News Column

NORTHEAST COMMUNITY BANCORP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, changes in real estate market values in the Company's market area, and changes in relevant accounting principles and guidelines. Additional factors that may affect the Company's results are discussed in the Company's Annual Report on Form 10-K under "Item 1A. Risk Factors." These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. 22 Table of Contents CRITICAL ACCOUNTING POLICIES We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses and valuation of goodwill to be a critical accounting policy. There have been no changes to our critical accounting policies and procedures during the six months ended June 30, 2014.



For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2013 Annual Report on Form 10-K.

Second Quarter Performance Highlights

The Company's earnings for the quarter ended June 30, 2014 increased by $75,000 compared to the same period in 2013 primarily due to an increase in net interest income, an increase in non-interest income, and a decrease in non-interest expense, partially offset by a credit in provision for loan losses that was less than the same period in 2013 and an increase in provision for income taxes. The Company had a credit of $217,000 in provision for loan losses during the June 30, 2014 quarter compared to a credit of $423,000 in provision for loan losses during the June 30, 2013 quarter. Non-performing loans increased by $6.0 million, or 128.1%, to $10.6 million as of June 30, 2014 from $4.7 million as of December 31, 2013. The increase in non-performing loans was primarily due to the addition of five non-performing mortgage loans totaling $5.3 million and two non-performing commercial and industrial loans totaling $2.5 million, partially offset by the conversion from non-performing to performing status of one mortgage loan totaling $830,000, the satisfaction of one mortgage loan totaling $789,000, and the partial charge-off of $325,000 for one mortgage loan. Our interest rate spread decreased to 3.55% for the three months ended June 30, 2014 from 3.92% for the three months ended June 30, 2013 and our net interest margin decreased to 3.77% for the three months ended June 30, 2014 from 4.16% for the three months ended June 30, 2013. Our loans receivable, net, increased by $14.2 million, or 3.9%, to $382.0 million as of June 30, 2014 from $367.8 million at December 31, 2013 due primarily to increases of $14.4 million in construction mortgage loans, $3.5 million in mixed-use mortgage loans, $1.1 million in multi-family mortgage loans, and $348,000 in one-to-four family mortgage loans, offset by decreases of $3.8 million in non-residential mortgage loans, $1.4 million in commercial and industrial loans, and $3,000 in consumer loans.



Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Total assets increased by $17.2 million, or 3.7%, to $475.4 million at June 30, 2014 from $458.2 million at December 31, 2013. The increase in total assets was due primarily to increases of $14.2 million in loans receivable, net, $6.1 million in cash and cash equivalents, $309,000 in bank owned life insurance, and $189,000 in accrued interest receivable, offset by decreases of $2.4 million in other assets, $938,000 in securities held-to-maturity, and $303,000 in premises and equipment. The increase in total assets was funded primarily from increases of $18.4 million in deposits and $570,000 in accounts payable and accrued expenses, partially offset by a decrease of $786,000 in advance payments by borrowers for taxes and insurance. Loans receivable, net, increased by $14.2 million, or 3.9%, to $382.0 million at June 30, 2014 from $367.8 million at December 31, 2013 due primarily to loan originations totaling $66.1 million which exceeded loan repayments and charge-offs totaling $51.9 million. The increase in the mortgage loan portfolio was due to increases of $14.4 million, or 219.2%, in the construction mortgage loan portfolio to $21.0 million at June 30, 2014 from $6.6 million at December 31, 2013, $3.5 million, or 7.0%, in the mixed-use mortgage loan portfolio to $53.0 million at June 30, 2014 from $50.5 million at December 31, 2013, $1.1 million, or 0.6%, in the multi-family mortgage loan portfolio to $190.0 million at June 30, 2014 from $188.9 million at December 31, 2013, and $348,000, or 3.0%, in the one-to-four family mortgage loan portfolio to $12.1 million at June 30, 2014 from $11.8 million at December 31, 2013, partially offset by decreases of $3.8 million, or 4.6%, in the non-residential mortgage loan portfolio to $78.2 million at June 30, 2014 from $82.0 million at December 31, 2013, $1.4 million, or 4.4%, in the commercial and industrial loan portfolio to $30.0 million at June 30, 2014 from $31.3 million at December 31, 2013, and $3,000, or 1.6%, in the consumer loan portfolio to $158,000 at June 30, 2014 from $161,000 at December 31, 2013. The increase in the construction mortgage loan portfolio was due to the Company's entry in 2012 in the Massachusetts construction market through the origination of construction loans secured by the construction of multi-family and single family properties and the Company's entry during the latter part of 2013 into the New York State construction market through the origination of construction loans secured by the construction of multi-family properties located in New York State. Cash and cash equivalents increased by $6.1 million, or 19.4%, to $37.6 million at June 30, 2014 from $31.5 million at December 31, 2013 due primarily to increases in deposits. Bank owned life insurance increased by $309,000, or 1.5%, to $20.8 million at June 30, 2014 from $20.5 million at December 31, 2013 due to accrued earnings during 2014. Accrued interest receivable increased by $189,000, or 14.9%, to $1.5 million at June 30, 2014 from $1.3 million at December 31, 2013 due primarily to an increase in the mortgage loan portfolio. 23 Table of Contents Other assets decreased by $2.4 million, or 32.2%, to $5.1 million at June 30, 2014 from $7.5 million at December 31, 2013 due to a $1.9 million income tax refund from the Internal Revenue Service that reduced current tax assets. Securities held-to-maturity decreased by $938,000, or 11.1%, to $7.5 million at June 30, 2014 from $8.4 million at December 31, 2013 due primarily to repayments of $956,000. Premises and equipment decreased by $303,000, or 2.5%, to $11.9 million at June 30, 2014 from $12.2 million at December 31, 2013 due primarily to depreciation.

Deposits increased by $18.4 million, or 5.6%, to $343.6 million at June 30, 2014 from $325.2 million at December 31, 2013. The increase in deposits was primarily attributable to increases of $17.8 million in certificates of deposit and $733,000 in regular savings accounts, partially offset by decreases of $99,000 in NOW and money market accounts and $32,000 in non-interest bearing accounts. The increase in certificates of deposit was due to non-broker certificates of deposit gathered through a nationwide certificate of deposit listing service from banks and credit unions in amounts greater than $75,000 and less than $250,000. In this regard, we obtained $17.1 million in non-broker certificates of deposit since December 31, 2013. The increase in deposits was primarily attributable to efforts by the Company to increase liquidity, fund loan originations, and increase reliance on long term certificates of deposit. Advance payments by borrowers for taxes and insurance decreased by $786,000, or 19.7%, to $3.2 million at June 30, 2014 from $4.0 million at December 31, 2013 due primarily to remittances of taxes for our borrowers. Accounts payable and accrued expenses increased by $570,000, or 14.8%, to $4.4 million at June 30, 2014 from $3.9 million at December 31, 2013 due primarily to preparation of remittances of taxes for our borrowers through the accounts payable process. Stockholders' equity decreased by $892,000, or 0.9%, to $103.3 million at June 30, 2014, from $104.2 million at December 31, 2013. This decrease was primarily the result of stock repurchases of $1.4 million, and cash dividends declared and paid of $289,000, partially offset by comprehensive income of $693,000 and the amortization of $94,000 for the ESOP for the period.



Comparison of Operating Results for the Three Months Ended June 30, 2014 and 2013

General. Net income increased by $75,000, or 19.7%, to $456,000 for the quarter ended June 30, 2014 from net income of $381,000 for the quarter ended June 30, 2013. The increase was primarily the result of an increase of $35,000 in net interest income, an increase of $21,000 in non-interest income, and a decrease of $296,000 in non-interest expenses, partially offset by a decrease of $206,000 in provision for loan losses and an increase of $71,000 in income taxes. Net Interest Income. Net interest income increased by $35,000, or 0.9%, to $4.02 million for the three months ended June 30, 2014 from $3.99 million for the three months ended June 30, 2013. The increase in net interest income resulted primarily from an increase of $105,000 in interest income, partially offset by an increase of $70,000 in interest expense. The net interest spread decreased by 37 basis points to 3.55% for the three months ended June 30, 2014 from 3.92% for the three months ended June 30, 2013. The net interest margin decreased by 39 basis points between these periods from 4.16% for the quarter ended June 30, 2013 to 3.77% for the quarter ended June 30, 2014. The decrease in the interest rate spread and the net interest margin in the second quarter of 2014 compared to the same period in 2013 was due to a decrease of 40 basis points in the yield on our interest-earning assets that exceeded a decrease of three basis points in the cost of our interest-bearing liabilities. The average yield on our interest-earning assets decreased by 40 basis points to 4.57% for the three months ended June 30, 2014 from 4.97% for the three months ended June 30, 2013 and the cost of our interest-bearing liabilities decreased by three basis points to 1.02% for the three months ended June 30, 2014 from 1.05% for the three months ended June 30, 2013. The decrease in the yield on our interest-earning assets was due to a decrease in the yield on loans receivable, offset by increases in the yield on securities and other interest-earning assets. The decrease in the cost of our interest-bearing liabilities was due to a decrease in the cost of borrowed money, offset by an increase in the cost

of interest-bearing deposits. 24 Table of Contents The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2014 and 2013. Three Months Ended June 30, 2014 2013 Interest Interest Average and Yield/ Average and Yield/ Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Assets: Interest-earning assets: Loans $ 388,603 $



4,789 4.93 % $ 343,487$ 4,677 5.45 %

Securities (including FHLB stock) 9,383 74 3.15 11,720 84 2.87 Other interest-earning assets 28,351 5 0.07 28,476 2 0.03 Total interest-earning assets 426,337



4,868 4.57 383,683 4,763 4.97 Allowance for loan losses

(4,200 ) (4,683 ) Non-interest-earning assets 47,420 50,110 Total assets $ 469,557$ 429,110 Liabilities and equity: Interest-bearing liabilities: Interest-bearing demand $ 59,646$ 54 0.36 % $ 61,107$ 52 0.34 % Savings and club accounts 86,310 118 0.55 82,049 110 0.54 Certificates of deposit 169,386 640 1.51 147,395 568 1.54 Total interest-bearing deposits 315,342 812 1.03 290,551 730 1.00

Borrowings 17,051 33 0.77 5,000 45 3.60 Total interest-bearing liabilities 332,393 845 1.02 295,551 775 1.05 Noninterest-bearing demand 24,638

20,567 Other liabilities 9,144 8,572 Total liabilities 366,175 324,690 Stockholders' equity 103,382 104,420



Total liabilities and

Stockholders' equity $ 469,557$ 429,110 Net interest income $ 4,023$ 3,988 Interest rate spread 3.55 % 3.92 % Net interest margin 3.77 % 4.16 % Net interest-earning assets $ 93,944$ 88,132 Interest-earning assets to interest-bearing liabilities 128.26 %

129.82 % Total interest income increased by $105,000, or 2.2%, to $4.9 million for the three months ended June 30, 2014 from $4.8 million for the three months ended June 30, 2013. Interest income on loans increased by $112,000, or 2.4%, to $4.8 million for the three months ended June 30, 2014 from $4.7 million for the three months ended June 30, 2013. The increase was primarily the result of an increase of $45.1 million, or 13.1%, in the average balance of the loan portfolio to $388.6 million for the three months ended June 30, 2014 from $343.5 million for the three months ended June 30, 2013 as originations outpaced repayments and charge-offs, net of recoveries. The increase in the average balance of the loan portfolio was offset by a decrease of 52 basis points in the average yield on loans to 4.93% for the three months ended June 30, 2014 from 5.45% for the three months ended June 30, 2013. The decrease in the average yield on loans was due to the pay-off of numerous higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of numerous mortgage loans in our

loan portfolio. Interest income on securities decreased by $10,000, or 11.9%, to $74,000 for the three months ended June 30, 2014 from $84,000 for the three months ended June 30, 2013. The decrease was primarily due to a decrease of $2.3 million, or 19.9%, in the average balance of securities to $9.4 million for the three months ended June 30, 2014 from $11.7 million for the three months ended June 30, 2013, offset by an increase of 28 basis points in the average yield on securities to 3.15% for the three months ended June 30, 2014 from 2.87% for the three months ended June 30, 2013. The decrease in the average balance was due to the principal repayments on investment securities, offset by an increase in FHLB New York stock. The increase in the yield was due to dividends from FHLB New York stock that yielded approximately 4.0% and an increase in FHLB New York stock as a percentage of total investment securities. 25 Table of Contents Interest income on other interest-earning assets (consisting solely of interest-earning deposits) increased by $3,000, or 150.0% to $5,000 for the three months ended June 30, 2014 from $2,000 for the three months ended June 30, 2013. The increase was primarily due to an increase of four basis points in the average yield on other interest-earning assets to 0.07% for the three months ended June 30, 2014 from 0.03% for the three months ended June 30, 2013, offset by a decrease of $125,000, or 0.4%, in the average balance of interest-earning assets to $28.4 million for the three months ended June 30, 2014 from $28.5 million for the three months ended June 30, 2013. The increase in interest income on interest-earnings deposits was due to an increase in the average balance of higher yielding certificates of deposit at other financial institutions, offset by a decrease in the average balance of interest-earning deposits maintained at the FHLB and Federal Reserve Bank of New York. Total interest expense increased by $70,000, or 9.0%, to $845,000 for the three months ended June 30, 2014 from $775,000 for the three months ended June 30, 2013. Interest expense on deposits increased by $82,000, or 11.2%, to $812,000 for the three months ended June 30, 2014 from $730,000 for the three months ended June 30, 2013. The increase in the interest expense on deposits was a result of an increase of $24.8 million, or 8.5%, in the average balance of interest bearing deposits to $315.3 million for the three months ended June 30, 2014 from $290.6 million for the three months ended June 30, 2013. The increase in the interest expense on deposits was also a result of an increase of three basis points in the average cost of interest-bearing deposits to 1.03% for the three months ended June 30, 2014 from 1.00% for the three months ended June

30, 2013. The interest expense of our interest-bearing demand deposits increased by $2,000, or 3.8%, to $54,000 for the three months ended June 30, 2014 from $52,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing demand deposits was due to an increase of two basis points in the average interest cost to 0.36% for the three months ended June 30, 2014 from 0.34% for the three months ended June 30, 2013 as we offered competitive interest rates to generate deposits, offset by a decrease of $1.5 million, or 2.4%, in the average balance of our interest-bearing demand deposits to $59.6 million for the three months ended June 30, 2014 from $61.1 million for the three months ended June 30, 2013. The interest expense of our interest-bearing savings and club deposits increased by $8,000, or 7.2%, to $118,000 for the three months ended June 30, 2014 from $110,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was due to an increase of $4.3 million, or 5.2%, in the average balance of our interest-bearing savings and club deposits to $86.3 million for the three months ended June 30, 2014 from $82.0 million for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was also due to a one basis point increase in the average interest cost to 0.55% for the three months ended June 30, 2014 from 0.54% for the three months ended June 30, 2013 as we continued to offer competitive interest rates to generate deposits. The interest expense of our interest-bearing certificates of deposit increased by $72,000, or 12.7%, to $640,000 for the three months ended June 30, 2014 from $568,000 for the three months ended June 30, 2013. The increase in interest expense in our interest-bearing certificates of deposit was due to an increase of $22.0 million, or 14.9%, in the average balance of our interest-bearing certificates of deposit to $169.4 million for the three months ended June 30, 2014 from $147.4 million for the three months ended June 30, 2013. The increase in our interest-bearing certificates was due to management's decision to continue offering competitive interest rates to generate deposits through a nationwide certificate of deposit listing service. The increase in interest expense of our interest-bearing certificates of deposit was offset by a three basis point decrease in the average interest cost on such certificates to 1.51% for the three months ended June 30, 2014 from 1.54% for the three months ended June 30, 2013. The decrease in the average interest cost of our interest-bearing certificates of deposit was due to the re-pricing of maturing certificates of deposit and the acquisition of competitively priced interest-bearing certificates of deposit through a non-broker nationwide certificate of deposit listing service. Interest expense on borrowings decreased by $12,000, or 26.7%, to $33,000 for the three months ended June 30, 2014 from $45,000 for the three months ended June 30, 2013. The decrease in interest expense on borrowings was due to a decrease of 283 basis points in the cost of borrowed money to 0.77% for the three months ended June 30, 2014 from 3.60% for the three months ended June 30, 2013 due primarily to the maturity and repayment of higher costing FHLB advances during the quarter ended June 30, 2014 and new lower cost FHLB advances obtained during the first six months of 2014. The decrease in interest expense on borrowings was partially offset by an increase of $12.1 million, or 241.0%, in the average balance of borrowed money to $17.1 million for the three months ended June 30, 2014 from $5.0 million for the three months ended June 30, 2013. Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended June 30, 2014 and 2013. 26 Table of Contents Three Months Ended June 30, 2014 2013 (Dollars in thousands) Allowance at beginning of period $ 4,205$ 4,706 Provision (credit) for loan losses (217 ) (423 ) Charge-offs (398 ) (105 ) Recoveries 340 27 Net charge-offs (58 ) (78 ) Allowance at end of period $ 3,930$ 4,205 End of period - Allowance to non-performing loans 36.93 % 195.40 % End of period - Allowance to total loans outstanding



1.02 % 1.25 % Net charge-offs to average loans outstanding during the period 0.01 % 0.02 %

The allowance to non-performing loans ratio decreased to 36.93% at June 30, 2014 from 195.40% at June 30, 2013 due primarily to an increase in non-performing loans to $10.6 million at June 30, 2014 from $2.2 million at June 30, 2013 and a decrease in the allowance for loan losses. The increase in non-performing loans was due to the addition of seven mortgage loans totaling $7.6 million and four commercial and industrial loans totaling $2.5 million, partially offset by the conversion from non-performing to performing status of three mortgage loans totaling $1.0 million and the satisfaction of one mortgage loan totaling $727,000. The allowance for loan losses was $3.93 million at June 30, 2014, $4.02 million at December 31, 2013, and $4.21 million at June 30, 2013. We recorded a credit provision for loan losses of ($217,000) for the three months ended June 30, 2014 compared to a credit provision for loan losses of ($423,000) for the three month period ended June 30, 2013. The reduction in the allowance for loan losses was due to the Company's assessment that there are no losses anticipated in connection with the increase in non-performing loans beyond the amounts already charged-off, that there has been an improvement in the Company's historical charge-offs, and that the level of allowance for loan losses was adequate due to improvements in the economy and the multi-family, mixed-use and non-residential real estate market.

We had charge-offs of $398,000 during the three months ended June 30, 2014 compared to charge-offs of $105,000 during the three months ended June 30, 2013. We recorded recoveries of $340,000 during the three months ended June 30, 2014 compared to recoveries of $27,000 during the three months ended June 30, 2013. Non-interest Income. Non-interest income increased by $21,000, or 4.5%, to $487,000 for the three months ended June 30, 2014 from $466,000 for the three months ended June 30, 2013. The increase was primarily due to increases of $20,000 in advisory fee income generated by our wealth management division, and $8,000 in other loan fees and service charges, offset by a decrease of $7,000 in earnings on bank owned life insurance. The increase in advisory fee income from our wealth management division was due to an increase in assets under management. The increase in other loan fees and service charges was due to an increase in loan fees as our loan portfolio increased. The decrease in earnings on bank owned life insurance was due to a decrease in the effective yield of the underlying investments.

Non-interest Expense. Non-interest expense decreased by $296,000, or 6.8%, to $4.1 million for the three months ended June 30, 2014 from $4.4 million for the three months ended June 30, 2013. The decrease resulted primarily from decreases of $334,000 in impairment loss on goodwill, $136,000 in real estate owned expenses, $14,000 in equipment expense, and $10,000 in advertising expense, partially offset by increases of $105,000 in salaries and employee benefits, $38,000 in FDIC insurance expense, $37,000 in other non-interest expense, $10,000 in occupancy expense, and $8,000 in outside data processing expense. The Company did not have any impairment loss on goodwill in the quarter ended June 30, 2014 compared to a $334,000 impairment loss on goodwill recognized in the quarter ended June 30, 2013. The impairment loss on goodwill during the second quarter of 2013 was due to the Company's determination that an adjustment to the goodwill impairment of $227,000 previously recorded in 2012 was necessary. The goodwill was recorded in connection with the Hayden Financial Group acquisition in 2007. The impairment was caused primarily by the expected decrease in other revenue from this division resulting from a reduction in personnel. Real estate owned expense decreased by $136,000, or 78.6%, to $37,000 in 2014 from $173,000 in 2013 due to operating expenses related to one foreclosed property during the quarter ended June 30, 2014 compared to two foreclosed properties during the quarter ended June 30, 2013 and a loss of $51,000 on the sale of a real estate owned during the quarter ended June 30, 2013. 27 Table of Contents Equipment expense decreased by $14,000, or 9.3%, to $136,000 in 2014 from $150,000 in 2013 due to decreases in the purchases of additional equipment and continued efforts to contain expenses. Advertising expense decreased by $10,000, or 50.0%, to $10,000 in 2014 from $20,000 in 2013 due to continued efforts

to contain expenses. Salaries and employee benefits, which represented 51.6% of the Company's non-interest expense during the quarter ended June 30, 2014, increased by $105,000, or 5.3%, to $2.1 million in 2014 from $2.0 million in 2013 due to the staffing of the Rockland County, New York loan production office, offset by a reduction in the number of full time equivalent employees to 99 at June 30, 2014 from 104 at June 30, 2013. The reduction in staff occurred in the wealth management department and branch operations. FDIC insurance expense increased by $38,000, or 45.8%, to $121,000 in 2014 from $83,000 in 2013 due to increases in the Company's assessment base and quarterly assessment multiplier from 2013 to 2014. Other non-interest expense increased by $37,000, or 3.8%, to $1.02 million in 2014 from $978,000 in 2013 due mainly to increases of $85,000 in miscellaneous other non-interest expenses, $54,000 in audit and accounting fees, $29,000 in service contracts, $10,000 in directors, officers and employee expenses, and $9,000 in telephone expenses, offset by decreases of $113,000 in legal fees, $23,000 in directors compensation, and $14,000 in office supplies and stationery. The decrease in legal fees from the quarter ended June 30, 2013 compared to the quarter ended June 30, 2014 was due primarily to the Company's decision to capitalize certain legal fees.



Occupancy expense increased by $10,000, or 2.9%, to $356,000 in 2014 from $346,000 in 2013 and outside data processing expense increased by $8,000, or 2.8%, to $291,000 in 2014 from $283,000 in 2013 due to the addition of the Rockland County, New York loan production office in January 2014.

Income Taxes. Income tax expense increased by $71,000, or 51.1%, to $210,000 for the three months ended June 30, 2014 from $139,000 for the three months ended June 30, 2013. The increase resulted primarily from a $146,000 increase in pre-tax income in 2014 compared to 2013. The effective tax rate was 31.5% for the three months ended June 30, 2014 and 26.7% for the three months ended June 30, 2013. The increase in the effective tax rate between periods was due to a higher percentage of our pre-tax income being tax-exempt, specifically the earnings on bank-owned life insurance, in 2013 compared to 2014.



Comparison of Operating Results For The Six Months Ended June 30, 2014 and 2013

General. Net income increased by $83,000, or 14.1%, to $671,000 for the six months ended June 30, 2014 from $588,000 for the six months ended June 30, 2013. The increase was primarily the result of an increase of $64,000 in net interest income and a decrease of $343,000 in non-interest expenses, offset by a decrease of $146,000 in credit to the provision for loan losses, a decrease of $69,000 in non-interest income, and an increase of $109,000 in the provision for income taxes.

Net Interest Income. Net interest income increased by $64,000, or 0.8%, to $7.97 million for the six months ended June 30, 2014 from $7.91 million for the six months ended June 30, 2013. The increase in net interest income resulted primarily from an increase of $124,000 in interest income that exceeded an increase of $60,000 in interest expense. The net interest spread decreased by 25 basis points to 3.57% for the six months ended June 30, 2014 from 3.82% for the six months ended June 30, 2013. The net interest margin decreased by 27 basis points between these periods from 4.06% for the six months ended June 30, 2013 to 3.79% for the six months ended June 30, 2014. The decrease in the interest rate spread and the net interest margin in 2014 compared to the same period in 2013 was due to a decrease of 31 basis points in the yield on our interest-earning assets that exceeded a decrease of six basis points in the cost of our interest-bearing liabilities. The average yield on our interest-earning assets decreased by 31 basis points to 4.58% for the six months ended June 30, 2014 from 4.89% for the six months ended June 30, 2013 and the cost of our interest-bearing liabilities decreased by six basis points to 1.01% for the six months ended June 30, 2014 from 1.07% for the six months ended June 30, 2013. The decrease in the yield on our interest-earning assets was due to a decrease in the yield on loans receivable, offset by increases in the yield on securities and other interest-earning assets. The decrease in the cost of our interest-bearing liabilities was due to a decrease in the cost of borrowed money, offset by an increase in the cost

of interest-bearing deposits. 28 Table of Contents The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2014 and 2013. Six Months Ended June 30, 2014 2013 Interest Interest Average and Yield/ Average and Yield/ Balance Dividends Cost Balance Dividends Cost (Dollars in thousands) Assets: Interest-earning assets: Loans $ 383,111$ 9,480 4.95 % $ 344,039$ 9,323 5.42 % Securities 9,684 147 3.04 12,353 183 2.96

Other interest-earning assets 27,556 9 0.07 32,960 6 0.04 Total interest-earning assets 420,351 9,636 4.58 389,352 9,512 4.89 Allowance for loan losses (4,165 ) (4,504 ) Non-interest-earning assets 48,386

50,017 Total assets $ 464,572$ 434,865 Liabilities and equity: Interest-bearing liabilities: Interest-bearing demand $ 61,418$ 109



0.35 % $ 61,480$ 102 0.33 %

Savings and club accounts 85,849 233 0.54 82,642 219 0.53 Certificates of deposit 162,238 1,224



1.51 147,701 1,137 1.54

Total interest-bearing deposits 309,505 1,566 1.01 291,823 1,458 1.00

Borrowings 19,015 98 1.03 8,122 146 3.60



Total interest-bearing liabilities 328,520 1,664 1.01 299,945 1,604 1.07

Noninterest-bearing demand 23,954 22,108 Other liabilities 8,446 7,856 Total liabilities 360,920 329,909 Stockholders' equity 103,652 104,956 Total liabilities and Stockholders' equity $ 464,572$ 434,865 Net interest income $ 7,972$ 7,908 Interest rate spread 3.57 % 3.82 % Net interest margin 3.79 % 4.06 % Net interest-earning assets $ 91,831$ 89,407 Average interest-earning assets to average interest-bearing liabilities 127.95 % 129.81 % Total interest income increased by $124,000, or 1.3%, to $9.6 million for the six months ended June 30, 2014, from $9.5 million for the six months ended June 30, 2013. Interest income on loans increased by $157,000, or 1.7%, to $9.5 million for the six months ended June 30, 2014 from $9.3 million for the six months ended June 30, 2013 as a result of an increase of $39.1 million, or 11.4%, in the average balance of the loan portfolio to $383.1 million for the six months ended June 30, 2014 from $344.0 million for the six months ended June 30, 2013 as originations outpaced repayments. The increase in the average balance of the loan portfolio was offset by a decrease of 47 basis points in the average yield on loans to 4.95% for the six months ended June 30, 2014 from 5.42% for the six months ended June 30, 2013. The decrease in the average yield on loans was due to the pay-off of higher yielding mortgage loans and the refinancing and/or re-pricing to lower interest rates of mortgage loans in

our loan portfolio. Interest income on securities decreased by $36,000, or 19.7%, to $147,000 for the six months ended June 30, 2014 from $183,000 for the six months ended June 30, 2013. The decrease was primarily due to a decrease of $2.7 million, or 21.6%, in the average balance of securities to $9.7 million for the six months ended June 30, 2014 from $12.4 million for the six months ended June 30, 2013, offset by an increase of eight basis points in the average yield on securities to 3.04% for the six months ended June 30, 2014 from 2.96% for the six months ended June 30, 2013. The decrease in the average balance was due to the principal repayments on investment securities, offset by an increase in FHLB New York stock. The increase in the yield was due to dividends from FHLB New York stock that yielded approximately 4.0% and an increase in FHLB New York stock as a percentage of total investment securities. 29 Table of Contents Interest income on other interest-earning assets (consisting solely of interest-earning deposits) increased by $3,000, or 50.0%, to $9,000 for the six months ended June 30, 2014 from $6,000 for the six months ended June 30, 2013. The increase was primarily due to an increase of three basis points in the average yield on other interest-earning assets to 0.07% for the six months ended June 30, 2014 from 0.04% for the six months ended June 30, 2013, offset by a decrease of $5.4 million or 16.4%, in the average balance of interest-earning assets to $27.6 million for the six months ended June 30, 2014 from $33.0 million for the six months ended June 30, 2013. The increase in interest income on interest-earnings deposits was due to an increase in the average balance of higher yielding certificates of deposit at other financial institutions, offset by a decrease in the average balance of interest-earning deposits maintained at the FHLB and Federal Reserve Bank of New York. Total interest expense increased by $60,000, or 3.7%, to $1.66 million for the six months ended June 30, 2014 from $1.60 million for the six months ended June 30, 2013. Interest expense on deposits increased by $108,000, or 7.4%, to $1.6 million for the six months ended June 30, 2014 from $1.5 million for the six months ended June 30, 2013. The increase in the interest expense on deposits was a result of an increase of $17.7 million, or 6.1%, in the average balance of interest bearing deposits to $309.5 million for the six months ended June 30, 2014 from $291.8 million for the six months ended June 30, 2013. The increase in the interest expense on deposits was also a result of an increase of one basis point in the average cost of interest-bearing deposits to 1.01% for the six months ended June 30, 2014 from 1.00% for the six months ended June 30, 2013. The interest expense of our interest-bearing demand deposits increased by $7,000, or 6.9%, to $109,000 for the six months ended June 30, 2014 from $102,000 for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing demand deposits was due to an increase of two basis points in the average interest cost to 0.35% for the six months ended June 30, 2014 from 0.33% for the six months ended June 30, 2013 as we continued to offer competitive interest rates to generate deposits, offset by a decrease of $62,000, or 0.1%, in the average balance of our interest-bearing demand deposits to $61.42 million for the six months ended June 30, 2014 from $61.48 million for the six months ended June 30, 2013. The interest expense of our interest-bearing savings and club deposits increased by $14,000, or 6.4%, to $233,000 for the six months ended June 30, 2014 from $219,000 for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was due to an increase of $3.2 million, or 3.9%, in the average balance of our interest-bearing savings and club deposits to $85.8 million for the six months ended June 30, 2014 from $82.6 million for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing savings and club deposits was also due to a 1 basis point increase in the average interest cost to 0.54% for the six months ended June 30, 2014 from 0.53% for the six months ended June 30, 2013 as we offered competitive interest rates to generate deposits. The interest expense of our interest-bearing certificates of deposit increased by $87,000, or 7.7%, to $1.2 million for the six months ended June 30, 2014 from $1.1 million for the six months ended June 30, 2013. The increase in interest expense in our interest-bearing certificates of deposit was due to an increase of $14.5 million, or 9.8%, in the average balance of our interest-bearing certificates of deposit to $162.2 million for the six months ended June 30, 2014 from $147.7 million for the six months ended June 30, 2013. The increase in our interest-bearing certificates was due to management's decision to continue offering competitive interest rates to generate deposits through a nationwide certificate of deposit listing service. The increase in interest expense of our interest-bearing certificates of deposit was offset by a 3 basis point decrease in the average interest cost on such certificates to 1.51% for the six months ended June 30, 2014 from 1.54% for the six months ended June 30, 2014. The decrease in the average interest cost of our interest-bearing certificates of deposit was due to the re-pricing of maturing certificates of deposit and the acquisition of competitively priced interest-bearing certificates of deposit through a non-broker nationwide certificate of deposit listing service. Interest expense on borrowings decreased by $48,000, or 32.9%, to $98,000 for the six months ended June 30, 2014 from $146,000 for the six months ended June 30, 2013. The decrease in interest expense on borrowings was due to a decrease of 257 basis points in the cost of borrowed money to 1.03% for the six months ended June 30, 2014 from 3.60% for the six months ended June 30, 2013 due primarily to the maturity and repayment of higher costing FHLB advances in June 2014 and new lower costing FHLB advances obtained in December 2013 and the first six months of 2014. The decrease in interest expense on borrowings was partially offset by an increase of $10.9 million, or 134.1%, in the average balance of borrowed money to $19.0 million for the six months ended June 30, 2014 from $8.1 million for the six months ended June 30, 2013. 30 Table of Contents



Allowance for Loan Losses. The following table summarizes the activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013.

Six Months Ended June 30, 2014 2013 (Dollars in thousands)



Allowance at beginning of period $ 4,015$ 4,646 Provision (credit) for loan losses (217 )

(363 ) Charge-offs (433 ) (105 ) Recoveries 565 27 Net recovery (charge-offs) 132 (78 ) Allowance at end of period $ 3,930$ 4,205 We recorded provisions (credit) for loan losses of ($217,000) and ($363,000) for the six-month periods ended June 30, 2014 and 2013, respectively. We charged-off $433,000 against two non-performing multi-family mortgage loans, one mixed-use mortgage loan, and one non-residential mortgage loan during the six months ended June 30, 2014 compared to charge-offs of $105,000 against two non-performing non-residential mortgage loans during the six months ended June 30, 2013. We recorded recoveries of $565,000 during the six months ended June 30, 2014 compared to recoveries of $27,000 during the six months ended June 30, 2013. Non-interest Income. Non-interest income decreased by $69,000, or 6.7%, to $954,000 for the six months ended June 30, 2014 from $1.0 million for the six months ended June 30, 2013. The decrease was primarily due to decreases of $104,000 in other loan fees and service charges and $11,000 in earnings on bank owned life insurance, partially offset by increases of $45,000 in advisory fee income generated by our wealth management division and $1,000 in other non-interest income. The decrease in other loan fees and service charges was due to decreases of $66,000 in mortgage broker fee income and $40,000 in loan fee income. The increase in advisory fee income from our wealth management division was due to an increase in assets under management. Non-interest Expense. Non-interest expense decreased by $343,000, or 4.0%, to $8.2 million for the six months ended June 30, 2014 from $8.6 million for the six months ended June 30, 2013. The decrease resulted primarily from decreases of $334,000 in impairment loss on goodwill, $147,000 in real estate owned expenses, $35,000 in equipment expenses, $16,000 in outside data processing expenses, and $9,000 in advertising expense, offset by increases of $135,000 in FDIC insurance expense, $37,000 in occupancy expense, $18,000 in salaries and employee benefits, and $8,000 in other non-interest expense. The Company did not have any impairment loss on goodwill for the six months ended June 30, 2014. During the second quarter of 2013, the Company determined that an adjustment to the goodwill impairment of $227,000 previously recorded in 2012 was necessary. As a result, an additional impairment charge of $334,000 was recognized for the six months ended June 30, 2013. The goodwill was recorded in connection with the Hayden Financial Group acquisition in 2007. The impairment was caused primarily by the expected decrease in other revenue from this division resulting from a reduction in personnel. Real estate owned expense decreased by $147,000, or 56.8%, to $112,000 in 2014 from $259,000 in 2013 due to operating expenses related to one foreclosed property during the six months ended June 30, 2014 compared to two foreclosed properties during the six months ended June 30, 2013 and a loss of $51,000 on the sale of a real estate owned during the six months ended June 30, 2013. Equipment expense decreased by $35,000, or 10.6%, to $296,000 in 2014 from $331,000 in 2013 due to decreases in the purchases of additional equipment and continued efforts to contain expenses. Outside data processing expense decreased by $16,000, or 2.9%, to $544,000 in 2014 from $560,000 in 2013 and advertising expense decreased by $9,000, or 30.0%, to $21,000 in 2014 from $30,000 in 2013 due to continued efforts to contain expenses. FDIC insurance expense increased by $135,000, or 119.5%, to $248,000 in 2014 from $113,000 in 2013 due to increases in the Company's assessment base and quarterly assessment multiplier from 2013 to 2014. Occupancy expense increased by $37,000, or 5.0%, to $777,000 in 2014 from $740,000 in 2013 due to the addition of the Rockland County, New York loan production office in January 2014. Salaries and employee benefits, which represented 53.1% of the Company's non-interest expense during the six months ended June 30, 2014, increased by $18,000, or 0.4%, to $4.35 million in 2014 from $4.33 million in 2013 due to the staffing of the Rockland County, New York loan production office, offset by a reduction in the number of full time equivalent employees to 99 at June 30, 2014 from 104 at June 30, 2013. The reduction in staff occurred in the wealth management department and branch operations. 31 Table of Contents Other non-interest expense increased by $8,000, or 0.4%, to $1.85 million in 2014 from $1.85 million in 2013 due mainly to increases of $96,000 in miscellaneous other non-interest expenses, $91,000 in audit and accounting fees, $48,000 in service contracts, $45,000 in telephone expenses, $6,000 in insurance expenses, and $4,000 in directors, officers and employee expenses, offset by decreases of $230,000 in legal fees, $37,000 in directors compensation, and $15,000 in office supplies and stationery. The increase in miscellaneous other non-interest expenses was due primarily to an increase of $117,000 in personnel finder's fees, offset by a decrease of $17,000 in consulting expenses. The increase in audit and accounting fees was due to an increase in services provided by our independent and contract internal auditors. The decrease in legal fees was due primarily to the Company's decision to capitalize certain legal fees. Income Taxes. Income tax expense increased by $109,000, or 69.0%, to $267,000 for the six months ended June 30, 2014 from $158,000 for the six months ended June 30, 2013. The increase resulted primarily from a $192,000 increase in pre-tax income in 2014 compared to 2013. The effective tax rate was 28.5% for the six months ended June 30, 2014 compared to 21.2% for the six months ended June 30, 2013. The increase in the effective tax rate was primarily due to the decreased portion of pre-tax income during 2014 attributed to tax-exempt earnings on bank-owned life insurance. NON PERFORMING ASSETS



The following table provides information with respect to our non-performing assets at the dates indicated.

At At June 30, 2014December 31, 2013



(Dollars in thousands)

Non-accrual loans $ 10,643 $ 4,666 Loans past due 90 days or more and accruing - - Total non-performing loans 10,643 4,666 Real estate owned 4,014 3,985 Total non-performing assets 14,657 8,651 Accruing troubled debt restructurings 12,201 15,535 Nonaccrual troubled debt restructurings 4,693 1,269 Total troubled debt restructurings 16,894 16,804 Less nonaccrual troubled debt restructurings in total nonaccrual loans 4,693 1,269 Total troubled debt restructurings and non-performing assets $ 26,858 $ 24,186 Total non-performing loans to total loans 2.76% 1.26% Total non-performing assets to total assets 3.08% 1.89%



Total non-performing assets and troubled

debt restructurings to total assets 5.65% 5.28% The non-accrual loans at June 30, 2014 consisted of 12 loans in the aggregate, comprised of three multi-family mortgage loans, one mixed-use mortgage loan, four non-residential mortgage loans, and four commercial and industrial loans. Non-performing loans increased by $6.0 million, or 128.1%, to $10.6 million at June 30, 2014 from $4.7 million at December 31, 2013. The increase in non-performing loans was due to the addition of five mortgage loans totaling $5.3 million and two commercial and industrial loans totaling $2.5 million, offset by the satisfaction of one mortgage loan totaling $789,000, the conversion from non-performing to performing status of one mortgage loan totaling $824,000, and the charge-off of one mortgage loan of $325,000.



The three non-accrual multi-family mortgage loans totaled $3.1 million at June 30, 2014 and consisted primarily of the following mortgage loans:

(1) An outstanding balance of $2.2 million secured by a 50 unit apartment

building. We classified this loan as substandard. The Company acquired the

property at a sheriff sale on July 8, 2014 and has retained a property

management company to renovate and operate the property. Upon renovation and

full lease-up of the property, the Company will evaluate its options. We do

not anticipate any loss due to the projected positive cash flow from the

property.



(2) An outstanding balance of $695,000 secured by a 23 unit apartment building.

We classified this loan as substandard. The Company has commenced a

foreclosure action. We are evaluating the options currently available to us.

32 Table of Contents



(3) An outstanding balance of $200,000 secured by a six unit apartment building.

We classified this loan as substandard. The Company has commenced a

foreclosure action. We are evaluating the options currently available to us.

The one non-accrual mixed-use mortgage loan totaled $1.9 million, net of charge-off of $325,000, at June 30, 2014, and was secured by three separate buildings with 25 apartment units and office spaces. We classified this loan as substandard. The Court has appointed a receiver who is currently managing the property and a forensic accountant who is reviewing the books and records of the borrowing entity and managing partner. Upon the hiring of the forensic accountant, the borrower filed a chapter 7 bankruptcy petition. The receiver is currently marketing the property for sale.



The four non-accrual non-residential mortgage loans totaled $3.0 million at June 30, 2014 and consisted primarily of the following mortgage loans:

(1) An outstanding balance of $2.1 million secured by an office building. We

classified this loan as substandard. The borrowers have agreed to provide a

deed-in-lieu of foreclosure. The Company has retained a property management

company to operate the property and has exercised the right to collect rents

from the tenants. Upon minor renovation and lease-up of the property, the

Company will market the property for sale. We do not anticipate any loss due

to the projected positive cash flow from the property.



(2) An outstanding balance of $448,000, net of charge-off of $400,000, secured by

a strip shopping center and warehouse. We classified this loan as substandard. The property was severely damaged by fire and the Company and borrower are currently suing the insurance company and the borrower's



insurance agent as part of the Company's collection efforts. The borrower is

marketing the property for sale.



(3) An outstanding balance of $336,000, secured by a building housing auto repair

and auto rental facilities. We classified this loan as substandard. The

Company has commenced a foreclosure action, but the borrower filed for

bankruptcy protection on March 18, 2014. The Chapter 11 bankruptcy was

dismissed and the foreclosure action is continuing. We are evaluating the

options available and anticipate scheduling a foreclosure sale during the

third quarter of 2014.



(4) An outstanding balance of $197,000, secured by a restaurant and seafood

market. We classified this loan as substandard. The Company has commenced a

foreclosure action. We are evaluating the options currently available to us.

The four non-accrual commercial and industrial loans totaled $2.6 million at June 30, 2014 and consisted primarily of the following loans:

(1) Two loans with an aggregate balance of $2.5 million, consisting of a line of

credit with an outstanding balance of $1.4 million and remaining available

line of credit of $76,000 and a term loan with an outstanding balance of $1.1

million. The loans are secured by the assets of a construction company. The

Company is working with the borrower and the borrower's surety bonding company to cure the delinquencies and/or satisfy the loans.



(2) Two loans with an aggregate balance of $79,000, consisting of a line of

credit with an outstanding balance of $48,000 and a remaining available line

of credit of $2,000 and a term loan with an outstanding balance of $31,000.

The loans are secured by the assets of the business and a real estate property. We are evaluating the options currently available to us.



Based on current appraisals and/or fair value analyses of these properties, the Company does not anticipate any losses beyond the amounts already charged off.

At June 30, 2014, we ownedone foreclosed property with a net balance of $4.0 million consisting of an office building located in New Jersey. The property was most recently appraised in November 2013 for $4.25 million. The Company plans to renovate the property shortly to attract more tenants. Upon completion of the renovation, the Company will order an updated appraisal. The Company's managing agent is operating and marketing the building for additional tenants and sale. The Company won a $1.7 million judgment in July 2014 against the former borrower whereby the judgment protects the Company in the event of a loss on the sale of the property.



TROUBLED DEBT RESTRUCTURED LOANS

There were no loans modified that were deemed to be TDRs during the three and six months ended June 30, 2014. As of June 30, 2014, none of the loans that were modified during the previous twelve months had defaulted in the three and six month period ended June 30, 2014. 33 Table of Contents The following tables show the activity in TDR loans for the period indicated: Commercial Residential Nonresidential and Real Estate Real Estate Construction Industrial Consumer Total (in thousands)



Balance at December 31, 2013$ 6,419$ 10,385 $

- $ - $ - $ 16,804 Additions 34 62 - - - 96 Repayments (31 ) (35 ) - - - (66 ) Amortization of TDR reserves 11 49 - - - 60 Balance - June 30, 2014 $ 6,433$ 10,461 $ - $ - $ - $ 16,894 Related allowance $ - $ - $ - $ - $ - $ -



There were no charge-offs of loans classified as TDRs in the three and six months ended June 30, 2014. Additions for the period consist of real estate taxes and similar items paid to protect the collateral position of the Company.

There were four loans modified during the three and six months ended June 30, 2013.

One multi-family mortgage loan had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date. Two non-residential mortgage loans had an original interest rate of 6.75% with an amortization of 25 years. We reduced the interest rate and converted the monthly payments to interest only for twenty months and then amortizing for 30 years, with a balloon payment after approximately five and one-half years from the modification date. One non-residential mortgage loan had an original interest rate of 6.75% with an amortization of 30 years. We reduced the interest rate and converted the monthly payments to interest only for nineteen months and then amortizing for 30 years, with a balloon payment after two years from the modification date. As of June 30, 2013, none of the loans that were modified during the previous twelve months had defaulted in the three and six month periods ended June 30, 2013. The following tables show the activity in TDR loans for the period indicated: Commercial Residential Nonresidential and Real Estate Real Estate Construction Industrial Consumer Total (in thousands)



Balance at December 31, 2012$ 6,444 $ 6,989 $

- $ - $ - $ 13,433 Additions 282 3,287 - - - 3,569 Repayments (19 ) (27 ) - - - (46 ) Amortization of TDR reserves 27 73 - - - 100 Balance - June 30, 2013 $ 6,734$ 10,322 $ - $ - $ - $ 17,056 Related allowance $ - $ - $ - $ - $ - $ -

There were no charge offs against loans classified as TDRs in the three and six months ended June 30, 2013. Additions for the period consist of four non-residential mortgage loans and one residential mortgage loans that were modified and real estate taxes and similar items paid to protect the collateral position of the Company. Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the Federal Home Loan Bank of New York. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. 34 Table of Contents We regularly adjust our investments in liquid assets based upon our assessment of: (1) expected loan demands; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending, and investing activities during any given period. Cash and cash equivalents totaled $37.6 million at June 30, 2014 and consisted primarily of interest-bearing deposits at other financial institutions and miscellaneous cash items. The Company can also borrow an additional $80.8 million from the FHLB of New York to provide additional liquidity. At June 30, 2014, we had $97.3 million in loan commitments outstanding, consisting of $38.6 million of real estate loan commitments, $26.9 million in unused commercial and industrial loan lines of credit, $25.2 million in unused loans in process, $3.8 million in unused real estate equity lines of credit, $2.7 million in commercial and industrial loan commitments, and $158,000 in consumer lines of credit. Certificates of deposit due within one year of June 30, 2014 totaled $62.2 million. This represented 36.8% of certificates of deposit at June 30, 2014. We believe a large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for long periods in the current interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we paid on the certificates of deposit due on or before June 30, 2014. We believe, however, based on past experience, a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of deposit accounts and FHLB advances. At June 30, 2014, we had the ability to borrow $80.8 million, net of $20.9 million in outstanding advances, from the FHLB of New York. At June 30, 2014, we had no overnight advances outstanding. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to maintain or increase our core deposit relationships depending on our level of real estate loan commitments outstanding. Occasionally, we offer promotional rates on certain deposit products to attract deposits or to lengthen repricing time frames. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for the repurchase, if any, of its shares of common stock. At June 30, 2014, the Company had liquid assets of $11.7 million. Capital Management. The Bank is subject to various regulatory capital requirements administered by the FDIC, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2014, the Bank exceeded all regulatory capital requirements. The Bank is considered "well capitalized" under regulatory guidelines. Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, letters of credit and lines of credit. For the three and six months ended June 30, 2014 and the year ended December 31, 2013, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.


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