MANAGEMENT STRATEGY

We are a community-oriented financial institution serving northern New Jersey, northeastern Pennsylvania and Orange County, New York. While offering traditional community bank loan and deposit products and services, we obtain non-interest income through our insurance brokerage operations and the sale of non-deposit products.

We continue to focus on strengthening our core operating performance by improving our net interest income and margin by closely monitoring our yield on earning assets and adjusting the rates offered on deposit products. The economic downturn continues to impact our level of nonperforming assets and in turn has increased our provision for loan losses. We have beenfocused on building for the future and strengthening our core operating results within a risk management framework.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") and practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. For additional information on our critical accounting policies, please refer to the information contained in Note 1 of the accompanying unaudited consolidated financial statements and Note 1 of the consolidated financial statements included in our 2011 Annual Report on Form 10-K.

COMPARISION OF OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 2012 AND 2011

Overview - We reported a net loss of $195 thousand for the first quarter of 2012 as compared to net income of $694 thousand for the same period in 2011. Basic and diluted loss per share for the three months ended March 31, 2012 were $0.06 compared to the basic and diluted earnings per share of $0.21 for the comparable period of 2011. The net loss was largely attributed to write-downs of $615 thousand on foreclosed real estate properties recognized during the first quarter of 2012, which was a $470 thousand increase from the same period last year. First quarter results also reflected a decrease in net interest income due to a decline in the net interest margin and an increase in non-interest expenses attributed to higher salaries and employee benefits expenses, due in part to the expansion of our commercial lending group, severance costs for a former executive and increased medical benefit expenses. Management continues to focus on strengthening our core operations as well as resolving and mitigating our credit exposures.

Comparative Average Balances and Average Interest Rates

The following table presents, on a fully taxable equivalent basis, a summary of
our interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs for the three month periods ended March 31,
2012 and 2011.



                                                      Three Months Ended March 31,
(Dollars in
thousands)                                 2012                                           2011
                         Average                         Average        Average                         Average
                         Balance      Interest (1)       Rate (2)       Balance      Interest (1)       Rate (2)
Earning Assets:
Securities:
Tax exempt (3)          $  24,686     $         371           6.04 %   $  30,023     $         441           5.96 %
Taxable                    77,506               320           1.66 %      59,427               365           2.49 %
Total securities          102,192               691           2.72 %      89,450               806           3.66 %
Total loans
receivable (4)            335,558             4,450           5.33 %     341,682             4,784           5.68 %
Other
interest-earning
assets                     33,837                17           0.20 %      11,485                 4           0.15 %
Total earning assets      471,587     $       5,158           4.40 %     442,617     $       5,594           5.13 %

Non-interest earning
assets                     41,203                                         36,429
Allowance for loan
losses                     (7,543 )                                       (6,813 )
Total Assets            $ 505,247                                      $ 472,233

Sources of Funds:
Interest bearing
deposits:
NOW                     $  92,293     $          51           0.22 %   $  80,689     $         114           0.57 %
Money market               17,560                20           0.47 %      13,410                19           0.56 %
Savings                   163,130               206           0.51 %     170,601               297           0.71 %
Time                      109,950               442           1.61 %      90,024               339           1.53 %
Total interest
bearing deposits          382,933               719           0.75 %     354,724               769           0.88 %
Borrowed funds             26,000               265           4.03 %      28,604               265           3.70 %
Junior subordinated
debentures                 12,887                62           1.91 %      12,887                54           1.69 %
Total interest
bearing liabilities       421,820             1,046           1.00 %     396,215             1,088           1.11 %

Non-interest bearing
liabilities:
Demand deposits            41,314                                         36,810
Other liabilities           2,012                                          2,293
Total non-interest
bearing liabilities        43,326                                         39,103
Stockholders' equity       40,100                                         36,915
Total Liabilities and
Stockholders' Equity    $ 505,246                                      $ 472,233

Net Interest Income
and Margin (5)                                4,112           3.51 %                         4,506           4.13 %
Tax-equivalent basis
adjustment                                     (126 )                                         (149 )
Net Interest Income                   $       3,986                                  $       4,357

(1) Includes loan fee income

(2) Average rates on securities are calculated on amortized costs

(3) Full 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 tax equivalent basis, decreased $394 thousand, or 8.7%, to $4.1 million for the quarter ended March 31, 2012, as compared to the same period in 2011. The decrease in net interest income was largely due to a decline in the net interest margin of 62 basis points to 3.51% for the first quarter of 2012 as compared to the same period in 2011. The decline in the net interest margin was mostly due to lower yields on loans and securities and an increase in cash balances (other interest earning assets with average rate of 0.20%) resulting from deposit growth ($28.2 million on average) and a decline in the loan portfolio ($6.1 million on average) for the first quarter 2012 as compared to same period last year. Total average interest earning assets increased $29.0 million, or 6.5%, for the first quarter of 2012 as compared to the same period last year.

Interest Income - Total interest income, on a fully taxable equivalent basis, decreased $436 thousand for the quarter ended March 31, 2012 as compared to the same period last year. The decline was due to lower taxable security and loan yields, which decreased 83 basis points and 35 basis points, respectively.

Total interest income on securities, on a fully taxable equivalent basis, decreased $115 thousand, to $691 thousand for the quarter ended March 31, 2012 from $806 thousand for the first quarter of 2011. This decline was largely due to a 94 basis point decrease in the yield on securities from 3.66% to 2.72% between the two first quarter periods. The decline in security yields was mostly attributed to the reinvestment of excess liquidity, cash flows from maturities, calls and prepayments into a lower market rate environment.

The interest earned on total loans receivable decreased $334 thousand for the first quarter of 2012 as compared to the same period in 2011. The decline was mostly driven by a 35 basis point decline in average yields due to lower market rates and a $2.1 million increase in non-accrual loans between the two first quarter periods. The average rate earned on loans for the quarter ended March 31, 2012 was 5.33% as compared to 5.68% for the same period in 2011.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. The interest earned on total other interest-earning assets increased $13 thousand for the first quarter of 2012 as compared to the first quarter in 2011 due to higher average balances. The average balances in other interest-earning assets increased $22.3 million to $33.8 million in the first quarter of 2012 from $11.5 million during the first quarter a year earlier. The increases in the average balance in other interest-earning assets were driven by deposit growth.

Interest Expense - Our interest expense for the three months ended March 31, 2012 decreased $42 thousand, or 3.9%, to $1.0 million from $1.1 million for the same period in 2011. The improvement was principally due to lower average rates paid on total interest-bearing liabilities, which declined 11 basis points from 1.11% for the three months ended March 31, 2011 to 1.00% for the same period in 2012. The improvement in interest expense was partly offset by an increase in average balances in interest-bearing liabilities, which grew $25.6 million, or 6.5%, to $421.8 million for the first quarter in 2012 from $396.2 million for the same period in 2011.

Interest expense on deposits declined $50 thousand, or 6.5%, for the quarter ended March 31, 2012, as compared to the same period last year. The decline was largely attributed to lower rates on total interest bearing deposits, which decreased 13 basis points for the first quarter 2012 as compared to the same period in 2011. The decrease in rates on deposit products reflects managements' asset/liability strategies and a lower market rate environment between the two first quarter periods. During the first quarter of 2012, there was a favorable shift in deposit mix as savings deposits, on average, with a yield of 51 basis points declined $7.5 million, while average NOW accounts with a yield of 22 basis points increased $11.6 million. The shift in mix had a positive effect on interest expense for the first quarter of 2012.

Provision for Loan Losses - The loan loss provision for the first quarter of 2012 increased $21 thousand, or 2.5%, to $860 thousand compared to a provision of $839 thousand in the first quarter of 2011. The provision for loan losses reflects management's judgment concerning the risks inherent in our 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 - Our non-interest income increased $79 thousand, or 6.3%, to $1.3 million for the three months ended March 31, 2012 compared to the same period in 2011. The increase in non-interest income was largely due to $59 thousand in gain on sale of securities and a $47 thousand gain on sale of loans held for sale. The security gains recognized in the first quarter of 2012 was largely driven by the execution of two security strategies. We sold $1.9 million in private label collateralized mortgage obligations with deteriorating credit profiles for a net gain of $8 thousand and $2.9 million in adjustable rate mortgage backed securities with an average balance of $122 thousand for a net gain of $49 thousand. The aforementioned increases were partly offset by a $41 thousand decrease in service charges on deposit accounts for the quarter ended March 31, 2012 as compared to the same period last year.

Non-Interest Expense - Total non-interest expense increased $1.1 million, or 27.2%, to $4.9 million for the quarter ended March 31, 2012. The increase for the first quarter of 2012 versus the same period in 2011 was largely due to a $539 thousand increase in write-downs and expenses related to foreclosed real estate and a $417 thousand increase in salaries and employee benefits. The increase in write-downs and expenses related to foreclosed real estate was principally due to the potential sale of our largest foreclosed asset scheduled for disposition during the second quarter. The increase in salaries and employee benefits was mostly attributed to costs of $160 thousand related to the hiring of additional commercial lenders and support staff, higher medical benefit costs and severance costs of $110 thousand for a former executive during the first quarter of 2012 as compared to the same quarter in 2011. The aforementioned increases were in part offset by a decline in FDIC assessments of $89 thousand.

Income Taxes - our income tax benefit, which includes both federal and state taxes, was $265 thousand for the three months ended March 31, 2012 compared to income tax expense of $209 thousand for the first quarter of 2011.

COMPARISION OF FINANCIAL CONDITION AT MARCH 31, 2012 TO DECEMBER 31, 2011

At March 31, 2012, our total assets were $513.2 million, an increase of $6.2 million, or 1.2%, as compared to total assets of $507.0 million at December 31, 2011.

Cash and Cash Equivalents - Our cash and cash equivalents increased by $6.6 million at March 31, 2012 to $44.1 million, or 8.6% of total assets, from $37.5 million, or 7.4% of total assets, at December 31, 2011. The increase was largely due to an increase of $6.7 million in deposits.

Securities Portfolio - At March 31, 2012, total investment securities, which include available-for-sale and held-to-maturity securities, were $105.6 million compared to $100.6 million at December 31, 2011. Available-for-sale securities were $100.9 million at March 31, 2012 compared to $96.4 million at December 31, 2011. The available-for-sale securities are held primarily for liquidity, interest rate risk management and profitability. Accordingly, our investment policy is to invest in securities with low credit risk, such as U.S. government agency obligations, state and political obligations and mortgage-backed securities.

Other investments totaled $1.8 million at March 31, 2012 and December 31, 2011 and consisted primarily of FHLB stock. We also held $100 thousand in time deposits with other financial institutions at March 31, 2012 and at December 31, 2011.

Net unrealized gains were $1.6 million and $1.2 million at March 31, 2012 and December 31, 2011, respectively. The improvement in the fair value of the investment securities is driven by mortgage backed securities. Gross unrealized gains improved by $92 thousand to $1.8 million at March 31, 2012, as compared to $1.7 million at December 31, 2011. The improvement in gross unrealized losses was largely attributed to higher fair values of state and political subdivisions.

We conduct a regular assessment of our investment securities to determine whether any securities are other-than-temporarily impaired ("OTTI"). Further detail of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 2 - Securities to the unaudited consolidated financial statements. Our securities in unrealized loss positions are mostly driven by changes in spreads and market interest rates. All of our debt and equity securities have been evaluated for other-than-temporary impairment as of March 31, 2012 and we do not consider any security OTTI. We evaluated the prospects of the issuers in relation to the severity and the duration of the unrealized losses. Based on that evaluation, we did not intend to the sell and it is more likely than not that we will not have to sell any of our securities before recovery of their cost basis.

Our equity portfolio, which amounted to a fair value of $1.4 million, is comprised primarily of investments in other banks, an equity fund and a tax exempt mutual fund. During the fourth quarter of 2011, we recognized a $231 thousand pre-tax ($183 thousand after-tax, or $0.06 per share) non-cash other-than-temporarily impaired charge related to an equity portfolio fund and common stock. We recognized a $144 thousand charge on the equity portfolio fund comprised of common stocks of bank holding companies that had an amortized cost of $250 thousand and a termination date of December 2012. The additional $87 thousand impairment charge was recognized on a common stock that had an amortized cost of $230 thousand. The impairment was recognized because the market value of this security was below our amortized cost for an extended period of time along with credit deterioration in some of the underlying collateral and it was not believed the market value of this security would recover to our amortized cost. We continue to closely monitor the performance of our equity securities that we own, as well as the impact from any further deterioration in the economy or in the banking industry that may adversely affect these securities. We will continue to evaluate them for OTTI, which could result in a future non-cash charge to earnings. We held no high-risk securities or derivatives at March 31, 2012 or December 31, 2011.

Loans - The loan portfolio comprises our largest class of earning assets. Total loans receivable, net of unearned income, at March 31, 2012 decreased $4.3 million to $335.4 million from $339.7 million at year-end 2011, as new loan originations were less than payments, charge-offs and maturities. The decline was largely in residential real estate loans, which declined $2.3 million to $97.8 million, and commercial real estate, which declined $1.5 million to $214.7 million, at March 31, 2012 as compared to December 31, 2011. Approximately 96% of our loan portfolio is secured by real estate and less than 5% of the loan portfolio is commercial and industrial based loans. We do not originate sub-prime or unconventional one to four family real estate loans.

The following table summarizes the composition of our loan portfolio by type:

(Dollars in thousands)             March 31, 2012       December 31, 2011

Commercial and industrial loans   $         13,401     $            13,711
Construction                                 8,293                   8,520
Commercial real estate                     214,678                 216,191
Residential real estate                     97,829                 100,175
Consumer and other                           1,467                   1,336
Total gross loans                 $        335,668     $           339,933

Loan and Asset Quality - Total non-performing assets, which include non-accrual loans, performing troubled debt restructured loans and foreclosed real estate, increased by $1.1 million to $34.3 million at March 31, 2012 from $33.2 million at year-end 2011. The increase was largely due to one borrowing relationship that totaled $3.8 million that was previously classified and became non-accrual during the first quarter of 2012. The increase was partly offset by a $1.3 million reduction in trouble debt restructured loans and non-performing loans that returned to performing status or were paid off during the period. Our non-accrual loans increased $2.9 million to $27.2 million at March 31, 2012 from $24.3 million at December 31, 2011. Troubled debt restructured loans that were not on non-accrual were $2.1 million at March 31, 2012 and $3.4 million at December 31, 2011. Non-accrual loans at March 31, 2012 primarily consist of loans which are collateralized by real estate. During the first three months of 2012, foreclosed real estate decreased by a net of $500 thousand, principally due the partial write-down on one foreclosed asset. We held 16 foreclosed real estate properties as of March 31, 2012 totaling $5.0 million. Foreclosed real estate properties were recorded at the lower of its carrying value or fair value less costs to sell and are currently being marketed for sale.

Management continues to monitor our asset quality and believes that the non-performing assets are adequately collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses. However, given the uncertainty of the current real estate market, additional provisions for losses may be deemed necessary in future periods. The following table provides information regarding risk elements in the loan portfolio at each of the periods presented:

(Dollars in thousands)                            March 31, 2012        December 31, 2011

Non-accrual loans                                $          27,184     $            24,283
Non-accrual loans to total loans                              8.10 %                  7.15 %
Non-performing assets                            $          29,268     $            27,694
Non-performing assets to total assets                         6.68 %                  6.55 %
Allowance for loan losses as a % of
non-performing loans                                         26.03 %                 26.03 %
Allowance for loan losses to total loans                      2.27 %                  2.12 %

Loan balances past due 90 days or more and still accruing interest, but which management expects will eventually be paid in full are not included in total non-performing loans. These loans are principally past due 90 days because of maturity but are currently paying and are well secured. At March 31, 2012, we had $983 thousand in this category as compared to $803 thousand at December 31, 2011.

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Total impaired loans at March 31, 2012 were $29.4 million and at December 31, 2011 were $27.7 million. Impaired loans measured at fair value increased to $15.3 million on March 31, 2012 from $11.6 million at December 31, 2011. The principal balances on loans measured at fair value were $18.3 million and $13.6 million, net of valuation allowance of $3.0 million at March 31, 2012 and $2.0 million at December 31, 2011. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Not all impaired loans and restructured loans are on non-accrual, and therefore not all are considered non-performing loans. Impaired and restructured loans still accruing totaled $2.1 million at March 31, 2012 and $3.4 million at December 31, 2011.

We also continue to monitor our portfolio for potential problem loans. Potential problem loans are defined as loans which causes management to have serious concerns as to the ability of such borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on non-accrual status. As of March 31, 2012, we had eight loan relationships totaling $3.8 million that it deemed potential problem loans. Management is actively monitoring these loans.

Further detail of the credit quality of the loan portfolio is in Note 3 - Loans and Note 4 - Allowance for Loan Losses and Credit Quality of Financing Receivables to the unaudited consolidated financial statements.

Allowance for Loan Losses - The allowance for loan losses consists of general and allocated components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected losses derived from our internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors, and believes the reserve is reasonable and adequate for each of the periods presented.

At March 31, 2012, the total allowance for loan losses increased $407 thousand, or 5.6%, to $7.6 million, as compared to $7.2 million at December 31, 2011. The components of this increase were a provision for loan losses of $860 thousand and net charge-offs totaling $453 thousand in the first three months of 2012. The provision also reflects the continued decline in current real estate values in our market area and reduced cash flows to support the repayment of loans. The allowance for loan losses as a percentage of total loans was 2.27% at March 31, 2012 and 2.12% at December 31, 2011.

The table below presents information regarding our provision and allowance for loan losses at March 31, 2012 and 2011:

(Dollars in thousands)          March 31, 2012       March 31, 2011

Balance, beginning of period   $          7,210     $          6,397
Provision                                   860                  839
Charge-offs                                (468 )                (25 )
Recoveries                                   15                   15
Balance, end of period         $          7,617     $          7,226

The table below presents details concerning the allocation of the allowance for loan losses to the various categories for each of the periods presented. The allocation is made for analytical purposes and it is not necessarily indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses from any category of loans.

                                  March 31, 2012                  December 31, 2011
                                          Percent of                         Percent of
                                         Loans In Each                      Loans In Each
                                          Category To                        Category To
(Dollars in thousands)      Amount        Gross Loans         Amount         Gross Loans
Commercial and industrial   $   305                 4.0 %   $      304                 4.0 %
. . .