the loan portfolio are subject to differing levels of credit and interest rate risk.

Total loans decreased $9.8 million or 1.7 percent to $582.8 million at March 31, 2012, compared to $592.6 million at year-end 2011. The decline occurred in all loan types except commercial loans as a direct result of the economic downturn, low consumer and business confidence levels, and reduced loan demand. Creditworthy borrowers are cutting back on capital expenditures or postponing their purchases in hopes that the economy will improve. In general, banks are lending less because consumers and businesses are demanding less credit.

The following table sets forth the classification of loans by major category, including unearned fees, deferred costs and excluding the allowance for loan losses as of March 31, 2012 and December 31, 2011:

	March 31, 2012					December 31, 2011
(In thousands)	Amount		% of Total			Amount		% of Total
SBA held for sale	$	8,015		1.4	%	$	7,668		1.3	%
SBA held to maturity		62,251		10.7			64,175		10.8
SBA 504		47,651		8.2			55,108		9.3
Commercial		284,861		48.8			283,104		47.8
Residential mortgage		132,192		22.7			134,090		22.6
Consumer		47,782		8.2			48,447		8.2
Total loans	$	582,752		100.0	%	$	592,592		100.0	%

Average loans decreased $27.9 million or 4.5 percent from $616.1 million for the three months ended March 31, 2011, to $588.1 million for the same period in 2012. The decrease in average loans was due to declines in all portfolio types except commercial and residential mortgage loans. The yield on the overall loan portfolio fell 39 basis points to 5.52 percent for the three months ended March 31, 2012, compared to 5.91 percent for the same period in the prior year. This decrease was the result of new loan volume at lower rates and existing variable rate loan products repricing lower as rates remain low.

SBA 7(a) loans, on which the SBA historically has provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. These loans are made for the purposes of providing working capital, financing the purchase of equipment, inventory or commercial real estate, and may be made inside or outside the Company's market place. Generally, an SBA 7(a) loan has a deficiency in its credit profile that would not allow the borrower to qualify for a traditional commercial loan, which is why the government provides the guarantee. The deficiency may be a higher loan to value (“LTV’) ratio, lower debt service coverage (“DSC”) ratio or weak personal financial guarantees. In addition, many SBA 7(a) loans are for start up businesses where there is no history of financial information. Finally, many SBA borrowers do not have an ongoing and continuous banking relationship with the Bank, but merely work with the Bank on a single transaction. The Company’s SBA loans are generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment.

SBA 7(a) loans held for sale, carried at the lower of cost or market, amounted to $8.0 million at March 31, 2012, an increase of $347 thousand from $7.7 million at December 31, 2011. SBA 7(a) loans held to maturity amounted to $62.3 million at March 31, 2012, a decrease of $1.9 million from $64.2 million at December 31, 2011. The yield on SBA loans, which are generally floating and adjust quarterly to the Prime rate, was 5.15 percent for the three months ended March 31, 2012, compared to 5.76 percent for the same period in the prior year.

The guarantee rates on SBA 7(a) loans range from 50 percent to 90 percent, with the majority of the portfolio having a guarantee rate of 75 percent. The guarantee percentage is determined by the SBA and can vary from year to year depending on government funding and the goals of the SBA program. The table below details the loan balances and their respective guarantee percentages as of March 31, 2012 and December 31, 2011. The balances represent the Company's portion of SBA loans originated, reduced by the amount sold into the secondary market. The Company serviced $124.6 million and $128.7 million in SBA loans at March 31, 2012 and December 31, 2011, respectively, which have been sold in the secondary market and are not included in the balances in the following table.

	March 31, 2012						December 31, 2011
(In thousands)	SBA held for sale		SBA held to maturity		Total		SBA held for sale		SBA held to maturity		Total
< 75% Guarantee	$	100	$	6,007	$	6,107	$	100	$	6,373	$	6,473
75% Guarantee		6,606		52,730		59,336		6,074		54,150		60,224
> 75% Guarantee		1,309		3,514		4,823		1,494		3,652		5,146
Total	$	8,015	$	62,251	$	70,266	$	7,668	$	64,175	$	71,843

There is no relationship or correlation between the guarantee percentages and the level of charge-offs and recoveries. Charge-offs taken on SBA 7(a) loans represent the unguaranteed portion of the loan. SBA loans are underwritten to the same credit standards irrespective of the guarantee percentage.

At March 31, 2012, SBA 504 loans totaled $47.7 million, a decrease of $7.5 million from $55.1 million at December 31, 2011. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Generally, the Company has a 50 percent LTV ratio on SBA 504 program loans at origination. The yield on SBA 504 loans fell 35 basis points to 5.90 percent for the three months ended March 31, 2012 from 6.25 percent for the three months ended March 31, 2011, due primarily to paydowns on higher yielding SBA 504 loans.

Commercial loans are generally made in the Company’s marketplace for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. These loans amounted to $284.9 million at March 31, 2012, an increase of $1.8 million from year-end 2011. The yield on commercial loans was 5.92 percent for the three months ended March 31, 2012, compared to 6.18 percent for the three months ended March 31, 2011 due to the low rate environment.

Residential mortgage loans consist of loans secured by 1 to 4 family residential properties. These loans amounted to $132.2 million at March 31, 2012, a decrease of $1.9 million from year-end 2011. New loan volume during the three months ended March 31, 2012 was offset by the sale of mortgage loans totaling $21.2 million. The yield on residential mortgages was 4.98 percent for the three months ended March 31, 2012, compared to 5.60 percent for the same period in 2011.

Consumer loans consist of home equity loans and loans for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being purchased. These loans amounted to $47.8 million at March 31, 2012, a decrease of $665 thousand from December 31, 2011. The yield on consumer loans was 4.73 percent for the three months ended March 31, 2012, compared to 5.07 percent for the same period in 2011.

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There are no concentrations of loans to any borrowers or group of borrowers exceeding 10 percent of the total loan portfolio. There are no foreign loans in the portfolio. As a preferred SBA lender, a portion of the SBA portfolio is to borrowers outside the Company’s lending area. However, during late 2008, the Company withdrew from SBA lending outside of its primary trade area, but continues to offer SBA loan products as an additional credit product within its primary trade area.

In the normal course of business, the Company may originate loan products whose terms could give rise to additional credit risk. Interest-only loans, loans with high LTV ratios, construction loans with payments made from interest reserves and multiple loans supported by the same collateral (e.g. home equity loans) are examples of such products. However, these products are not material to the Company’s financial position and are closely managed via credit controls that mitigate their additional inherent risk. Management does not believe that these products create a concentration of credit risk in the Company’s loan portfolio. The Company does not have any option adjustable rate mortgage loans.

The majority of the Company’s loans are secured by real estate. The declines in the market values of real estate in the Company’s trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. Specifically, as of March 31, 2012, 88 percent of SBA 7(a) loans are secured by commercial or residential real estate and 12 percent by other non-real estate collateral. Commercial real estate secures all SBA 504 loans. Approximately 96 percent of consumer loans are secured by owner-occupied residential real estate, with the other 4 percent secured by automobiles or other. The detailed allocation of the Company’s commercial loan portfolio collateral as of March 31, 2012 is shown in the table below:

	March 31, 2012					December 31, 2011
(In thousands)	Amount		% of Total			Amount		% of Total
Commercial real estate – owner occupied	$	149,851		52.7	%	$	137,963		48.7	%
Commercial real estate – investment property		106,323		37.3			117,454		41.5
Undeveloped land		15,793		5.5			15,513		5.5
Other non-real estate collateral		12,894		4.5			12,174		4.3
Total commercial loans	$	284,861		100.0	%	$	283,104		100.0	%

Troubled Debt Restructurings

Troubled debt restructurings (“TDRs”) occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, as well as for loans modified as TDRs that subsequently default on their modified terms.

At March 31, 2012, there were twenty-eight loans totaling $23.3 million that were classified as TDRs by the Company and are deemed impaired, compared to twenty-four such loans totaling $21.1 million at December 31, 2011 and eighteen such loans totaling $20.1 million at March 31, 2011. Nonperforming loans included $2.3 million of TDRs as of March 31, 2012, compared to $3.6 million and $2.9 million at December 31, 2011 and March 31, 2011, respectively. Restructured loans that are placed in nonaccrual status may be removed after 6 months of contractual payments and the business showing the ability to service the debt going forward. The remaining TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans. The following table presents a breakdown of performing and nonperforming TDRs by class as of March 31, 2012:

	March 31, 2012						December 31, 2011
(In thousands)	Performing TDRs		Nonperforming TDRs		Total TDRs		Performing TDRs		Nonperforming TDRs		Total TDRs
Troubled Debt Restructurings:
SBA	$	1,340	$	76	$	1,416	$	1,398	$	80	$	1,478
SBA 504		4,358		927		5,285		4,371		1,754		6,125
Commercial other		3,225		-		3,225		985		-		985
Commercial real estate		12,062		1,284		13,346		10,682		1,811		12,493
Total TDRs	$	20,985	$	2,287	$	23,272	$	17,436	$	3,645	$	21,081

Through March 31, 2012, our TDRs consisted of interest rate reductions, interest only periods and maturity extensions. There has been no principal forgiveness. The following table shows the types of modifications done to date by class through March 31, 2012:

(In thousands)	SBA			SBA 504	Commercial other		Commercial real estate		Total
Type of Modification:
Interest only	$	446	$	-	$	2,240	$	2,522	$	5,208
Principal only		25		-		-		-		25
Reduced interest rate		52		-		-		1,284		1,336
Interest only with reduced interest rate		-		927		985		5,512		7,424
Interest only with nominal principal		418		3,038		-		1,138		4,594
Extended maturity with reduced interest rate		-		-		-		2,890		2,890
Previously modified back to original terms		475		1,320		-		-		1,795
Total TDRs		1,416		5,285		3,225		13,346		23,272

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Asset Quality

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to strict credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding 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 then subject to on-going internal reviews for credit quality, as well as independent credit reviews by an outside firm.

Nonperforming assets consist of nonperforming loans and other real estate owned ("OREO"). Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest previously recognized as income is reversed and charged against current period income. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal, until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans. Loans past due 90 days or more and still accruing generally represent loans that are well collateralized and in a continuing process that are expected to result in repayment or restoration to current status.

The following table sets forth information concerning nonperforming loans and nonperforming assets at each of the periods presented:

(In thousands)	March 31, 2012			December 31, 2011			March 31, 2011
Nonperforming by category:
SBA (1)	$	4,132		$	5,859		$	9,057
SBA 504		2,715			2,086			4,300
Commercial		9,003			8,519			5,751
Residential mortgage		6,007			6,037			4,409
Consumer		349			268			406
Total nonperforming loans (2)	$	22,206		$	22,769		$	23,923
OREO		1,625			3,032			2,602
Total nonperforming assets	$	23,831		$	25,801		$	26,525
Past due 90 days or more and still accruing interest:
SBA	$	355		$	246		$	299
SBA 504		-			-			1,339
Commercial		926			1,141			1,124
Residential mortgage		1,884			36			1,486
Consumer		-			988			-
Total past due 90 days or more and still accruing interest	$	3,165		$	2,411		$	4,248
Nonperforming loans to total loans		3.81	%		3.84	%		3.89	%
Nonperforming loans and TDRs to total loans (3)		7.41			6.78			6.69
Nonperforming assets to total loans and OREO		4.08			4.33			4.30
Nonperforming assets to total assets		2.94			3.18			3.23
(1) Guaranteed SBA loans included above	$	555		$	939		$	3,355
(2) Nonperforming TDRs included above		2,287			3,645			2,917
(3) Performing TDRs included above		20,985			17,436			17,169

The current state of the economy impacts the Company’s level of delinquent and nonperforming loans by putting a strain on the Company’s borrowers and their ability to pay their loan obligations. Unemployment rates continue to be at elevated levels and businesses are reluctant to hire. Consequently, the Company’s nonperforming loans remain at an elevated level.

Nonperforming loans were $22.2 million at March 31, 2012, a $563 thousand decrease from $22.8 million at year-end 2011 and a $1.7 million decrease from $23.9 million at March 31, 2011. Since year-end 2011, nonperforming loans in the SBA and residential mortgage segments decreased, partially offset by an increase in the SBA 504, commercial and consumer segments. Included in nonperforming loans at March 31, 2012 are approximately $555 thousand of loans guaranteed by the SBA, compared to $939 thousand at December 31, 2011 and $3.4 million at March 31, 2011. In addition, there were $3.2 million, $2.4 million, and $4.2 million in loans past due 90 days or more and still accruing interest at March 31, 2012, December 31, 2011, and March 31, 2011, respectively.

Other real estate owned (“OREO”) properties totaled $1.6 million at March 31, 2012, a decrease of $1.4 million from $3.0 million at year-end 2011 and a $977 thousand decrease from $2.6 million at March 31, 2011. During the three months ended March 31, 2012, the Company took title to three properties totaling $350 thousand and recorded valuation adjustments of $40 thousand on two OREO properties. The Company sold four OREO properties, resulting in a net loss of $117 thousand on the sales.

The Company also monitors potential problem loans. Potential problem loans are those loans where information about possible credit problems of borrowers causes management to have doubts as to the ability of such borrowers to comply with loan repayment terms. These loans are not included in nonperforming loans as they continue to perform. Potential problem loans totaled $6.3 million at March 31, 2012, an increase of $643 thousand from $5.7 million at December 31, 2011. The increase is due to the addition of five loans totaling $3.1 million during the quarter, partially offset by the removal of five loans totaling $2.5 million.

See Note 8 to the accompanying Consolidated Financial Statements for more information regarding Asset Quality.

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Allowance for Loan Losses and Unfunded Loan Commitments

Management reviews the level of the allowance for loan losses on a quarterly basis. The standardized methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. Specific reserves are made to individual impaired loans, which have been defined to include all nonperforming loans and troubled debt restructurings. The general reserve is set based upon a representative average historical net charge-off rate adjusted for certain environmental factors such as: delinquency and impairment trends, charge-off and recovery trends, volume and loan term trends, risk and underwriting policy trends, staffing and experience changes, national and local economic trends, industry conditions and credit concentration changes.

Beginning in the third quarter of 2009, when calculating the five-year historical net charge-off rate, the Company weights the past three years more heavily due to the higher amount of charge-offs experienced during those years. All of the environmental factors are ranked and assigned a basis points value based on the following scale: low, low moderate, moderate, high moderate, and high risk. The factors are evaluated separately for each type of loan. For example, commercial loans are broken down further into commercial and industrial loans, commercial mortgages, construction loans, etc. Each type of loan is risk weighted for each environmental factor based on its individual characteristics.

According to the Company’s policy, a loss (“charge-off”) is to be recognized and charged to the allowance for loan losses as soon as a loan is recognized as uncollectable. All credits which are 90 days past due must be analyzed for the Company's ability to collect on the credit. Once a loss is known to exist, the charge-off approval process is immediately expedited.

Beginning in 2011, the Company significantly increased its loan loss provision in response to the inherent credit risk within its loan portfolio and changes to some of the environmental factors noted above. The inherent credit risk was evidenced by the increase in delinquent and nonperforming loans in recent quarters, as the downturn in the economy impacted borrowers’ ability to pay and factors, such as a weakened housing market, eroded the value of underlying collateral. In addition, net charge-offs are higher than normal, as the Company is proactively addressing these issues.

The allowance for loan losses totaled $16.3 million, $16.3 million, and $15.3 million at March 31, 2012, December 31, 2011, and March 31, 2011, respectively, with resulting allowance to total loan ratios of 2.80 percent, 2.76 percent, and 2.49 percent, respectively. Net charge-offs amounted to $1.2 million for the three months ended March 31, 2012, compared to $1.6 million for the same period in 2011. Net charge-offs to average loan ratios are shown in the table below for each major loan category.

	For the three months ended March 31,
(In thousands)		2012			2011
Balance, beginning of period	$	16,348		$	14,364
Provision charged to expense		1,200			2,500
Charge-offs:
SBA		615			711
SBA 504		227			300
Commercial		346			548
Residential mortgage		113			142
Consumer		-			-
Total charge-offs		1,301			1,701
Recoveries:
SBA		53			8
SBA 504		28			-
Commercial		11			98
Residential mortgage		-			4
Consumer		-			2
Total recoveries		92			112
Total net charge-offs	$	1,209		$	1,589
Balance, end of period	$	16,339		$	15,275
Selected loan quality ratios:
Net charge-offs to average loans:
SBA		3.15	%		3.32	%
SBA 504		1.55			1.96
Commercial		0.47			0.65
Residential mortgage		0.34			0.43
Consumer		-			(0.01	)
Total loans		0.83			1.05
Allowance to total loans		2.80			2.49
Allowance to nonperforming loans		73.58			63.85

See Note 9 to the accompanying Consolidated Financial Statements for more information regarding the Allowance for Loan Losses.

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Deposits

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with primary focus on building and expanding relationships. The Company continues to focus on establishing a comprehensive relationship with business borrowers, seeking deposits as well as lending relationships.

Total deposits decreased $870 thousand to $643.1 million at March 31, 2012, from $644.0 million at December 31, 2011. This decrease in deposits was due to decreases of $9.5 million and $1.7 million in time deposits and interest-bearing demand deposits, respectively, partially offset by increases of $7.4 million and $2.9 million in noninterest-bearing demand deposits and savings deposits, respectively. The decline in time deposits was due to the planned run off of a maturing high rate promotion done at the end of 2008 to bolster liquidity. The increase in noninterest-bearing and savings deposits was a result of new sales initiatives and efforts by branch personnel to bring in deposit relationships.

The mix of deposits at March 31, 2012 remained relatively unchanged when compared to December 31, 2011.

Borrowed Funds and Subordinated Debentures

Borrowed funds consist primarily of fixed rate advances from the Federal Home Loan Bank (“FHLB”) of New York and repurchase agreements. These borrowings are used as a source of liquidity or to fund asset growth not supported by deposit generation. Residential mortgages and investment securities collateralize the borrowings from the FHLB, while investment securities are pledged against the repurchase agreements.

Borrowed funds and subordinated debentures totaled $90.5 million at both March 31, 2012 and December 31, 2011 and are broken down in the following table:

(In thousands)	March 31, 2012		December 31, 2011
FHLB borrowings:
Fixed rate advances	$	30,000	$	30,000
Repurchase agreements		30,000		30,000
Other repurchase agreements		15,000		15,000
Subordinated debentures		15,465		15,465

At March 31, 2012, the Company had $57.7 million of additional credit available at the FHLB. Pledging additional collateral in the form of 1 to 4 family residential mortgages or investment securities can increase the line with the FHLB.

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 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 re-pricing 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 at March 31, 2012, is a decline of 0.93 percent in a rising-rate environment and a decline of 0.91 percent in a falling-rate environment. The variances in the EVPE at March 31, 2012 are within the Board-approved guidelines of +/- 3.00 percent. At December 31, 2011, the economic value of equity as a percentage of assets with rate shocks of 200 basis points was a decline of 0.40 percent in a rising-rate environment and a decline of 1.38 percent in a falling-rate environment.

Page 39 of 48

Operating, Investing and Financing

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities. At March 31, 2012, the balance of cash and cash equivalents was $71.8 million, a decrease of $10.8 million from December 31, 2011.

Net cash provided by operating activities totaled $2.4 million and $3.3 million for the three months ended March 31, 2012 and 2011, respectively. The primary sources of funds were net income from operations and adjustments to net income, such as the provision for loan losses, depreciation and amortization, proceeds from the sale of mortgage and SBA loans held for sale, partially offset by originations of SBA and mortgage loans held for sale.

Net cash used by investing activities amounted to $12.1 million for the three months ended March 31, 2012, compared to net cash provided by investing activities amounting to $6.4 million for the three months ended March 31, 2011. The cash used by investing activities was primarily a result of the purchase of securities and equipment, partially offset by maturities and paydowns on securities, a net decrease in loans and proceeds from the sale of securities and OREO.

Net cash used by financing activities amounted to $1.1 million for the three months ended March 31, 2012, compared to net cash provided by financing activity amounting to $1.7 million for the three months ended March 31, 2011. The cash used by financing activities was primarily due to dividends paid on preferred stock and a decrease in the Company’s deposit base, partially offset by proceeds from the exercise of stock options.

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.

Parent Company

Generally, the Parent Company’s cash is used for the payment of operating expenses and cash dividends on the preferred stock issued to the U.S. Treasury. The principal sources of funds for the Parent Company are dividends paid by the Bank. The Parent Company only pays expenses that are specifically for the benefit of the Parent Company. Other than its investment in the Bank, Unity Statutory Trust II and Unity Statutory Trust III, the Parent Company does not actively engage in other transactions or business. The majority of expenses paid by the Parent Company are related to Unity Statutory Trust II and Unity Statutory Trust III.

At March 31, 2012, the Parent Company had $3.3 million in cash and $95 thousand in marketable securities valued at fair market value compared to $3.5 million in cash and $88 thousand in marketable securities at December 31, 2011. The decrease in cash at the Parent Company was primarily due to the payment of dividends on preferred stock.

Consolidated Bank

The principal sources of funds at the Bank are deposits, scheduled amortization and prepayments of loan and investment principal, sales and maturities of investment securities and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

Total FHLB borrowings amounted to $60.0 million and third party repurchase agreements totaled $15.0 million as of both March 31, 2012 and December 31, 2011. At March 31, 2012, $57.7 million was available for additional borrowings from the FHLB. Pledging additional collateral in the form of 1 to 4 family residential mortgages or investment securities can increase the line with the FHLB. An additional source of liquidity is the securities available for sale portfolio and SBA loans held for sale portfolio, which amounted to $110.1 million and $8.0 million, respectively, at March 31, 2012.

As of March 31, 2012, deposits included $48.4 million of Government deposits, as compared to $54.6 million at year-end 2011. These deposits are generally short in duration and are very sensitive to price competition. The Company believes that the current level of these types of deposits is appropriate. Included in the portfolio were $44.9 million of deposits from seven municipalities. The withdrawal of these deposits, in whole or in part, would not create a liquidity shortfall for the Company.

The Company was committed to advance approximately $92.9 million to its borrowers as of March 31, 2012, compared to $79.4 million at December 31, 2011. At March 31, 2012, $45.7 million of these commitments expire within one year, compared to $37.4 million at December 31, 2011. At March 31, 2012, the Company had $1.3 million in standby letters of credit compared to $1.8 million at December 31, 2011, which are included in the commitments amount noted above. The estimated fair value of these guarantees is not significant. The Company believes it has the necessary liquidity to honor all commitments. Many of these commitments will expire and never be funded.

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Regulatory Capital

A significant measure of the strength of a financial institution is its capital base. Federal regulators have classified and defined capital into the following components: (1) tier 1 capital, which includes tangible shareholders’ equity for common stock, qualifying preferred stock and certain qualifying hybrid instruments, and (2) tier 2 capital, which includes a portion of the allowance for loan losses, subject to limitations, certain qualifying long-term debt, preferred stock and hybrid instruments, which do not qualify for tier 1 capital. The parent company and its subsidiary bank are subject to various regulatory capital requirements administered by banking regulators. Quantitative measures of capital adequacy include the leverage ratio (tier 1 capital as a percentage of tangible assets), tier 1 risk-based capital ratio (tier 1 capital as a percent of risk-weighted assets) and total risk-based capital ratio (total risk-based capital as a percent of total risk-weighted assets).

Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Company and the Bank to maintain certain capital as a percentage of assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk-weighted assets). Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines. However, prompt corrective action provisions are not applicable to bank holding companies. At a minimum, tier 1 capital as a percentage of risk-weighted assets of 4 percent and combined tier 1 and tier 2 capital as a percentage of risk-weighted assets of 8 percent must be maintained.

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 of 3 percent. For those banks with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be proportionately increased. Minimum leverage ratios for each institution are evaluated through the ongoing regulatory examination process.

The Company’s capital amounts and ratios are presented in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
(In thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2012
Leverage ratio	$	86,833		10.67	%	≥ $ 32,538			4.00	%	N/A			N/A
Tier I risk-based capital ratio		86,833		14.44			24,045		4.00			N/A		N/A
Total risk-based capital ratio		94,457		15.71			48,091		8.00			N/A		N/A
As of December 31, 2011
Leverage ratio	$	86,077		10.44	%	≥ $ 32,979			4.00	%	N/A			N/A
Tier I risk-based capital ratio		86,077		14.33			24,027		4.00			N/A		N/A
Total risk-based capital ratio		93,696		15.60			48,055		8.00			N/A		N/A

The Bank’s capital amounts and ratios are presented in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
(In thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2012
Leverage ratio	$	75,140		9.24	%	≥ $ 32,513			4.00	%	≥ $ 40,641			5.00	%
Tier I risk-based capital ratio		75,140		12.51			24,022		4.00			36,033		6.00
Total risk-based capital ratio		91,257		15.20			48,043		8.00			60,054		10.00
As of December 31, 2011
Leverage ratio	$	74,191		9.01	%	≥ $ 32,953			4.00	%	≥ $ 41,192			5.00	%
Tier I risk-based capital ratio		74,191		12.36			24,003		4.00			36,004		6.00
Total risk-based capital ratio		90,302		15.05			48,006		8.00			60,007		10.00

Shareholders’ Equity

Shareholders’ equity increased $444 thousand to $74.0 million at March 31, 2012 compared to $73.6 million at December 31, 2011, due to net income of $905 thousand and $100 thousand from the issuance of common stock under employee benefit plans, partially offset by $303 thousand depreciation in the net unrealized gains on available for sale securities and cash flow hedge derivatives and $258 thousand in dividends accrued on preferred stock. The issuance of common stock under employee benefit plans includes nonqualified stock options and restricted stock expense related entries, employee option exercises and the tax benefit of options exercised.

On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (“EESA”), which provided the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets. One of the programs resulting from the EESA was the Treasury’s Capital Purchase Program (“CPP”) which provided direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. This program was voluntary and requires an institution to comply with several restrictions and provisions, including limits on executive compensation, stock redemptions, and declaration of dividends. The perpetual preferred stock has a dividend rate of 5 percent per year until the fifth anniversary of the Treasury investment and a dividend of 9 percent thereafter. The Company received an investment in perpetual preferred stock of $20.6 million on December 5, 2008.

As part of the CPP, the Company’s future ability to pay cash dividends is limited for so long as the Treasury holds the preferred stock. As so limited the Company may not increase its quarterly cash dividend above $0.05 per share, the quarterly rate in effect at the time the CPP program was announced, without the prior approval of the Treasury. The Company did not declare or pay any dividends during the three months ended March 31, 2012 or 2011. The Company is currently preserving capital and may resume paying dividends when earnings and credit quality improve.

The Company has suspended its share repurchase program, as required by the CPP. On October 21, 2002, the Company authorized the repurchase of up to 10% of its outstanding common stock. The amount and timing of purchases would be dependent upon a number of factors, including the price and availability of the Company’s shares, general market conditions and competing alternate uses of funds. As of March 31, 2012, the Company had repurchased a total of 556 thousand shares, of which 131 thousand shares have been retired, leaving 153 thousand shares remaining to be repurchased under the plan when and if it is reinstated. There were no shares repurchased during the three month periods ended March 31, 2012 or 2011.

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Derivative Financial Instruments

The Company may use stand alone derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Such difference, which represents the fair value of the derivative instruments, is reflected on the Company’s balance sheet as other assets or other liabilities.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations. The Company deals only with primary dealers.

Derivative instruments are generally either negotiated over the counter (“OTC”) contracts or standardized contracts executed on a recognized exchange. Negotiated OTC derivative contracts are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise prices and maturity.

Risk Management Policies – Hedging Instruments

The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s net portfolio value and net income under varying interest rate scenarios to take steps to control its risks. On a quarterly basis, the Company evaluates the effectiveness of entering into any derivative agreement by measuring the cost of such an agreement in relation to the reduction in net portfolio value and net income volatility within an assumed range of interest rates.

Interest Rate Risk Management – Cash Flow Hedging Instruments

The Company has long-term variable rate debt as a source of funds for use in the Company’s lending and investment activities and for other general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, may hedge a portion of its variable-rate interest payments. To meet this objective, management has historically entered into interest rate swap agreements whereby the Company received variable interest rate payments and made fixed interest rate payments during the contract period.

The Company was not a party to any interest rate swap agreements as of March 31, 2012, as the remaining interest rate swap agreement with a notional amount of $5.0 million expired during the first quarter of 2012. At December 31, 2011, the information pertaining to outstanding interest rate swap agreements used to hedge variable rate debt was as follows:

(In thousands, except percentages and years)	December 31, 2011
Notional amount	$	5,000
Weighted average pay rate		3.94	%
Weighted average receive rate (three-month LIBOR)		0.32	%
Weighted average maturity in years		0.25
Unrealized loss relating to interest rate swaps	$	(43	)

The previous agreements provided for the Company to receive payments at a variable rate determined by a specific index (three-month LIBOR) in exchange for making payments at a fixed rate.

At December 31, 2011, the net unrealized loss relating to interest rate swaps was recorded as a derivative liability. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with long-term debt are reported in other comprehensive income. The net spread between the fixed rate of interest which is paid and the variable interest received is classified in interest expense as a yield adjustment in the same period in which the related interest on the long-term debt affects earnings.

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 Company’s 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.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

During 2012, there have been no significant changes in the Company's assessment of market risk as reported in Item 6 of the Company's Annual Report on Form 10-K for the year ended December 31, 2011. (See Interest Rate Sensitivity in Management's Discussion and Analysis Herein.)

ITEM 4. Controls and Procedures

(a)

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2012. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms.

(b)

Changes in internal controls over financial reporting – No significant change in the Company’s internal control over financial reporting has occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

Information regarding this item as of March 31, 2012 appears under the heading, “Risk Factors” within the Company’s Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - None

Item 3. Defaults Upon Senior Securities - None

Item 4. Mine Safety Disclosures - N/A

Item 5. Other Information - None

Item 6. Exhibits

(a)	Exhibits	Description
	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

	UNITY BANCORP, INC.

Dated: May 11, 2012	/s/ Alan J. Bedner, Jr.
	ALAN J. BEDNER, JR.
	Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

QUARTERLY REPORT ON FORM 10-Q

EXHIBIT NO.	DESCRIPTION
31.1	Exhibit 31.1-Certification of James A. Hughes. Required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002
31.2	Exhibit 31.2-Certification of Alan J. Bedner, Jr. Required by Rule 13a-14(a) or Rule 15d-14(a) and section 302 of the Sarbanes-Oxley Act of 2002
32.1	Exhibit 32.1-Certification of James A. Hughes and Alan J. Bedner. Required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document

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