UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 
 FORM 10-Q 
  (Mark One)x

          

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2012 OR  o

          

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to Commission File Number: 000-11486 
 CENTER BANCORP, INC. (Exact Name of Registrant as Specified in Its Charter) 
  New Jersey

          

          52-1273725(State or Other Jurisdiction of Incorporation or Organization)

          

          (IRS EmployerIdentification No.)
 2455 Morris Avenue Union, New Jersey 07083-0007 (Address of Principal Executive Offices) (Zip Code) (908) 688-9500 (Registrants Telephone Number, Including Area Code) 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (check one):  Large accelerated filer o

          

          Accelerated filer x

          

          Non-accelerated filer o

          

          Smaller reporting company o(Do not check if smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.  Common Stock, no par value:

          

          16,347,088 shares(Title of Class)

          

          (Outstanding as of July 31, 2012)
     TABLE OF CONTENTS Table of Contents  PagePART I  FINANCIAL INFORMATION





1Item 1.Financial Statements





2Consolidated Statements of Condition at June 30, 2012 and December 31, 2011 (unaudited)





2Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 (unaudited)





3Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011 (unaudited)





4Consolidated Statements of Changes in Stockholders Equity for the six months ended June 30, 2012 and 2011 (unaudited)





5Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)





6Notes to Consolidated Financial Statements





7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





39Item 3.Qualitative and Quantitative Disclosures about Market Risks





59Item 4.Controls and Procedures





60PART II  OTHER INFORMATION





61Item 1.Legal Proceedings





61Item 6.Exhibits





61SIGNATURES





62
 i    TABLE OF CONTENTS PART I  FINANCIAL INFORMATION The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily
indicative of the results that may be expected for the full year ending December 31, 2012, or for any other interim period. The Center Bancorp, Inc. 2011 Annual Report on Form 10-K, should be read in conjunction with these financial statements.
 1    TABLE OF CONTENTS Item 1. Financial Statements CENTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)  (in thousands, except for share data)

          

          June 30,2012

          

          December 31,2011ASSETSCash and due from banks

          

          $

          73,668

          

          

          $

          111,101Interest bearing deposits with banks

          

          

          12,000

          

          

          

          Total cash and cash equivalents

          

          

          85,668

          

          

          

          111,101Investment securities:Available for sale

          

          

          467,190

          

          

          

          414,507Held to maturity (fair value of $66,562 and $74,922)

          

          

          62,997

          

          

          

          72,233Loans

          

          

          807,454

          

          

          

          756,010Less: Allowance for loan losses

          

          

          10,221

          

          

          

          9,602Net loans

          

          

          797,233

          

          

          

          746,408Restricted investment in bank stocks, at cost

          

          

          9,139

          

          

          

          9,233Premises and equipment, net

          

          

          12,218

          

          

          

          12,327Accrued interest receivable

          

          

          6,465

          

          

          

          6,219Bank-owned life insurance

          

          

          29,440

          

          

          

          28,943Goodwill and other intangible assets

          

          

          16,804

          

          

          

          16,902Prepaid FDIC assessments

          

          

          1,350

          

          

          

          1,884Other real estate owned

          

          

          453

          

          

          

          591Other assets

          

          

          12,065

          

          

          

          12,390Total assets

          

          $

          1,501,022

          

          

          $

          1,432,738LIABILITIESDeposits:Non-interest bearing

          

          $

          181,282

          

          

          $

          167,164Interest-bearing:Time deposits $100 and over

          

          

          106,452

          

          

          

          137,998Interest-bearing transaction, savings and time deposits less than $100

          

          

          886,915

          

          

          

          816,253Total deposits

          

          

          1,174,649

          

          

          

          1,121,415Short-term borrowings

          

          

          107

          

          

          

          Long-term borrowings

          

          

          161,000

          

          

          

          161,000Subordinated debentures

          

          

          5,155

          

          

          

          5,155Due to brokers for investment securities

          

          

          1,545

          

          

          

          Accounts payable and accrued liabilities

          

          

          10,583

          

          

          

          9,252Total liabilities

          

          

          1,353,039

          

          

          

          1,296,822STOCKHOLDERS EQUITYPreferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at June 30, 2012 and December 31, 2011

          

          

          11,250

          

          

          

          11,250Common stock, no par value, authorized 25,000,000 shares; issued 18,477,412 shares at June 30, 2012 and December 31, 2011; outstanding 16,347,088 shares at June 30, 2012 and 16,332,327 shares at December 31, 2011

          

          

          110,056

          

          

          

          110,056Additional paid-in capital

          

          

          4,742

          

          

          

          4,715Retained earnings

          

          

          39,663

          

          

          

          32,695Treasury stock, at cost (2,130,324 common shares at June 30, 2012 and 2,145,085 common shares at December 31, 2011)

          

          

          (17,234

          )

          

          

          (17,354

          )Accumulated other comprehensive loss

          

          

          (494

          )

          

          

          (5,446

          )Total stockholders equity

          

          

          147,983

          

          

          

          135,916Total liabilities and stockholders equity

          

          $

          1,501,022

          

          

          $

          1,432,738
 See accompanying notes to unaudited consolidated financial statements.
 2    TABLE OF CONTENTS CENTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)  Three Months EndedJune 30,

          

          Six Months EndedJune 30,(in thousands, except for share and per share data)

          

          2012

          

          2011

          

          2012

          

          2011Interest incomeInterest and fees on loans

          

          $

          9,414

          

          

          $

          8,950

          

          

          $

          18,799

          

          

          $

          18,167Interest and dividends on investment securities:Taxable

          

          

          3,112

          

          

          

          3,428

          

          

          

          6,200

          

          

          

          6,806Tax-exempt

          

          

          826

          

          

          

          351

          

          

          

          1,599

          

          

          

          439Dividends

          

          

          140

          

          

          

          149

          

          

          

          289

          

          

          

          333Interest on federal funds sold and other short-term investment

          

          

          4

          

          

          

          

          

          

          

          4

          

          

          

          Total interest income

          

          

          13,496

          

          

          

          12,878

          

          

          

          26,891

          

          

          

          25,745Interest expenseInterest on certificates of deposit $100 or more

          

          

          182

          

          

          

          348

          

          

          

          434

          

          

          

          613Interest on other deposits

          

          

          1,126

          

          

          

          1,072

          

          

          

          2,282

          

          

          

          2,074Interest on borrowings

          

          

          1,642

          

          

          

          1,665

          

          

          

          3,284

          

          

          

          3,320Total interest expense

          

          

          2,950

          

          

          

          3,085

          

          

          

          6,000

          

          

          

          6,007Net interest income

          

          

          10,546

          

          

          

          9,793

          

          

          

          20,891

          

          

          

          19,738Provision for loan losses

          

          

          (107

          )

          

          

          250

          

          

          

          

          

          

          

          1,128Net interest income after provision for loan losses

          

          

          10,653

          

          

          

          9,543

          

          

          

          20,891

          

          

          

          18,610Other incomeService charges, commissions and fees

          

          

          421

          

          

          

          461

          

          

          

          867

          

          

          

          910Annuities and insurance commissions

          

          

          48

          

          

          

          33

          

          

          

          92

          

          

          

          39Bank-owned life insurance

          

          

          246

          

          

          

          261

          

          

          

          497

          

          

          

          521Loan related fees

          

          

          195

          

          

          

          145

          

          

          

          431

          

          

          

          232Other

          

          

          181

          

          

          

          31

          

          

          

          222

          

          

          

          60Other-than-temporary impairment losses on investment securities

          

          

          (140

          )

          

          

          (142

          )

          

          

          (198

          )

          

          

          (237

          )Net other-than-temporary impairment losses on investment securities

          

          

          (140

          )

          

          

          (142

          )

          

          

          (198

          )

          

          

          (237

          )Net gains on sale of investment securities

          

          

          653

          

          

          

          943

          

          

          

          1,648

          

          

          

          1,804Net investment securities gains

          

          

          513

          

          

          

          801

          

          

          

          1,450

          

          

          

          1,567Total other income

          

          

          1,604

          

          

          

          1,732

          

          

          

          3,559

          

          

          

          3,329Other expenseSalaries and employee benefits

          

          

          3,055

          

          

          

          2,903

          

          

          

          6,173

          

          

          

          5,770Occupancy and equipment

          

          

          606

          

          

          

          667

          

          

          

          1,306

          

          

          

          1,533FDIC insurance

          

          

          270

          

          

          

          528

          

          

          

          569

          

          

          

          1,056Professional and consulting

          

          

          294

          

          

          

          245

          

          

          

          540

          

          

          

          486Stationery and printing

          

          

          96

          

          

          

          99

          

          

          

          180

          

          

          

          200Marketing and advertising

          

          

          56

          

          

          

          65

          

          

          

          87

          

          

          

          86Computer expense

          

          

          362

          

          

          

          350

          

          

          

          715

          

          

          

          689Other real estate owned, net

          

          

          22

          

          

          

          

          

          

          

          84

          

          

          

          (1

          )All other

          

          

          929

          

          

          

          900

          

          

          

          1,843

          

          

          

          1,873Total other expense

          

          

          5,690

          

          

          

          5,757

          

          

          

          11,497

          

          

          

          11,692Income before income tax expense

          

          

          6,567

          

          

          

          5,518

          

          

          

          12,953

          

          

          

          10,247Income tax expense

          

          

          2,214

          

          

          

          1,934

          

          

          

          4,369

          

          

          

          3,645Net Income

          

          

          4,353

          

          

          

          3,584

          

          

          

          8,584

          

          

          

          6,602Preferred stock dividends and accretion

          

          

          84

          

          

          

          145

          

          

          

          225

          

          

          

          291Net income available to common stockholders

          

          $

          4,269

          

          

          $

          3,439

          

          

          $

          8,359

          

          

          $

          6,311Earnings per common shareBasic

          

          $

          0.26

          

          

          $

          0.21

          

          

          $

          0.51

          

          

          $

          0.39Diluted

          

          $

          0.26

          

          

          $

          0.21

          

          

          $

          0.51

          

          

          $

          0.39Weighted Average Common Shares OutstandingBasic

          

          

          16,333,653

          

          

          

          16,290,700

          

          

          

          16,332,990

          

          

          

          16,290,547Diluted

          

          

          16,341,767

          

          

          

          16,315,667

          

          

          

          16,340,011

          

          

          

          16,309,026Dividend paid per common share

          

          $

          0.03

          

          

          $

          0.03

          

          

          $

          0.06

          

          

          $

          0.06
 See accompanying notes to unaudited consolidated financial statements.
 3    TABLE OF CONTENTS CENTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)  Three Months Ended June 30,

          

          Six Months EndedJune 30,(in thousands)

          

          2012

          

          2011

          

          2012

          

          2011Net income

          

          $

          4,353

          

          

          $

          3,584

          

          

          $

          8,584

          

          

          $

          6,602Other comprehensive income, net of tax:Unrealized gains and losses on securities available-for-saleUnrealized holding gains arising during the period

          

          

          2,721

          

          

          

          2,855

          

          

          

          5,909

          

          

          

          4,637Reclassification adjustment on OTTI losses included in income

          

          

          93

          

          

          

          92

          

          

          

          131

          

          

          

          153Reclassification adjustment for net gains arising during the period

          

          

          (432

          )

          

          

          (613

          )

          

          

          (1,092

          )

          

          

          (1,162

          )Unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities

          

          

          

          

          

          

          205

          

          

          

          

          

          

          

          205Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities

          

          

          10

          

          

          

          2

          

          

          

          4

          

          

          

          2Net unrealized gains on investment securities

          

          

          2,392

          

          

          

          2,541

          

          

          

          4,952

          

          

          

          3,835Change in minimum pension liability

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (85

          )Total other comprehensive income (see Note 6)

          

          

          2,392

          

          

          

          2,541

          

          

          

          4,952

          

          

          

          3,750Total comprehensive income

          

          $

          6,745

          

          

          $

          6,125

          

          

          $

          13,536

          

          

          $

          10,352
 See accompanying notes to unaudited consolidated financial statements.
 4    TABLE OF CONTENTS CENTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)  (in thousands, except for share and per share data)

          

          Preferred Stock

          

          Common Stock

          

          Additional Paid In Capital

          

          Retained Earnings

          

          Treasury Stock

          

          Accumulated Other Comprehensive Loss

          

          Total Stockholders EquityBalance as of December 31, 2010

          

          $

          9,700

          

          

          $

          110,056

          

          

          $

          4,941

          

          

          $

          21,633

          

          

          $

          (17,698

          )

          

          $

          (7,675

          )

          

          $

          120,957Net income

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          6,602

          

          

          

          

          

          

          

          

          

          

          

          6,602Other comprehensive income, net of tax

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          3,750

          

          

          

          3,750Accretion of discount on preferred stock

          

          

          41

          

          

          

          

          

          

          

          

          

          

          

          (41

          )

          

          

          

          

          

          

          

          

          

          

          Issuance cost of common stock

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (3

          )

          

          

          

          

          

          

          

          

          

          

          (3

          )Cash dividend on series A preferred stock

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (250

          )

          

          

          

          

          

          

          

          

          

          

          (250

          )Cash dividends declared on common stock ($0.06 per share)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (978

          )

          

          

          

          

          

          

          

          

          

          

          (978

          )Stock issued for options exercise (868 shares)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          7

          

          

          

          

          

          

          

          7Stock-based compensation expense

          

          

          

          

          

          

          

          

          

          

          19

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          19Balance as of June 30, 2011

          

          $

          9,741

          

          

          $

          110,056

          

          

          $

          4,960

          

          

          $

          26,963

          

          

          $

          (17,691

          )

          

          $

          (3,925

          )

          

          $

          130,104Balance as of December 31, 2011

          

          $

          11,250

          

          

          $

          110,056

          

          

          $

          4,715

          

          

          $

          32,695

          

          

          $

          (17,354

          )

          

          $

          (5,446

          )

          

          $

          135,916Net income

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          8,584

          

          

          

          

          

          

          

          

          

          

          

          8,584Other comprehensive income, net of tax

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          4,952

          

          

          

          4,952Dividend on series B preferred stock

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (225

          )

          

          

          

          

          

          

          

          

          

          

          (225

          )Issuance cost of common stock

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (3

          )

          

          

          

          

          

          

          

          

          

          

          (3

          )Cash dividends declared on common stock ($0.085 per share)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (1,388

          )

          

          

          

          

          

          

          

          

          

          

          (1,388

          )Stock issued for options exercise (14,761 shares)

          

          

          

          

          

          

          

          

          

          

          12

          

          

          

          

          

          

          

          120

          

          

          

          

          

          

          

          132Stock-based compensation expense

          

          

          

          

          

          

          

          

          

          

          15

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          15Balance as of June 30, 2012

          

          $

          11,250

          

          

          $

          110,056

          

          

          $

          4,742

          

          

          $

          39,663

          

          

          $

          (17,234

          )

          

          $

          (494

          )

          

          $

          147,983
 See accompanying notes to unaudited consolidated financial statements.
 5    TABLE OF CONTENTS CENTER BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  Six Months EndedJune 30,(in thousands)

          

          2012

          

          2011Cash flows from operating activities:Net income

          

          $

          8,584

          

          

          $

          6,602Adjustments to reconcile net income to net cash provided by operating activities:Amortization of premiums and accretion of discounts on investment securities, net

          

          

          2,339

          

          

          

          2,036Depreciation and amortization

          

          

          421

          

          

          

          484Stock-based compensation

          

          

          15

          

          

          

          19Provision for loan losses

          

          

          

          

          

          

          1,128Net other-than-temporary impairment losses on investment securities

          

          

          198

          

          

          

          237Gains on sales of investment securities, net

          

          

          (1,648

          )

          

          

          (1,804

          )Loans originated for resale

          

          

          (10,833

          )

          

          

          (2,827

          )Proceeds from sale of loans held for sale

          

          

          11,587

          

          

          

          2,481Gains on sale of loans held for sale

          

          

          (226

          )

          

          

          (32

          )Increase in accrued interest receivable

          

          

          (246

          )

          

          

          (1,095

          )Decrease in prepaid FDIC insurance assessments

          

          

          534

          

          

          

          1,061Increase in cash surrender value of bank-owned life insurance

          

          

          (497

          )

          

          

          (521

          )(Increase) decrease in other assets

          

          

          (2,533

          )

          

          

          1,352Increase (decrease) in other liabilities

          

          

          923

          

          

          

          (1,277

          )Net cash provided by operating activities

          

          

          8,618

          

          

          

          7,844Cash flows from investing activities:Investment securities available-for-sale:Purchases

          

          

          (134,679

          )

          

          

          (213,875

          )Sales

          

          

          71,162

          

          

          

          158,201Maturities, calls and principal repayments

          

          

          18,184

          

          

          

          30,180Investment securities held-to-maturity:Purchases

          

          

          (5,866

          )

          

          

          (5,843

          )Maturities and principal repayments

          

          

          16,325

          

          

          

          Net redemption of restricted investment in bank stocks

          

          

          94

          

          

          

          402Net (increase) decrease in loans

          

          

          (51,353

          )

          

          

          10,515Purchases of premises and equipment

          

          

          (288

          )

          

          

          (93

          )Proceeds from sale of other real estate owned

          

          

          105

          

          

          

          Net cash used in investing activities

          

          

          (86,316

          )

          

          

          (20,513

          )Cash flows from financing activities:Net increase in deposits

          

          

          53,234

          

          

          

          105,344Net increase (decrease) in short-term borrowings

          

          

          107

          

          

          

          (9,481

          )Repayments of long-term borrowings

          

          

          

          

          

          

          (10,000

          )Cash dividends on preferred stock

          

          

          (225

          )

          

          

          (250

          )Cash dividends on common stock

          

          

          (980

          )

          

          

          (978

          )Issuance cost of common stock

          

          

          (3

          )

          

          

          (3

          )Proceeds from exercise of stock options

          

          

          132

          

          

          

          7Net cash provided by financing activities

          

          

          52,265

          

          

          

          84,639Net change in cash and cash equivalents

          

          

          (25,433

          )

          

          

          71,970Cash and cash equivalents at beginning of period

          

          

          111,101

          

          

          

          37,497Cash and cash equivalents at end of period

          

          $

          85,668

          

          

          $

          109,467Supplemental disclosures of cash flow information:Cash payments for:Interest paid on deposits and borrowings

          

          $

          6,080

          

          

          $

          6,037Income taxes

          

          $

          3,885

          

          

          $

          2,564Supplemental disclosures of non-cash investing activities:Trade date accounting settlements for investments, net

          

          $

          1,545

          

          

          $

          3,761Transfer from investment securities available-for-sale to investment securities held-to-maturity

          

          $

          

          

          

          $

          35,987
 See accompanying notes to unaudited consolidated financial statements.
 6    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The consolidated financial statements of Center Bancorp, Inc. (the Parent Corporation) are prepared on the accrual basis and include the accounts of the Parent Corporation and its wholly-owned subsidiary, Union Center National Bank (the Bank and, collectively with the Parent Corporation and the Parent Corporations other direct and indirect subsidiaries, the Corporation). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the valuation of deferred tax assets. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). Note 2. Earnings per Common Share Basic earnings per common share (EPS) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Corporations weighted average common shares outstanding for diluted EPS include the effect of stock options and warrants outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. Anti-dilutive stock option shares outstanding were 79,343 and 79,343, respectively, for the three and six months ended
June 30, 2012 and 79,343 and 79,343, respectively, for three and six months ended June 30, 2011, respectively. Earnings per common share have been computed based on the following:  Three Months Ended June 30,

          

          Six Months Ended June 30,(in thousands, except per share amounts)

          

          2012

          

          2011

          

          2012

          

          2011Net income

          

          $

          4,353

          

          

          $

          3,584

          

          

          $

          8,584

          

          

          $

          6,602Preferred stock dividends and accretion

          

          

          84

          

          

          

          145

          

          

          

          225

          

          

          

          291Net income available to common shareholders

          

          $

          4,269

          

          

          $

          3,439

          

          

          $

          8,359

          

          

          $

          6,311Basic weighted average common shares outstanding

          

          

          16,334

          

          

          

          16,291

          

          

          

          16,333

          

          

          

          16,291Plus: effect of dilutive options and warrants

          

          

          8

          

          

          

          25

          

          

          

          7

          

          

          

          18Diluted weighted average common shares outstanding

          

          

          16,342

          

          

          

          16,316

          

          

          

          16,340

          

          

          

          16,309Earnings per common share:Basic

          

          $

          0.26

          

          

          $

          0.21

          

          

          $

          0.51

          

          

          $

          0.39Diluted

          

          $

          0.26

          

          

          $

          0.21

          

          

          $

          0.51

          

          

          $

          0.39
 Note 3. Stock-Based Compensation The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporations stock option plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 394,417 shares are available for grant and issuance as of June 30, 2012. Under the 2003 Non-Employee Director Stock Option Plan, a total of 403,219 shares remain available for grant and issuance under the plan as of June 30, 2012.
Such shares may be treasury shares, newly issued shares or a combination thereof.
 7    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Stock-Based Compensation   (continued) Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable over a three year vesting period starting one year after the date of grant and generally expire ten years from the date of grant. Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718-10-10 Stock Based Compensation. The Corporation recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of 3 years. The Corporation estimated the forfeiture rate based on its historical experience during the preceding seven fiscal years. For the six months ended June 30, 2012, the Corporations income before income taxes and net income were reduced by $15,000 and $9,000, respectively, as a result of the compensation expense related to stock options. For the six months ended June 30, 2011, the Corporations income before income taxes and net income were reduced by $19,000 and $11,000, respectively, as a result of the compensation expense related to stock options. Under the principal option plans, the Corporation may also grant restricted stock awards to certain employees. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The Corporation expenses the cost of
restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. There were no restricted stock awards outstanding at June 30, 2012 and June 30, 2011. There were 27,784 and 30,564 shares of common stock underlying granted options for the six months ended June 30, 2012 and 2011, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:  Six Months Ended June 30,2012

          

          2011Weighted average fair value of grants

          

          $

          2.03

          

          

          $

          1.89Risk-free interest rate

          

          

          2.03

          %

          

          

          2.19

          %Dividend yield

          

          

          1.24

          %

          

          

          1.32

          %Expected volatility

          

          

          22.04

          %

          

          

          22.25

          %Expected life in months

          

          

          68

          

          

          

          65
 Activity under the principal option plans as of June 30, 2012 and changes during the six months ended June 30, 2012 were as follows:  Shares

          

          Weighted-Average Exercise Price

          

          Weighted-Average Remaining Contractual Term (Years)

          

          Aggregate Intrinsic ValueOutstanding at December 31, 2011

          

          

          171,378

          

          

          $

          10.01Granted

          

          

          27,784

          

          

          

          9.64Exercised

          

          

          14,761

          

          

          

          8.89Outstanding at June 30, 2012

          

          

          184,401

          

          

          

          10.04

          

          

          

          6.48

          

          

          $

          282,988Exercisable at June 30, 2012

          

          

          115,813

          

          

          $

          10.61

          

          

          

          5.16

          

          

          $

          134,131
 8    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Stock-Based Compensation   (continued) The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporations closing stock price on the last trading day of the second quarter of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2012. This amount changes based on the fair value of the Corporations stock. As of June 30, 2012, there was approximately $119,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 1.65 years. Note 4. Recent Accounting Pronouncements In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the
agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Corporation accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU had no impact on the Corporations statements of income and condition. In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income.The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The
statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Corporations interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 resulted in presentation changes to the Corporations statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 had no impact on the Corporations statements of condition. In September 2011, the FASB issued ASU No. 2011-08, Intangibles  Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. The provisions of ASU No. 2011-08
are effective for the Corporations interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, provided that the entity has not yet performed its annual impairment test for goodwill. The Corporation performs its annual impairment test for goodwill in the fourth quarter of each year. The adoption of ASU No. 2011-08 is not expected to have a material impact on the Corporations statements of income and statements of condition.
 9    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Recent Accounting Pronouncements   (continued) In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) : Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 . The Update defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. ASU No. 2011-12, which shares the same effective date as ASU No. 2011-05, does not defer the requirement for entities to present
components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Corporation adopted the provisions of ASU No. 2011-12 which resulted in a new statement of comprehensive income for the interim period ended March 31, 2012. The adoption of ASU No. 2011-12 had no impact onto the Corporations statements of income and condition. Note 5. Subsequent Event On August 1, 2012, Union Center National Bank (the Bank) assumed all of the deposits and acquired certain assets of Saddle River Valley Bank, a New Jersey State-chartered bank, pursuant to the terms of the Purchase and Assumption Agreement, dated as of February 1, 2012, among the Bank, Saddle River Valley Bank and Saddle River Valley Bancorp. The Bank assumed approximately $85.6 million in deposits and $87.2 million in loans and securities from Saddle River Valley Bank. Note 6. Comprehensive Income Total comprehensive income includes all changes in equity during a period arising from transactions and other events and circumstances from non-owner sources. The Corporations other comprehensive income is comprised of unrealized holding gains and losses on investment securities available-for-sale, and actuarial losses of defined benefit plans, net of taxes.
 10    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Comprehensive Income   (continued) Disclosure of comprehensive income for the six months ended June 30, 2012, and 2011 is presented in the Consolidated Statements of Comprehensive Income. The table below provides a reconciliation of the components of other comprehensive income to the data provided in the Consolidated Statements of Comprehensive Income. The components of other comprehensive income, net of tax, were as follows for the periods indicated:  Six Months Ended June 30,2012

          

          2011(in thousands)Unrealized holding gains on available-for-sale securities

          

          $

          9,372

          

          

          $

          7,543Tax effect

          

          

          (3,463

          )

          

          

          (2,906

          )Net of tax amount

          

          

          5,909

          

          

          

          4,637Reclassification adjustment of OTTI losses included in income

          

          

          198

          

          

          

          237Tax effect

          

          

          (67

          )

          

          

          (84

          )Net of tax amount

          

          

          131

          

          

          

          153Reclassification adjustment for net gains arising during this period

          

          

          (1,648

          )

          

          

          (1,804

          )Tax effect

          

          

          556

          

          

          

          642Net of tax amount

          

          

          (1,092

          )

          

          

          (1,162

          )Unrealized holding gains on securities transferred from available-for-sale to held-to-maturity

          

          

          

          

          

          

          330Tax effect

          

          

          

          

          

          

          (125

          )Net of tax amount

          

          

          

          

          

          

          205Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity

          

          

          6

          

          

          

          3Tax effect

          

          

          (2

          )

          

          

          (1

          )Net of tax amount

          

          

          4

          

          

          

          2Change in minimum pension liability

          

          

          

          

          

          

          (142

          )Tax effect

          

          

          

          

          

          

          57Net of tax amount

          

          

          

          

          

          

          (85

          )Other comprehensive income, net of tax

          

          $

          4,952

          

          

          $

          3,750
 Accumulated other comprehensive loss at June 30, 2012 and December 31, 2011 consisted of the following:  June 30, 2012

          

          December 31, 2011(in thousands)Investment securities available-for-sale, net of tax

          

          $

          2,752

          

          

          $

          (2,196

          )Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax

          

          

          167

          

          

          

          163Defined benefit pension and post-retirement plans, net of tax

          

          

          (3,413

          )

          

          

          (3,413

          )Total accumulated other comprehensive loss

          

          $

          (494

          )

          

          $

          (5,446

          )
 Note 7. Investment Securities The Corporations investment securities are classified as available-for-sale and held-to-maturity at June 30, 2012 and December 31, 2011. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in
 11    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion. Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an
adjustment of yield, offsetting the related amortization of the premium or accretion of the discount. The following tables present information related to the Corporations investment securities at June 30, 2012 and December 31, 2011.  June 30, 2012Amortized Cost

          

          Gross Unrealized Gains

          

          Gross Unrealized Losses

          

          Fair Value(in thousands)Investment Securities Available-for-Sale:Federal agency obligations

          

          $

          18,301

          

          

          $

          382

          

          

          $

          

          

          

          $

          18,683Residential mortgage-backed securities

          

          

          86,792

          

          

          

          2,002

          

          

          

          

          

          

          

          88,794Commercial mortgage-backed securities

          

          

          9,742

          

          

          

          74

          

          

          

          (17

          )

          

          

          9,799Obligations of U.S. states and political subdivisions

          

          

          81,898

          

          

          

          3,449

          

          

          

          (203

          )

          

          

          85,144Trust preferred securities

          

          

          20,610

          

          

          

          42

          

          

          

          (1,827

          )

          

          

          18,825Corporate bonds and notes

          

          

          210,859

          

          

          

          3,432

          

          

          

          (1,587

          )

          

          

          212,704Asset-backed securities

          

          

          19,643

          

          

          

          117

          

          

          

          (127

          )

          

          

          19,633Collateralized mortgage obligations

          

          

          2,854

          

          

          

          

          

          

          

          (1,102

          )

          

          

          1,752Equity securities

          

          

          772

          

          

          

          16

          

          

          

          (187

          )

          

          

          601Other securities

          

          

          11,229

          

          

          

          47

          

          

          

          (21

          )

          

          

          11,255Total

          

          $

          462,700

          

          

          $

          9,561

          

          

          $

          (5,071

          )

          

          $

          467,190Investment Securities Held-to-Maturity:Federal agency obligations

          

          $

          17,532

          

          

          $

          103

          

          

          $

          (22

          )

          

          $

          17,613Commercial mortgage-backed securities

          

          

          6,182

          

          

          

          93

          

          

          

          (8

          )

          

          

          6,267Obligations of U.S. states and political subdivisions

          

          

          39,283

          

          

          

          3,400

          

          

          

          (1

          )

          

          

          42,682Total

          

          $

          62,997

          

          

          $

          3,596

          

          

          $

          (31

          )

          

          $

          66,562Total investment securities

          

          $

          525,697

          

          

          $

          13,157

          

          

          $

          (5,102

          )

          

          $

          533,752
 12    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued)  December 31, 2011Amortized Cost

          

          Gross Unrealized Gains

          

          Gross Unrealized Losses

          

          Fair Value(in thousands)Investment Securities Available-for-Sale:Federal agency obligations

          

          $

          24,781

          

          

          $

          188

          

          

          $

          

          

          

          $

          24,969Residential mortgage-backed securities

          

          

          113,213

          

          

          

          2,157

          

          

          

          (6

          )

          

          

          115,364Obligations of U.S. states and political subdivisions

          

          

          66,309

          

          

          

          2,900

          

          

          

          (36

          )

          

          

          69,173Trust preferred securities

          

          

          20,567

          

          

          

          14

          

          

          

          (4,394

          )

          

          

          16,187Corporate bonds and notes

          

          

          175,812

          

          

          

          1,382

          

          

          

          (4,077

          )

          

          

          173,117Collateralized mortgage obligations

          

          

          3,226

          

          

          

          

          

          

          

          (1,327

          )

          

          

          1,899Asset-backed securities

          

          

          7,614

          

          

          

          52

          

          

          

          (13

          )

          

          

          7,653Equity securities

          

          

          535

          

          

          

          21

          

          

          

          (273

          )

          

          

          262Other securities

          

          

          5,882

          

          

          

          21

          

          

          

          (20

          )

          

          

          5,883Total

          

          $

          417,939

          

          

          $

          6,714

          

          

          $

          (10,146

          )

          

          $

          414,507Investment Securities Held-to-Maturity:Federal agency obligations

          

          $

          28,262

          

          

          $

          177

          

          

          $

          (34

          )

          

          $

          28,405Commercial mortgage-backed securities

          

          

          6,276

          

          

          

          

          

          

          

          (69

          )

          

          

          6,207Obligations of U.S. states and political subdivisions

          

          

          37,695

          

          

          

          2,615

          

          

          

          

          

          

          

          40,310Total

          

          $

          72,233

          

          

          $

          2,792

          

          

          $

          (103

          )

          

          $

          74,922Total investment securities

          

          $

          490,172

          

          

          $

          9,506

          

          

          $

          (10,249

          )

          

          $

          489,429
 The following table presents information for investment securities available-for-sale at June 30, 2012, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.  June 30, 2012Amortized Cost

          

          Fair Value(in thousands)Investment Securities Available-for-Sale:Due in one year or less

          

          $

          14,556

          

          

          $

          14,476Due after one year through five years

          

          

          96,758

          

          

          

          97,606Due after five years through ten years

          

          

          116,072

          

          

          

          117,896Due after ten years

          

          

          126,779

          

          

          

          126,763Residential mortgage-backed securities

          

          

          86,792

          

          

          

          88,794Commercial mortgage-backed securities

          

          

          9,742

          

          

          

          9,799Equity securities

          

          

          772

          

          

          

          601Other securities

          

          

          11,229

          

          

          

          11,255Total

          

          $

          462,700

          

          

          $

          467,190Investment Securities Held-to-Maturity:Due after five years through ten years

          

          $

          5,498

          

          

          $

          5,607Due after ten years

          

          

          51,317

          

          

          

          54,688Commercial mortgage-backed securities

          

          

          6,182

          

          

          

          6,267Total

          

          $

          62,997

          

          

          $

          66,562Total investment securities

          

          $

          525,697

          

          

          $

          533,752
 13    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) During the six months ended June 30, 2011, the Corporation reclassified at fair value approximately $36.0 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax gains of approximately $218,000 remained in accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to
be appropriate as the Corporation has the positive intent and ability to hold these securities to maturity. For the six months ended June 30, 2012, proceeds of available for sale investment securities sold amounted to approximately $71.2 million. Gross realized gains on investment securities sold amounted to approximately $1.6 million, while gross realized losses amounted to approximately $198,000, which were impairment charges, for the period. For the six months ended June 30, 2011, proceeds of investment securities sold amounted to approximately $158.2 million. Gross realized gains on investment securities sold amounted to approximately $1.9 million, while gross realized losses, which included impairment charges of $237,000, amounted to approximately
$306,000 for the period. The following summarizes OTTI charges for the periods indicated.  Six Months Ended June 30,2012

          

          2011(in thousands)Other than temporary impairment charges

          

          $

          28

          

          

          $

          18Principal losses on a variable rate CMO

          

          

          170

          

          

          

          219Total other-than-temporary impairment charges

          

          $

          198

          

          

          $

          237
 The Corporation performs regular analysis on all its investment securities to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record OTTI charges, through earnings, if they have the intent to sell, or if it is more likely than not that they will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss,
the OTTI is recognized in earnings equal to the entire difference between the investments amortized cost basis and its estimated fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. The Corporations assessment of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result from credit rating downgrades.
 14    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) The following table presents detailed information for each trust preferred security held by the Corporation at June 30, 2012 which has at least one rating below investment grade.  Deal Name

          

          Single Issuer or Pooled

          

          Class/ Tranche

          

          Amortized Cost

          

          Fair Value

          

          Gross Unrealized Gain (Loss)

          

          Lowest Credit Rating Assigned

          

          Number of Banks Currently Performing

          

          Deferrals and Defaults as % of Original Collateral

          

          Expected Deferral/Defaults as % of Remaining Performing Collateral(dollars in thousands)Countrywide Capital IV

          

          

          Single

          

          

          

          

          

          

          $

          1,770

          

          

          $

          1,747

          

          

          $

          (23

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneCountrywide Capital V

          

          

          Single

          

          

          

          

          

          

          

          2,747

          

          

          

          2,731

          

          

          

          (16

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneCountrywide Capital V

          

          

          Single

          

          

          

          

          

          

          

          250

          

          

          

          248

          

          

          

          (2

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneNPB Capital Trust II

          

          

          Single

          

          

          

          

          

          

          

          868

          

          

          

          894

          

          

          

          26

          

          

          

          NR

          

          

          

          1

          

          

          

          None

          

          

          

          NoneCitigroup Cap IX

          

          

          Single

          

          

          

          

          

          

          

          992

          

          

          

          980

          

          

          

          (12

          )

          

          

          BB

          

          

          

          1

          

          

          

          None

          

          

          

          NoneCitigroup Cap IX

          

          

          Single

          

          

          

          

          

          

          

          1,904

          

          

          

          1,891

          

          

          

          (13

          )

          

          

          BB

          

          

          

          1

          

          

          

          None

          

          

          

          NoneCitigroup Cap XI

          

          

          Single

          

          

          

          

          

          

          

          246

          

          

          

          244

          

          

          

          (2

          )

          

          

          BB

          

          

          

          1

          

          

          

          None

          

          

          

          NoneBAC Capital Trust X

          

          

          Single

          

          

          

          

          

          

          

          2,500

          

          

          

          2,508

          

          

          

          8

          

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneNationsbank Cap Trust III

          

          

          Single

          

          

          

          

          

          

          

          1,571

          

          

          

          1,125

          

          

          

          (446

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneMorgan Stanley Cap Trust IV

          

          

          Single

          

          

          

          

          

          

          

          2,500

          

          

          

          2,380

          

          

          

          (120

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneMorgan Stanley Cap Trust IV

          

          

          Single

          

          

          

          

          

          

          

          1,742

          

          

          

          1,665

          

          

          

          (77

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneSaturns  GS 2004  06

          

          

          Single

          

          

          

          

          

          

          

          242

          

          

          

          244

          

          

          

          2

          

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneSaturns  GS 2004  06

          

          

          Single

          

          

          

          

          

          

          

          312

          

          

          

          314

          

          

          

          2

          

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneSaturns  GS 2004  04

          

          

          Single

          

          

          

          

          

          

          

          780

          

          

          

          785

          

          

          

          5

          

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneSaturns  GS 2004  04

          

          

          Single

          

          

          

          

          

          

          

          22

          

          

          

          22

          

          

          

          

          

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneGoldman Sachs

          

          

          Single

          

          

          

          

          

          

          

          1,000

          

          

          

          942

          

          

          

          (58

          )

          

          

          BB+

          

          

          

          1

          

          

          

          None

          

          

          

          NoneALESCO Preferred Funding VI

          

          

          Pooled

          

          

          

          C2

          

          

          

          325

          

          

          

          69

          

          

          

          (256

          )

          

          

          Ca

          

          

          

          36 of 56

          

          

          

          36.1

          %

          

          

          46.7

          %ALESCO Preferred Funding VII

          

          

          Pooled

          

          

          

          C1

          

          

          

          839

          

          

          

          36

          

          

          

          (803

          )

          

          

          Ca

          

          

          

          48 of 62

          

          

          

          35.9

          %

          

          

          47.7

          %Total

          

          

          

          

          

          

          

          

          

          $

          20,610

          

          

          $

          18,825

          

          

          $

          (1,785

          )
  (1)

          Includes banks and insurance companies. The Corporation owns two pooled trust preferred securities (Pooled TRUPS), which consist of securities issued by financial institutions and insurances companies. The Corporation holds the mezzanine tranche of such securities. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. The Corporations analysis of these Pooled TRUPS falls within the scope of EITF 99-20, ASC 320-40 and uses a discounted cash flow model to determine the
total OTTI loss. The model considers the structure, and term and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers and the allocation of the payments to the note classes according to a priority of payments specified in the offering circular and indenture. The current estimate of expected cash flows is based on the most recent trustee reports and other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include defaults rates, default rate timing profile and recovery rates. We assume no prepayments, as these Pooled TRUPS were issued at comparatively tight spreads and as such, there is little incentive, if any, to prepay. One of the Pooled TRUPS, ALESCO VI, has incurred its fourteenth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded no other-than-temporary impairment charge for the six months ended June 30, 2012 and June 30, 2011. The other Pooled TRUP, ALESCO VII,
 15    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) incurred its twelfth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded an other-than-temporary impairment charge of $28,000 for the six months ended June 30, 2012 and none for the six months ended June 30, 2011. Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities  Six Months Ended June 30, 2012

          

          Year Ended December 31, 2011(in thousands)Balance of credit-related OTTI at January 1,

          

          $

          6,539

          

          

          $

          6,197Addition:Credit losses on investment securities for which other-than-temporary impairment was not previously recognized

          

          

          198

          

          

          

          342Reduction:Credit losses on investment securities sold during the period

          

          

          

          

          

          

          Balance of credit-related OTTI at period end

          

          $

          6,737

          

          

          $

          6,539
 The Corporation owns one variable rate private label CMO, which was also evaluated for impairment. This CMO was originally issued in 2006 and collateralized by 30 year Adjustable Rate Mortgage loans secured by a first lien, fully amortizing one-to-four residential mortgage loans. The tranche purchased was a Super Senior with an original credit rating of AAA/AAA. The top five states geographic concentration comprised in the deal were California 18.2 percent, Arizona 10.5 percent, Virginia 6.1 percent, Florida 6.5 percent and Nevada 6.3 percent. No one state exceeded a 25 percent concentration. These states have been heavily impacted by the financial
crises and as such have sustained heavy delinquencies affecting the credit rating of the security. Management had applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. The Corporation recorded $112,000 and $170,000 in principal losses on this bond for the three and six months ended June 30, 2012, and $133,000 and $219,000 in principal losses for the three and six months ended June 30, 2011, respectively, and expects additional losses in future periods. As such, management determined that no an other-than-temporary impairment charge exists for this period. At June 30, 2012, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VI and VII investments were -47.6 percent and -49.5 percent, respectively. Excess subordination is the amount of performing collateral above the amount of outstanding collateral underlying each class of the security. The excess subordination as a percent of remaining performing collateral reflects the difference between the performing collateral and the collateral underlying each security divided by the performing collateral. A negative number results when the paying collateral is less than the collateral underlying each class of
the security. A low or negative number decreases the likelihood of full repayment of principal and interest accordingly to original contractual terms. The Corporation did not record other-than-temporary impairment charges relating to equity holdings in bank stocks for the six months ended June 30, 2012 and June 30, 2011. Temporarily Impaired Investments For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 76 investment securities as of June 30, 2012, represent an other-than-temporary impairment. The gross unrealized losses associated with federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
 16    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporations investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified. The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates. The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the collateralized mortgage obligations category consist primarily of private issue collateralized mortgage obligations. Unrealized losses in the corporate debt securities category consist of single issuer corporate trust preferred securities, pooled trust preferred securities and corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. The unrealized loss in equity securities consists primarily of other bank equities. The decline in fair value
is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. For collateralized mortgage obligations, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid. None of the corporate issuers have defaulted on interest payments. Management concluded that these securities, other than the previously mentioned two Pooled TRUPS and one private label CMO were not other-than-temporarily impaired at June 30, 2012. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future. In determining that the securities giving rise to the previously mentioned unrealized losses were not other than temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly there can be no assurance that the actual results will not differ from the Corporations judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Corporations financial
position and results of operations. In addition, the value of, and the realization of any loss on, an investment security are subject to numerous risks as cited above.
 17    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:  June 30, 2012Total

          

          Less than 12 Months

          

          12 Months or LongerFair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses(in thousands)Investment Securities Available-for-Sale:Commercial mortgage-backed securities

          

          $

          3,080

          

          

          $

          (17

          )

          

          $

          3,080

          

          

          $

          (17

          )

          

          $

          

          

          

          $

          Obligations of U.S. states and political subdivisions

          

          

          13,166

          

          

          

          (203

          )

          

          

          13,166

          

          

          

          (203

          )

          

          

          

          

          

          

          Trust preferred securities

          

          

          14,059

          

          

          

          (1,827

          )

          

          

          

          

          

          

          

          

          

          

          14,059

          

          

          

          (1,827

          )Corporate bonds and notes

          

          

          85,953

          

          

          

          (1,587

          )

          

          

          54,310

          

          

          

          (517

          )

          

          

          31,643

          

          

          

          (1,070

          )Collateralized mortgage obligations

          

          

          1,752

          

          

          

          (1,102

          )

          

          

          

          

          

          

          

          

          

          

          1,752

          

          

          

          (1,102

          )Asset-backed securities

          

          

          8,352

          

          

          

          (127

          )

          

          

          8,352

          

          

          

          (127

          )

          

          

          

          

          

          

          Equity securities

          

          

          349

          

          

          

          (187

          )

          

          

          

          

          

          

          

          

          

          

          349

          

          

          

          (187

          )Other securities

          

          

          978

          

          

          

          (21

          )

          

          

          

          

          

          

          

          

          

          

          978

          

          

          

          (21

          )Total

          

          

          127,689

          

          

          

          (5,071

          )

          

          

          78,908

          

          

          

          (864

          )

          

          

          48,781

          

          

          

          (4,207

          )Investment Securities Held-to-Maturity:Federal agency obligations

          

          

          5,138

          

          

          

          (22

          )

          

          

          5,138

          

          

          

          (22

          )

          

          

          

          

          

          

          Commercial mortgage-backed securities

          

          

          1,538

          

          

          

          (8

          )

          

          

          1,538

          

          

          

          (8

          )

          

          

          

          

          

          

          Obligations of U.S. states and political subdivisions

          

          

          1,021

          

          

          

          (1

          )

          

          

          1,021

          

          

          

          (1

          )

          

          

          

          

          

          

          Total

          

          

          7,697

          

          

          

          (31

          )

          

          

          7,697

          

          

          

          (31

          )

          

          

          

          

          

          

          Total Temporarily Impaired Securities

          

          $

          135,386

          

          

          $

          (5,102

          )

          

          $

          86,605

          

          

          $

          (895

          )

          

          $

          48,781

          

          

          $

          (4,207

          )
  December 31, 2011Total

          

          Less than 12 Months

          

          12 Months or LongerFair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses(in thousands)Investment Securities Available-for-Sale:Residential mortgage pass-through securities

          

          $

          2,013

          

          

          $

          (6

          )

          

          $

          2,013

          

          

          $

          (6

          )

          

          $

          

          

          

          $

          Obligations of U.S. states and political subdivisions

          

          

          4,352

          

          

          

          (36

          )

          

          

          4,352

          

          

          

          (36

          )

          

          

          

          

          

          

          Trust preferred securities

          

          

          15,272

          

          

          

          (4,394

          )

          

          

          4,325

          

          

          

          (996

          )

          

          

          10,947

          

          

          

          (3,398

          )Corporate bonds and notes

          

          

          97,043

          

          

          

          (4,077

          )

          

          

          89,534

          

          

          

          (3,663

          )

          

          

          7,509

          

          

          

          (414

          )Collateralized mortgage obligations

          

          

          1,899

          

          

          

          (1,327

          )

          

          

          

          

          

          

          

          

          

          

          1,899

          

          

          

          (1,327

          )Asset-backed securities

          

          

          3,884

          

          

          

          (13

          )

          

          

          3,884

          

          

          

          (13

          )

          

          

          

          

          

          

          Equity securities

          

          

          262

          

          

          

          (273

          )

          

          

          

          

          

          

          

          

          

          

          262

          

          

          

          (273

          )Other securities

          

          

          980

          

          

          

          (20

          )

          

          

          

          

          

          

          

          

          

          

          980

          

          

          

          (20

          )Total

          

          

          125,705

          

          

          

          (10,146

          )

          

          

          104,108

          

          

          

          (4,714

          )

          

          

          21,597

          

          

          

          (5,432)
 18    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Investment Securities   (continued) December 31, 2011Total

          

          Less than 12 Months

          

          12 Months or LongerFair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses

          

          Fair Value

          

          Unrealized Losses(in thousands)Investment Securities Held-to-Maturity:Federal agency obligations

          

          

          11,980

          

          

          

          (34

          )

          

          

          11,980

          

          

          

          (34

          )

          

          

          

          

          

          

          Collateralized mortgage obligations

          

          

          6,207

          

          

          

          (69

          )

          

          

          6,207

          

          

          

          (69

          )

          

          

          

          

          

          

          Total

          

          

          18,187

          

          

          

          (103

          )

          

          

          18,187

          

          

          

          (103

          )

          

          

          

          

          

          

          Total Temporarily Impaired Securities

          

          $

          143,892

          

          

          $

          (10,249

          )

          

          $

          122,295

          

          

          $

          (4,817

          )

          

          $

          21,597

          

          

          $

          (5,432

          )
 Investment securities having a carrying value of approximately $128.1 million and $98.7 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, securities sold under agreement to repurchase, and Federal Home Loan Bank advances and for other purposes required or permitted by law. Note 8. Loans and the Allowance for Loan Losses Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Portfolio segments are defined as the level at which an entity develops and documents a systematic methodology to determine its Allowance. Management has determined that the Corporation has two portfolio segments of loans and leases (commercial and consumer) in determining the Allowance. Both quantitative and qualitative factors are used by management at the portfolio segment level in determining the adequacy of the Allowance for the Corporation. Classes of loans and leases are a disaggregation of a Corporation's portfolio segments. Classes are defined as a group of loans and leases which share similar initial measurement attributes, risk
characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Corporation has five classes of loans and leases commercial and industrial (including lease financing), commercial  real estate, construction, residential mortgage (including home equity) and installment. Generally, all classes of commercial and consumer loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans and leases are adequately secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), when terms are renegotiated below market levels, or where substantial doubt about full repayment of principal or interest is evident. For certain installment loans the entire outstanding balance on the loan is charged-off when the loan becomes 60 days past due. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected and six months of payments to demonstrate that the borrower can continue to meet the loan terms. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loans yield using the level yield method. Impaired Loans The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of impaired loans is based on the present value of expected future cash flows discounted at the loans effective
 19    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) interest rate or, as a practical expedient, at the loans observable market price or at the fair value of the collateral if the loan is collateral dependent. The Corporation has defined its population of impaired loans to include all non-accrual and troubled debt restructuring loans. As part of the evaluation of the value of impaired loans, the Corporation reviews for impairment all non-homogeneous loans (in each instance, above an established dollar threshold of $200,000) internally classified as substandard or below. Smaller impaired non-homogeneous loans and impaired homogeneous loans are not measured for specific reserves and are covered under the Corporations general reserve. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial and consumer non-accruing loans and all loans modified in a troubled debt restructuring (TDR). When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), an impairment is recognized by creating or adjusting an existing allocation of the Allowance, or by recording a partial
charge-off of the loan to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis. Loans Modified in a Troubled Debt Restructuring Loans are considered to have been modified in a TDR when due to a borrower's financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or
significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Reserve for Credit Losses The Corporation's reserve for credit losses is comprised of two components, the allowance and the reserve for unfunded commitments (the Unfunded Commitments). Allowance for Loan Losses The allowance for loan losses is maintained at a level determined adequate to provide for probable loan losses. The allowance is increased by provisions charged to operations and reduced by loan charge-offs, net of recoveries. The allowance is based on managements evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
 20    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) The ultimate collectability of a substantial portion of the Banks loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers. Management believes that the allowance for loan losses is adequate. Management uses available information to recognize loan losses; however, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. Reserve for Unfunded Commitments The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense. Risk Related to Representation and Warranty Provisions The Corporation sells residential mortgage loans in the secondary market primarily to Fannie Mae. The Corporation sells residential mortgage loans to Fannie Mae that includes various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other
matters. As of June 30, 2012, the unpaid principal balance of the Corporations portfolio of residential mortgage loans sold to Fannie Mae was $9.4 million. These loans are generally sold on a non-recourse basis. The agreements under which the Corporation sells residential mortgage loans require the Corporation to deliver various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, the Corporation may be obligated to repurchase residential mortgage loans where required documents are not delivered or are defective. Investors may require the immediate repurchase of a mortgage loan when an
early payment default discovered in an underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. As of June 30, 2012, there were no pending repurchase requests related to representation and warranty provisions.
 21    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) Composition of Loan Portfolio The following table sets forth the composition of the Corporations loan portfolio, including net deferred fees and costs, at June 30, 2012 and December 31, 2011:  June 30,2012

          

          December 31,2011(in thousands)Commercial and industrial

          

          $

          168,137

          

          

          $

          146,711Commercial real estate

          

          

          448,624

          

          

          

          408,164Construction

          

          

          33,521

          

          

          

          39,388Residential mortgage

          

          

          156,664

          

          

          

          160,771Installment

          

          

          345

          

          

          

          959Subtotal

          

          

          807,291

          

          

          

          755,993Net deferred loan costs

          

          

          163

          

          

          

          17Total loans

          

          $

          807,454

          

          

          $

          756,010
 At June 30, 2012 and December 31, 2011, loans to executive officers and directors aggregated approximately $19,616,000 and $10,279,000, respectively. During the six months ended June 30, 2012, the Corporation made new loans to executive officers and directors in the amount of $2,850,000; payments by such persons during 2012 aggregated $3,423,000. On March 30, 2012, the Corporation appointed Frederick S. Fish to the Board of Directors. Mr. Fish had a prior lending relationship with the Bank, and as of June 30, 2012, total loans to Mr. Fish were approximately $9,705,000 and were reflected in the aggregate amount for June 30, 2012. Management is of the opinion that the above loans were made on the same terms and conditions as those prevailing for comparable transactions with non-related borrowers. At June 30, 2012 and December 31, 2011, loan balances of approximately $526.8 million and $469.5 million, respectively, were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances. The following table presents information about loan receivables on non-accrual status at June 30, 2012 and December 31, 2011: Loans Receivable on Non-Accrual Status  June 30, 2012

          

          December 31, 2011(in thousands)Commercial and industrial

          

          $

          233

          

          

          $

          125Commercial real estate

          

          

          408

          

          

          

          225Construction

          

          

          

          

          

          

          3,044Residential mortgage

          

          

          3,302

          

          

          

          3,477Total loans receivable on non-accrual status

          

          $

          3,943

          

          

          $

          6,871
 The amount of interest income that would have been recorded on non-accrual loans during the six months ended June 30, 2012 and the year ended December 31, 2011, had payments remained in accordance with the original contractual terms, was $103,000 and $378,000, respectively. The Corporation continuously monitors the credit quality of its loans receivable. In addition to the internal staff, the Corporation utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified Pass are deemed to possess average to superior credit quality, requiring no more than normal attention.
 22    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) Assets classified as Special Mention have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporations credit position at some future date. Assets are classified Substandard if the asset has a well defined weakness that requires managements attention to a greater degree than for loans classified
special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as Doubtful if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a distinct possibility that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or more and all impaired loans are included in the appropriate category below. The following table presents information, including deferred fees and costs, about the loan credit quality at June 30, 2012 and December 31, 2011: Credit Quality Indicators  June 30, 2012Pass

          

          Special Mention

          

          Substandard

          

          Doubtful

          

          Total(in thousands)Commercial and industrial

          

          $

          164,073

          

          

          $

          2,744

          

          

          $

          1,320

          

          

          $

          

          

          

          $

          168,137Commercial real estate

          

          

          416,855

          

          

          

          17,028

          

          

          

          14,741

          

          

          

          

          

          

          

          448,624Construction

          

          

          33,521

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          33,521Residential mortgage

          

          

          149,437

          

          

          

          392

          

          

          

          6,835

          

          

          

          

          

          

          

          156,664Installment

          

          

          345

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          345Total loans

          

          $

          764,231

          

          

          $

          20,164

          

          

          $

          22,896

          

          

          $

          

          

          

          $

          807,291
 Credit Quality Indicators  December 31, 2011Pass

          

          Special Mention

          

          Substandard

          

          Doubtful

          

          Total(in thousands)Commercial and industrial

          

          $

          143,097

          

          

          $

          2,022

          

          

          $

          1,592

          

          

          $

          

          

          

          $

          146,711Commercial real estate

          

          

          371,519

          

          

          

          24,282

          

          

          

          12,363

          

          

          

          

          

          

          

          408,164Construction

          

          

          36,344

          

          

          

          

          

          

          

          3,044

          

          

          

          

          

          

          

          39,388Residential mortgage

          

          

          155,098

          

          

          

          

          

          

          

          5,673

          

          

          

          

          

          

          

          160,771Installment

          

          

          959

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          959Total loans

          

          $

          707,017

          

          

          $

          26,304

          

          

          $

          22,672

          

          

          $

          

          

          

          $

          755,993
 23    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) The following table provides an analysis of the impaired loans at June 30, 2012 and December 31, 2011:  Six Months Ended June 30, 2012Recorded Investment

          

          Unpaid Principal Balance

          

          Related Allowance(in thousands)No Related Allowance RecordedCommercial real estate

          

          $

          2,093

          

          

          $

          2,542

          

          

          $

          Total

          

          $

          2,093

          

          

          $

          2,542

          

          

          $

          With An Allowance RecordedCommercial real estate

          

          $

          4,180

          

          

          $

          4,180

          

          

          $

          531Residential mortgage

          

          

          4,046

          

          

          

          4,046

          

          

          

          340Total

          

          $

          8,226

          

          

          $

          8,226

          

          

          $

          871TotalCommercial real estate

          

          $

          6,273

          

          

          $

          6,722

          

          

          $

          531Residential mortgage

          

          

          4,046

          

          

          

          4,046

          

          

          

          340Total (including related allowance)

          

          $

          10,319

          

          

          $

          10,768

          

          

          $

          871
  Year Ended December 31, 2011Recorded Investment

          

          Unpaid Principal Balance

          

          Related Allowance(in thousands)No Related Allowance RecordedCommercial real estate

          

          

          2,121

          

          

          

          2,570

          

          

          

          Total

          

          $

          2,121

          

          

          $

          2,570

          

          

          $

          With An Allowance RecordedCommercial real estate

          

          $

          4,180

          

          

          $

          4,180

          

          

          $

          567Construction

          

          

          3,044

          

          

          

          3,584

          

          

          

          200Residential mortgage

          

          

          4,601

          

          

          

          4,601

          

          

          

          318Total

          

          $

          11,825

          

          

          $

          12,365

          

          

          $

          1,085TotalCommercial real estate

          

          

          6,301

          

          

          

          6,750

          

          

          

          567Construction

          

          

          3,044

          

          

          

          3,584

          

          

          

          200Residential mortgage

          

          

          4,601

          

          

          

          4,601

          

          

          

          318Total (including related allowance)

          

          $

          13,946

          

          

          $

          14,935

          

          

          $

          1,085
 24    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued)  Three Months Ended June 30, 2012

          

          Six Months Ended June 30, 2012

          

          Year Ended December 31, 2011Average Recorded Investment

          

          Interest Income Recognized

          

          Average Recorded Investment

          

          Interest Income Recognized

          

          Average RecordedInvestment

          

          InterestIncomeRecognized(in thousands)Impaired loans with no related allowance recorded:Commercial and industrial

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          292

          

          

          $

          11Commercial real estate

          

          

          2,250

          

          

          

          28

          

          

          

          2,250

          

          

          

          58

          

          

          

          3,390

          

          

          

          149Construction

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          3,156

          

          

          

          Residential mortgage

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Total

          

          $

          2,250

          

          

          $

          28

          

          

          $

          2,250

          

          

          $

          58

          

          

          $

          6,838

          

          

          $

          160Impaired loans with an allowance recorded:Commercial real estate

          

          $

          4,180

          

          

          $

          34

          

          

          $

          4,180

          

          

          $

          69

          

          

          $

          4,583

          

          

          $

          258Construction

          

          

          2,873

          

          

          

          16

          

          

          

          3,093

          

          

          

          16

          

          

          

          3,048

          

          

          

          18Residential mortgage

          

          

          4,016

          

          

          

          33

          

          

          

          4,217

          

          

          

          59

          

          

          

          4,572

          

          

          

          102Total

          

          $

          11,069

          

          

          $

          83

          

          

          $

          11,490

          

          

          $

          144

          

          

          $

          12,203

          

          

          $

          378Total impaired loans:Commercial and industrial

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          

          

          

          $

          292

          

          

          $

          11Commercial real estate

          

          

          6,430

          

          

          

          62

          

          

          

          6,430

          

          

          

          127

          

          

          

          7,973

          

          

          

          407Construction

          

          

          2,873

          

          

          

          16

          

          

          

          3,093

          

          

          

          16

          

          

          

          6,204

          

          

          

          18Residential mortgage

          

          

          4,016

          

          

          

          33

          

          

          

          4,217

          

          

          

          59

          

          

          

          4,572

          

          

          

          102Total

          

          $

          13,319

          

          

          $

          111

          

          

          $

          13,740

          

          

          $

          202

          

          

          $

          19,041

          

          

          $

          538
 Loans are considered to have been modified in a troubled debt restructuring when due to a borrower's financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan.
However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Included in impaired loans at June 30, 2012 are loans that are deemed troubled debt restructurings. Of these loans, $8.7 million, 84.9 percent of which are included in the tables above, are performing under the restructured terms and are accruing interest.
 25    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) The following table provides an analysis of the aging of loans, excluding deferred fees and costs that are past due at June 30, 2012 and December 31, 2011: Aging Analysis  June 30, 201230  59 Days Past Due

          

          60  89 Days Past Due

          

          Greater Than 90 Days

          

          Total Past Due

          

          Current

          

          Total Loans Receivable

          

          Loans Receivable > 90 Days And Accruing(in thousands)Commercial and Industrial

          

          $

          155

          

          

          $

          

          

          

          $

          233

          

          

          $

          388

          

          

          $

          167,749

          

          

          $

          168,137

          

          

          $

          Commercial Real Estate

          

          

          543

          

          

          

          

          

          

          

          1,434

          

          

          

          1,977

          

          

          

          446,647

          

          

          

          448,624

          

          

          

          1,026Construction

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          33,521

          

          

          

          33,521

          

          

          

          Residential Mortgage

          

          

          279

          

          

          

          312

          

          

          

          3,302

          

          

          

          3,893

          

          

          

          152,771

          

          

          

          156,664

          

          

          

          Installment

          

          

          5

          

          

          

          

          

          

          

          

          

          

          

          5

          

          

          

          340

          

          

          

          345

          

          

          

          Total

          

          $

          982

          

          

          $

          312

          

          

          $

          4,969

          

          

          $

          6,263

          

          

          $

          801,028

          

          

          $

          807,291

          

          

          $

          1,026
  December 31, 201130  59 Days Past Due

          

          60  89 Days Past Due

          

          Greater Than 90 Days

          

          Total Past Due

          

          Current

          

          Total Loans Receivable

          

          Loans Receivable > 90 Days And Accruing(in thousands)Commercial and Industrial

          

          $

          137

          

          

          $

          1,544

          

          

          $

          125

          

          

          $

          1,806

          

          

          $

          144,905

          

          

          $

          146,711

          

          

          $

          Commercial Real Estate

          

          

          1,331

          

          

          

          5,335

          

          

          

          1,254

          

          

          

          7,920

          

          

          

          400,244

          

          

          

          408,164

          

          

          

          1,029Construction

          

          

          

          

          

          

          

          

          

          

          3,044

          

          

          

          3,044

          

          

          

          36,344

          

          

          

          39,388

          

          

          

          Residential Mortgage

          

          

          2,174

          

          

          

          99

          

          

          

          3,477

          

          

          

          5,750

          

          

          

          155,021

          

          

          

          160,771

          

          

          

          Installment

          

          

          16

          

          

          

          

          

          

          

          

          

          

          

          16

          

          

          

          943

          

          

          

          959

          

          

          

          Total

          

          $

          3,658

          

          

          $

          6,978

          

          

          $

          7,900

          

          

          $

          18,536

          

          

          $

          737,457

          

          

          $

          755,993

          

          

          $

          1,029
 The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan loss that is allocated to each loan portfolio segment: Allowance for loan and lease losses  June 30, 2012C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Allowance for loan and lease losses:Individually evaluated for impairment

          

          $

          

          

          

          $

          531

          

          

          $

          

          

          

          $

          340

          

          

          $

          

          

          

          $

          

          

          

          $

          871Collectively evaluated for impairment

          

          

          1,747

          

          

          

          5,642

          

          

          

          449

          

          

          

          960

          

          

          

          59

          

          

          

          493

          

          

          

          9,350Total

          

          $

          1,747

          

          

          $

          6,173

          

          

          $

          449

          

          

          $

          1,300

          

          

          $

          59

          

          

          $

          493

          

          

          $

          10,221
 26    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) June 30, 2012C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Loans ReceivableIndividually evaluated for impairment

          

          $

          841

          

          

          $

          11,250

          

          

          $

          3,600

          

          

          $

          4,487

          

          

          $

          

          

          

          $

          

          

          

          $

          20,178Collectively evaluated for impairment

          

          

          167,296

          

          

          

          437,374

          

          

          

          29,921

          

          

          

          152,177

          

          

          

          345

          

          

          

          

          

          

          

          787,113Total

          

          $

          168,137

          

          

          $

          448,624

          

          

          $

          33,521

          

          

          $

          156,664

          

          

          $

          345

          

          

          $

          

          

          

          $

          807,291
 Allowance for loan and lease losses  December 31, 2011C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Allowance for loan and lease losses:Individually evaluated for impairment

          

          $

          

          

          

          $

          567

          

          

          $

          200

          

          

          $

          318

          

          

          $

          

          

          

          $

          

          

          

          $

          1,085Collectively evaluated for impairment

          

          

          1,527

          

          

          

          5,405

          

          

          

          507

          

          

          

          945

          

          

          

          51

          

          

          

          82

          

          

          

          8,517Total

          

          $

          1,527

          

          

          $

          5,972

          

          

          $

          707

          

          

          $

          1,263

          

          

          $

          51

          

          

          $

          82

          

          

          $

          9,602Loans ReceivableIndividually evaluated for impairment

          

          $

          953

          

          

          $

          12,769

          

          

          $

          3,044

          

          

          $

          5,050

          

          

          $

          

          

          

          $

          

          

          

          $

          21,816Collectively evaluated for impairment

          

          

          145,758

          

          

          

          395,395

          

          

          

          36,344

          

          

          

          155,721

          

          

          

          959

          

          

          

          

          

          

          

          734,177Total

          

          $

          146,711

          

          

          $

          408,164

          

          

          $

          39,388

          

          

          $

          160,771

          

          

          $

          959

          

          

          $

          

          

          

          $

          755,993
 The Corporations allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporations Annual Report on Form 10-K for the year ended December 31, 2011. A summary of the activity in the allowance for loan losses is as follows:  Three Months Ended June 30, 2012C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Balance at April 1,

          

          $

          1,784

          

          

          $

          5,876

          

          

          $

          637

          

          

          $

          1,234

          

          

          $

          54

          

          

          $

          169

          

          

          $

          9,754Charge offs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (5

          )

          

          

          

          

          

          

          (5

          )Recoveries

          

          

          

          

          

          

          

          

          

          

          540

          

          

          

          38

          

          

          

          1

          

          

          

          

          

          

          

          579Provision

          

          

          (37

          )

          

          

          297

          

          

          

          (728

          )

          

          

          28

          

          

          

          9

          

          

          

          324

          

          

          

          (107

          )Balance at June 30,

          

          $

          1,747

          

          

          $

          6,173

          

          

          $

          449

          

          

          $

          1,300

          

          

          $

          59

          

          

          $

          493

          

          

          $

          10,221
 27    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued)  Six Months Ended June 30, 2012C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Balance at January 1,

          

          $

          1,527

          

          

          $

          5,972

          

          

          $

          707

          

          

          $

          1,263

          

          

          $

          51

          

          

          $

          82

          

          

          $

          9,602Charge offs

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (8

          )

          

          

          

          

          

          

          (8

          )Recoveries

          

          

          

          

          

          

          

          

          

          

          540

          

          

          

          85

          

          

          

          2

          

          

          

          

          

          

          

          627Provision

          

          

          220

          

          

          

          201

          

          

          

          (798

          )

          

          

          (48

          )

          

          

          14

          

          

          

          411

          

          

          

          Balance at June 30,

          

          $

          1,747

          

          

          $

          6,173

          

          

          $

          449

          

          

          $

          1,300

          

          

          $

          59

          

          

          $

          493

          

          

          $

          10,221
  Three Months Ended June 30, 2011C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Balance at April 1,

          

          $

          1,378

          

          

          $

          6,183

          

          

          $

          900

          

          

          $

          952

          

          

          $

          51

          

          

          $

          127

          

          

          $

          9,591Charge offs

          

          

          (20

          )

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (4

          )

          

          

          

          

          

          

          (24

          )Recoveries

          

          

          

          

          

          

          15

          

          

          

          

          

          

          

          2

          

          

          

          2

          

          

          

          

          

          

          

          19Provision

          

          

          18

          

          

          

          (43

          )

          

          

          230

          

          

          

          51

          

          

          

          7

          

          

          

          (13

          )

          

          

          250Balance at June 30,

          

          $

          1,376

          

          

          $

          6,155

          

          

          $

          1,130

          

          

          $

          1,005

          

          

          $

          56

          

          

          $

          114

          

          

          $

          9,836
  Six Months Ended June 30, 2011C & I

          

          Comm R/E

          

          Construction

          

          Res Mtge

          

          Installment

          

          Unallocated

          

          Total(in thousands)Balance at January 1,

          

          $

          1,272

          

          

          $

          5,715

          

          

          $

          551

          

          

          $

          1,038

          

          

          $

          52

          

          

          $

          239

          

          

          $

          8,867Charge offs

          

          

          (185

          )

          

          

          

          

          

          

          

          

          

          

          (23

          )

          

          

          (7

          )

          

          

          

          

          

          

          (215

          )Recoveries

          

          

          35

          

          

          

          15

          

          

          

          

          

          

          

          2

          

          

          

          4

          

          

          

          

          

          

          

          56Provision

          

          

          254

          

          

          

          425

          

          

          

          579

          

          

          

          (12

          )

          

          

          7

          

          

          

          (125

          )

          

          

          1,128Balance at June 30,

          

          $

          1,376

          

          

          $

          6,155

          

          

          $

          1,130

          

          

          $

          1,005

          

          

          $

          56

          

          

          $

          114

          

          

          $

          9,836
 At June 30, 2012, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status or were contractually past due in excess of 90 days and still accruing interest. The policy of the Corporation is to generally grant commercial, mortgage and installment loans to New Jersey residents and businesses within its market area. The borrowers abilities to repay their obligations are dependent upon various factors, including the borrowers income and net worth, cash flows generated by the borrowers underlying collateral, value of the underlying collateral, and priority of the lenders lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Corporation. The Corporation is therefore subject to risk of loss. The
Corporation believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans.
 28    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Loans and the Allowance for Loan Losses   (continued) The following table presents information about the troubled debt restructurings (TDRs) by class for the period indicated:  Three Months Ended June 30, 2012

          

          Six Months Ended June 30, 2012Number of Loans

          

          Pre-restructuring Outstanding Recorded Investment

          

          Post-restructuring Outstanding Recorded Investment

          

          Number of Loans

          

          Pre-restructuring Outstanding Recorded Investment

          

          Post-restructuring Outstanding Recorded Investment(dollars in thousands)Troubled debt restructurings:Commercial Real Estate

          

          

          

          

          

          $

          

          

          

          $

          

          

          

          

          1

          

          

          $

          225

          

          

          $

          225Residential Mortgage

          

          

          1

          

          

          

          1,354

          

          

          

          1,354

          

          

          

          2

          

          

          

          2,068

          

          

          

          2,059Total

          

          

          1

          

          

          $

          1,354

          

          

          $

          1,354

          

          

          

          3

          

          

          $

          2,293

          

          

          $

          2,284
 The Corporation had no loan charge offs in connection with loan modifications at the time of the modification during the six months ended June 30, 2012. The Corporation had one loan modified as a TDR within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2012. The Corporation adopted ASU No. 2011-02 on July 1, 2011 which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In general, a modification or restructuring of a loan constitutes a TDR if the Corporation grants a concession to a borrower experiencing financial difficulty. Loans modified in TDRs are placed on non-accrual status until the Corporation determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least
six months. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Loans modified in a troubled debt restructuring totaled $9.7 million at June 30, 2012 of which $900,000 were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. At December 31, 2011, loans modified in a troubled debt restructuring totaled $11.1 million of which $3.7 million were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of June 30, 2012, loans on which concessions were made with respect to adjusted repayment terms amounted to $1.6 million. Loans on which combinations of two or more concessions were made amounted to $8.0 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment
deferral. Note 9. Fair Value Measurements and Fair Value of Financial Instruments Fair Value Measurements Management uses its best judgment in estimating the fair value of the Corporations financial and non-financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial and non-financial instruments, the fair value estimates herein are not necessarily
 29    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued) indicative of the amounts the Corporation could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period-end dates indicated herein and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial and non-financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end. U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: 

          Level 1: Unadjusted exchange quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. 

          Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. 

          Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporations assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporations disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporations assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011. Investment Securities Available-for-Sale Where quoted prices are available in an active market, investment securities are classified in Level 1 of the valuation hierarchy. Level 1 inputs include investment securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in
the market for a particular instrument, assumptions must be made to determine their fair value and are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Corporation treated certain investment securities as Level 3 assets in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Corporations evaluations are based on market data and the Corporation employs combinations of these approaches for its valuation methods depending on the asset class. In certain cases where there were limited or less transparent information provided by the Corporations third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party
broker quotes. On a quarterly basis, management reviews the pricing information received from the Corporations third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Corporations third-party pricing service.
 30    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued) Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of June 30, 2012,
management made adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets. At June 30, 2012, the Corporations two pooled trust preferred securities, ALESCO VI and ALESCO VII, and one variable rate CMO were classified as Level 3. Market pricing for these Level 3 securities varied widely from one pricing service to another based on the lack of trading. As such, these securities were not considered to have readily observable market data that was accurate to support a fair value as prescribed by FASB ASC 820-10-05. The Corporation determined that significant adjustments using unobservable inputs are required to determine fair value at the measurement date. The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value. The fair value as of June 30, 2012 was determined by discounting the expected cash flows over the life of the security. The discount rate was determined by deriving a discount rate when the markets were considered more active for this type of security. To this estimated discount rate, additions were made for more liquid markets and increased credit risk as well as assessing the risks in the security, such as default risk and severity risk. However, the private label CMO had interruptions of its scheduled principal payments and the Corporation recorded principal loss of $112,000 and $170,000 for the three and six months ended June 30, 2012,
respectively. Assets and Liabilities Measured at Fair Value on a Recurring Basis For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2012 and December 31, 2011 are as follows:  Fair Value Measurements at Reporting Date UsingAssets Measured at Fair Value on a Recurring Basis

          

          June 30, 2012

          

          Quoted Prices in Active Markets for Identical Assets (Level 1)

          

          Significant Other Observable Inputs (Level 2)

          

          Significant Unobservable Inputs (Level 3)(in thousands)Federal agency obligations

          

          $

          18,683

          

          

          $

          

          

          

          $

          18,683

          

          

          $

          Residential mortgage-backed securities

          

          

          88,794

          

          

          

          

          

          

          

          88,794

          

          

          

          Commercial mortgage-backed securities

          

          

          9,799

          

          

          

          

          

          

          

          9,799

          

          

          

          Obligations of U.S. states and political subdivisions

          

          

          85,144

          

          

          

          256

          

          

          

          84,888

          

          

          

          Trust preferred securities

          

          

          18,825

          

          

          

          

          

          

          

          18,721

          

          

          

          104Corporate bonds and notes

          

          

          212,704

          

          

          

          

          

          

          

          212,704

          

          

          

          Collateralized mortgage obligations

          

          

          1,752

          

          

          

          

          

          

          

          

          

          

          

          1,752Asset-backed securities

          

          

          19,633

          

          

          

          

          

          

          

          19,633

          

          

          

          Equity securities

          

          

          601

          

          

          

          601

          

          

          

          

          

          

          

          Other securities

          

          

          11,255

          

          

          

          11,255

          

          

          

          

          

          

          

          Investment securities available-for-sale

          

          $

          467,190

          

          

          $

          12,112

          

          

          $

          453,222

          

          

          $

          1,856
 31    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued)  Fair Value Measurements atReporting Date UsingAssets Measured at Fair Value on a Recurring Basis

          

          December 31,2011

          

          Quoted Prices in Active Markets for Identical Assets(Level 1)

          

          Significant Other Observable Inputs(Level 2)

          

          Significant Unobservable Inputs(Level 3)(in thousands)Federal agency obligations

          

          $

          24,969

          

          

          $

          2,004

          

          

          $

          22,965

          

          

          $

          Residential mortgage pass-through securities

          

          

          115,364

          

          

          

          

          

          

          

          115,364

          

          

          

          Obligations of U.S. states and political subdivision

          

          

          69,173

          

          

          

          397

          

          

          

          68,776Trust preferred securities

          

          

          16,187

          

          

          

          

          

          

          

          15,971

          

          

          

          216Corporate bonds and notes

          

          

          173,117

          

          

          

          2,000

          

          

          

          171,117

          

          

          

          Collateralized mortgage obligations

          

          

          1,899

          

          

          

          

          

          

          

          

          

          

          

          1,899Asset-backed securities

          

          

          7,653

          

          

          

          

          

          

          

          7,653

          

          

          

          Equity securities

          

          

          262

          

          

          

          262

          

          

          

          

          

          

          

          Other securities

          

          

          5,883

          

          

          

          5,883

          

          

          

          

          

          

          

          Securities available-for-sale

          

          $

          414,507

          

          

          $

          10,546

          

          

          $

          401,846

          

          

          $

          2,115
 The fair values used by the Corporation are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2). The fair values of the federal agency obligations, obligations of states and political subdivision and corporate bonds and notes measured at fair value using Level 1 inputs at June 30, 2012 and December 31, 2011 represented the purchase
price of the securities since they were acquired near quarter-end June 30, 2012 and year-end 2011. The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for the three and six months ended June 30, 2012 and 2011.  Three Months Ended June 30,

          

          Six Months EndedJune 30,2012

          

          2011

          

          2012

          

          2011(in thousands)Balance, beginning of the period

          

          $

          1,963

          

          

          $

          3,009

          

          

          $

          2,115

          

          

          $

          2,870Principal interest deferrals

          

          

          34

          

          

          

          30

          

          

          

          68

          

          

          

          59Principal repayments

          

          

          (112

          )

          

          

          (268

          )

          

          

          (170

          )

          

          

          (452

          )Total net losses included in net income

          

          

          (28

          )

          

          

          

          

          

          

          (28

          )

          

          

          Total net unrealized (losses) gains

          

          

          (1

          )

          

          

          (76

          )

          

          

          (129

          )

          

          

          218Balance, end of the period

          

          $

          1,856

          

          

          $

          2,695

          

          

          $

          1,856

          

          

          $

          2,695
 For the six months ended June 30, 2012, there were no transfers of investment securities available-for-sale into or out of Level 1, Level 2, or Level 3 assets.
 32    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued) Assets Measured at Fair Value on a Non-Recurring Basis For assets measured at fair value on a non-recurring basis, the fair value measurements used at June 30, 2012 and December 31, 2011 were as follows:  Fair Value Measurements at Reporting Date UsingAssets Measured at Fair Value on a Non-Recurring Basis

          

          June 30, 2012

          

          Quoted Prices in Active Markets for Identical Assets(Level 1)

          

          Significant Other Observable Inputs(Level 2)

          

          Significant Unobservable Inputs(Level 3)(in thousands)Impaired loans

          

          $

          7,355

          

          

          $

          

          

          

          $

          

          

          

          $

          7,355Other real estate owned

          

          

          453

          

          

          

          

          

          

          

          

          

          

          

          453
  Fair Value Measurements at Reporting Date UsingAssets Measured at Fair Value on a Non-Recurring Basis

          

          December 31, 2011

          

          Quoted Prices in Active Markets for Identical Assets(Level 1)

          

          Significant Other Observable Inputs(Level 2)

          

          Significant Unobservable Inputs (Level 3)(in thousands)Impaired loans

          

          $

          10,740

          

          

          $

          

          

          

          $

          

          

          

          $

          10,740Other real estate owned

          

          

          591

          

          

          

          

          

          

          

          

          

          

          

          591
 The following methods and assumptions were used to estimate the fair values of the Corporations assets measured at fair value on a non-recurring basis at June 30, 2012 and December 31, 2011. Impaired Loans.  The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loans effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Corporations impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loans carrying value is not in excess of the fair
value of the related collateral or the present value of the expected future cash flows. Impaired loans at June 30, 2012 that required a valuation allowance were $8,226,000 with a related valuation allowance of $871,000 compared to $11,825,000 with related valuation allowance of $1,085,000 at December 31, 2011. Impaired loans of $2,093,000 and $2,121,000 didnt record a valuation allowance for June 30, 2012 and December 31, 2011, respectively. Fair Value of Financial Instruments Other Real Estate Owned.  Other real estate owned (OREO) is measured at fair value less costs to sell. The Corporation believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation. Costs to sell associated with OREO is based on estimation per the terms and conditions of the sales agreements or appraisals. FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Corporations financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporations general practice and intent to
 33    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued) hold its financial instruments to maturity and to not engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Corporation for the purposes of this disclosure. Investment Securities Held-to-Maturity.  The fair value of the Corporations investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Corporations third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Loans.  The fair value of the Corporations loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. Interest-Bearing Deposits.  The fair values of the Corporations interest-bearing deposits were estimated using discounted cash flow analyses. The discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Corporations interest-bearing deposits do not take into consideration the value of the Corporations long-term relationships with depositors, which may have significant value. Term Borrowings and Subordinated Debentures.  The fair value of the Corporations long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities. Accrued Interest Receivable/Payable.  The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.
 34    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Fair Value Measurements and Fair Value of Financial Instruments   (continued) The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporations financial instruments as of June 30, 2012 and December 31, 2011.  Fair Value MeasurementsCarrying Amount

          

          Fair Value

          

          Quoted Prices in Active Markets for Identical Assets(Level 1)

          

          Significant Other Observable Inputs(Level 2)

          

          Significant Unobservable Inputs(Level 3)(in thousands)June 30, 2012Financial assetsCash and due from banks

          

          $

          73,668

          

          

          $

          73,668

          

          

          $

          73,668

          

          

          $

          

          

          

          $

          Interest bearing deposits with banks

          

          

          12,000

          

          

          

          12,000

          

          

          

          12,000

          

          

          

          

          

          

          

          Investment securities held-to-maturity

          

          

          62,997

          

          

          

          66,562

          

          

          

          

          

          

          

          66,562

          

          

          

          Restricted investment in bank stocks

          

          

          9,139

          

          

          

          9,139

          

          

          

          9,139

          

          

          

          

          

          

          

          Net loans (including loans held for sale)

          

          

          797,233

          

          

          

          803,952

          

          

          

          501

          

          

          

          

          

          

          

          803,451Accrued interest receivable

          

          

          6,465

          

          

          

          6,465

          

          

          

          

          

          

          

          4,302

          

          

          

          2,163Financial liabilitiesNon interest-bearing deposits

          

          

          181,282

          

          

          

          181,282

          

          

          

          

          

          

          

          181,282

          

          

          

          Interest-bearing deposits

          

          

          993,367

          

          

          

          994,379

          

          

          

          

          

          

          

          994,379

          

          

          

          Short-term borrowings

          

          

          107

          

          

          

          107

          

          

          

          

          

          

          

          107

          

          

          

          Long-term borrowings

          

          

          161,000

          

          

          

          179,241

          

          

          

          

          

          

          

          179,241

          

          

          

          Subordinated debentures

          

          

          5,155

          

          

          

          5,184

          

          

          

          

          

          

          

          5,184

          

          

          

          Accrued interest payable

          

          

          912

          

          

          

          912

          

          

          

          

          

          

          

          912

          

          

          

          December 31, 2011Financial assetsCash and due from banks

          

          $

          111,101

          

          

          $

          111,101

          

          

          $

          111,101

          

          

          $

          

          

          

          $

          Investment securities held-to-maturity

          

          

          72,233

          

          

          

          74,922

          

          

          

          

          

          

          

          74,922

          

          

          

          Restricted investment in bank stocks

          

          

          9,233

          

          

          

          9,233

          

          

          

          9,233

          

          

          

          

          

          

          

          Net loans (including loans held for sale)

          

          

          746,408

          

          

          

          752,252

          

          

          

          1,029

          

          

          

          

          

          

          

          751,223Accrued interest receivable

          

          

          6,219

          

          

          

          6,219

          

          

          

          

          

          

          

          3,894

          

          

          

          2,325Financial liabilitiesNon interest-bearing deposits

          

          

          167,164

          

          

          

          167,164

          

          

          

          

          

          

          

          167,164

          

          

          

          Interest-bearing deposits

          

          

          954,251

          

          

          

          928,777

          

          

          

          

          

          

          

          928,777

          

          

          

          Long-term borrowings

          

          

          161,000

          

          

          

          175,933

          

          

          

          

          

          

          

          175,933

          

          

          

          Subordinated debentures

          

          

          5,155

          

          

          

          5,159

          

          

          

          

          

          

          

          5,159

          

          

          

          Accrued interest payable

          

          

          992

          

          

          

          992

          

          

          

          

          

          

          

          992

          

          

          

          
 Note 10. Net Investment in Direct Financing Lease During the second quarter of 2010, the Corporation entered into a lease of its former operations facility under a direct financing lease. The lease has a 15 year term with no renewal options. According to the terms of the lease, the lessee has an obligation to purchase the property underlying the lease in either year seven (7), ten (10) or fifteen (15) at predetermined prices for those years as provided in the lease. The structure of the
 35    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Net Investment in Direct Financing Lease   (continued) minimum lease payments and the purchase prices as provided in the lease provide an inducement to the lessee to purchase the property in year seven (7). At June 30, 2012 and December 31, 2011, the net investment in direct financing lease consists of a minimum lease receivable of $4,792,000 and $4,870,000, respectively, and unearned interest income of $1,026,000 and $1,123,000, respectively, for a net investment in direct financing lease of $3,766,000 and $3,747,000, respectively. The net investment in direct financing lease is carried as a component of loans in the Corporations consolidated statements of condition. Minimum future lease receipts of the direct financing lease are as follows:  June 30, 2012For years ending December 31,

          

          (in thousands)2012

          

          $

          932013

          

          

          2162014

          

          

          2162015

          

          

          2282016

          

          

          265Thereafter

          

          

          2,748Total minimum future lease receipts

          

          $

          3,766
 Note 11. Components of Net Periodic Pension Cost The Corporation maintained a non-contributory pension plan for substantially all of its employees until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. The following table sets forth the net periodic pension cost of the Corporations pension plan for the periods indicated.  Three Months EndedJune 30,

          

          Six Months EndedJune 30,2012

          

          2011

          

          2012

          

          2011(in thousands)Interest cost

          

          $

          135

          

          

          $

          147

          

          

          $

          278

          

          

          $

          294Net amortization and deferral

          

          

          (12

          )

          

          

          (50

          )

          

          

          (42

          )

          

          

          (100

          )Net periodic pension cost

          

          $

          123

          

          

          $

          97

          

          

          $

          236

          

          

          $

          194
 Contributions The Corporation presently estimates it will contribute $500,000 to its Pension Trust in 2012. The Preservation of Access to Care for Medical Beneficiaries and Pension Relief Act of 2010, signed into law on June 25, 2010, permits single employer and multiple employer defined benefit plan sponsors to elect to extend the plans amortization period of a Shortfall Amortization Base over either a nine year period or a fifteen year period, rather than the seven year period required under the Pension Protection Act of 2006. The Bank has elected to apply the Pension Relief Act Fifteen Year amortization of the Shortfall Amortization Base for its 2011 minimum funding requirement. The minimum amount to be funded is $453,000, as noted above, by December 31, 2012 with the understanding that fully funding the plan earlier than this date will lower this amount and that funding the plan after this date will increase this amount. As noted, this amount is the minimum required funding amount. The Corporation does have the option of funding above this amount but has contributed the minimum historically.
 36    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Income Taxes For the six months ended June 30, 2012, the Corporation recorded income tax expense of $4.4 million, compared with a $3.6 million income tax expense for the six months ended June 30, 2011. The effective tax rates for the six-month period ended June 30, 2012 and 2011 were 33.7 percent and 35.6 percent, respectively. Note 13. Borrowed Funds Short-Term Borrowings Short-term borrowings, which consist primarily of securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances and federal funds purchased, generally have maturities of less than one year. The details of these short-term borrowings are presented in the following table.  June 30, 2012

          

          June 30, 2011(dollars in thousands)Average interest rate:At quarter end

          

          

          4.75

          %

          

          

          0.23

          %For the quarter

          

          

          1.15

          %

          

          

          0.28

          %Average amount outstanding during the quarter

          

          $

          182

          

          

          $

          36,747Maximum amount outstanding at any month end in the quarter

          

          $

          5,125

          

          

          $

          43,799Amount outstanding at quarter end

          

          $

          107

          

          

          $

          32,374
 Long-Term Borrowings Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $161.0 million at June 30, 2012 and mature within one to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. At June 30, 2012, FHLB advances had a weighted average interest rate of 3.46 percent and are contractually scheduled for repayment as follows:  June 30, 2012(in thousands)2013

          

          $

          5,0002016

          

          

          20,000Thereafter

          

          

          95,000Total

          

          $

          120,000
 The Corporation has entered into agreements under which it has sold securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Corporations consolidated statement of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as
collateral by third party trustees. At June 30, 2012, securities sold under agreements to repurchase had a weighted average interest rate of 5.31 percent and are contractually scheduled for repayment as follows:
 37    TABLE OF CONTENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Borrowed Funds   (continued)  June 30, 2012(in thousands)2015

          

          $

          10,000Thereafter

          

          

          31,000Total

          

          $

          41,000
 Note 14. Subordinated Debentures During 2003, the Corporation formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Corporation; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10.
Distributions on the subordinated debentures owned by the subsidiary trusts below have been classified as interest expense in the Consolidated Statements of Income. The characteristics of the business trusts and capital securities have not changed with the deconsolidation of the trusts. The capital securities provide an attractive source of funds since they constitute Tier 1 capital for regulatory purposes and have the same tax advantages as debt for Federal income tax purposes. The subordinated debentures are redeemable in whole or part prior to maturity on January 23, 2034. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and resets quarterly. The rate at June 30, 2012 was 3.32 percent. Note 15. Stockholders Equity On January 12, 2009, the Corporation issued $10 million in nonvoting Fixed Rate Cumulative Perpetual Preferred Stock, Series A to the U.S. Department of Treasury (Treasury) under its Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As a result of the successful completion of the rights offering in October 2009, the number of shares underlying the warrants held by the U.S. Treasury was reduced to 86,705 shares, or 50 percent of the original 173,410 shares as outlined by the
provisions of the Capital Purchase Program. On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the Treasury under the Small Business Lending Fund Program (SBLF Program). Under the Securities Purchase Agreement, the Corporation issued to the Treasury a total of 11,250 shares of the Corporations Senior Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the Corporation redeemed from the Treasury, all 10,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation
amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provides the Corporation with approximately $1.25 million additional Tier 1 capital. The capital received under the program will allow the Corporation to continue to serve its small business clients through the commercial lending program. On December 7, 2011, the Corporation repurchased the warrants issued on January 12, 2009 to the U.S. Treasury as part of its participation in the U.S. Treasurys TARP Capital Purchase Program. In the repurchase, the Corporation paid the U.S. Treasury $245,000 for the warrants.
 38    TABLE OF CONTENTS Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporations results of operations for the periods presented herein and financial condition as of June 30, 2012 and December 31, 2011. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report. Cautionary Statement Concerning Forward-Looking Statements This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as believes, expects, anticipates, plans, trend,
objective, continue, remain, pattern or similar expressions or future or conditional verbs such as will, would, should, could, might, can, may or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or
increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which Center Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact Center Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by Center Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) Center Bancorp my experience unforeseen difficulties in integrating Saddle River Valley Banks operations into its own following its August 1, 2012 acquisition of certain assets and assumption of certain liabilities of Saddle River Valley Bank; and (11) the outcome of regulatory and legal investigations and proceedings
may not be anticipated. Further information on other factors that could affect the financial results of Center Bancorp is included in Item 1A. of Center Bancorps Annual Report on Form 10-K and this Current report on Form 10-Q and in Center Bancorps other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commissions website at http://www.sec.gov and/or from Center Bancorp, Inc. Critical Accounting Policies and Estimates The accounting and reporting policies followed by Center Bancorp, Inc. and its subsidiaries (the Corporation) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates. The Corporations accounting policies are fundamental to understanding Managements Discussion and Analysis (MD&A) of financial condition and results of operations. The Corporation has identified its policies on the allowance for loan losses, issues relating to other-than-temporary impairment losses in the securities portfolio, the valuation of deferred tax assets, goodwill and the fair value of investment securities to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional
information on these policies is provided below.
 39    TABLE OF CONTENTS Allowance for Loan Losses and Related Provision The allowance for loan losses represents managements estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated
statements of condition. The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications. The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers ability to pay. The evaluation also details historical losses by loan category and the resulting loan
loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements. Other-Than-Temporary Impairment of Investment Securities Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost
basis of the investment. Previously, this assessment required management to assert that it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price. In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total
other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Fair Value of Investment Securities FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Corporation applied the guidance in FASB ASC 820-10-35 when determining fair value for the Corporations private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 6 of the Notes to Consolidated Financial Statements for further discussion.
 40    TABLE OF CONTENTS FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. Goodwill The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the six months ended June 30, 2012 and 2011. Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entitys financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporations consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the Corporations consolidated financial condition or results of operations. Note 11 of the Notes to Consolidated Financial Statements includes additional discussion on the accounting for income taxes. Earnings Net income available to common stockholders for the three months ended June 30, 2012 amounted to $4,269,000 compared to $3,439,000 for the comparable three-month period ended June 30, 2011. The Corporation recorded earnings per diluted common share of $0.26 for the three months ended June 30, 2012 as compared with earnings of $0.21 per diluted common share for the same three months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.01 per fully diluted common share for both periods. The annualized return on average assets was 1.16 percent for the three months ended June
30, 2012, compared to 1.10 percent for three months ended June 30, 2011. The annualized return on average stockholders equity was 11.96 percent for the three-month period ended June 30, 2012, compared to 11.17 percent for the three months ended June 30, 2011. Net income available to common stockholders for the six months ended June 30, 2012 amounted to $8,359,000 compared to $6,311,000 for the comparable six-month period ended June 30, 2011. The Corporation recorded earnings per diluted common share of $0.51 for the six months ended June 30, 2012 as compared with earnings of $0.39 per diluted common share for the same six months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.01 and $0.02 per fully diluted common share for the six months ended June 30, 2012 and 2011, respectively. The annualized return on average assets was
1.16 percent for the six months ended June 30, 2012, compared to 1.04 percent for the six months ended June 30, 2011. The annualized return on average stockholders equity was 12.00 percent for the six-month period ended June 30, 2012, compared to 10.53 percent for the six months ended June 30, 2011. Net Interest Income and Margin Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a fully tax-equivalent basis as a percentage of total average interest-earning assets.
 41    TABLE OF CONTENTS The following table presents the components of net interest income on a fully tax-equivalent basis for the periods indicated. Net Interest Income (tax-equivalent basis)  Three Months Ended June 30,

          

          Six Months Ended June 30,(dollars in thousands)

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent Change

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent ChangeInterest income:Investment securities AFS

          

          $

          3,750

          

          

          $

          3,651

          

          

          $

          99

          

          

          

          2.7

          %

          

          $

          7,326

          

          

          $

          7,203

          

          

          $

          123

          

          

          

          1.7

          %Investment securities HTM

          

          

          662

          

          

          

          349

          

          

          

          313

          

          

          

          89.7

          

          

          

          1,391

          

          

          

          349

          

          

          

          1,042

          

          

          

          298.6Loans, including net costs

          

          

          9,414

          

          

          

          8,950

          

          

          

          464

          

          

          

          5.2

          

          

          

          18,799

          

          

          

          18,167

          

          

          

          632

          

          

          

          3.5Restricted investment in bank stocks, at cost

          

          

          111

          

          

          

          109

          

          

          

          2

          

          

          

          1.8

          

          

          

          232

          

          

          

          252

          

          

          

          (20

          )

          

          

          (7.9

          )Other interest bearing deposits

          

          

          4

          

          

          

          

          

          

          

          4

          

          

          

          

          

          

          

          4

          

          

          

          

          

          

          

          4

          

          

          

          Total interest income

          

          

          13,941

          

          

          

          13,059

          

          

          

          882

          

          

          

          6.8

          

          

          

          27,752

          

          

          

          25,971

          

          

          

          1,781

          

          

          

          6.9Interest expense:Time deposits $100 or more

          

          

          182

          

          

          

          348

          

          

          

          (166

          )

          

          

          (47.7

          )

          

          

          434

          

          

          

          613

          

          

          

          (179

          )

          

          

          (29.2

          )All other deposits

          

          

          1,126

          

          

          

          1,072

          

          

          

          54

          

          

          

          5.0

          

          

          

          2,282

          

          

          

          2,074

          

          

          

          208

          

          

          

          10.0Borrowings

          

          

          1,642

          

          

          

          1,665

          

          

          

          (23

          )

          

          

          (1.4

          )

          

          

          3,284

          

          

          

          3,320

          

          

          

          (36

          )

          

          

          (1.1

          )Total interest expense

          

          

          2,950

          

          

          

          3,085

          

          

          

          (135

          )

          

          

          (4.4

          )

          

          

          6,000

          

          

          

          6,007

          

          

          

          (7

          )

          

          

          (0.1

          )Net interest income on a fully tax-equivalent basis

          

          

          10,991

          

          

          

          9,974

          

          

          

          1,017

          

          

          

          10.2

          

          

          

          21,752

          

          

          

          19,964

          

          

          

          1,788

          

          

          

          9.0Tax-equivalent adjustment(1)

          

          

          (445

          )

          

          

          (181

          )

          

          

          (264

          )

          

          

          145.9

          

          

          

          (861

          )

          

          

          (226

          )

          

          

          (635

          )

          

          

          281.0Net interest income

          

          $

          10,546

          

          

          $

          9,793

          

          

          $

          753

          

          

          

          7.7

          %

          

          $

          20,891

          

          

          $

          19,738

          

          

          $

          1,153

          

          

          

          5.8

          %
  (1)

          Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011. Net interest income on a fully tax-equivalent basis increased $1.0 million or 10.2 percent to $11.0 million for the three months ended June 30, 2012 as compared to the same period in 2011. For the three months ended June 30, 2012, the net interest margin contracted 24 basis points to 3.29 percent from 3.53 percent during the three months ended June 30, 2011. For the three months ended June 30, 2012, a decrease in the average yield on interest-earning assets of 45 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 21 basis points, resulting in a decrease in the Corporations net interest spread
of 24 basis points for the period. Net interest margin compression during the second quarter period of 2012, occurred primarily as result of a high liquidity pool carried during the quarter and the timing of a substantial portion of the Corporations loan growth, which occurred in the later part of the quarter. This, coupled with a continued high level of prepayment speeds on mortgage-backed securities in the investment portfolio and a high level of loan modifications during the quarter, dampened other action taken to improve the margin. This represented growth in the Corporations customer base and enhanced the Corporations liquidity position while the Corporation continued to expand its earning assets base. Net interest income on a fully tax-equivalent basis increased $1.8 million or 9.0 percent to $21.8 million for the six months ended June 30, 2012 as compared to the same period in 2011. For the six months ended June 30, 2012, the net interest margin contracted 20 basis points to 3.34 percent from 3.54 percent during the six months ended June 30, 2011. For the six months ended June 30, 2012, a decrease in the average yield on
 42    TABLE OF CONTENTS interest-earning assets of 34 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 19 basis points, resulting in a decrease in the Corporations net interest spread of 15 basis points for the period. For the three-month period ended June 30, 2012, interest income on a tax-equivalent basis increased by $882,000 or 6.8 percent compared to the same three-month period in 2011. This increase in interest income was due primarily to a volume increase in investment securities and loans partially offset by a decline in yields due to the lower interest rate environment. Average investment securities volume increased during the current three-month period by $111.3 million, to $531.4 million, compared to the second quarter of 2011. The loan portfolio increased on average $89.3 million, to $790.4 million, from an average of $701.1 million in the same quarter
in 2011, reflecting net increases in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 59.2 percent of average interest-earning assets during the second quarter of 2012 compared to 62.0 percent in the same quarter in 2011. For the six-month period ended June 30, 2012, interest income on a tax-equivalent basis increased by $1.8 million or 6.9 percent from the comparable six-month period in 2011. This increase in interest income was due primarily to higher volume of earning assets of $175.3 million offset in part by lower rates in a lower interest rate environment. Average investment securities volume increased during the current six-month period by 108.3 million, to $518.9 million, compared to the six months ended June 30, 2011. The average loan portfolio increased $64.3 million, to $773.1 million, from $708.8 million for the same six months in 2011, reflecting net
increases in commercial loans and commercial real estate. Average loans represented approximately 59.3 percent of average interest-earning assets during the first six months of 2012 compared to 62.8 percent for the same six months in 2011. For the three months ended June 30, 2012, interest expense decreased $135,000, or 4.4 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 21 basis points to 1.01 percent for the three months ended June 30, 2012, from 1.22 percent for the three months ended June 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $159.9 million. This increase was primarily in money markets, savings, and other interest-bearing deposits of $183.7 million, $6.1 million and $71.7 million, respectively, and was partially offset by decreases in borrowings of $36.6 million and time deposits
of $64.9 million. Since 2009 steps have been taken to improve the Corporations net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further high-costing cash outflows. The result has been a decline in the Corporations average cost of funds. For the three months ended June 30, 2012, the Corporations net interest spread on a tax-equivalent basis decreased to 3.16 percent, from 3.40 percent for the three months ended June 30, 2011. For the six months ended June 30, 2012, interest expense declined $7,000, or 0.1 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 19 basis points to 1.04 percent for the six months ended June 30, 2012, from 1.23 percent for the six months ended June 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $176.0 million. This increase included increases in money market deposits of $170.8 million, savings deposits of $8.5 million and other interest-bearing deposits of $71.2 million, offset by decreases in borrowings of $41.9 million and time deposits of $32.6 million.
The result of this was an improvement in the Corporations average cost of funds for the period. As a result of these factors, for the six months ended June 30, 2012, the Corporations net interest spread on a tax-equivalent basis decreased to 3.22 percent, from 3.37 percent for the six months ended June 30, 2011.
 43    TABLE OF CONTENTS The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the three and six month periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category. Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates  Three Months EndedJune 30, 2012 and 2011Increase (Decrease) Due to Change in:

          

          Six Months EndedJune 30, 2012 and 2011Increase (Decrease) Due to Change in:(tax-equivalent basis, in thousands)

          

          AverageVolume

          

          AverageRate

          

          NetChange

          

          AverageVolume

          

          AverageRate

          

          NetChangeInterest-earning assets:Investment securities:Available for saleTaxable

          

          $

          142

          

          

          $

          (626

          )

          

          $

          (484

          )

          

          $

          (24

          )

          

          $

          (1,073

          )

          

          $

          (1,097 )Tax-exempt

          

          

          643

          

          

          

          (60

          )

          

          

          583

          

          

          

          1,287

          

          

          

          (67

          )

          

          

          1,220Held to maturityTaxable

          

          

          215

          

          

          

          (57

          )

          

          

          158

          

          

          

          520

          

          

          

          (52

          )

          

          

          468Tax-exempt

          

          

          150

          

          

          

          5

          

          

          

          155

          

          

          

          568

          

          

          

          6

          

          

          

          574Total investment securities

          

          

          1,150

          

          

          

          (738

          )

          

          

          412

          

          

          

          2,351

          

          

          

          (1,186

          )

          

          

          1,165Loans

          

          

          1,090

          

          

          

          (626

          )

          

          

          464

          

          

          

          1,781

          

          

          

          (1,149

          )

          

          

          632Restricted investment in bank stocks

          

          

          (1

          )

          

          

          3

          

          

          

          2

          

          

          

          

          

          

          

          (20 )

          

          

          

          (20

          )Other interest bearing deposits

          

          

          4

          

          

          

          

          

          

          

          4

          

          

          

          4

          

          

          

          

          

          

          

          4Total interest-earning assets

          

          

          2,243

          

          

          

          (1,361

          )

          

          

          882

          

          

          

          4,136

          

          

          

          (2,355

          )

          

          

          1,781Interest-bearing liabilities:Money market deposits

          

          

          203

          

          

          

          (63

          )

          

          

          140

          

          

          

          396

          

          

          

          (90

          )

          

          

          306Savings deposits

          

          

          9

          

          

          

          (98

          )

          

          

          (89

          )

          

          

          23

          

          

          

          (155

          )

          

          

          (132

          )Time deposits

          

          

          180

          

          

          

          (350

          )

          

          

          (170

          )

          

          

          (166

          )

          

          

          (3

          )

          

          

          (169

          )Other interest-bearing deposits

          

          

          90

          

          

          

          (83

          )

          

          

          7

          

          

          

          178

          

          

          

          (154

          )

          

          

          24Total interest-bearing deposits

          

          

          482

          

          

          

          (594

          )

          

          

          (112

          )

          

          

          431

          

          

          

          (402

          )

          

          

          29Borrowings and subordinated debentures

          

          

          (332

          )

          

          

          309

          

          

          

          (23

          )

          

          

          (748

          )

          

          

          712

          

          

          

          (36

          )Total interest-bearing liabilities

          

          

          150

          

          

          

          (285

          )

          

          

          (135

          )

          

          

          (317

          )

          

          

          310

          

          

          

          (7

          )Change in net interest income

          

          $

          2,093

          

          

          $

          (1,076

          )

          

          $

          1,017

          

          

          $

          4,453

          

          

          $

          (2,665 )

          

          

          $

          1,788
 44    TABLE OF CONTENTS The following tables, Average Statements of Condition with Interest and Average Rates, present for the three and six months ended June 30, 2012 and 2011, the Corporations average assets, liabilities and stockholders equity. The Corporations net interest income, net interest spread and net interest margin are also reflected. Average Statements of Condition with Interest and Average Rates  Three Months Ended June 30,2012

          

          2011(tax-equivalent basis)

          

          Average Balance

          

          InterestIncome/Expense

          

          AverageRate

          

          AverageBalance

          

          InterestIncome/Expense

          

          AverageRate(dollars in thousands)AssetsInterest-earning assets:Investment securities(1):Available for saleTaxable

          

          $

          393,353

          

          

          $

          2,903

          

          

          

          2.95

          %

          

          $

          376,947

          

          

          $

          3,387

          

          

          

          3.59

          %Tax-exempt

          

          

          71,467

          

          

          

          847

          

          

          

          4.74

          

          

          

          18,066

          

          

          

          264

          

          

          

          5.85Held to maturityTaxable

          

          

          37,688

          

          

          

          238

          

          

          

          2.53

          

          

          

          6,461

          

          

          

          80

          

          

          

          4.95Tax-exempt

          

          

          28,938

          

          

          

          424

          

          

          

          5.86

          

          

          

          18,711

          

          

          

          269

          

          

          

          5.75Total investment securities

          

          

          531,446

          

          

          

          4,412

          

          

          

          3.32

          

          

          

          420,185

          

          

          

          4,000

          

          

          

          3.81Loans(2)

          

          

          790,382

          

          

          

          9,414

          

          

          

          4.76

          

          

          

          701,056

          

          

          

          8,950

          

          

          

          5.11Restricted investment in bank stocks

          

          

          9,143

          

          

          

          111

          

          

          

          4.86

          

          

          

          9,191

          

          

          

          109

          

          

          

          4.74Other interest bearing deposits

          

          

          5,242

          

          

          

          4

          

          

          

          0.31

          

          

          

          

          

          

          

          

          

          

          

          Total interest-earning assets

          

          

          1,336,213

          

          

          

          13,941

          

          

          

          4.17

          

          

          

          1,130,432

          

          

          

          13,059

          

          

          

          4.62Non interest-earning assets:Cash and due from banks

          

          

          93,473

          

          

          

          

          

          

          

          

          

          

          

          102,805Bank-owned life insurance

          

          

          29,298

          

          

          

          

          

          

          

          

          

          

          

          28,274Intangible assets

          

          

          16,884

          

          

          

          

          

          

          

          

          

          

          

          16,936Other assets

          

          

          32,203

          

          

          

          

          

          

          

          

          

          

          

          32,738Allowance for loan losses

          

          

          (9,813

          )

          

          

          

          

          

          

          

          

          

          

          (9,601

          )Total non interest-earning assets

          

          

          162,045

          

          

          

          

          

          

          

          

          

          

          

          171,152Total assets

          

          $

          1,498,258

          

          

          

          

          

          

          

          

          

          

          $

          1,301,584Liabilities and Stockholders EquityInterest-bearing liabilities:Money market deposits

          

          $

          364,121

          

          

          $

          384

          

          

          

          0.42

          %

          

          $

          180,468

          

          

          $

          244

          

          

          

          0.54

          %Savings deposits

          

          

          188,550

          

          

          

          174

          

          

          

          0.37

          

          

          

          182,455

          

          

          

          263

          

          

          

          0.58Time deposits

          

          

          176,869

          

          

          

          449

          

          

          

          1.02

          

          

          

          241,816

          

          

          

          619

          

          

          

          1.02Other interest-bearing deposits

          

          

          272,690

          

          

          

          301

          

          

          

          0.44

          

          

          

          201,013

          

          

          

          294

          

          

          

          0.59Total interest-bearing deposits

          

          

          1,002,230

          

          

          

          1,308

          

          

          

          0.52

          

          

          

          805,752

          

          

          

          1,420

          

          

          

          0.70Short-term and long-term borrowings

          

          

          161,144

          

          

          

          1,599

          

          

          

          3.97

          

          

          

          197,747

          

          

          

          1,639

          

          

          

          3.32Subordinated debentures

          

          

          5,155

          

          

          

          43

          

          

          

          3.34

          

          

          

          5,155

          

          

          

          26

          

          

          

          2.02Total interest-bearing liabilities

          

          

          1,168,529

          

          

          

          2,950

          

          

          

          1.01

          

          

          

          1,008,654

          

          

          

          3,085

          

          

          

          1.22Non interest-bearing liabilities:Demand deposits

          

          

          173,248

          

          

          

          

          

          

          

          

          

          

          

          157,002Other liabilities

          

          

          10,874

          

          

          

          

          

          

          

          

          

          

          

          7,537Total non interest-bearing liabilities

          

          

          184,122

          

          

          

          

          

          

          

          

          

          

          

          164,539Stockholders equity

          

          

          145,607

          

          

          

          

          

          

          

          

          

          

          

          128,391Total liabilities and stockholders equity

          

          $

          1,498,258

          

          

          

          

          

          

          

          

          

          

          $

          1,301,584Net interest income (tax-equivalent basis)

          

          

          

          

          

          

          10,991

          

          

          

          

          

          

          

          

          

          

          

          9,974Net interest spread

          

          

          

          

          

          

          

          

          

          

          3.16

          %

          

          

          

          

          

          

          

          

          

          

          3.40

          %Net interest margin(3)

          

          

          

          

          

          

          

          

          

          

          3.29

          %

          

          

          

          

          

          

          

          

          

          

          3.53

          %Tax-equivalent adjustment(4)

          

          

          

          

          

          

          (445

          )

          

          

          

          

          

          

          

          

          

          

          (181

          )Net interest income

          

          

          

          

          

          $

          10,546

          

          

          

          

          

          

          

          

          

          

          $

          9,793
  (1)

          Average balances are based on amortized cost. (2)

          Average balances include loans on non-accrual status. (3)

          Represents net interest income as a percentage of total average interest-earning assets. (4)

          Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.
 45    TABLE OF CONTENTS Average Statements of Condition with Interest and Average Rates  Six Months Ended June 30,2012

          

          2011(tax-equivalent basis)

          

          AverageBalance

          

          InterestIncome/Expense

          

          AverageRate

          

          AverageBalance

          

          InterestIncome/Expense

          

          AverageRate(dollars in thousands)AssetsInterest-earning assets:Investment securities(1) :Available for saleTaxable

          

          $

          382,559

          

          

          $

          5,709

          

          

          

          2.98

          %

          

          $

          383,946

          

          

          $

          6,806

          

          

          

          3.55

          %Tax-exempt

          

          

          66,789

          

          

          

          1,617

          

          

          

          4.84

          

          

          

          13,972

          

          

          

          397

          

          

          

          5.68Held to maturityTaxable

          

          

          40,691

          

          

          

          548

          

          

          

          2.69

          

          

          

          3,249

          

          

          

          80

          

          

          

          4.92Tax-exempt

          

          

          28,823

          

          

          

          843

          

          

          

          5.85

          

          

          

          9,407

          

          

          

          269

          

          

          

          5.72Total investment securities

          

          

          518,862

          

          

          

          8,717

          

          

          

          3.36

          

          

          

          410,574

          

          

          

          7,552

          

          

          

          3.68Loans(2)

          

          

          773,097

          

          

          

          18,799

          

          

          

          4.86

          

          

          

          708,769

          

          

          

          18,167

          

          

          

          5.13Restricted investment in bank stocks

          

          

          9,188

          

          

          

          232

          

          

          

          5.05

          

          

          

          9,174

          

          

          

          252

          

          

          

          5.49Other interest bearing deposits

          

          

          2,621

          

          

          

          4

          

          

          

          0.31

          

          

          

          

          

          

          

          

          

          

          

          Total interest-earning assets

          

          

          1,303,768

          

          

          

          27,752

          

          

          

          4.26

          

          

          

          1,128,517

          

          

          

          25,971

          

          

          

          4.60Non interest-earning assets:Cash and due from banks

          

          

          107,832

          

          

          

          

          

          

          

          

          

          

          

          68,629Bank-owned life insurance

          

          

          29,173

          

          

          

          

          

          

          

          

          

          

          

          28,143Intangible assets

          

          

          16,891

          

          

          

          

          

          

          

          

          

          

          

          16,944Other assets

          

          

          31,849

          

          

          

          

          

          

          

          

          

          

          

          32,695Allowance for loan losses

          

          

          (9,748

          )

          

          

          

          

          

          

          

          

          

          

          (9,371

          )Total non interest-earning assets

          

          

          175,997

          

          

          

          

          

          

          

          

          

          

          

          137,040Total assets

          

          $

          1,479,765

          

          

          

          

          

          

          

          

          

          

          $

          1,265,557Liabilities and Stockholders EquityInterest-bearing liabilities:Money market deposits

          

          $

          344,522

          

          

          $

          775

          

          

          

          0.45

          %

          

          $

          173,710

          

          

          $

          469

          

          

          

          0.54

          %Savings deposits

          

          

          186,257

          

          

          

          368

          

          

          

          0.40

          

          

          

          177,758

          

          

          

          500

          

          

          

          0.56Time deposits

          

          

          190,427

          

          

          

          973

          

          

          

          1.02

          

          

          

          222,987

          

          

          

          1,142

          

          

          

          1.02Other interest-bearing deposits

          

          

          268,388

          

          

          

          600

          

          

          

          0.45

          

          

          

          197,208

          

          

          

          576

          

          

          

          0.58Total interest-bearing deposits

          

          

          989,594

          

          

          

          2,716

          

          

          

          0.55

          

          

          

          771,663

          

          

          

          2,687

          

          

          

          0.70Short-term and long-term borrowings

          

          

          161,182

          

          

          

          3,199

          

          

          

          3.97

          

          

          

          203,098

          

          

          

          3,268

          

          

          

          3.22Subordinated debentures

          

          

          5,155

          

          

          

          85

          

          

          

          3.30

          

          

          

          5,155

          

          

          

          52

          

          

          

          2.02Total interest-bearing liabilities

          

          

          1,155,931

          

          

          

          6,000

          

          

          

          1.04

          

          

          

          979,916

          

          

          

          6,007

          

          

          

          1.23Non interest-bearing liabilities:Demand deposits

          

          

          170,585

          

          

          

          

          

          

          

          

          

          

          

          154,552Other liabilities

          

          

          10,240

          

          

          

          

          

          

          

          

          

          

          

          5,631Total non interest-bearing liabilities

          

          

          180,825

          

          

          

          

          

          

          

          

          

          

          

          160,183Stockholders equity

          

          

          143,009

          

          

          

          

          

          

          

          

          

          

          

          125,458Total liabilities and stockholders equity

          

          $

          1,479,765

          

          

          

          

          

          

          

          

          

          

          $

          1,265,557Net interest income (tax-equivalent basis)

          

          

          

          

          

          

          21,752

          

          

          

          

          

          

          

          

          

          

          

          19,964Net interest spread

          

          

          

          

          

          

          

          

          

          

          3.22

          %

          

          

          

          

          

          

          

          

          

          

          3.37

          %Net interest margin(3)

          

          

          

          

          

          

          

          

          

          

          3.34

          %

          

          

          

          

          

          

          

          

          

          

          3.54

          %Tax-equivalent adjustment(4)

          

          

          

          

          

          

          (861

          )

          

          

          

          

          

          

          

          

          

          

          (226

          )Net interest income

          

          

          

          

          

          $

          20,891

          

          

          

          

          

          

          

          

          

          

          $

          19,738
  (1)

          Average balances are based on amortized cost. (2)

          Average balances include loans on non-accrual status. (3)

          Represents net interest income as a percentage of total average interest-earning assets. (4)

          Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.
 46    TABLE OF CONTENTS Investment Portfolio At June 30, 2012, the principal components of the investment securities portfolio were U.S. Government agency obligations, federal agency obligations including mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset backed securities and equity securities. During the six months ended June 30, 2012, approximately $71.2 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to purchase new securities. The Corporations sales from its available-for-sale investment portfolio were made in the ordinary course of business. For the three months ended June 30, 2012, average investment securities increased $111.3 million to approximately $531.4 million, or 39.8 percent of average interest-earning assets, from $420.2 million on average, or 37.2 percent of average interest-earning assets, for the comparable period in 2011. For the six months ended June 30, 2012, average investment securities increased $108.3 million to approximately $518.9 million, or 39.8 percent of average interest-earning assets, from $410.6 million on average, or 36.4 percent of average interest-earning assets, for the comparable period in 2011. During the three-month period ended June 30, 2012, the volume-related factors applicable to the investment portfolio increased interest income by approximately $1.2 million while rate-related changes resulted in a decrease in interest income of approximately $738,000 from the same period in 2011. The tax-equivalent yield on investments decreased by 49 basis points to 3.32 percent from a yield of 3.81 percent during the comparable period in 2011. A 71 basis points decrease in taxable yield was partially offset by an increase in the purchase of tax exempt municipal securities during the period. During the six-month period ended June 30, 2012, the volume-related factors applicable to the investment portfolio increased interest income by approximately $2.4 million while rate-related changes resulted in a decrease in interest income of approximately $1.2 million from the same period in 2011. The tax-equivalent yield on investments decreased by 32 basis points to 3.36 percent from a yield of 3.68 percent during the comparable period in 2011. A 60 basis points decrease in taxable yield was partially offset by an increase in the purchase of tax exempt municipal securities during the period. For the six months ended June 30, 2012, the Corporation recorded principal losses of $170,000 on a private label collateralized mortgage obligation. The Corporation expects that there may be additional losses on this obligation. See Note 7 of the Notes to the Consolidated Financial Statements for further discussion. At June 30, 2012, net unrealized gains on investment securities available-for-sale, which is carried as a component of accumulated other comprehensive loss and included in stockholders equity, net of tax, amounted to $2.8 million as compared with net unrealized losses of $2.2 million at December 31, 2011. At June 30, 2012, net unrealized gains on investment securities held to maturity, transferred from securities available-for-sale, which is carried as a component of accumulated other comprehensive loss and included in stockholders equity, net of tax, amounted to $167,000. The gross unrealized losses associated with agency securities and
federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer. Loan Portfolio Lending is one of the Corporations primary business activities. The Corporations loan portfolio consists of commercial, residential and retail loans, serving the diverse customer base in its market area. The composition of the Corporations portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets. The Corporation seeks to create growth in commercial lending by offering products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the
 47    TABLE OF CONTENTS financial requirements of the Corporations customers. It is the objective of the Corporations credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry. At June 30, 2012, total loans amounted to $807.5 million, an increase of $51.4 million or 6.8 percent as compared to December 31, 2011. For the six-month period ended June 30, 2012, growth of $21.4 million and $40.5 million in the commercial and industrial and commercial real estate portfolios were partially offset by decreases of $5.9 million, $4.1 million, and $614,000 in the construction, residential mortgage and installment loan portfolios. Total gross loans recorded in the quarter included $74.9 million of new loans and advances, partially offset by payoffs and principal payments of $58.5 million. At June 30, 2012, the Corporation had $74.9 million in outstanding loan commitments which are expected to fund over the next 90 days. Average total loans increased $89.3 million or 12.7 percent for the three months ended June 30, 2012 as compared to the same period in 2011, while the average yield on loans decreased by 35 basis points as compared with the same period in 2011. The decrease in the average yield on loans was primarily the result of lower market interest rates on the repricing of existing loans and the origination of new loans. The increase in average total loan volume was due primarily to increased customer activity and new lending relationships. The volume-related factors during the period contributed increased interest income of $1.1 million, while the rate-related
changes decreased interest income by $626,000. Average total loans increased $64.3 million or 9.1 percent for the six months ended June 30, 2012 as compared to the same period in 2011, while the average yield on loans decreased by 27 basis points as compared with the same period in 2011. Allowance for Loan Losses and Related Provision The purpose of the allowance for loan losses (the allowance) is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon a periodic evaluation of the portfolios risk characteristics. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the extraordinary economic volatility impacting national, regional and local markets, the Corporations analysis of its allowance for loan losses takes into consideration the potential impact that current trends may have on the Corporations borrower base. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporations allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Corporations loans are secured by real estate in the State of New Jersey. Future adjustments to the allowance may be necessary
due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Corporations control. At June 30, 2012, the level of the allowance was $10,221,000 as compared to $9,602,000 at December 31, 2011. Provisions to the allowance for the six-month period ended June 30, 2012 totaled $0 compared to $1,128,000 for the same period in 2011. The net recoveries were $574,000 for the three months ended June 30, 2012 compared to a $5,000 net charge offs for the three months ended June 30, 2011, bringing the Corporations net recoveries to $619,000 for the six months of 2012 compared to net charge offs of $159,000 for the same period of 2011. The allowance for loan losses as a percentage of total loans amounted to 1.27 percent and 1.27 percent at
June 30, 2012 and December 31, 2011, respectively. The level of the allowance for the respective periods of 2012 and 2011 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial
 48    TABLE OF CONTENTS and residential real estate loan portfolios and other related factors. In managements view, the level of the allowance at June 30, 2012 is adequate to cover losses inherent in the loan portfolio. Managements judgment regarding the adequacy of the allowance constitutes a Forward-Looking Statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from managements analysis, based principally upon the factors considered by management in establishing the allowance. Changes in the allowance for loan losses are presented in the following table for the periods indicated.  Six Months EndedJune 30,2012

          

          2011(dollars in thousands)Average loans for the period

          

          $

          773,097

          

          

          $

          708,769Total loans at end of period

          

          

          807,454

          

          

          

          698,148Analysis of the Allowance for Loan Losses:Balance  beginning of year

          

          $

          9,602

          

          

          $

          8,867Charge-offs:Commercial and industrial loans

          

          

          

          

          

          

          (185

          )Residential mortgage loans

          

          

          

          

          

          

          (23

          )Installment loans

          

          

          (8

          )

          

          

          (7

          )Total charge-offs

          

          

          (8

          )

          

          

          (215

          )Recoveries:Commercial and industrial loans

          

          

          

          

          

          

          35Residential real estate loans

          

          

          

          

          

          

          15Construction

          

          

          540

          

          

          

          Residential mortgage loans

          

          

          85

          

          

          

          2Installment loans

          

          

          2

          

          

          

          4Total recoveries

          

          

          627

          

          

          

          56Net recoveries (charge-offs)

          

          

          619

          

          

          

          (159

          )Provision for loan losses

          

          

          

          

          

          

          1,128Balance  end of period

          

          $

          10,221

          

          

          $

          9,836Ratio of net (recoveries) charge-offs during the period to average loans during the period(1)

          

          

          (0.16

          )%

          

          

          0.04

          %Allowance for loan losses as a percentage of total loans

          

          

          1.27

          %

          

          

          1.41

          %
  (1)

          Annualized. Asset Quality The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times. It is generally the Corporations policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next six months on a timely basis. Accruing loans past due 90 days or more are generally
well-secured and in the process of collection.
 49    TABLE OF CONTENTS Non-Performing Assets and Troubled Debt Restructured Loans Non-performing loans include non-accrual loans and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned. Troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate which is
lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as restructured, are not included within the Corporations non-performing loans. The following table sets forth, as of the dates indicated, the amount of the Corporations non-accrual loans, accruing loans past due 90 days or more, other real estate owned and troubled debt restructured loans.  June 30, 2012

          

          December 31, 2011(in thousands)Non-accrual loans

          

          $

          3,943

          

          

          $

          6,871Accruing loans past due 90 days or more

          

          

          1,026

          

          

          

          1,029Total non-performing loans

          

          

          4,969

          

          

          

          7,900Other real estate owned

          

          

          453

          

          

          

          591Total non-performing assets

          

          $

          5,422

          

          

          $

          8,491Troubled debt restructured loans  performing

          

          $

          8,736

          

          

          $

          7,459
 Non-performing assets decreased by $3,069,000 at June 30, 2012 from December 31, 2011. The decrease was attributable to the addition of five new residential loans (totaling approximately $489,000) and two commercial loans (totaling approximately $295,000) into non-performing status. This was partially offset by decreases from loans return to performing status of $3.7 million, payments of $60,000, sales proceeds of $104,000 and other real estate owned write downs of $34,000. The Corporation held $453,000 of other real estate owned at June 30, 2012 and $591,000 at December 31, 2011, respectively. Troubled debt restructured loans totaled $9.7 million at June 30, 2012 and $11.1 million at December 31, 2011. A total of $8.7 million and $7.5 million of troubled debt restructured loans were performing pursuant to the terms of their respective modifications at June 30, 2012 and December 31, 2011, respectively. Overall credit quality in the Banks loan portfolio at June 30, 2012 remained relatively strong. Other known potential problem loans (as defined by SEC regulations), some of which are non-performing loans and are included in the table above, as of June 30, 2012 have been identified and internally risk-rated as assets specially mentioned or substandard. Such loans amounted to $43.1 million and $49.0 million at June 30, 2012 and December 31, 2011, respectively. The improvement in credit quality occurred in the commercial real estate category which decreased $7.3 million in special mention but increased $2.4 million in the substandard
category. Commercial and industrial increased $722,000 in special mention but decreased $272,000 in the substandard category, residential mortgage increased in both special mention and substandard categories by $392,000 and $1.2 million, respectively, and construction decreased $3.0 million in the substandard category. These loans are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers. The Corporation has no foreign loans. At June 30, 2012, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.
 50    TABLE OF CONTENTS Other Income The following table presents the principal categories of other income for the periods indicated.  Three Months Ended June 30,

          

          Six Months Ended June 30,(dollars in thousands)

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent Change

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent ChangeService charges, commissions and fees

          

          $

          421

          

          

          $

          461

          

          

          $

          (40

          )

          

          

          (8.7

          )%

          

          $

          867

          

          

          $

          910

          

          

          $

          (43

          )

          

          

          (4.7

          )%Annuities and insurance commission

          

          

          48

          

          

          

          33

          

          

          

          15

          

          

          

          45.5

          

          

          

          92

          

          

          

          39

          

          

          

          53

          

          

          

          135.9Bank-owned life insurance

          

          

          246

          

          

          

          261

          

          

          

          (15

          )

          

          

          (5.7

          )

          

          

          497

          

          

          

          521

          

          

          

          (24

          )

          

          

          (4.6

          )Net investment securities gains

          

          

          513

          

          

          

          801

          

          

          

          (288

          )

          

          

          (36.0

          )

          

          

          1,450

          

          

          

          1,567

          

          

          

          (117

          )

          

          

          (7.5

          )Loan related fees

          

          

          195

          

          

          

          145

          

          

          

          50

          

          

          

          34.5

          

          

          

          431

          

          

          

          232

          

          

          

          199

          

          

          

          85.8All other

          

          

          181

          

          

          

          31

          

          

          

          150

          

          

          

          483.9

          

          

          

          222

          

          

          

          60

          

          

          

          162

          

          

          

          270.0Total other income

          

          $

          1,604

          

          

          $

          1,732

          

          

          $

          (128

          )

          

          

          (7.4

          )%

          

          $

          3,559

          

          

          $

          3,329

          

          

          $

          230

          

          

          

          6.9

          %
 For the three months ended June 30, 2012, total other income amounted to $1.6 million, compared to total other income of $1.7 million for the same period in 2011. The decrease of $128,000 for the three months ended June 30, 2012 was primarily as a result of net investment securities gains of $513,000 compared to net investment gains of $801,000 for the same period last year. Net investment securities gains in the second quarter of 2012 included $653,000 in net gains on the sale of investment securities, reduced by $140,000 in net other-than-temporary impairment charges. Excluding net investment securities gains, the Corporation recorded total other
income of $1.1 million for the three months ended June 30, 2012, compared to $931,000 for the three months ended June 30, 2011. This increase reflected increases of $150,000 in all other income related to the sale of a judgment, $50,000 in loan related fees and $15,000 in commissions on annuities and insurance contracts partially offset by declines in service charges on deposits of $40,000 and bank owned life insurance of $15,000. For the six months ended June 30, 2012, total other income increased $230,000 compared to the same period in 2011, primarily as a result of net investment securities gains and losses including other-than-temporary impairment charges. Excluding net investment securities gains and losses, the Corporation recorded other income of $2.1 million for the six months ended June 30, 2012 compared to $1.8 million for the comparable period in 2011, an increase of $347,000 or 19.7 percent. Increases in other income for the six months ended June 30, 2012 were recorded primarily in all other income which increased $162,000 primarily related to the sale of a
judgment, $199,000 in loan related fees and $53,000 in annuity and insurance commission, offset by lower service charges of $43,000 and bank owned life insurance income of $24,000.
 51    TABLE OF CONTENTS Other Expense The following table presents the principal categories of other expense for the periods indicated.  Three Months Ended June 30,

          

          Six Months Ended June 30,(dollars in thousands)

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent Change

          

          2012

          

          2011

          

          Increase (Decrease)

          

          Percent ChangeSalaries and employee benefits

          

          $

          3,055

          

          

          $

          2,903

          

          

          $

          152

          

          

          

          5.2

          %

          

          $

          6,173

          

          

          $

          5,770

          

          

          $

          403

          

          

          

          7.0

          %Occupancy and equipment

          

          

          606

          

          

          

          667

          

          

          

          (61

          )

          

          

          (9.1

          )

          

          

          1,306

          

          

          

          1,533

          

          

          

          (227

          )

          

          

          (14.8

          )FDIC insurance

          

          

          270

          

          

          

          528

          

          

          

          (258

          )

          

          

          (48.9

          )

          

          

          569

          

          

          

          1,056

          

          

          

          (487

          )

          

          

          (46.1

          )Professional and consulting

          

          

          294

          

          

          

          245

          

          

          

          49

          

          

          

          20.0

          

          

          

          540

          

          

          

          486

          

          

          

          54

          

          

          

          11.1Stationery and printing

          

          

          96

          

          

          

          99

          

          

          

          (3

          )

          

          

          (3.0

          )

          

          

          180

          

          

          

          200

          

          

          

          (20

          )

          

          

          (10.0

          )Marketing and advertising

          

          

          56

          

          

          

          65

          

          

          

          (9

          )

          

          

          (13.8

          )

          

          

          87

          

          

          

          86

          

          

          

          1

          

          

          

          1.2Computer expense

          

          

          362

          

          

          

          350

          

          

          

          12

          

          

          

          3.4

          

          

          

          715

          

          

          

          689

          

          

          

          26

          

          

          

          3.8Other real estate owned, net

          

          

          22

          

          

          

          

          

          

          

          22

          

          

          

          

          

          

          

          84

          

          

          

          (1

          )

          

          

          85

          

          

          

          8,500.0All other

          

          

          929

          

          

          

          900

          

          

          

          29

          

          

          

          3.2

          

          

          

          1,843

          

          

          

          1,873

          

          

          

          (30

          )

          

          

          (1.6

          )Total other expense

          

          $

          5,690

          

          

          $

          5,757

          

          

          $

          (67

          )

          

          

          (1.2

          )%

          

          $

          11,497

          

          

          $

          11,692

          

          

          $

          (195

          )

          

          

          (1.7

          )%
 For the three months ended June 30, 2012, total other expense decreased $67,000, or 1.2 percent, from the comparable three months ended June 30, 2011. This was primarily attributable to decreases in occupancy and equipment expenses and FDIC insurance partially offset by increases in salaries and employee benefits expense, professional and consulting expense, computer expense, other real estate owned and all other expense. For the six months ended June 30, 2012, total other expense decreased $195,000, or 1.7 percent from the same period in 2011. Salaries and employee benefits expense for the quarter ended June 30, 2012 increased $152,000 or 5.2 percent over the comparable period in the prior year. For the six months ended June 30, 2012, salaries and employee benefits expense increased $403,000, or 7.0 percent. These increases were primarily due to additions to staff, merit increases and higher benefit costs. Full-time equivalent staffing levels were 165 at June 30, 2012 and 167 at June 30, 2011. Occupancy and equipment expense for the quarter ended June 30, 2012 decreased $61,000, or 9.1 percent, from the comparable three-month period in 2011. The decrease for the quarter was primarily attributable to expense reductions pertaining to lower rent expense of $52,000, and reductions of $26,000 in depreciation expense. These decreases were partially offset by an increase of $35,000 in building expense. For the six months ended June 30, 2012, occupancy and equipment expense decreased $227,000, or 14.8 percent from the same period last year. The decrease was primarily attributable to reductions of $130,000 in repair and maintenance, $55,000 in
depreciation expense and $54,000 in rent expense. These decreases were partially offset by an increase of $25,000 in real estate taxes due to real estate tax appeal benefit recognized in the first half of 2011. FDIC insurance expense decreased $258,000, or 48.9 percent, for the three months ended June 30, 2012 compared to the same period in 2011. For the six months ended June 30, 2012, FDIC insurance expense decreased $487,000 compared to the same period in 2011. The decreases were caused by a new assessment formula which resulted in a more favorable rating category for the Corporation. Professional and consulting expense for the three months ended June 30, 2012 increased $49,000 or 20.0 percent compared to the comparable quarter of 2011. For the six months ended June 30, 2012, professional and consulting expense increased $54,000, or 11.1 percent, from the comparable period in 2011, reflecting higher expenses related to enterprise risk management implementation. All other expense for the three months ended June 30, 2012 increased $29,000, or 3.2 percent, compared to the same quarter of 2011. For the six months ended June 30, 2012, all other expense decreased $30,000, or 1.6 percent compared to the same period in 2011.
 52    TABLE OF CONTENTS Provision for Income Taxes For the quarter ended June 30, 2012, the Corporation recorded income tax expense of $2.2 million, compared with $1.9 million of income tax expense for the quarter ended June 30, 2011. The effective tax rates for the quarterly periods ended June 30, 2012 and 2011 were 33.7 percent and 35.0 percent, respectively. For the six months ended June 30, 2012, income tax expense amounted to $4.4 million compared with $3.6 million of income tax expense for the comparable period in 2011. The effective tax rates for the respective six-month periods ended June 30, 2012 and 2011 were 33.7 percent and 35.6 percent, respectively. Recent Accounting Pronouncements Note 4 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted. Asset and Liability Management Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporations statement of condition is planned and monitored by the Asset and Liability Committee (ALCO). In general, managements objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates. Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities,
total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on managements judgment as to projected interest rate trends. The Corporations interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a
liability-sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position. At June 30, 2012, the Corporation reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.89:1.00 at the cumulative one-year position. Based on managements perception of interest rates remaining low through 2012, emphasis has been, and is expected to continue to be, placed on controlling liability costs while extending the maturities of liabilities in order to insulate the net interest spread from rising interest rates in the future. However, no assurance can be given that this objective will be met. Estimates of Fair Value The estimation of fair value is significant to a number of the Corporations assets, including loans held for sale and investment securities available-for-sale. These are all recorded at either fair value or the lower of
 53    TABLE OF CONTENTS cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Impact of Inflation and Changing Prices The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Corporations assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Liquidity The liquidity position of the Corporation is dependent primarily on successful management of the Banks assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Corporation regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the
Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable investment securities, the Corporation also maintains borrowing capacity through the Federal Reserve Bank Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities. The Corporations primary sources of short-term liquidity consist of cash and cash equivalents and unpledged investment securities available-for-sale. At June 30, 2012, the Parent Corporation had $700,000 in cash and short-term investments compared to $2.0 million at December 31, 2011. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation presently has adequate liquidity to fund its obligations. Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of June 30, 2012, the Corporation was in compliance with all covenants and provisions of these agreements. Deposits Total deposits increased to $1.17 billion at June 30, 2012 from $1.12 billion at December 31, 2011. Total non interest-bearing deposits increased from $167.2 million at December 31, 2011 to $181.3 million at June 30, 2012, an increase of $14.1 million or 8.4 percent. Interest-bearing demand, savings and time deposits under $100,000 increased to a total of $886.9 million at June 30, 2012 as compared to $816.3 million at December 31, 2011. Time deposits $100,000 and over decreased $31.5 million as compared to year-end 2011 primarily due to an outflow of municipal certificates of deposit. Time deposits $100,000 and over represented 9.1 percent of total
deposits at June 30, 2012 compared to 12.3 percent at December 31, 2011.
 54    TABLE OF CONTENTS Core Deposits The Corporation derives a significant proportion of its liquidity from its core deposit base. Total demand deposits, savings and money market accounts of $1.0 billion at June 30, 2012 increased by $85.2 million, or 9.1 percent, from December 31, 2011. At June 30, 2012, total demand deposits, savings and money market accounts were 86.8 percent of total deposits compared to 83.4 percent at year-end 2011. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally, which calculation consists of total demand, savings accounts and money market accounts (excluding money market accounts greater
than $100,000 and time deposits) as a percentage of total deposits. This number increased by $84.5 million, or 12.6 percent, from $668.2 million at December 31, 2011 to $752.6 million at June 30, 2012 and represented 64.1 percent of total deposits at June 30, 2012 as compared with 59.6 percent at December 31, 2011. The Corporation continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. Management believes that the emphasis on serving the needs of our communities will provide a long term relationship base that will allow the Corporation to efficiently compete for business in its market. The success of this strategy is reflected in the growth of the demand, savings and money market balances during the second quarter of 2012. The following table depicts the Corporations core deposit mix at June 30, 2012 and December 31, 2011 based on the Corporations alternative calculation:  June 30, 2012

          

          December 31, 2011

          

          DollarChange 2012 vs. 2011Amount

          

          Percentage

          

          Amount

          

          Percentage(dollars in thousands)Non interest-bearing demand

          

          $

          181,282

          

          

          

          24.1

          %

          

          $

          167,164

          

          

          

          25.0

          %

          

          $

          14,118Interest-bearing demand

          

          

          199,064

          

          

          

          26.4

          

          

          

          215,523

          

          

          

          32.3

          

          

          

          (16,459

          )Regular savings

          

          

          105,827

          

          

          

          14.1

          

          

          

          135,703

          

          

          

          20.3

          

          

          

          (29,876

          )Money market deposits under $100

          

          

          266,445

          

          

          

          35.4

          

          

          

          149,760

          

          

          

          22.4

          

          

          

          116,685Total core deposits

          

          $

          752,618

          

          

          

          100.0

          %

          

          $

          668,150

          

          

          

          100.0

          %

          

          $

          84,468Total deposits

          

          $

          1,174,649

          

          

          

          

          

          

          $

          1,121,415

          

          

          

          

          

          

          $

          53,234Core deposits to total deposits

          

          

          

          

          

          

          64.1

          %

          

          

          

          

          

          

          59.6

          %
 Borrowings Short-Term Borrowings Short-term borrowings, which consist primarily of securities sold under agreements to repurchase, Federal Home Loan Bank (FHLB) advances and federal funds purchased, generally have maturities of less than one year. The details of these short-term borrowings are presented in the following table.  June 30, 2012(dollars in thousands)Average interest rate:At quarter end

          

          

          4.75

          %For the quarter

          

          

          1.15

          %Average amount outstanding during the quarter

          

          $

          182Maximum amount outstanding at any month end in the quarter

          

          $

          5,125Amount outstanding at quarter end

          

          $

          107
 Long-Term Borrowings Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $161.0 million at June 30, 2012 and December 31, 2011, and mature within one to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage
 55    TABLE OF CONTENTS loans, consisting of both residential mortgages and commercial real estate loans. At June 30, 2012, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.46 percent and 5.31 percent, respectively. Subordinated Debentures On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Parent Corporations subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and reprices quarterly. The rate at June 30, 2012 was 3.32 percent. The capital securities qualify as Tier 1
capital for regulatory capital purposes. Cash Flows The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Corporations operating, investing and financing activities. During the six months ended June 30, 2012, cash and cash equivalents decreased by $25.4 million over the balance at December 31, 2011. Net cash of $8.6 million was provided by operating activities, primarily, net income as adjusted to net cash. Net income of $8.6 million was adjusted principally by net gains on sales of investment securities of $1.5 million, a decrease in prepaid FDIC insurance assessments of $534,000, an increase in other assets of $2.5 million and an increase
in other liabilities of $923,000. Net cash used in investing activities amounted to approximately $86.3 million, primarily reflecting a net increase in loans of $51.4 million and a net increase in investment securities of $34.9 million. Net cash of $52.3 million was provided by financing activities, primarily from the increase in deposits of $53.2 million offset in part by the funding of dividends. Stockholders Equity Total stockholders equity amounted to $148.0 million, or 9.86 percent of total assets, at June 30, 2012, compared to $135.9 million or 9.49 percent of total assets at December 31, 2011. Book value per common share was $8.36 at June 30, 2012, compared to $7.63 at December 31, 2011. Tangible book value (i.e., total stockholders equity less preferred stock, goodwill and other intangible assets) per common share was $7.33 at June 30, 2012, compared to $6.60 at December 31, 2011. Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders equity (or tangible book value) calculated on a per common share basis. The Corporation believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporations book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of June 30, 2012 and December 31, 2011.  June 30,2012

          

          December 31,2011(in thousands, except for share data)Stockholders equity

          

          $

          147,983

          

          

          $

          135,916Less: Preferred stock

          

          

          11,250

          

          

          

          11,250Less: Goodwill and other intangible assets

          

          

          16,804

          

          

          

          16,902Tangible common stockholders equity

          

          $

          119,929

          

          

          $

          107,764Book value per common share

          

          $

          8.36

          

          

          $

          7.63Less: Goodwill and other intangible assets

          

          

          1.03

          

          

          

          1.03Tangible book value per common share

          

          $

          7.33

          

          

          $

          6.60
 On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the Treasury under the Small Business Lending Fund Program (SBLF Program). Under the Securities Purchase Agreement, the Corporation issued to the Treasury a total of 11,250 shares of the Corporations Senior Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation value of $1,000 per share.
 56    TABLE OF CONTENTS Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the Corporation redeemed from the Treasury, all 10,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provides the Corporation with approximately $1.25 million additional Tier 1 capital. The capital that the Corporation received under the program will allow it to continue to serve small business clients through the commercial lending program. On December 7, 2011, the Corporation repurchased the warrants issued on January 12, 2009 to the U.S. Treasury as part of its participation in the U.S. Treasurys TARP Capital Purchase Program. In the repurchase, the Corporation paid the U.S. Treasury $245,000 for the warrants. During the three and six months ended June 30, 2012, the Corporation had no purchases of common stock associated with its stock buyback programs. At June 30, 2012, there were 652,868 shares available for repurchase under the Corporations stock buyback programs. Regulatory Capital and Capital Adequacy The maintenance of a solid capital foundation is a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The Corporations objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment. The Corporation and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices. The following is a summary of regulatory capital amounts and ratios as of June 30, 2012 for the Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.  Center Bancorp, Inc.

          

          For Capital Adequacy Purposes

          

          To Be Well-Capitalized Under Prompt Corrective Action ProvisionsAt June 30, 2012

          

          Amount

          

          Ratio

          

          Amount

          

          Ratio

          

          Amount

          

          Ratio(dollars in thousands)Tier 1 leverage capital

          

          $

          136,660

          

          

          

          9.23

          %

          

          $

          59,224

          

          

          

          4.00

          %

          

          

          N/A

          

          

          

          N/ATier 1 risk-based capital

          

          

          136,660

          

          

          

          11.75

          %

          

          

          46,523

          

          

          

          4.00

          %

          

          

          N/A

          

          

          

          N/ATotal risk-based capital

          

          

          147,066

          

          

          

          12.64

          %

          

          

          93,080

          

          

          

          8.00

          %

          

          

          N/A

          

          

          

          N/A
  Union Center National Bank

          

          For Capital Adequacy Purposes

          

          To Be Well-Capitalized Under Prompt Corrective Action ProvisionsAt June 30, 2012

          

          Amount

          

          Ratio

          

          Amount

          

          Ratio

          

          Amount

          

          Ratio(dollars in thousands)Tier 1 leverage capital

          

          $

          136,049

          

          

          

          9.19

          %

          

          $

          59,216

          

          

          

          4.00

          %

          

          $

          74,020

          

          

          

          5.00

          %Tier 1 risk-based capital

          

          

          136,049

          

          

          

          11.70

          %

          

          

          46,512

          

          

          

          4.00

          %

          

          

          69,769

          

          

          

          6.00

          %Total risk-based capital

          

          

          146,455

          

          

          

          12.60

          %

          

          

          92,987

          

          

          

          8.00

          %

          

          

          116,234

          

          

          

          10.00

          %
  N/A  not applicable The Office of the Comptroller of the Currency (OCC) had established higher minimum capital ratios for the Bank effective as of December 31, 2009; however, those higher capital ratios were removed during the second quarter of 2012. As of June 30, 2012, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which they are subject. Basel III The Basel Committee on Banking Supervision (the Basel Committee) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information
 57    TABLE OF CONTENTS on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision. The Basel Committee released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as Basel III). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals and in September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods. In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as Basel III. Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Union Center National Bank. For banks in the United States, among the most significant provisions of Basel III concerning capital are the following: 

          A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period. 

          A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period. 

          A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase-in period. 

          An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice. 

          Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone. 

          Deduction from common equity of deferred tax assets that depend on future profitability to be realized. 

          Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities. 

          For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required. The Basel III provisions on liquidity include complex criteria establishing the LCR and NSFR. Although Basel III is described as a final text, it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks. Looking Forward One of the Corporations primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporations ability to achieve its objectives:
 58    TABLE OF CONTENTS The financial marketplace is rapidly changing and currently is in flux. The U.S. Treasury and banking regulators have implemented, and may continue to implement, a number of programs under new legislation to address capital and liquidity issues in the banking system. In addition, new financial system reform legislation may affect banks abilities to compete in the marketplace. It is difficult to assess whether these programs and actions will have short-term and/or long-term positive effects. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporations ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations can be mitigated by appropriate asset/liability management strategies, significant changes in interest rates can have a material adverse impact on profitability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes. This Looking Forward description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporations forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporations Annual Report on Form 10-K for the year ended December 31, 2011. Item 3. Qualitative and Quantitative Disclosures about Market Risks Market Risk The Corporations profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect the Corporations earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporations primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporations net interest income and capital, while structuring the Corporations asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its
asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities and has been focusing its efforts on increasing the Corporations yield-cost spread through wholesale and retail growth opportunities. The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporations exposure to differential changes in interest rates between assets and liabilities is the Corporations analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts. The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over multiple-year time horizons enables management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on a ramped rise and fall in interest rates based on a parallel yield curve shift over a twelve month time horizon and then
 59    TABLE OF CONTENTS maintained at those levels over the remainder of the model time horizon, which provides a rate shock to the two-year period and beyond. The model is based on the actual maturity and repricing characteristics of interest rate-sensitive assets and liabilities. The model incorporates assumptions regarding earning asset and deposit growth, prepayments, interest rates and other factors. Management believes that both individually and taken together, these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturities or payment schedules. Based on the results of the interest simulation model as of June 30, 2012, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 1.37 percent in net interest income if interest rates increased by 200 basis points from current rates in a gradual and parallel rate ramp over a twelve month period. These results and other analyses indicate to management that the Corporations net interest income is presently minimally sensitive to rising interest rates. Based on managements perception that financial markets will continue to be volatile, interest rates that are projected to continue at low levels will generate increased downward repricing of earning assets. Emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with an overall objective of improving the net interest spread and margin during 2012. However, no assurance can be given that this objective will be met. Equity Price Risk The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $11.9 million and $6.1 million at June 30, 2012 and December 31, 2011, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three and six months ended June 30, 2012 and 2011, the Corporation
recorded no other-than-temporary impairment charges on its equity security holdings. Item 4. Controls and Procedures a) Disclosure controls and procedures.  As of the end of the Corporations most recently completed fiscal quarter covered by this report, the Corporation carried out an evaluation, with the participation of the Corporations management, including the Corporations chief executive officer and chief financial officer, of the effectiveness of the Corporations disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Corporations chief executive officer and chief financial officer concluded that the Corporations disclosure controls and procedures
are effective in ensuring that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Corporations chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. b) Changes in internal controls over financial reporting:  There have been no changes in the Corporations internal controls over financial reporting that occurred during the Corporations last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Corporations internal control over financial reporting.
 60    TABLE OF CONTENTS PART II  OTHER INFORMATION Item 1. Legal Proceedings There are no significant pending legal proceedings involving the Corporation other than those arising out of routine operations. Based upon the information currently available, it is the opinion of management that the disposition or ultimate determination of such other claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Corporation. This statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including the uncertainties arising in
proving facts within the context of the legal processes. Item 6. Exhibits  Exhibit No.

          

          Description31.1

          

          Certification of the Chief Executive Officer of the Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

          

          Certification of the Chief Financial Officer of the Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

          

          Certification of the Chief Executive Officer of the Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

          

          Certification of the Chief Financial Officer of the Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INS**

          

          XBRL Instance Document101.SCH**

          

          XBRL Taxonomy Extension Schema Document101.CAL**

          

          XBRL Taxonomy Extension Calculation Linkbase Document101.DEF**

          

          Definition Taxonomy Extension Linkbase Document101.LAB**

          

          XBRL Taxonomy Extension Label Linkbase Document101.PRE**

          

          XBRL Taxonomy Extension Presentation Linkbase Document
  * =

          Furnished and not filed. ** =

          Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
 61    TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized. CENTER BANCORP, INC. (Registrant)  By:/s/ Anthony C. WeagleyAnthony C. Weagley President and Chief Executive Officer Date: August 8, 2012          

          By:/s/ Vincent N. TozziVincent N. Tozzi Vice President, Treasurer and Chief Financial Officer Date: August 8, 2012
 62