News Column

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 10, 2014

Forward-Looking Statements

This Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities. Additional potential factors include changes in interest rates, deposit flows, cost of funds, demand for loan products and financial services, competition, changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company's other filings with the Securities and Exchange Commission.



Restructuring and Wholesale Growth Transactions

The following discussion presents an overview of certain balance sheet restructuring and wholesale growth transactions executed by the Company during the prior fiscal year ended June 30, 2013 and will serve as a point of reference for subsequent discussions included in this report. The Company completed a series of balance sheet restructuring and wholesale growth transactions during the latter half of fiscal 2013 that improved the financial position and operating results of the Company and the Bank. Through the restructuring transactions, the Company reduced its concentration in agency mortgage-backed securities ("MBS") in favor of other investment sectors within the portfolio. As a result, the Company reduced its exposure to residential mortgage prepayment and extension risk while enhancing the overall yield of the investment portfolio and providing some additional protection to earnings against potential movements in market interest rates. The gains recognized through the sale of MBS enabled the Company to fully offset the costs of prepaying a portion of its high-rate Federal Home Loan Bank ("FHLB") advances during the year. The Company also modified the terms of its remaining high-rate FHLB advances to a lower interest rate while extending the duration of that modified funding to better protect against potential increases in interest rates in the future.



The key features and characteristics of the restructuring transactions executed during the latter half of fiscal 2013 were as follows:

The Company sold available for sale agency MBS totaling approximately $330.0

million with a weighted average book yield of 1.78% resulting in a one-time

gain on sale totaling approximately $9.1 million;

A portion of the proceeds from the noted MBS sales were used to prepay $60.0

million of fixed-rate FHLB advances at a weighted average rate of 3.99%

resulting in a one-time expense of $8.7 million largely attributable to the

prepayment penalties paid to the FHLB to extinguish the debt; and - 70 -

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The Company reinvested the remaining proceeds from the noted MBS sales into a

diversified mix of high-quality securities with an aggregate tax-effective

yield modestly exceeding that of the MBS sold. Such securities primarily included: o Fixed-rate, bank-qualified municipal obligations; o Floating-rate corporate bonds issued by financial companies;



o Floating-rate, asset-backed securities comprising education loans with 97%

U.S. government guarantees;

o Fixed-rate agency commercial MBS secured by multi-family mortgage loans; and

o Fixed-rate agency collateralized mortgage obligations ("CMO").

The Company modified the terms of its remaining $145.0 million of "putable"

FHLB advances with a weighted average cost of 3.68% and weighted average

remaining maturity of approximately 4.5 years. Such advances were subject to

the FHLB's quarterly "put" option enabling it to demand repayment in full in

the event of an increase in interest rates. The terms of the modified advances

extended their "non-putable" period to five years with a final stated maturity

of ten years while reducing their average interest rate by 0.64% to 3.04% at

no immediate cost to the Company.

The Company augmented the restructuring transaction noted above by also executing a limited wholesale growth strategy during the latter half of fiscal 2013. The strategy has further enhanced the Company's net interest income and operating results without significantly impacting the sensitivity of its Economic Value of Equity ("EVE") to movements in interest rates - a key measure of long-term exposure to interest rate risk. In conjunction with the wholesale growth strategy, the Company drew an additional $300.0 million of wholesale funding that was utilized to purchase a diverse set of high-quality investment securities of an equivalent amount. The key features and characteristics of the wholesale growth transactions were as follows:



Wholesale funding sources utilized in the strategy included 90-day FHLB

borrowings and money-market deposits indexed to one-month LIBOR acquired

through Promontory Interfinancial Network's ("Promontory") Insured Network

Deposits ("IND") program.



The Company utilized interest rate derivatives in the form of "plain vanilla"

swaps and caps with aggregate notional amounts totaling $300.0 million to

serve as cash flow hedges to manage the interest rate risk exposure of the

floating rate funding sources noted above.

The investment securities acquired with this funding primarily included:

o Floating-rate corporate bonds issued by financial companies;



o Floating-rate, asset-backed securities comprising education loans with 97%

U.S. government guarantees; o Floating rate collateralized loan obligations ("CLO") o Fixed-rate agency residential and commercial MBS; and o Fixed-rate agency collateralized mortgage obligations ("CMO"). - 71 -

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Comparison of Financial Condition at December 31, 2013 and June 30, 2013

General. Total assets increased by $113.7 million to $3.26 billion at December 31, 2013 from $3.15 billion at June 30, 2013. The increase in total assets was primarily attributable to increases in the balances of loans, FHLB stock and cash and cash equivalents that were partially offset by a decline in the balance of mortgage-backed securities. The net increase in total assets was complemented by increases in the balances of deposits and borrowings that were partially offset by a decline in stockholders' equity. Cash and Cash Equivalents. Cash and cash equivalents, which consist primarily of interest-earning and non-interest-earning deposits in other banks, increased by $26.3 million to $153.3 million at December 31, 2013 from $127.0 million at June 30, 2013. The increase in the balance of cash and cash equivalents at December 31, 2013 primarily reflected additional cash held to fulfill the Company's commitment to fund $39.0 million of new commercial mortgage loans that closed during the first week of January 2014. Notwithstanding the additional liquidity held at December 31, 2013, the Company generally expects to continue maintaining the average balance of interest-earning and non-interest-earning cash and equivalents at comparatively lower levels than those maintained during prior years to reduce the opportunity cost of holding excess liquidity in the current low rate environment. Management will continue to monitor the level of short term, liquid assets in relation to the expected need for such liquidity to fund the Company's strategic initiatives - particularly those relating to the expansion of its commercial lending functions. The Company may alter its liquidity reinvestment strategies based upon the timing and relative success of those initiatives. Debt Securities Available for Sale. Debt securities classified as available for sale decreased by $2.1 million to $298.1 million at December 31, 2013 from $300.1 million at June 30, 2013. The net decrease primarily reflected security sales of totaling $55.4 million during the six months ended December 31, 2013 that were partially offset by security purchases totaling $55.2 million during the same period. The security sales primarily reflected the Company's decision to reduce its investment in certain collateralized loan obligations that may become ineligible investments under the terms of the "Volcker Rule" whose provisions were enacted by regulatory agencies during the quarter ended December 31, 2013 in conjunction with the ongoing adoption and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Security purchases for the period primarily reflect the reinvestment of the security sale proceeds into other eligible sectors within the portfolio. The net change in debt securities available for sale also reflected a net increase in the net unrealized loss within the portfolio coupled with repayments of principal attributable to amortization during the first six months of fiscal 2014. The net unrealized loss for this portfolio increased by $1.5 million to $6.7 million at December 31, 2013 from $5.2 million at June 30, 2013. The increase in the net unrealized loss was primarily attributable to declines in the fair value of several sectors within the portfolio that resulted from recent increases in market interest rates. Partially offsetting these declines was an increase in the fair value of the Company's investment in single-issuer, trust preferred securities whose unrealized losses decreased by $95,000 to $1.5 million at December 31, 2013 from $1.6 million at June 30, 2013. At December 31, 2013, the available for sale debt securities portfolio included U.S. agency debentures, single-issuer trust preferred securities, corporate bonds, asset-backed securities, collateralized loan obligations and municipal obligations. Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date. - 72 -

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Additional information regarding debt securities available for sale at December 31, 2013 is presented in Note 7 and Note 9 to the unaudited consolidated financial statements.

Debt Securities Held to Maturity. Debt securities classified as held to maturity increased by $1.3 million to $211.3 million at December 31, 2013 from $210.0 million at June 30, 2013. The net increase primarily reflected purchases of municipal obligations totaling $2.5 million during the six months ended December 31, 2013 that were partially offset by maturities and repayments of such securities during that same period. At December 31, 2013, the held to maturity debt securities portfolio included U.S. agency debentures and municipal obligations, a small portion of which represent non-rated, short term, bond anticipation notes ("BANs") issued by New Jersey municipalities with whom the Bank maintains or seeks to maintain deposit relationships. Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.



Additional information regarding debt securities held to maturity at December 31, 2013 is presented in Note 8 and Note 9 to the unaudited consolidated financial statements.

Loans Receivable. Loans receivable, net of unamortized premiums, deferred costs and the allowance for loan losses, increased by $193.3 million to $1.54 billion at December 31, 2013 from $1.35 billion at June 30, 2013. The increase in net loans receivable was primarily attributable to new loan origination and purchase volume outpacing loan repayments during the six months ended December 31, 2013. Residential mortgage loans, including home equity loans and lines of credit, increased by $7.4 million to $615.4 million at December 31, 2013 from $608.1 million at June 30, 2013. The components of the net increase included an increase in the balance of one-to-four family first mortgage loans of $10.2 million to $510.8 million at December 31, 2013 from $500.6 million at June 30, 2013. Partially offsetting this increase was a net reduction in the balance of home equity loans of $2.0 million to $78.9 million at December 31, 2013 from $80.8 million for those same comparative periods. Additionally, the balance of home equity lines of credit decreased by $875,000 to $25.7 million at December 31, 2013 from $26.6 million at June 30, 2013. Residential mortgage loan activity for the six months ended December 31, 2013 continues to reflect the Company's diminished strategic focus on such loans coupled with the reduced level of "new purchase" loan demand resulting from a weak economy and lower real estate values. The modest increase in the outstanding balance of the portfolio reflected slowing refinancing activity resulting primarily from longer-term mortgage rates increasing from their historical lows during the current period. Such increases in mortgage rates were largely attributable to market expectations for a reduction or "tapering" in the Federal Reserve's efforts to stimulate the economy by maintaining longer-term interest rates at historically low levels through quantitative easing. Through this policy, the Federal Reserve has aggressively purchased mortgage-backed securities in the open market thereby driving the yield on such securities, and their underlying mortgage loans, to historical lows. Slowing the rate of such purchases by the Federal Reserve is expected to result in an increase in longer-term interest rates. The likelihood of such action by the Federal Reserve was reinforced by their formal announcement in December 2013 indicating their expectation to begin the process of tapering in early 2014. - 73 - -------------------------------------------------------------------------------- As a portfolio lender cognizant of potential exposure to interest rate risk, the Bank has generally refrained from lowering its long-term, fixed-rate residential mortgage rates to the levels available in the marketplace. Consequently, a portion of the Company's residential mortgage borrowers may continue to seek long-term, fixed-rate refinancing opportunities from other market resources resulting in further declines in the outstanding balance of its residential mortgage loan portfolio. In total, residential mortgage loan origination and purchase volume for the six months ended December 31, 2013 was $50.1 million and $10.3 million, respectively, while aggregate originations of home equity loans and home equity lines of credit totaled $18.4 million for that same period. Commercial loans, in aggregate, increased by $190.4 million to $927.9 million at December 31, 2013 from $737.5 million at June 30, 2013. The components of the aggregate increase included an increase in commercial mortgage loans totaling $195.4 million that was partially offset by a decline in commercial business loans of $5.0 million. The ending balances of commercial mortgage loans and commercial business loans at December 31, 2013 were $862.3 million and $65.6 million, respectively. Commercial loan origination volume for the six months ended December 31, 2013 totaled $212.1 million comprising $203.8 million and $8.3 million of commercial mortgage and commercial business loans originations, respectively. Commercial loan originations were augmented with the purchase of commercial loan participations totaling $48.0 million during the six months ended December 31, 2013.



The outstanding balance of construction loans, net of loans-in-process, decreased by $3.0 million to $8.9 million at December 31, 2013 from $11.9 million at June 30, 2013. Construction loan disbursements for the six months ended December 31, 2013 totaled $2.4 million.

Finally, other loans, primarily comprising account loans, deposit account overdraft lines of credit and other consumer loans, increased $70,000 to $4.4 million at December 31, 2013 from $4.3 million at June 30, 2013. Other loan originations for the six months ended December 31, 2013 totaled approximately $974,000.



Additional information regarding loans receivable at December 31, 2013 is presented in Note 10 to the unaudited consolidated financial statements.

Nonperforming Loans. At December 31, 2013, nonperforming loans decreased by $5.0 million to $25.9 million or 1.67% of total loans from $30.9 million or 2.27% of total loans as of June 30, 2013. The balance of nonperforming loans at December 31, 2013 included $25.4 million and $522,000 of "nonaccrual" loans and loans reported as "over 90 days past due and accruing", respectively. By comparison, the balance of nonperforming loans at June 30, 2013 was comprised entirely of "nonaccrual" loans. The composition of nonperforming loans at December 31, 2013 continued to include a disproportionate balance of residential mortgage loans originally acquired from Countrywide Home Loans, Inc. ("Countrywide") which continue to be serviced by their acquirer, Bank of America through its subsidiary, BAC Home Loans Servicing, LP ("BOA"). In total, nonperforming Countrywide loans totaled $8.9 million or 34.3% of total nonperforming loans at December 31, 2013. As of that same date, the Company owned a total of 84 residential mortgage loans with an aggregate outstanding balance of $37.3 million that were originally acquired from Countrywide. Of these loans, an additional five loans totaling $1.6 million are 30-89 days past due and are in various stages of collection.



Additional information about the Company's nonperforming loans at December 31, 2013 is presented in Note 10 to the unaudited consolidated financial statements.

- 74 - -------------------------------------------------------------------------------- Allowance for Loan Losses. During the six months ended December 31, 2013, the balance of the allowance for loan losses increased by approximately $597,000 to $11.5 million or 0.74% of total loans at December 31, 2013 from $10.9 million or 0.80% of total loans at June 30, 2013. The increase resulted from provisions of $1.7 million during the six months ended December 31, 2013 that were partially offset by charge offs, net of recoveries, totaling approximately $1.1 million. With regard to loans individually evaluated for impairment, the balance of the Company's allowance for loan losses attributable to such loans decreased by $599,000 to $1.5 million at December 31, 2013 from $2.1 million at June 30, 2013. The balance of this portion of the allowance at December 31, 2013 reflected the allowance for impairment identified on $4.0 million of impaired loans while an additional $33.7 million of impaired loans had no allowance for impairment as of that date. By comparison, the comparable portion of the allowance at June 30, 2013 reflected the impairment identified on $4.7 million of impaired loans while an additional $34.8 million of impaired loans had no impairment as of that date. The outstanding balances of impaired loans reflect the cumulative effects of various adjustments including, but not limited to, purchase accounting valuations and prior charge offs, where applicable, which are considered in the evaluation of impairment. With regard to loans evaluated collectively for impairment, the balance of the Company's allowance for loan losses attributable to such loans increased by $1.2 million to $10.0 million at December 31, 2013 from $8.8 million at June 30, 2013. The increase in the balance of this portion of the allowance largely reflected the additional allowance attributable to an overall increase of $196.7 million in the non-impaired portion of the loan portfolio between comparative periods. The increase in the allowance also reflected changes in the Company's historical and environmental loss factors made in accordance with its allowance for loan loss calculation methodology as discussed earlier. Specifically, the Company's loan portfolio experienced a net annualized average charge-off rate of 15 basis points during the six months ended December 31, 2013 representing a decrease of 13 basis points from the 28 basis points of charge offs reported for fiscal 2013. The historical loss factors used in the Company's allowance for loan loss calculation methodology were updated to reflect the effect of these charge offs on the average annualized historical charge off rates by loan segment over the two year look-back period used by that methodology. In conjunction with the net changes to the outstanding balance of the applicable loans, the changes to these factors resulted in a net decrease of $214,000 in the applicable portion of the allowance to $2.2 million at December 31, 2013 from $2.4 million as of June 30, 2013. Regarding environmental loss factors, changes to such factors during the six month period ended December 31, 2013 were limited to increases applicable to the Company's acquired portfolio of SBA loans. All such loans were initially recorded at fair value at acquisition reflecting any impairment identified on such loans at that time. Subsequent to their acquisition, however, the Company has identified and recognized additional impairment and charge offs attributable to this subset of acquired loans. While the level of this "post-acquisition" impairment has generally been limited, the Company considers such losses in developing the environmental loss factors used to calculate the required allowance applicable to the non-impaired portion of such loans. In recognition of these considerations, the Company has modified the following environmental loss factors applicable to the acquired SBA loans during the six months ended December 31, 2013 from those levels that were in effect at June 30, 2013:



Level of and trends in nonperforming loans: Increased (+3) from "12" to "15" reflecting continuing increases in the level of nonperforming loans and associated losses within the portfolio segment.

- 75 - -------------------------------------------------------------------------------- Given their prior acquisition at fair value, the environmental loss factors established for loans acquired though business combinations generally reflect a comparatively lower level of risk than those applicable to the remaining portfolio. The level of environmental loss factors attributable to these loans continue to be monitored and adjusted, as above, to reflect the Company's best judgment as to the level of incurred losses on the acquired loans that are collectively evaluated for impairment. In conjunction with the net changes to the outstanding balance of the applicable loans, the noted increase in the environmental loss factors resulted in a net increase of $1.4 million in the applicable valuation allowances to $7.8 million at December 31, 2013 from $6.4 million at June 30, 2013. - 76 - -------------------------------------------------------------------------------- The following tables present the historical and environmental loss factors, reported as a percentage of outstanding loan principal, that were the basis for computing the portion of the allowance for loan losses attributable to loans collectively evaluated for impairment at December 31, 2013 and June 30, 2013. Allowance for Loan Losses Allocation of Loss Factors on Loans Collectively Evaluated for Impairment at December 31, 2013 Historical Environmental Loss Loss Factors Loan Category Factors (2) Total Residential mortgage loans Originated 0.06% 0.30% 0.36% Purchased 2.58% 0.75% 3.33%



Acquired in merger 1.62% 0.24% 1.86%

Home equity loans Originated 0.13% 0.36% 0.49%



Acquired in merger 0.35% 0.24% 0.59%

Home equity lines of credit Originated 0.00% 0.36% 0.36%



Acquired in merger 0.00% 0.24% 0.24%

Construction loans 1-4 family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Multi-family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Nonresidential Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Commercial mortgage loans Multi-family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Nonresidential Originated 0.10% 0.72% 0.82% Acquired in merger 0.00% 0.24% 0.24% Commercial business loans Secured (1-4 family) Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Secured (Other) Originated 0.08% 0.72% 0.80% Acquired in merger 0.06% 0.24% 0.30% Unsecured Originated 0.00% 0.57% 0.57% Acquired in merger 0.00% 0.18% 0.18% - 77 -

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Allocation of Loss Factors on Loans Collectively Evaluated for Impairment

at December 31, 2013 (continued) Historical Environmental Loss Loss Factors Loan Category Factors (2) Total SBA 7A Originated 0.00% 0.72% 0.72% Acquired in merger 19.01% 0.27% 19.28% SBA Express Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.27% 0.27% SBA Line of Credit Originated 0.00% 0.72% 0.72% Acquired in merger 0.52% 0.27% 0.79% SBA Other Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.27% 0.27% Other consumer loans (1) - - -



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(1) The Company generally maintains an environmental loss factor of 0.18% - 0.27% on other consumer loans while historical loss factors range from 0.00% to 60.23% based on loan type. Resulting balances in the allowance for loan losses are immaterial and therefore excluded from the presentation.

(2) "Base" environmental factors reported excluding the effect of "weights" attributable to internal credit-rating classification as follows: "Pass-1": 70%, "Pass-2": 80%, "Pass-3": 90%, "Pass-4": 100%, "Watch": 200%, "Special Mention": 400%, "Substandard": 600%, "Doubtful": 800%. (e.g. Environmental loss factor applicable to originated residential mortgage loan rated as "Substandard": 0.30% x 600% = 1.8%).

- 78 - -------------------------------------------------------------------------------- Allowance for Loan Losses Allocation of Loss Factors on Loans Collectively Evaluated for Impairment at June 30, 2013 Environmental Loan Category Historical Loss Factors Loss Factors (2) Total Residential mortgage loans Originated 0.09% 0.30% 0.39% Purchased 2.78% 0.75% 3.53% Acquired in merger 1.62% 0.24% 1.86% Home equity loans Originated 0.15% 0.36% 0.51% Acquired in merger 0.30% 0.24% 0.54% Home equity lines of credit Originated 0.00% 0.36% 0.36% Acquired in merger 0.00% 0.24% 0.24% Construction loans 1-4 family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Multi-family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Nonresidential Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Commercial mortgage loans Multi-family Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Nonresidential Originated 0.13% 0.72% 0.85% Acquired in merger 0.11% 0.24% 0.35% Commercial business loans Secured (1-4 family) Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Secured (Other) Originated 0.08% 0.72% 0.80% Acquired in merger 0.07% 0.24% 0.31% Unsecured Originated 0.00% 0.57% 0.57% Acquired in merger 0.00% 0.18% 0.18% - 79 -

-------------------------------------------------------------------------------- Allowance for Loan Losses Allocation of Loss Factors on Loans Collectively Evaluated for Impairment at June 30, 2013 (continued) Environmental Historical Loss Factors Loan Category Loss Factors (2) Total SBA 7A Originated 0.00% 0.72% 0.72% Acquired in merger 1.58% 0.24% 1.82% SBA Express Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% SBA Line of Credit Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% SBA Other Originated 0.00% 0.72% 0.72% Acquired in merger 0.00% 0.24% 0.24% Other consumer loans (1) - - -



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(1) The Company generally maintains an environmental loss factor of 0.27% on other consumer loans while historical loss factors range from 0.00% to 100.00% based on loan type. Resulting balances in the allowance for loan losses are immaterial and therefore excluded from the presentation.

(2) "Base" environmental factors reported excluding the effect of "weights" attributable to internal credit-rating classification as follows: "Pass-1": 70%, "Pass-2": 80%, "Pass-3": 90%, "Pass-4": 100%, "Watch": 200%, "Special Mention": 400%, "Substandard": 600%, "Doubtful": 800%. (e.g. Environmental loss factor applicable to originated residential mortgage loan rated as "Substandard": 0.30% x 600% = 1.8%).

Additional information about the Company's allowance for loan losses at December 31, 2013 is presented in Note 10 to the unaudited consolidated financial statements.

Mortgage-backed Securities Available for Sale. Mortgage-backed securities available for sale decreased by $116.2 million to $664.5 million at December 31, 2013 from $780.7 million at June 30, 2013. The net decrease partly reflected sales of securities totaling $52.1 million during the six months ended December 31, 2013 partially offset by purchases totaling $17.1 million during the same period. The proceeds from mortgage-backed security sales were primarily used to fund loan growth during the period while security purchases represented 30-year, fixed-rate agency MBS that were acquired based upon their Community Reinvestment Act eligibility. The net decrease in mortgage-backed securities available for sale also reflected cash repayment of principal, net of discount accretion and premium amortization as well as an aggregate decrease in the fair value of the applicable securities resulting in an increase in the unrealized loss in the portfolio between comparative periods.



At December 31, 2013, the available for sale mortgage-backed securities portfolio included agency pass-through securities and agency collateralized mortgage obligations. Based on its evaluation,

- 80 - --------------------------------------------------------------------------------



management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.

Additional information regarding mortgage-backed securities available for sale at December 31, 2013 is presented in Note 7 and Note 9 to the unaudited consolidated financial statements.

Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity, decreased by $869,000 to $100.2 million at December 31, 2013 from $101.1 million at June 30, 2013. The decrease was largely attributable to cash repayment of principal, net of discount accretion and premium amortization. At December 31, 2013, the held to maturity mortgage-backed securities portfolio primarily included agency pass-through securities and agency collateralized mortgage obligations. As of that date, the Company also held a nominal balance of non-agency mortgage-backed securities whose aggregate carrying values and market values totaled $93,000 and $93,000, respectively. Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.



Additional information regarding mortgage-backed securities held to maturity at December 31, 2013 is presented in Note 8 and Note 9 to the unaudited consolidated financial statements.

Other Assets. The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, bank owned life insurance, deferred income taxes and other miscellaneous assets, increased by $11.9 million to $288.3 million at December 31, 2013 from $276.4 million at June 30, 2013. The increase in other assets partly reflected a $5.4 million increase in the investment in FHLB stock resulting from an increase in the Bank's mandatory investment attributable to the increase in the balance of borrowings with the FHLB. The change also reflected a $3.5 million increase in net deferred income tax assets resulting primarily from increases in the unrealized losses within the available for sale securities portfolio and a $1.4 million increase in the cash surrender value of the Company's bank owned life insurance. The balance of real estate owned ("REO"), included in other assets, increased by $319,000 to $2.4 million at December 31, 2013 from $2.1 million at June 30, 2013 while the number of properties held in REO increased to ten from eight for those same comparative periods, respectively. The net change in the carrying value and number of REO properties reflected the acquisition and sale of several properties during the period. Two properties with aggregate carrying values totaling $273,000 and $245,000, respectively, were under contract for sale at December 31, 2013 with such values generally reflecting the net sale proceeds that the Bank expects to receive based upon the terms of that contract.



The remaining increases and decreases in other assets generally comprised normal growth or operating fluctuations in their respective balances.

Deposits. The balance of total deposits increased by $7.1 million to $2.38 billion at December 31, 2013 from $2.37 billion at June 30, 2013. The net increase in deposit balances reflected a $4.5 million increase in interest-bearing deposits as well as an increase of $2.6 million in non-interest-bearing checking accounts. The increase in interest-bearing deposit accounts comprised a $14.5 million increase in interest-bearing checking accounts coupled with a $6.1 million increase in savings accounts. These increases were partially offset by a $16.1 million decline in certificates of deposit.



The increase in interest-bearing checking accounts largely reflected aggregate growth in retail accounts while the balance of the Company's brokered money market deposits remained generally stable

- 81 - -------------------------------------------------------------------------------- between comparative periods. The Company's brokered money market deposits were originally acquired through Promontory Interfinancial Network's Insured Network Deposits ("IND") program in conjunction with the wholesale funding transactions completed during the latter half of fiscal 2013. The Company's IND deposit balances totaled approximately $229.5 million at December 31, 2013 compared to $229.6 million at June 30, 2013. The net decline in the balance of certificates of deposit partly reflects the Company's active management of deposit pricing during the six months ended December 31, 2013 to support net interest rate spread and margin which continued to allow for some degree of controlled outflow of shorter-term retail time deposits. However, the net change in certificate of deposit balances also reflected the Company's efforts to extend the duration of its time deposits for interest rate risk management purposes. Toward that end, the Bank increased its offering rates on certain longer-term retail time deposits during the quarter ended December 31, 2013 with an emphasis on attracting "new money" within the four-to-five year maturity tranche. Concurrently, the Bank also began to utilize a deposit listing service through which it has attracted "non-brokered" wholesale time deposits targeting institutional investors with a three-to-five investment horizon. The Bank generally prohibits the withdrawal of its listing service deposits prior to maturity further reinforcing the resiliency of those deposits in a rising rate environment. The balance of the Bank's listing service deposits totaled approximately $9.0 million at December 31, 2013 with the balance of funding expected to increase over the near term. Finally, the Bank acquired a small portfolio of longer-term, brokered certificates of deposit during the current quarter whose balances totaled approximately $19.2 million at December 31, 2013. Borrowings. The balance of borrowings increased by $109.2 million to $396.9 million at December 31, 2013 from $287.7 million at June 30, 2013. The reported increase primarily reflected an additional $120.0 million of FHLB advances drawn primarily to fund loan growth during the period. For interest rate risk management purposes, the Company has utilized interest rate derivatives to effectively swap the rolling 90-day maturity/repricing characteristics of the new borrowings into fixed rate for five years. The change in borrowing balances also reflected a $10.8 million decline in the balance of customer sweep accounts to $26.0 million at December 31, 2013 from $36.8 million at June 30, 2013. Sweep accounts are short-term borrowings representing funds that are withdrawn from a customer's non-interest-bearing deposit account and invested in an uninsured overnight investment account that is collateralized by specified investment securities owned by the Company. Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, increased by $576,000 to $20.0 million at December 31, 2013 from $19.5 million at June 30, 2013 reflecting normal operating fluctuations in such balances. Stockholders' Equity. Stockholders' equity decreased $3.2 million to $464.5 million at December 31, 2013 from $467.7 million at June 30, 2013. The decrease was partly attributable a $5.8 million increase in accumulated other comprehensive loss due primarily to a net decline in the fair value of the Company's available for sale securities that was partially offset by an increase in the fair value of its derivatives portfolio. The net decline in stockholders' equity also reflected a $3.8 million increase in Treasury stock resulting from the Company's repurchase of 365,880 shares of its common stock during the period at an average price of $10.36 per share. These decreases were partially offset by $5.6 million in net income coupled with a reduction of unearned ESOP shares for plan shares earned during the current period. - 82 - --------------------------------------------------------------------------------



Comparison of Operating Results for the Three Months Ended December 31, 2013 and December 31, 2012

General. The Company reported net income of $2,987,000 or $0.05 per diluted share for the three months ended December 31, 2013; an increase of $1,810,000 compared to net income of $1,177,000 or $0.02 per diluted share for the three months ended December 31, 2012. The increase in net income between comparative quarters reflected an increase in net interest income coupled with a decrease in the provision for loan losses that were partially offset by a decline in non-interest income and an increase in non-interest expense. In total, these factors resulted in an overall increase in pre-tax income and the provision for income taxes. Net Interest Income. Net interest income for the three months ended December 31, 2013 was $18.5 million, an increase of $2.5 million from $16.0 million for the three months ended December 31, 2012. The increase in net interest income between the comparative periods resulted from an increase in interest income coupled with a decline in interest expense. In general, the increase in interest income was attributable to an increase in the average balance of interest-earning assets that was partially offset by a decrease in their average yield. The decrease in interest expense primarily reflected a decline in the cost of interest-bearing liabilities that was partially offset by an increase in their average balance. As a result of these factors, the Company's net interest rate spread increased eight basis points to 2.33% for the three months ended December 31, 2013 from 2.25% for the three months ended December 31, 2012. The increase in the net interest rate spread reflected a 20 basis point decrease in the cost of interest-bearing liabilities to 0.85% from 1.05% that was partially offset by decline in the yield on earning assets of 12 basis points to 3.18% from 3.30% for the same comparative periods. A discussion of the factors contributing to the overall change in yield on earning assets and cost of interest-bearing liabilities is presented in the separate discussion and analysis of interest income and interest expense below. The factors contributing to the increase in net interest rate spread were also reflected in the Company's net interest margin. However, those effects were partially offset by other factors resulting in a four basis point increase in the Company's net interest margin to 2.46% for the three months ended December 31, 2013 from 2.42% for the three months ended December 31, 2012. The additional factors resulting in the comparatively smaller increase in net interest margin include the foregone interest income associated with the use of earning assets to fund the Company's share repurchase programs. For the three months ended December 31, 2013, the average balance of treasury stock increased by $5.8 million to $74.6 million from $68.9 million for the three months ended December 31, 2012. Interest Income. Total interest income increased by $2.1 million to $23.9 million for the three months ended December 31, 2013 from $21.8 million for the three months ended December 31, 2012. As noted above, the increase in interest income reflected a $362.2 million increase in the average balance of interest-earning assets to $3.01 billion for the quarter ended December 31, 2013 from $2.64 billion for the quarter ended December 31, 2012. The effect on interest income from the increase in average balance was partially offset by a 12 basis point decline in the average yield on interest earning assets to 3.18% from 3.30% those same comparative periods. Interest income from loans increased $1.3 million to $16.5 million for the three months ended December 31, 2013 from $15.2 million for the three months ended December 31, 2012. The increase in interest income on loans was attributable to an increase in their average balance that was partially offset by a decrease in their average yield. The average balance of loans increased by $230.9 million to $1.51 billion for the three months ended December 31, 2013 from $1.28 billion for the three months ended December 31, 2012. The - 83 -

-------------------------------------------------------------------------------- reported increase in the average balance of loans reflected an aggregate increase of $281.0 million in the average balance of commercial loans to $885.4 million for the three months ended December 31, 2013 from $604.4 million for the three months ended December 31, 2012. The Company's commercial loans generally comprise commercial mortgage loans, including multi-family and nonresidential mortgage loans, as well as secured and unsecured commercial business loans. The increase in the average balance of commercial loans was partially offset by a decline in the average balance of residential mortgage loans which decreased by $42.2 million to $616.6 million for the three months ended December 31, 2013 from $658.8 million for the three months ended December 31, 2012. The Company's residential mortgages generally comprise one-to-four family first mortgage loans, home equity loans and home equity lines of credit. The net increase in the average balance of loans also reflected a $7.0 million decline in the average balance of construction loans whose aggregate average balances decreased to $9.7 million for the three months ended December 31, 2013 from $16.7 million for the three months ended December 31, 2012. For those same comparative periods, the average balance of consumer loans also decreased by $216,000 to $4.4 million from $4.6 million. The effect on interest income attributable to the increase in the average balance of loans was partially offset by a decrease in their average yield. The average yield on loans decreased by 37 basis points to 4.36% for the three months ended December 31, 2013 from 4.73% for the three months ended December 31, 2012. The reduction in the overall yield on the Company's loan portfolio primarily reflects the effect of loan origination volume at comparatively lower market interest rates than the aggregate portfolio coupled with the effects of the downward re-pricing of adjustable-rate loans. Interest income from mortgage-backed securities decreased $657,000 to $5.5 million for the three months ended December 31, 2013 from $6.2 million for the three months ended December 31, 2012. The decrease in interest income reflected a decline in the average balance of mortgage-backed securities that was partially offset by an increase in their average yield. The average balance of mortgage-backed securities decreased $280.2 million to $835.9 million for the three months ended December 31, 2013 from $1.12 billion for the three months ended December 31, 2012. For those same comparative periods, the average yield on mortgage-backed securities increased 42 basis points to 2.63% for the three months ended December 31, 2013 from 2.21% for the three months ended December 31, 2012. The decrease in the average balance of mortgage-backed securities primarily reflected the net effects of the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The decrease in average balance also reflected other security sales and principal repayments outpacing the level of other security purchases during the period. As noted earlier, a significant portion of mortgage-backed security sale proceeds during the current fiscal year have been used to fund commercial loan originations while the purchases of such securities have resulted largely from the Bank's Community Reinvestment Act commitments. The increase in the overall yield of the mortgage-backed securities portfolio was primarily attributable to a decrease in purchased premium amortization during the current quarter arising from a reduction in loan prepayments reflecting the overall increase in longer-term market interest rates during the quarter that reduced the incentive for borrowers to refinance. Interest income from non-mortgage-backed securities increased $1.4 million to $1.7 million for the three months ended December 31, 2013 from $280,000 for the three months ended December 31, 2012. The increase in interest income reflected increases in both the average balance and average yield of non-mortgage-backed securities between comparative periods. The average balance of these securities - 84 - -------------------------------------------------------------------------------- increased $408.3 million to $513.7 million for the three months ended December 31, 2013 from $105.4 million for the three months ended December 31, 2012. For those same comparative periods, the average yield on non-mortgage-backed securities increased by 24 basis points to 1.31% from 1.07%. The increase in the average balance of non-mortgage-backed securities primarily reflected the net effects of the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The increase in average balance also reflected other security purchases outpacing the level of other sales and principal repayments during the period. The increase in the average balance of non-mortgage backed securities included a $315.7 million increase in the average balance of taxable securities to $419.0 million during the three months ended December 31, 2013 from $103.3 million during the three months ended December 31, 2012. For those same comparative periods, the average balance of tax-exempt securities increased by $92.6 million to $94.7 million from $2.1 million. The increase in the average yield on non-mortgage backed securities reflected a 10 basis point increase in the yield of taxable securities to 1.17% during the three months ended December 31, 2013 from 1.07% during the three months ended December 31, 2012 augmented by an 87 basis point increase in the average yield on tax-exempt securities to 1.94% from 1.07% between those same comparative periods. The changes in the average yields of the taxable and tax-exempt sectors of the non-mortgage-backed securities portfolios primarily reflected the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013 coupled with the effects of other security purchases and sales within the portfolio during the current fiscal year. Interest income from other interest-earning assets increased by $43,000 to $238,000 for the three months ended December 31, 2013 from $195,000 for the three months ended December 31, 2012. The increase in interest income was primarily attributable to an 11 basis point increase in average yield to 0.67% for the three months ended December 31, 2013 from 0.56% for the three months ended December 31, 2012. For those same comparative periods, the average balance of other interest-earning assets increased by $3.3 million to $142.9 million from $139.7 million. The nominal change in the average balance of other interest-earning assets between comparative periods largely reflects a consistent level of such assets maintained by the Company in the aggregate between comparative periods. The corresponding increase in the average yield, however, reflects proportionately greater average balances of higher yielding assets within the category, such as FHLB stock, in relation to other, lower yielding asset types such as interest-bearing deposits. Interest Expense. Total interest expense decreased $350,000 to $5.5 million for the three months ended December 31, 2013 from $5.8 million for the three months ended December 31, 2012. As noted earlier, the decrease in interest expense reflected a decrease in the average cost of interest-bearing liabilities which declined 20 basis points to 0.85% for the three months ended December 31, 2013 from 1.05% for the three months ended December 31, 2012. The decrease in the average cost was partially offset by a $355.1 million increase in the average balance of interest-bearing liabilities to $2.57 billion from $2.22 billion for the same comparative periods. Interest expense attributed to deposits decreased $179,000 to $3.6 million for the three months ended December 31, 2013 from $3.8 million for the three months ended December 31, 2012. The decrease in interest expense was attributable to a decline in the average cost of interest-bearing deposits that was partially offset by an increase in their average balance. - 85 - -------------------------------------------------------------------------------- The cost of interest-bearing deposits declined by 10 basis points to 0.67% for the three months ended December 31, 2013 from 0.77% for the three months ended December 31, 2012. The reported decline in the average cost was reflected in the decreases in the average costs of certificates of deposit and savings accounts that were partially offset by an increase in the average cost of interest-bearing checking accounts. For those comparative periods, the average cost of certificates of deposit declined 16 basis points to 1.02% from 1.18% while the average cost of savings accounts decreased five basis points to 0.16% from 0.21%. In contrast, the average cost of interest-bearing checking accounts increased by 14 basis points to 0.53% for the three months ended December 31, 2013 from 0.39% for the three months ended December 31, 2012. The increase in cost primarily reflected the effect of money-market deposits maintained as a wholesale funding source through Promontory Interfinancial Network's Insured Network Deposits ("IND") program in conjunction with the wholesale growth transactions completed during the latter half of fiscal 2013. The comparatively higher cost of such "non-retail" funding in relation to the Company's "retail" money market accounts primarily reflects the use of derivatives instruments to hedge the interest rate risk of that floating rate funding source for a period of five years. The overall decrease in the average cost of interest-bearing deposits was partially offset by a $184.9 million increase in their average balance to $2.15 billion for the three months ended December 31, 2013 from $1.97 billion for the three months ended December 31, 2012. The reported increase in the average balance was primarily attributable to a $243.4 million increase in the average balance of interest-bearing checking accounts to $727.4 million for the three months ended December 31, 2013 from $483.9 million for the three months ended December 31, 2012. The reported increase in the average balance of interest-bearing checking accounts was largely attributable to the "non-retail" money market funding that was acquired in conjunction with the wholesale growth transactions noted above. The average balance of this funding source totaled $226.3 million for the three months ended December 31, 2013 with no such balances being reported during the earlier comparative period. The increase in interest-bearing deposits also reflected a $31.4 million increase in the average balance of savings accounts to $467.3 million for the three months ended December 31, 2013 from $436.0 million for the three months ended December 31, 2012. The reported increases in average balance of interest-bearing checking and savings accounts were partially offset by a decline in the average balance of certificates of deposit. For those same comparative periods, the average balance of certificates of deposit decreased $89.9 million to $955.6 million from $1.05 billion. As noted earlier, the reported decline in certificates of deposit was largely attributable to the Company's active management of deposit pricing to support net interest rate spread and margin which continued to allow for some degree of controlled outflow of short-term time deposits during the six months ended December 31, 2013. Partially offsetting this decline was an increase in average balance of longer-term certificates of deposit originated through the Bank's retail branch and "non-retail" deposit listing service resources. Interest expense attributed to borrowings decreased by $171,000 to $1.9 million for the three months ended December 31, 2013 from $2.0 million for the three months ended December 31, 2012. The decrease in interest expense on borrowings reflected a decrease in their average cost that was partially offset by an increase in their average balance. The average cost of borrowings decreased by 145 basis points to 1.76% for the three months ended December 31, 2013 from 3.21% for the three months ended December 31, 2012. For those same comparative periods, the average balance of borrowings increased $170.2 million to $423.7 million from $253.5 million. - 86 -

-------------------------------------------------------------------------------- The decrease in the average cost of borrowings and the increase in their average balance partly reflected the effects of restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The decrease also reflects effects of the additional FHLB advances drawn during the first six months of the current fiscal year as well as the effects of the associated interest rate derivatives used to hedge the cost of those advances. In total, the average cost of FHLB advances decreased by 179 basis points to 1.87% for the three months ended December 31, 2013 from 3.66% for the three months ended December 31, 2012. For those same comparative periods, the average balance of FHLB advances increased by $172.0 million to $388.7 million from $216.7 million. The noted increase in the average balance of FHLB advances was partially offset by a $1.9 million decrease in the average balance of other borrowings to $35.0 million for the three months ended December 31, 2013 from $36.9 million for the three months ended December 31, 2012. For those same comparative periods, the average cost of other borrowings declined by five basis points to 0.50% from 0.55%. Other borrowings primarily include depositor overnight sweep accounts. Provision for Loan Losses. The provision for loan losses decreased by $834,000 to $559,000 for the three months ended December 31, 2013 from $1.4 million for the three months ended December 31, 2012. The decrease in the provision primarily reflected a lower level of specific losses recognized on nonperforming loans individually reviewed for impairment coupled with an overall reduction in net charge offs between comparative periods. This net reduction in provision expense was partially offset by a greater provision for loan losses on non-impaired loans due largely to their comparatively greater aggregate growth during the current period. Non-impaired loans are collectively evaluated for impairment using historical and environmental loss factors which were updated during the current period in accordance with the Bank's allowance for loan loss calculation methodology. Additional information regarding the allowance for loan losses and the associated provisions recognized during the three months ended December 31, 2013 is presented in Note 10 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at December 31, 2013 and June 30, 2013 presented earlier. Non-Interest Income. Non-interest income decreased $356,000 to $1.9 million for the three months ended December 31, 2013 from $2.3 million for the three months ended December 31, 2012. However, excluding gains and losses on the sale of securities and real estate owned ("REO"), non-interest income increased by $276,000 between those same comparative periods. The increase in non-interest income, as adjusted, was largely attributable to a $314,000 increase in income from bank owned life insurance that was due primarily to an increase in the average balance of the underlying insurance assets between comparative periods. The increase in non-interest income also reflected increases in electronic banking and other fees and service charges due to an increase in applicable transaction activity. Partially offsetting these increases was a $62,000 decline in miscellaneous income due largely to reduced levels of REO rental income between comparative periods. The overall decrease in non-interest income also reflected an $871,000 decline in security sale gains reflecting a lower level of net gains arising from security sales during the current period. This decline in non-interest income was partially offset by the absence in the current period of losses on the sale and write down of REO that totaled $239,000 during the earlier comparative period. Non-Interest Expenses. Non-interest expense increased by $366,000 to $15.6 million for the three months ended December 31, 2013 from $15.2 million for the three months ended December 31, 2012. The net increase in non-interest expense primarily reflected increases in equipment and systems expense, federal deposit insurance expense and miscellaneous expense. These increases were partially offset by declines in certain employee compensation and premises occupancy expenses. Less noteworthy - 87 - --------------------------------------------------------------------------------



increases and decreases in other categories of non-interest expense reflected normal operating fluctuations within those categories.

The reported increase in equipment and systems expense was largely attributable to certain expenses relating to the Company's upcoming conversion of its primary core processing and related customer-facing systems to more robust and enhanced systems provided by Fiserv, Inc. ("Fiserv"). The Company had previously selected and engaged Fiserv to be its primary source of internal and customer-facing technology solutions including, but not limited to, core and item processing, Internet banking and electronic bill payment, and ATM/debit card management and processing. Fiserv will also provide the Company with technology solutions supporting data communications, electronic document management, data warehouse and reporting, financial accounting and analysis as well as certain forms of loan and credit-related analyses. Through the relationship with Fiserv, the Company also intends to enhance and expand its technology-based services offerings to include mobile banking, person-to-person payments and online account opening. The conversions to the Fiserv platform are expected to take place during the third and fourth quarters of fiscal 2014 during which the Company expects to incur additional one-time conversion- related expenses. However, upon completing all applicable system conversions and integrations with Fiserv, the Company anticipates that its recurring technology service provider expenses will be reduced by approximately $1.0 million per year. Such anticipated cost savings are based upon the current composition and transactional characteristics of the Company's customer account base and may vary over time based upon changes to those factors. The reported increase in deposit insurance expense reflects an increase in the Bank's FDIC insurance premiums arising primarily from the growth in the Bank's total assets which, when offset by tangible capital, generally establishes the calculation basis of those premiums. The increase in miscellaneous expense includes the recognition of certain costs associated with professional services rendered in support of the Company's strategic efforts to expand its business into insurance agency activities and commercial and industrial ("C&I") lending. The decrease in salaries and employee benefits expense primarily reflected changes to actuarial assumptions relating to the Bank's multi-employer defined benefit pension plan for employees that reduced the required contributions and associated expense to be recognized during fiscal 2014. Finally, the overall increase in non-interest expense was further offset by a decline in premises occupancy expenses that were primarily attributable to a net reduction in property tax expense resulting from the Company's tax appeal efforts to reduce its property tax obligations on certain branch facilities. Provision for Income Taxes. The provision for income taxes increased $783,000 to $1.3 million for the three months ended December 31, 2013 from $518,000 for the three months ended December 31, 2012. The variance in income tax expense between comparative quarters was largely attributable to underlying differences in the level of the taxable portion of pre-tax income between comparative periods. The Company's effective tax rate during the three months ended December 31, 2013 was 30.3% which, in relation to statutory income tax rates, reflected the effects of tax-favored income sources included in pre-tax income. By comparison, the Company's effective tax rate for the three months ended December 31, 2012 was 30.6%. - 88 -

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Comparison of Operating Results for the Six Months Ended December 31, 2013 and December 31, 2012

General. The Company reported net income of $5,573,000 or $0.08 per diluted share for the six months ended December 31, 2013; an increase of $2,736,000 compared to net income of $2,837,000 or $0.04 per diluted share for the six months ended December 31, 2012. The increase in net income between comparative quarters reflected increases in net interest income and non-interest income coupled with a decrease in the provision for loan losses that were partially offset by an increase in non-interest expense. In total, these factors resulted in an overall increase in pre-tax income and the provision for income taxes. Net Interest Income. Net interest income for the six months ended December 31, 2013 was $36.7 million, an increase of $3.8 million from $32.9 million for the six months ended December 31, 2012. The increase in net interest income between the comparative periods resulted from an increase in interest income coupled with a decline in interest expense. In general, the increase in interest income was attributable to an increase in the average balance of interest-earning assets that was partially offset by a decrease in their average yield. The decrease in interest expense primarily reflected a decline in the cost of interest-bearing liabilities that was partially offset by an increase in their average balance. As a result of these factors, the Company's net interest rate spread increased four basis points to 2.35% for the six months ended December 31, 2013 from 2.31% for the six months ended December 31, 2012. The increase in the net interest rate spread reflected a 26 basis point decrease in the cost of interest-bearing liabilities to 0.83% from 1.09% that was partially offset by decline in the yield on earning assets of 22 basis points to 3.18% from 3.40% for the same comparative periods. A discussion of the factors contributing to the overall change in yield on earning assets and cost of interest-bearing liabilities is presented in the separate discussion and analysis of interest income and interest expense below. The factors contributing to the increase in net interest rate spread were also reflected in the Company's net interest margin. However, those effects were more than offset by other factors resulting in a two basis point decrease in the Company's net interest margin to 2.47% for the six months ended December 31, 2013 from 2.49% for the six months ended December 31, 2012. The additional factors resulting in the decrease in net interest margin include the foregone interest income associated with the use of earning assets to fund the Company's share repurchase programs. For the six months ended December 31, 2013, the average balance of treasury stock increased by $5.2 million to $73.6 million from $68.4 million for the six months ended December 31, 2012. Interest Income. Total interest income increased by $2.2 million to $47.2 million for the six months ended December 31, 2013 from $45.0 million for the six months ended December 31, 2012. As noted above, the increase in interest income reflected a $322.1 million increase in the average balance of interest-earning assets to $2.97 billion for the six months ended December 31, 2013 from $2.65 billion for the six months ended December 31, 2012. The effect on interest income from the increase in average balance was partially offset by a 22 basis point decline in the average yield on interest earning assets to 3.18% from 3.40% those same comparative periods. Interest income from loans increased $1.4 million to $32.3 million for the six months ended December 31, 2013 from $30.9 million for the six months ended December 31, 2012. The increase in interest income on loans was attributable to an increase in their average balance that was partially offset by a decrease in their average yield. The average balance of loans increased by $186.1 million to $1.47 billion for the six months ended December 31, 2013 from $1.28 billion for the six months ended December 31, 2012. The reported increase in the average balance of loans reflected an aggregate increase of $248.9 million in the average - 89 - -------------------------------------------------------------------------------- balance of commercial loans to $843.1 million for the six months ended December 31, 2013 from $594.2 million for the six months ended December 31, 2012. The Company's commercial loans generally comprise commercial mortgage loans, including multi-family and nonresidential mortgage loans, as well as secured and unsecured commercial business loans. The increase in the average balance of commercial loans was partially offset by a decline in the average balance of residential mortgage loans which decreased by $55.1 million to $614.2 million for the six months ended December 31, 2013 from $669.3 million for the six months ended December 31, 2012. The Company's residential mortgages generally comprise one-to-four family first mortgage loans, home equity loans and home equity lines of credit. The net increase in the average balance of loans also reflected a $7.6 million decline in the average balance of construction loans whose aggregate average balances decreased to $10.5 million for the six months ended December 31, 2013 from $18.1 million for the six months ended December 31, 2012. For those same comparative periods, the average balance of consumer loans also decreased by $76,000 to $4.4 million from $4.5 million. The effect on interest income attributable to the net increase in the average balance of loans was partially offset by a decrease in their average yield. The average yield on loans decreased by 42 basis points to 4.40% for the six months ended December 31, 2013 from 4.82% for the six months ended December 31, 2012. The reduction in the overall yield on the Company's loan portfolio primarily reflects the effect of loan origination volume at comparatively lower market interest rates than the aggregate portfolio coupled with the effects of the downward re-pricing of adjustable rate loans. Interest income from mortgage-backed securities decreased $2.1 million to $11.1 million for the six months ended December 31, 2013 from $13.2 million for the six months ended December 31, 2012. The decrease in interest income reflected a decline in the average balance of mortgage-backed securities that was partially offset by an increase in their average yield. The average balance of mortgage-backed securities decreased $303.9 million to $854.9 million for the six months ended December 31, 2013 from $1.16 billion for the six months ended December 31, 2012. For those same comparative periods, the average yield on mortgage-backed securities increased 32 basis points to 2.59% for the six months ended December 31, 2013 from 2.27% for the six months ended December 31, 2012. The decrease in the average balance of mortgage-backed securities primarily reflected the net effects of the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The decrease in average balance also reflected other security sales and principal repayments outpacing the level of other security purchases during the period. As noted earlier, a significant portion of mortgage-backed security sale proceeds during the current fiscal year have been used to fund commercial loan originations while the purchases of such securities have resulted largely from the Bank's Community Reinvestment Act commitments. The increase in the overall yield of the mortgage-backed securities portfolio was primarily attributable to a decrease in purchased premium amortization during the current quarter arising from a reduction in loan prepayments reflecting the overall increase in longer-term market interest rates during the quarter that reduced the incentive for borrowers to refinance. Interest income from non-mortgage-backed securities increased $2.9 million to $3.4 million for the six months ended December 31, 2013 from $512,000 for the six months ended December 31, 2012. The increase in interest income reflected an increase in the average balance of such securities that was partially offset by a decline in their average yield between comparative periods. The average balance of non-mortgage-backed securities increased $439.0 million to $515.2 million for the six months ended - 90 - --------------------------------------------------------------------------------



December 31, 2013 from $76.2 million for the six months ended December 31, 2012. For those same comparative periods, the average yield on non-mortgage-backed securities decreased by three basis points to 1.32% from 1.35%.

The increase in the average balance of non-mortgage-backed securities primarily reflected the net effects of the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The increase in average balance also reflected other security purchases outpacing the level of other sales and principal repayments during the period. The increase in the average balance of non-mortgage backed securities included a $347.3 million increase in the average balance of taxable securities to $421.3 million during the six months ended December 31, 2013 from $74.0 million during the six months ended December 31, 2012. For those same comparative periods, the average balance of tax-exempt securities increased by $91.7 million to $93.9 million from $2.2 million. The decrease in the average yield on non-mortgage backed securities reflected a 16 basis point decline in the yield of taxable securities to 1.19% during the six months ended December 31, 2013 from 1.35% during the six months ended December 31, 2012. This decline in yield was partially offset by an 87 basis point increase in the average yield on tax-exempt securities to 1.95% from 1.08% between those same comparative periods. The changes in the average yields of the taxable and tax-exempt sectors of the non-mortgage-backed securities portfolios primarily reflected the restructuring and wholesale growth transactions completed during the latter half of fiscal 2013 coupled with the effects of other security purchases and sales within the portfolio during the current fiscal year. Interest income from other interest-earning assets increased by $46,000 to $436,000 for the six months ended December 31, 2013 from $390,000 for the six months ended December 31, 2012. The increase in interest income was primarily attributable to a seven basis point increase in average yield to 0.67% for the six months ended December 31, 2013 from 0.60% for the six months ended December 31, 2012. For those same comparative periods, the average balance of other interest-earning assets increased by $891,000 to $130.2 million from $129.3 million. The nominal change in the average balance of other interest-earning assets between comparative periods largely reflects a consistent level of such assets maintained by the Company in the aggregate between comparative periods. The corresponding increase in the average yield, however, reflects proportionately greater average balances of higher yielding assets within the category, such as FHLB stock, in relation to other, lower yielding asset types such as interest-bearing deposits. Interest Expense. Total interest expense decreased $1.6 million to $10.6 million for the six months ended December 31, 2013 from $12.1 million for the six months ended December 31, 2012. As noted earlier, the decrease in interest expense reflected a decrease in the average cost of interest-bearing liabilities which declined 26 basis points to 0.83% for the six months ended December 31, 2013 from 1.09% for the six months ended December 31, 2012. The decrease in the average cost was partially offset by a $307.5 million increase in the average balance of interest-bearing liabilities to $2.54 billion from $2.23 billion for the same comparative periods. Interest expense attributed to deposits decreased $824,000 to $7.2 million for the six months ended December 31, 2013 from $8.1 million for the six months ended December 31, 2012. The decrease in interest expense was attributable to a decline in the average cost of interest-bearing deposits that was partially offset by an increase in their average balance. - 91 - -------------------------------------------------------------------------------- The cost of interest-bearing deposits declined by 14 basis points to 0.67% for the six months ended December 31, 2013 from 0.81% for the six months ended December 31, 2012. The reported decline in the average cost was reflected in the decreases in the average costs of certificates of deposit and savings accounts that were partially offset by an increase in the average cost of interest-bearing checking accounts. For those comparative periods, the average cost of certificates of deposit declined 19 basis points to 1.03% from 1.22% while the average cost of savings accounts decreased seven basis points to 0.16% from 0.23%. In contrast, the average cost of interest-bearing checking accounts increased by 10 basis points to 0.53% for the six months ended December 31, 2013 from 0.43% for the six months ended December 31, 2012. The increase in cost primarily reflected the effect of money-market deposits maintained as a wholesale funding source through Promontory IND program in conjunction with the wholesale growth transactions completed during the latter half of fiscal 2013. The comparatively higher cost of such "non-retail" funding in relation to the Company's "retail" money market accounts primarily reflects the use of derivatives instruments to hedge the interest rate risk of that floating rate funding source for a period of five years. The overall decrease in the average cost of interest-bearing deposits was partially offset by a $173.7 million increase in their average balance to $2.15 billion for the six months ended December 31, 2013 from $1.98 billion for the six months ended December 31, 2012. The reported increase in the average balance was primarily attributable to a $249.5 million increase in the average balance of interest-bearing checking accounts to $727.6 million for the six months ended December 31, 2013 from $478.0 million for the six months ended December 31, 2012. The reported increase in the average balance of interest-bearing checking accounts was largely attributable to the "non-retail" money market funding that was acquired in conjunction with the wholesale growth transactions noted above. The average balance of this funding source totaled $226.9 million for the six months ended December 31, 2013 with no such balances being reported during the earlier comparative period. The increase in interest-bearing deposits also reflected a $34.1 million increase in the average balance of savings accounts to $467.9 million for the six months ended December 31, 2013 from $433.8 million for the six months ended December 31, 2012. The reported increases in average balance of interest-bearing checking and savings accounts were partially offset by a decline in the average balance of certificates of deposit. For those same comparative periods, the average balance of certificates of deposit decreased $110.0 million to $959.0 million from $1.07 billion. As noted earlier, the reported decline in certificates of deposit was largely attributable to the Company's active management of deposit pricing to support net interest rate spread and margin which continued to allow for some degree of controlled outflow of short-term time deposits during the six months ended December 31, 2013. Partially offsetting this decline was an increase in average balance of longer-term certificates of deposit originated through the Bank's retail branch and "non-retail" deposit listing service resources. Interest expense attributed to borrowings decreased by $753,000 to $3.3 million for the six months ended December 31, 2013 from $4.1 million for the six months ended December 31, 2012. The decrease in interest expense on borrowings reflected a decrease in their average cost that was partially offset by an increase in their average balance. The average cost of borrowings decreased by 153 basis points to 1.74% for the six months ended December 31, 2013 from 3.27% for the six months ended December 31, 2012. For those same comparative periods, the average balance of borrowings increased $133.8 million to $384.2 million from $250.4 million. - 92 -

-------------------------------------------------------------------------------- The decrease in the average cost of borrowings and the increase in their average balance partly reflected the effects of restructuring and wholesale growth transactions completed during the latter half of fiscal 2013. The decrease also reflects effects of the additional FHLB advances drawn during the first six months of the current fiscal year as well as the effects of the associated interest rate derivatives used to hedge the cost of those advances. In total, the average cost of FHLB advances decreased by 186 basis points to 1.86% for the six months ended December 31, 2013 from 3.72% for the six months ended December 31, 2012. For those same comparative periods, the average balance of FHLB advances increased by $135.1 million to $349.0 million from $213.9 million. The noted increase in the average balance of FHLB advances was partially offset by a $1.2 million decrease in the average balance of other borrowings to $35.2 million for the six months ended December 31, 2013 from $36.4 million for the six months ended December 31, 2012. For those same comparative periods, the average cost of other borrowings declined by eight basis points to 0.50% from 0.58%. Other borrowings primarily include depositor overnight sweep accounts. Provision for Loan Losses. The provision for loan losses remained consistent at $1.7 million for the comparative six month periods ended December 31, 2013 and December 31, 2012. However, the provision in the current period reflected a lower level of specific losses recognized on nonperforming loans individually reviewed for impairment coupled with an overall reduction in net charge offs between comparative periods. This net reduction in provision expense was substantially offset by a greater provision for loan losses on non-impaired loans due largely to their comparatively greater aggregate growth during the current period. Non-impaired loans are collectively evaluated for impairment using historical and environmental loss factors which were updated during the current period in accordance with the Bank's allowance for loan loss calculation methodology. Additional information regarding the allowance for loan losses and the associated provisions recognized during the six months ended December 31, 2013 is presented in Note 10 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at December 31, 2013 and June 30, 2013 presented earlier. Non-Interest Income. Non-interest income increased $305,000 to $3.8 million for the six months ended December 31, 2013 from $3.5 million for the six months ended December 31, 2012. Excluding gains and losses on the sale of securities and REO, non-interest income increased by $642,000 between those same comparative periods. The increase in non-interest income, as adjusted, was largely attributable to a $633,000 increase in income from bank owned life insurance that was due primarily to an increase in the average balance of the underlying insurance assets between comparative periods. The increase in non-interest income also reflected increases in electronic banking and other fees and service charges due to an increase in applicable transaction activity. Non-interest income during the current period also reflected gains relating to the sale of SBA loan originations for which no such sale gains were reported during the earlier comparative period. Partially offsetting these increases was an $185,000 decline in miscellaneous income due, in part, to the absence in the current period of a gain on the sale of a parcel of vacant land adjacent to one of the Bank's branches that was recorded during the earlier comparative period. The decline in miscellaneous income also reflected reduced levels of REO rental income between comparative periods. The overall decrease in non-interest income also reflected an $871,000 decline in security sale gains reflecting a lower level of net gains arising from security sales during the current period. This decline in non-interest income was partially offset by $1,000 in net gains on the sale of REO during the current period compared to sale losses and write down of REO that totaled $533,000 during the earlier comparative period. - 93 - -------------------------------------------------------------------------------- Non-Interest Expenses. Non-interest expense increased by $375,000 to $30.8 million for the six months ended December 31, 2013 from $30.5 million for the six months ended December 31, 2012. Such increases were reflected across most categories of non-interest expense including salaries and employee benefits expense, premises occupancy expense, equipment and systems expense, federal deposit insurance expense and miscellaneous expense. Less noteworthy increases and decreases in other categories of non-interest expense reflected normal operating fluctuations within those categories. The increase in salaries and employee benefits expense primarily reflected increases in employee wages and salaries expense and health insurance expense. The increases in these expenses were partially offset by a decrease in the expense associated with the Bank's multi-employer defined benefit pension plan for employees due to changes in actuarial assumptions that reduced the required contributions and associated expense to be recognized during fiscal 2014. The increase in premises occupancy expenses were primarily attributable to an increase in facility rent expense that was partially offset by a net reduction in property tax expense resulting from the Company's tax appeal efforts to reduce its property tax obligations on certain branch facilities. The reported increase in equipment and systems expense was largely attributable to certain expenses relating to the upcoming conversion of the Company's primary core processing and related customer-facing systems to more robust and enhanced systems provided by Fiserv, Inc. ("Fiserv"). The Company had previously selected and engaged Fiserv to be its primary source of internal and customer-facing technology solutions including, but not limited to, core and item processing, Internet banking and electronic bill payment, and ATM/debit card management and processing. Fiserv will also provide the Company with technology solutions supporting data communications, electronic document management, data warehouse and reporting, financial accounting and analysis as well as certain forms of loan and credit-related analyses. Through the relationship with Fiserv, the Company also intends to enhance and expand its technology-based services offerings to include mobile banking, person-to-person payments and online account opening. The conversions to the Fiserv platform are expected to take place during the third and fourth quarters of fiscal 2014 during which the Company expects to incur additional one-time conversion- related expenses. However, upon completing all applicable system conversions and integrations with Fiserv, the Company anticipates that its recurring technology service provider expenses will be reduced by approximately $1.0 million per year. Such anticipated cost savings are based upon the current composition and transactional characteristics of the Company's customer account base and may vary over time based upon changes to those factors. The reported increase in deposit insurance expense reflects an increase in the Bank's FDIC insurance premiums arising primarily from the growth in the Bank's total assets which, when offset by tangible capital, generally establishes the calculation basis of those premiums. Finally, the increase in miscellaneous expense includes the recognition of certain costs associated with professional services rendered in support of the Company's strategic efforts to expand its business into insurance agency activities and commercial and industrial ("C&I") lending. These increases in expense were partially offset by a decline in REO-related expenses. - 94 - -------------------------------------------------------------------------------- Provision for Income Taxes. The provision for income taxes increased $1.0 million to $2.3 million for the six months ended December 31, 2013 from $1.3 million for the six months ended December 31, 2012. The variance in income tax expense between comparative quarters was largely attributable to underlying differences in the level of the taxable portion of pre-tax income between comparative periods. The Company's effective tax rate during the six months ended December 31, 2013 was 29.4% which, in relation to statutory income tax rates, reflected the effects of tax-favored income sources included in pre-tax income. By comparison, the Company's effective tax rate for the six months ended December 31, 2012 was 31.8%.



Liquidity and Capital Resources

Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of mortgage-backed securities and outstanding loans, maturities and calls of debt securities and funds provided from operations. In addition to cash and cash equivalents, we invest excess funds in short-term interest-earning assets such as overnight deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and mortgage-backed securities. The Bank is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure a safe operation. Management generally maintains cash and cash equivalents for this purpose. Investments that qualify as liquid assets are supplemented by those securities classified as available for sale at December 31, 2013, which included $664.5 million of mortgage-backed securities and $298.1 million of debt securities that can readily be sold if necessary. As noted earlier, the balance of the Company's cash and cash equivalents increased by $26.3 million to $153.3 million at December 31, 2013 from $127.0 million at June 30, 2013. The increase in the balance of cash and cash equivalents at December 31, 2013 primarily reflected additional cash held to fulfill the Company's commitment to fund $39.0 million of new commercial mortgage loans that closed during the first week of January 2014. Notwithstanding the additional liquidity held at December 31, 2013, the Company generally expects to continue maintaining the average balance of interest-earning and non-interest-earning cash and equivalents at comparatively lower levels than those maintained during prior years to reduce the opportunity cost of holding excess liquidity in the current low rate environment. Management will continue to monitor the level of short term, liquid assets in relation to the expected need for such liquidity to fund the Company's strategic initiatives - particularly those relating to the expansion of its commercial lending functions. The Company may alter its liquidity reinvestment strategies based upon the timing and relative success of those initiatives. At December 31, 2013, the Company had outstanding commitments to originate and purchase loans totaling approximately $108.9 million compared to $60.1 million at June 30, 2013. Construction loans in process and unused lines of credit were $11.7 million and $61.9 million, respectively, at December 31, 2013 compared to $11.6 million and $69.4 million, respectively, at June 30, 2013. The Company is also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled $1.3 million and $1.8 million at December 31, 2013 and June 30, 2013, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates - 95 - -------------------------------------------------------------------------------- or other termination clauses and may require payment of a fee by the customer. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. As noted earlier, for the six months ended December 31, 2013, the balance of total deposits increased by $7.1 million to $2.38 billion reflecting the Company's active management of deposit pricing during the period to support net interest spread and margin while extending the duration of term deposits for interest rate risk management purposes. The balance of certificates of deposit with maturities of greater than 12 months increased to $377.6 million at December 31, 2013 compared to $334.9 million at June 30, 2013 with such balances representing 39.1% and 34.1% of total certificates of deposit at the close of each period, respectively. Borrowings from the FHLB of New York are available to supplement the Company's liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with advances. As of December 31, 2013, the Company's outstanding balance of FHLB advances, excluding fair value adjustments, totaled $370.8 million. Of these advances, $145.0 million represent long-term, fixed-rate advances maturing in 2023 that have terms enabling the FHLB to call the borrowing at their option prior to maturity. Short-term FHLB advances at December 31, 2013 included $225.0 million of 90-day, fixed-rate borrowings. The remaining $810,000 of advances represents one fixed-rate, amortizing advance maturing in 2021. The Company has the capacity to borrow additional funds from the FHLB, through a line of credit or by taking additional short-term or long-term advances. Such borrowings are an option available to management if funding needs change or to lengthen liabilities. Most of the Bank's mortgage-backed and debt securities are held in safekeeping at the FHLB of New York with a majority being available as collateral if necessary. In addition to the FHLB advances, the Bank has other borrowings totaling $26.0 million representing overnight "sweep account" balances linked to customer demand deposits. We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving the Bank's facilities. These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to purchase securities or mortgage-backed securities and commitments to extend credit to meet the financing needs of our customers. At December 31, 2013, we had no significant off-balance sheet commitments to purchase securities or for capital expenditures.



Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of December 31, 2013, the Bank exceeded all capital requirements of federal banking regulators.

- 96 - -------------------------------------------------------------------------------- The following table sets forth the Bank's capital position at December 31, 2013 and June 30, 2013, as compared to the minimum regulatory capital requirements: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) As of December 31, 2013: Total capital (to risk-weighted assets) $ 355,552 20.18 % $ 140,956 8.00 % $ 176,195 10.00 % Tier 1 capital (to risk-weighted assets) 344,059 19.53 % 70,478



4.00 % 105,717 6.00 %

Core (Tier 1) capital (to adjusted total assets) 344,059 10.94 % 125,773 4.00 % 157,216 5.00 % Tangible capital (to adjusted total assets) 344,059 10.94 % 47,165 1.50 % - - As of June 30, 2013: Total capital (to risk-weighted assets) $ 353,386 21.77 % $ 129,850 8.00 % $ 162,313 10.00 % Tier 1 capital (to risk-weighted assets) 342,490 21.10 % 64,925 4.00 % 97,388 6.00 % Core (Tier 1) capital (to adjusted total assets) 342,490 11.32 % 121,054 4.00 % 151,317 5.00 % Tangible capital (to adjusted total assets) 342,490 11.32 % 45,395 1.50 % - -



Recent Accounting Pronouncements

For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by the Company, please refer to Note 5 to the unaudited consolidated financial statements.

- 97 - -------------------------------------------------------------------------------- ITEM 3.


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Source: Edgar Glimpses


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