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 been focused on building for the future and strengthening our core operating results within a risk management framework.

RECENT LEGISLATIVE UPDATES

In June 2012, the FRB, the Office of the Comptroller of the Currency and the FDIC issued three proposals that would amend the existing regulatory risk-based capital adequacy requirements of banks and bank holding companies. The proposed rules implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act. The Basel III proposal would increase the minimum levels of required capital, narrow the definition of capital, and places much greater emphasis on common equity. The proposed rules will be subject to a comment period through September 7, 2012.

The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes "capital" for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to us and the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a "capital conservation buffer" of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, such as trust preferred securities, which would be phased out over time. Although the Dodd-Frank Act only required the phase out of such instruments for institutions with total consolidated assets of $15 billion or more, the proposed rules would require almost all institutions to phase out instruments that will no longer qualify as Tier 1 capital, albeit on a longer time frame than for institutions with total consolidated assets of $15 billion or more.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. We are still in the process of assessing the impacts of these complex proposals.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with 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 JUNE 30, 2012 AND 2011

Overview - We reported net income of $481 thousand for the second quarter of 2012 as compared to net income of $727 thousand for the same period in 2011. Basic and diluted loss per share for the three months ended June 30, 2012 were $0.15 and $0.14, respectively, compared to the basic and diluted earnings per share of $0.22 for the comparable period of 2011. The decline in net income was largely attributed to higher operating costs attributed to supporting growth initiatives and a decline in the net interest margin. Management continues to focus on strengthening our core operations as well as resolving and mitigating our credit exposures.

Net income before taxes for our Tri-State segment increased $23 thousand, or 47.9%, resulting in a net income before taxes of $71 thousand for the second quarter of 2012 compared to $48 thousand for the same period in 2011. This increase was due to insurance commission and fee income increasing $45 thousand, or 8.0%, between the two periods.

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 June 30,
2012 and 2011.



                                                         Three Months Ended June 30,
(Dollars in thousands)                       2012                                           2011
                           Average                         Average        Average                         Average
Earning Assets:            Balance      Interest (1)       Rate (2)       Balance      Interest (1)       Rate (2)
Securities:
Tax exempt (3)            $  31,416     $         440           5.64 %   $  29,805     $         441           5.94 %
Taxable                      90,026               433           1.93 %      48,992               310           2.54 %
Total securities            121,442               873           2.89 %      78,797               751           3.83 %
Total loans receivable
(4)                         341,426             4,375           5.15 %     343,333             4,739           5.54 %
Other interest-earning
assets                       19,162                 9           0.18 %      22,674                12           0.20 %
Total earning assets        482,030     $       5,257           4.39 %     444,804     $       5,502           4.96 %

Non-interest earning
assets                       41,691                                         36,421
Allowance for loan
losses                       (7,798 )                                       (7,602 )
Total Assets              $ 515,923                                      $ 473,623

Sources of Funds:
Interest bearing
deposits:
NOW                       $  95,817     $          42           0.17 %   $  78,439     $         106           0.54 %
Money market                 18,849                15           0.33 %      14,504                20           0.55 %
Savings                     164,106               154           0.38 %     169,086               296           0.70 %
Time                        108,124               421           1.57 %      91,804               345           1.51 %
Total interest bearing
deposits                    386,896               632           0.66 %     353,833               767           0.87 %
Borrowed funds               26,000               264           4.02 %      26,000               264           4.02 %
Junior subordinated
debentures                   12,887                61           1.86 %      12,887                55           1.69 %
Total interest bearing
liabilities                 425,783               957           0.90 %     392,720     $       1,086           1.11 %

Non-interest bearing
liabilities:
Demand deposits              47,801                                         40,402
Other liabilities             1,931                                          2,370
Total non-interest
bearing liabilities          49,732                                         42,772
Stockholders' equity         40,408                                         38,131
Total Liabilities and
Stockholders' Equity      $ 515,923                                      $ 473,623

Net Interest Income and
Margin (5)                                      4,300           3.59 %                         4,416           3.98 %
Tax-equivalent basis
adjustment (6)                                   (150 )                                         (150 )
Net Interest Income                     $       4,150                                  $       4,266

(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

(6) Calculated using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance

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.

Our net interest income, on a fully tax equivalent basis, declined $116 thousand, or 2.6%, to $4.3 million for the quarter ended June 30, 2012, as compared to $4.4 million for same period in 2011. The decrease in net interest income was largely due to our net interest margin declining 39 basis points to 3.59% for the second quarter of 2012 primarily due to a 39 basis point decline in the average rate earned on loans. This decline in net interest income was partially offset by a decrease in the average rate paid on total interest bearing liabilities, which decreased 21 basis points to 0.90% for the second quarter of 2012 from 1.11% for the same period in 2011. The decline was in part offset by a $37.2 million, or 8.4%, increase in average interest earning assets, principally securities.

Interest Income - Our total interest income, on a fully taxable equivalent basis, decreased $245 thousand, or 4.5%, to $5.3 million for the quarter ended June 30, 2012, as compared to the same period last year. The decline was due to lower earning asset yields, which decreased 58 basis points to 4.39% for the quarter ended June 30, 2012 as compared to the same period in 2011.

Our total interest income earned on loans receivable decreased $364 thousand, or 7.7%, to $4.4 million for the second quarter of 2012 as compared to the same period in 2011. The decline was driven by a 39 basis point decline in average yields to 5.15% for the quarter end June 30, 2012, as compared to the same period in 2011. The decline in interest income earned on loans receivable was also impacted by a $1.9 million decline in average balances on loans receivable to $341.4 million for the quarter-end June 30, 2012, as compared to the same period in 2011.

Our total interest income earned on securities, on a fully taxable equivalent basis, increased $122 thousand, to $873 thousand for the quarter ended June 30, 2012, from $751 thousand for the same period in 2011. This increase was largely due to a $42.6 million, or 54.1%, increase in average balance of securities for the quarter ended June 30, 2012, as compared to same period last year. The increase resulted from investing excess liquidity from interest bearing deposits yielding less than 25 basis points into securities with higher yields. The increase in interest income on securities was partly offset by a decline in the average rate earned on securities, which declined 93 basis points for the quarter ended June 30, 2012, as compared to the same period last year. The lower yields on securities reflect investment in securities in a low market rate environment.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets decreased $3 thousand for the second quarter of 2012 as compared to the same period in 2011 due to a decline in average balances. The average balances in other interest-earning assets decreased $3.5 million to $19.2 million in the second quarter of 2012 from $22.7 million during the second quarter a year earlier.

Interest Expense -Our interest expense for the three months ended June 30, 2012 decreased $129 thousand, or 11.9%, to $957 thousand 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 21 basis points from 1.11% for the three months ended June 30, 2011, to 0.90% 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 $33.1 million, or 8.4%, to $425.8 million for the second quarter in 2012 from $392.7 million for the same period in 2011.

Our interest expense on deposits declined $135 thousand, or 17.6%, for the quarter ended June 30, 2012, as compared to the same period last year. The decline was largely attributed to lower rates on total interest bearing deposits, which decreased 21 basis points to 0.66% for the second 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 second quarter periods. The aforementioned benefit from the decline in rates paid on deposits was partly offset by $33.1 million, or 8.4%, increase in interest bearing deposits.

Provision for Loan Losses -The loan loss provision for the second quarter of 2012 decreased $154 thousand, or 13.8%, to $958 thousand compared to a provision of $1.1 million in the second 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 decreased $82 thousand, or 5.5%, to $1.4 million for the quarter ended June 30, 2012, as compared to the same period last year. The decrease in non-interest income was largely due to a $134 thousand decline in gain on the sale of securities and a $53 thousand decrease in service fees on deposit accounts. The decrease in non-interest income was partly offset by increases in other income and insurance commissions and fees of $67 thousand and $45 thousand, respectively.

Non-Interest Expense - Our non-interest expenses increased $366 thousand, or 9.9%, to $4.1 million for the quarter ended June 30, 2012 as compared to the same period last year. The increase for the second quarter of 2012 versus the same period in 2011 was largely due to an increase of $138 thousand in salaries and employee benefits. The increase was mostly attributed to approximate costs of $110 thousand related to the hiring of additional commercial lenders and support staff. In addition, furniture, equipment and data processing, advertising and promotion and FDIC assessments increased $46 thousand, $42 thousand and $46 thousand, respectively, for the second quarter of 2012 versus the same period in 2011. The increase in FDIC assessments resulted from deposit growth for 2012 as compared to the prior year.

Income Taxes - our income tax expense, which includes both federal and state taxes, was $65 thousand for the three months ended June 30, 2012, representing a 11.9% effective tax rate, compared to income tax expense of $229 thousand for the second quarter of 2011, representing a 24.0% effective tax rate. The effective tax rate benefited from tax exempt income from securities and bank-owned life insurance policies.

COMPARISION OF OPERATING RESULTS FOR SIX MONTHS ENDED JUNE 30, 2012 AND 2011

Overview - We reported net income of $286 thousand for the six months ended June 30, 2012, as compared to net income of $1.4 million for the same period in 2011. Basic and diluted income per share for the six months ended June 30, 2012 were $0.09 compared to the basic and diluted earnings per share of $0.44 and $0.43, respectively, for the comparable period of 2011. The decline in net income was largely attributed to higher operating costs attributed to supporting our growth initiatives, costs related to the resolution of one of our largest foreclosed assets and a decline in the net interest margin.

Net income before taxes for our Tri-State segment decreased $48 thousand, or 30.4%, resulting in a net income before taxes of $110 thousand for the first six months of 2012 compared $158 thousand for the same period in 2011. The decline was largely due to the expansion of sales staff and a decline in contingency income. The Tri-State revenues for the first half of 2012 were higher by 2.5% and when adjusting for a decline in contingency income ($69 thousand), core revenues were up 9.4% first six months of 2012 as compared to the same period last year. Expenses were higher for the first half of 2012 by $77 thousand, or 7.5%, as compared to the same period last year principally due to the addition of sales staff.

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 six month period ended June 30, 2012
and 2011.



                                                               Six Months Ended June 30,
(Dollars in thousands)                          2012                                              2011
                             Average                            Average        Average                            Average
Earning Assets:              Balance        Interest (1)       Rate (2)        Balance        Interest (1)       Rate (2)
Securities:
Tax exempt (3)              $   28,051     $          811            5.81 %   $   29,913     $          883            5.95 %
Taxable                         83,766                753            1.81 %       54,181                675            2.51 %
Total securities               111,817              1,564            2.81 %       84,094              1,558            3.74 %
Total loans receivable
(4)                            338,492              8,825            5.24 %      342,511              9,523            5.61 %
Other interest-earning
assets                          26,499                 26            0.20 %       17,111                 16            0.19 %
Total earning assets           476,808     $       10,415            4.39 %      443,716     $       11,097            5.04 %

Non-interest earning
assets                          41,447                                            36,425
Allowance for loan losses       (7,670 )                                          (7,209 )
Total Assets                $  510,585                                        $  472,932

Sources of Funds:
Interest bearing
deposits:
NOW                         $   94,055     $           93            0.20 %   $   79,558     $          220            0.56 %
Money market                    18,204                 36            0.39 %       13,960                 38            0.56 %
Savings                        163,619                359            0.44 %      169,839                594            0.71 %
Time                           109,037                863            1.59 %       90,919                684            1.52 %
Total interest bearing
deposits                       384,915              1,351            0.71 %      354,276              1,536            0.87 %
Borrowed funds                  26,000                529            4.03 %       27,295                529            3.86 %
Junior subordinated
debentures                      12,887                123            1.88 %       12,887                109            1.69 %
Total interest bearing
liabilities                    423,802     $        2,003            0.95 %      394,458     $        2,174            1.11 %

Non-interest bearing
liabilities:
Demand deposits                 44,557                                            38,616
Other liabilities                1,972                                             2,332
Total non-interest
bearing liabilities             46,529                                            40,948
Stockholders' equity            40,254                                            37,526
Total Liabilities and
Stockholders' Equity        $  510,585                                        $  472,932

Net Interest Income and
Margin (5)                                 $        8,412            3.55 %                  $        8,923            4.06 %
Tax-equivalent basis
adjustment (6)                                       (276 )                                            (300 )
Net Interest Income                        $        8,136                                    $        8,623

(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

(6) Calculated using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance

Net Interest Income - Net interest income, on a fully taxable equivalent basis, decreased $511 thousand, or 5.7%, to $8.4 million for the six months ended June 30, 2012, as compared to $8.9 million for same period in 2011. Our net interest margin declined 51 basis points to 3.55% for the first six months of 2012, compared to 4.06% for the same period last year. The decline was mostly attributed to a 65 basis point decline in the average rate on earning assets to 4.39% for the six month period ended June 30, 2012, as compared to the same period last year. The decline in net interest income was partly offset by an increase in the average balance of earning assets, which grew $33.1 million to $476.8 million at June 30, 2012, as compared to June 30, 2011.

Interest Income - Our total interest income, on a fully taxable equivalent basis, decreased $682 thousand, or 6.1%, to $10.4 million for the six months ended June 30, 2012, as compared to the same period last year. The decline was due to lower earning asset yields, which decreased 65 basis points to 4.39% for the six months ended June 30, 2012, as compared to the same period in 2011.

Our total interest income earned on loans receivable decreased $698 thousand, or 7.3%, to $8.8 million for the six months ended June 30, 2012, as compared to the same period in 2011. The decline was driven by a 37 basis point decline in average yields to 5.24% for the six months ended June 30, 2012, as compared to the same period in 2011. The decline in interest income earned on loans receivable was also impacted by a $4.0 million decline in average balances on loans receivable to $338.5 million for the six months ended June 30, 2012, as compared to the same period in 2011.

Our total interest income earned on securities, on a fully taxable equivalent basis, increased $6 thousand, or 0.4%, to $1.6 million for the six months ended June 30, 2012 and 2011. This increase was largely due to a $27.7 million, or 33.0%, increase in average balance of securities for the six months ended June 30, 2012 as compared to same period last year. The increase resulted from investing excess liquidity generated from deposit growth outpacing loan growth. The increase in interest income on securities was mostly offset by a decrease in the average rate earned on securities, which declined 93 basis points for the six months ended June 30, 2012, as compared to the same period last year. The lower yields on securities reflect investment in securities in a low market rate environment.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets increased $10 thousand for the six months ended June 30, 2012, as compared to the same period in 2011 due to a $9.4 million growth in average balances.

Interest Expense - Our interest expense for the six months ended June 30, 2012 decreased $171 thousand, or 7.9%, to $2.0 million from $2.2 million for the same period in 2011. The improvement was principally due to lower average rates paid on total interest-bearing liabilities, which declined 16 basis points from 1.11% for the six months ended June 30, 2011, to 0.95% 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 $29.3 million, or 7.4%, to $423.8 million for the six months ended June 30, 2012, from $394.5 million for the same period in 2011.

Our interest expense on deposits declined $185 thousand, or 12.0%, for the six months ended June 30, 2012, as compared to the same period last year. The decline was largely attributed to lower rates on total interest bearing deposits, which decreased 16 basis points for the six months ended 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 periods. The aforementioned benefit from the decline in rates paid on deposits was partly offset by $30.6 million, or 8.6%, increase in interest bearing deposits.

Provision for Loan Losses - The loan loss provision for the first six months of 2012 decreased $133 thousand, or 6.8%, to $1.8 million compared to a provision of $2.0 million for the same period in 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.

. . .