MANAGEMENT STRATEGY
The Company's goal is to serve as community-oriented financial institution serving the northwestern New Jersey, northeastern Pennsylvania and Orange County, New York marketplace. While offering traditional community bank loan and deposit products and services, the Company obtains non-interest income through its Tri-State Insurance Agency, Inc. ("Tri-State") insurance brokerage operations and the sale of non-deposit products. We report the operations of Tri-State as a separate segment from our commercial banking operations.

Our results of operations continue to be impacted by the continuing economic downturn, which has affected our level of nonperforming assets. This in turn has increased our provision for loan losses and our expenses related to foreclosed real estate. We continue to work out our non-performing assets, but our ability to return to historic levels of profitability will depend, in part, upon a strengthening of the real estate market in our trade area. The Company is closely monitoring rates offered on deposit products and is seeking to enhance its yield on earning assets. Management believes this will benefit the Company's net interest margin and profitability.

FORWARD LOOKING STATEMENTS
When used in this discussion the words: "believes", "anticipates", "contemplates", "expects" or similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Those risks and uncertainties include those listed under Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 and changes to interest rates, the ability to control costs and expenses, general economic conditions, the success of the Company's efforts to diversify its revenue base by developing additional sources of non-interest income while continuing to manage its existing fee based business, risks associated with the quality of the Company's assets and the ability of its borrowers to comply with repayment terms, and the risks inherent in integrating acquisitions into the Company and commencing operations in new markets. The Company undertakes no obligation to publicly release the results of any revisions to those forward looking statements that may be made to reflect events or circumstances after this date or to reflect the occurrence of unanticipated events.

CRITICAL ACCOUNTING POLICIES
Our accounting policies are fundamental to understanding Management's Discussion and Analysis of Financial Condition and Results of Operations. Disclosure of the Company's significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Since future events and their effect cannot be determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management believes the critical accounting policies relating to the allowance for loan losses, stock-based compensation, income taxes, goodwill and other intangible assets, and investment securities impairment evaluation, encompass the most significant judgments and estimates used in preparation of our consolidated financial statements. These estimates, judgments and policies were unchanged from the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

COMPARISION OF OPERATING RESULTS FOR THREE MONTHS ENDED JUNE 30, 2009 AND 2008 Overview - The Company realized net income of $595 thousand for the second quarter of 2009, an increase of $236 thousand, or 32.7%, from the $359 thousand in net income reported for the same period in 2008. Basic and diluted earnings per share for the three months ended June 30, 2009 were $0.18 compared to $0.11 for the comparable period of 2008.

The increase in both net income and earnings per share reflects an increase in net interest income and non-interest income, partially offset by increases in the provision for loan losses and non-interest expenses. During the quarter, our net interest income increased compared to the prior year period, as our total interest income increased by $381 thousand while our interest expense declined by $400 thousand, reflecting changes in market rates offset by increases in average balances in earning assets and average liabilities.

Comparative Average Balances and Average Interest Rates

The following table presents, on a fully taxable equivalent basis, a summary of
the Company's interest-earning assets and their average yields, and
interest-bearing liabilities and their average costs for the three month period
ended June 30, 2009 and 2008.

                                                                                                2009                                                                               2008
                                                                  Average                                                   Average                  Average                                                   Average
(Dollars in thousands)                                            Balance                   Interest (1)                   Rate (2)                  Balance                   Interest (1)                   Rate (2)
Earning Assets:
Securities:
   Tax exempt (3)                                            $          30,456        $                     475                     6.25 %      $          21,931        $                     339                     6.22 %
   Taxable                                                              66,888                              754                     4.52 %                 42,289                              543                     5.16 %
Total securities                                                        97,344                            1,229                     5.06 %                 64,220                              882                     5.52 %
Total loans receivable (4)                                             325,164                            4,789                     5.91 %                306,361                            4,637                     6.09 %
Other interest-earning assets                                           26,371                               16                     0.24 %                 17,364                               88                     2.04 %
Total earning assets                                                   448,879        $                   6,034                     5.39 %                387,945        $                   5,607                     5.81 %

Non-interest earning assets                                             37,291                                                                             30,671
Allowance for loan losses                                               (6,576 )                                                                           (5,384 )
Total Assets                                                 $         479,594                                                                  $         413,232

Sources of Funds:
Interest bearing deposits:
   NOW                                                       $          57,542        $                     141                     0.98 %      $          57,617        $                     186                     1.30 %
   Money market                                                         14,906                               47                     1.26 %                 26,460                              138                     2.10 %
   Savings                                                             179,725                              716                     1.60 %                 69,485                              439                     2.54 %
   Time                                                                107,251                              829                     3.10 %                133,455                            1,305                     3.93 %
Total interest bearing deposits                                        359,424                            1,733                     1.93 %                287,017                            2,068                     2.90 %
   Borrowed funds                                                       33,123                              356                     4.25 %                 36,178                              373                     4.08 %
   Junior subordinated debentures                                       12,887                               83                     2.56 %                 12,887                              131                     4.02 %
Total interest bearing liabilities                                     405,434        $                   2,172                     2.15 %                336,082        $                   2,572                     3.08 %

Non-interest bearing liabilities:
   Demand deposits                                                      38,886                                                                             39,919
   Other liabilities                                                     2,476                                                                              2,293
Total non-interest bearing liabilities                                  41,362                                                                             42,212
Stockholders' equity                                                    32,798                                                                             34,938
Total Liabilities and Stockholders' Equity                   $         479,594                                                                  $         413,232

Net Interest Income and Margin (5)                                                    $                   3,862                     3.45 %                               $                   3,035                     3.15 %

(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Fully taxable equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets

Net Interest Income - Net interest income is the difference between interest and fees on loans and other interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities that support those assets, as well as changing interest rates when differences exist in repricing dates of assets and liabilities.

Net interest income, on a fully taxable equivalent basis (a 39% tax rate), increased $828 thousand, or 27.3%, to $3.9 million for the three months ended June 30, 2009 from $3.0 million for the second quarter of 2008. Total average interest earning assets increased by $60.9 million, or 15.7%, to $448.9 million for the three months ended June 30, 2009, while total interest bearing liabilities increased $69.4 million, or 20.6 %, to $405.4 million during the same three month period. The major increase in average earning assets was in total securities, while the largest increase in interest bearing liabilities was in savings deposits.

The net interest margin increased, on a fully taxable equivalent basis, by 30 basis points to 3.45% for the three months ended June 30, 2009 compared to 3.15% for the same period in 2008, as the yield on total earning assets decreased 42 basis points to 5.39% and the cost of total interest bearing liabilities decreased 93 basis points to 2.15% in the three month period ended June 30, 2009 from the same period a year earlier. The decrease in yield on earning assets reflects the decrease in market rates of interest and a 51.6% increase in lower yielding average security balances, as compared to a 6.1% increase in average loan balances, while the decrease in cost of interest bearing liabilities is related to a shift from higher costing time deposits to a lower costing savings account product between the two quarterly periods. During 2008, the Company began offering a higher yielding savings account product linked to a demand deposit account. The goal of the program is to reduce the Company's interest expense by increasing savings and demand deposit accounts, reducing reliance on time deposits, and increasing the Company's total deposits.

Interest Income - Total interest income, on a fully taxable equivalent basis, increased $427 thousand to $6.0 million for the three month period ended June 30, 2009 from $5.6 million in the same period a year earlier. The increase in total interest income primarily reflects a $347 thousand increase in interest earned on second quarter average securities balances.
Other interest-earning asset average balances increased $9.0 million to $26.4 million in the second quarter of 2009 from $17.4 million during the second quarter a year earlier. As the current market rates of interest on federal funds sold are at historical lows, the yield on these assets fell 180 basis points to 0.24% in the second quarter of 2009 from 2.04% during the same period a year earlier and the interest earned decreased $72 thousand to $16 thousand in the second quarter of 2009. The average balance increase in other interest-earning assets was largely due to the increase in federal funds sold, which increased as average deposit account balances grew faster than new loan demand.

Total interest income on securities, on a fully taxable equivalent basis, increased $347 thousand, to $1.2 million for the quarter ended June 30, 2009 from $882 thousand for the second quarter of 2008. As the average balance of total securities increased $33.1 million, or 51.6%, the yield on securities decreased 46 basis points, from 5.52% in the second quarter of 2008 to 5.06% for the second quarter of 2009. The increase in the average balance in the securities portfolio reflects a $24.6 million increase in taxable securities and an $8.5 million increase in tax-exempt securities, as excess liquidity in federal funds sold balances were used to purchase securities, as deposit balance growth outpaced loan demand in the second quarter of 2009.

The interest earned on total loans receivable increased $152 thousand to $4.8 million for the second quarter of 2009 from $4.6 million in the second quarter a year earlier, while the average balance in loans receivable increased $18.8 million, or 6.1%, to $325.2 million in the current three month period from $306.4 million in the same period of 2008. The average rate earned on loans decreased 18 basis points from 6.09% for the three months ended June 30, 2008 to 5.91% for the same period in 2009. The increase in our loan portfolio average balance reflects our continuing efforts to build market share, while the decrease in yield is the result of lower market rates of interest and an increase in non-accrual loan balances.

Interest Expense - The Company's interest expense for the three months ended June 30, 2009 decreased $400 thousand to $2.2 million from $2.6 million for the same period in 2008, as the balance in average interest-bearing liabilities increased $69.4 million, or 20.6%, to $405.4 million from $336.1 million in the year ago period. The average rate paid on total interest-bearing liabilities has decreased by 93 basis points from 3.08% for the three months ended June 30, 2008 to 2.15% for the same period in 2009. The decrease in rate reflects the Company's efforts to reprice higher costing time deposits into a savings account product, as well as quarterly repricing of the junior subordinated debentures in a declining interest rate environment.

The promotion of a high yielding savings account product, which began in the first quarter of 2008, has changed the Company's average balance breakdown between products. Time deposits represented the largest component of average interest-bearing deposits in the second quarter of 2008. However, in the second quarter of 2009, average savings deposits have surpassed time deposit average balances. Second quarter 2009 average savings balances increased by 158.7%, to $179.7 million, from $69.5 million for the same period in 2008, as the yield on savings accounts decreased 94 basis points to 1.60% from 2.54% between the three month periods ending June 30, 2009 and 2008, respectively. The result was an increase of $277 thousand in savings deposit interest expense to $716 thousand for the second quarter of 2009 from $439 thousand a year earlier.

The average balance in time deposits decreased $26.2 million, or 19.6%, to $107.3 million for the three month period ended June 30, 2009 compared to $133.5 million for the same period in 2008, while the related interest expense on time deposits decreased $477 thousand, or 36.6%, to $829 thousand from $1.3 million in the second quarter of 2008. The average rate paid on time deposits decreased 83 basis points from 3.93% for the three months ended June 30, 2008 to 3.10% for the same period in 2009 reflecting the current decrease in market interest rates.

As the popularity of the savings account product grew, customers trended towards reallocating funds from money market and NOW account balances. Money market average balances declined $11.6 million, or 43.7%, to $14.9 million for the three month period ended June 30, 2009 from $26.5 million one year earlier. The yield on money market accounts declined 84 basis points from 2.10% to 1.26% during the two periods as interest expense decreased $91 thousand, or 66.0%, from $138 thousand for the three months ended June 30, 2008 to $47 thousand during the same period in 2009. The decline in yield on our money market account reflects the decline in market rates between the two comparable three month periods. NOW account average balances saw the smallest decrease between this year's second quarter and the same period of 2008, as average balances decreased $75 thousand, to $57.5 million, and the yield fell 32 basis points to 0.98% from 1.30%.

For the quarter ended June 30, 2009, the Company's average borrowed funds decreased $3.1 million to $33.1 million compared to average borrowed funds of $36.2 million during the second quarter of 2008. The balance at June 30, 2009 consisted of six convertible notes totaling $30.0 million and one $3.1 million amortizing advance from the Federal Home Loan Bank of New York. The average rate paid on total borrowed funds increased 17 basis points, from 4.08% in the second quarter of 2008 to 4.25% in the same period in 2009, as a $2.0 million lower yielding repurchase agreement matured in December of 2008.

The Company had an average balance of $12.9 million in junior subordinated debentures outstanding during the second quarters of 2009 and 2008. The $12.9 million junior subordinated debentures, issued on June 28, 2007 bears a floating rate of interest tied to the three month LIBOR. The average rate paid on the debentures declined 154 basis points from 4.02% for the three months ended June 30, 2008 compared to 2.56% for the same period in 2009, as the LIBOR rate decreased between the two second quarter periods.

Provision for Loan Losses - The loan loss provision for the second quarter of 2009 increased $307 thousand to $424 thousand compared to a provision of $117 thousand in the second quarter of 2008. The higher provision during the second quarter of 2009 was related to a $3.4 million increase in non-performing loan balances during the quarter, compared to a $915 thousand decrease in the same period one year earlier. The current period provision reflects the deterioration of collateral in the portfolio between the two second quarter periods, as real estate values in our trade area have declined, and the general economic slow-down in our market area, which has affected borrowers' cash flows. The provision for loan losses reflects management's judgment concerning the risks inherent in the Company's existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods. Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary.

Non-Interest Income - The Company's non-interest income increased $225 thousand, or 18.3%, to $1.5 million for the three months ended June 30, 2009 as compared to non-interest income of $1.2 million for the same period in 2008.

The Company's non-interest income is primarily generated through insurance commissions earned through the operation of Tri-State and service fees on deposit accounts. Insurance commission income from Tri-State has decreased $58 thousand, or 8.9%, to $595 thousand in the second quarter of 2009 over the same period in 2008. For the three months ended June 30, 2009, we recognized net income before taxes of $34 thousand from Tri-State's operations, compared to a net loss before taxes of $11 thousand in the year ago period. The increase in Tri-State's income before taxes reflects a reduction in expenses between the two second quarter periods. Service fees on deposit accounts have decreased $3 thousand, to $348 thousand in the second quarter of 2009 from $351 thousand during the same period in 2008.

ATM and debit card fees increased $1 thousand to $121 thousand in the second quarter of 2009. Unrealized holding losses on trading securities decreased $180 thousand to an unrealized holding loss of $16 thousand, compared to an unrealized loss of $196 thousand in the second quarter of 2008. There was a $203 thousand gain on the sale of fixed assets during the second quarter of 2009 on the sale of a commercial strip mall in Montague, New Jersey. The Company continues to rent space in the mall which is the location of our Montague branch.

Other income decreased $16 thousand, or 8.7%, in the second quarter of 2009 to $168 thousand from $184 thousand during the same period a year earlier. The majority of the decrease in other income in the second quarter of 2009 was the result of a $27 thousand decrease in other loan fee income and a $22 thousand decrease in joint venture fee income received from SussexMortgage.com compared to second quarter 2008, offset by an increase in income on executive life insurance policies.

Non-Interest Expense - Non-interest expense increased $435 thousand to $4.0 million in the second quarter of 2009 compared to $3.6 million in the year ago period. The increases are partially related to increased FDIC insurance premiums, plus a special assessment of 5 basis points on assets less tier 1 capital imposed on all insured depository institutions as of June 30, 2009, and payable September 30, 2009. In addition, the Company recognized increases in expenses related to foreclosed real estate. Offsetting these increases were operational decreases in non-interest expenses as the Company continues to closely monitor these expenses.

Management's cost savings measures have had the biggest impact on salaries and employee benefits and advertising and promotion expenses. Salary and employee benefits decreased $205 thousand, or 10.4%, due to restricted pay increases and reductions to staff and certain benefits. Advertising and promotion expenses decreased $124 thousand, or 77.0%, in the second quarter of 2009 from the same period in 2008 as the Company eliminated most print advertising and severely reduced its marketing campaign for account promotions in the second quarter of 2009. Furniture, equipment and data processing expenses decreased $37 thousand to $337 thousand and other expenses decreased $66 thousand between the two periods.

Normal FDIC insurance premiums increased $60 thousand to $150 thousand for the second quarter of 2009 from $90 thousand in the same year ago period mostly due to higher assessment rate calculations from the Federal Deposit Insurance Reform Act of 2005. In addition, the FDIC was required to establish a plan to rebuild the Deposit Insurance Fund to preserve its minimum 1.15 percent reserve threshold and thereby established a special assessment determined as of June 30, 2009 and payable September 30, 2009. The Company's assessment is $215 thousand. Professional fees have increased $98 thousand, or 111.4%, to $186 thousand in the second quarter of 2009, largely due to legal expenses associated with non-performing loans. Expenses related to foreclosed real estate increased $58 thousand to $93 thousand for the second quarter of 2009 compared to $35 thousand for the same year ago period, and $456 thousand was expensed to write-down the value on one foreclosed property in the second quarter of 2009.

Income Taxes - The Company's income tax expense, which includes both federal and state taxes, was $135 thousand for the three months ended June 30, 2009 compared to an income tax expense of $107 thousand for the second three months of 2008. This $28 thousand increase in income taxes resulted from a $264 thousand increase in income before taxes and the tax benefit on tax exempt securities and life insurance policies on executives.

COMPARISION OF OPERATING RESULTS FOR SIX MONTHS ENDED JUNE 30, 2009 AND 2008 Overview - For the six months ended June 30, 2009, net income was $848 thousand, a decrease of $148 thousand, or 14.8%, from the $996 thousand reported for the same period in 2008. Basic and diluted earnings per share were $0.26 for the six month period ended June 30, 2009 and $0.30 for the six month period ended June 30, 2008. The decline in net income reflects a $773 thousand increase in the provision for loan losses and $510 thousand increase in non-interest expenses (substantially related to increased FDIC insurance assessments and expenses related to foreclosed real estate) partially offset by a $992 thousand increase in the Company's net interest income and $260 thousand decrease in the provision for income taxes.

Comparative Average Balances and Average Interest Rates

The following table presents, on a fully taxable equivalent basis, a summary of
the Company's interest-earning assets and their average yields, and
interest-bearing liabilities and their average costs for the six month period
ended June 30, 2009 and 2008.

                                                                                                                                      Six Months Ended June 30,
(Dollars in thousands)                                                                                 2009                                                                                2008
. . .