ConnectOne Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - ConnectOne Bancorp, Inc.	v221406_ex32-1.htm
EX-31.1 - ConnectOne Bancorp, Inc.	v221406_ex31-1.htm
EX-32.2 - ConnectOne Bancorp, Inc.	v221406_ex32-2.htm
EX-31.2 - ConnectOne Bancorp, Inc.	v221406_ex31-2.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

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 Employer Identification 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 ¨

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 ¨ No ¨ Not applicable to the Registrant.

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 ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if smaller

reporting company)

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 ¨ 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:	16,290,700 shares
(Title of Class)	(Outstanding as of April 30, 2011)

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements	2
	Consolidated Statements of Condition at March 31, 2011 and December 31, 2010 (unaudited)	2
	Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	45

Item 4.	Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 6.	Exhibits	47

SIGNATURES		48

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 three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011, or for any other interim period. The Center Bancorp, Inc. 2010 Annual Report on Form 10-K, should be read in conjunction with these financial statements.

Item 1. Financial Statements

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)

(in thousands, except for share data)	March 31, 2011			December 31, 2010

ASSETS
Cash and due from banks	$	80,129		$	37,497
Investment securities		410,376			378,080
Loans		716,096			708,444
Less: Allowance for loan losses		9,591			8,867
Net loans		706,505			699,577
Restricted investment in bank stocks, at cost		9,146			9,596
Premises and equipment, net		12,747			12,937
Accrued interest receivable		4,756			4,134
Bank-owned life insurance		28,165			27,905
Goodwill and other intangible assets		16,942			16,959
Prepaid FDIC assessments		3,109			3,582
Other assets		16,771			17,118
Total assets	$	1,288,646		$	1,207,385
LIABILITIES
Deposits:
Non interest-bearing	$	154,910		$	144,210
Interest-bearing:
Time deposits $100 and over		165,596			119,651
Interest-bearing transaction, savings and time deposits $100 and less		614,140			596,471
Total deposits		934,646			860,332
Short-term borrowings		35,917			41,855
Long-term borrowings		161,000			171,000
Subordinated debentures		5,155			5,155
Accounts payable and accrued liabilities		27,344			8,086
Total liabilities		1,164,062			1,086,428
STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued 10,000 shares		9,721			9,700
Common stock, no par value, authorized 25,000,000 shares; issued 18,477,412 shares; outstanding 16,290,700 shares at March 31, 2011 and 16,289,832 shares at December 31, 2010		110,056			110,056
Additional paid-in capital		4,949			4,941
Retained earnings		24,015			21,633
Treasury stock, at cost (2,186,712 common shares at March 31, 2011 and 2,187,580 common shares at December 31, 2010)		(17,691	)		(17,698	)
Accumulated other comprehensive loss		(6,466	)		(7,675	)
Total stockholders’ equity		124,584			120,957
Total liabilities and stockholders’ equity	$	1,288,646		$	1,207,385

See accompanying notes to consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
(in thousands, except for share data)	2011			2010
Interest income
Interest and fees on loans	$	9,217		$	9,368
Interest and dividends on investment securities:
Taxable interest		3,378			3,009
Tax-exempt interest		88			117
Dividends		184			178
Total interest income		12,867			12,672
Interest expense
Interest on certificates of deposit $100 or more		265			414
Interest on other deposits		1,002			1,264
Interest on borrowings		1,655			2,485
Total interest expense		2,922			4,163
Net interest income		9,945			8,509
Provision for loan losses		878			940
Net interest income after provision for loan losses		9,067			7,569
Other income
Service charges, commissions and fees		449			430
Annuities and insurance commissions		6			93
Bank-owned life insurance		260			264
Other		116			108
Other-than-temporary impairment losses on investment securities		(95	)		(7,767	)
Portion of losses recognized in other comprehensive income, before taxes		—			3,377
Net other-than-temporary impairment losses on investment securities		(95	)		(4,390	)
Net gains on sale of investment securities		861			1,046
Net investment securities gains (losses)		766			(3,344	)
Total other income (loss)		1,597			(2,449	)
Other expense
Salaries and employee benefits		2,867			2,657
Occupancy and equipment		866			889
FDIC insurance		528			618
Professional and consulting		241			274
Stationery and printing		101			84
Marketing and advertising		21			93
Computer expense		339			340
Other real estate owned		(1	)		—
Loss on fixed assets, net		—			(10	)
Repurchase agreement termination fee		—			594
Other		973			853
Total other expense		5,935			6,392
Income (loss) before income tax expense (benefit)		4,729			(1,272	)
Income tax expense (benefit)		1,711			(1,553	)
Net Income		3,018			281
Preferred stock dividends and accretion		146			145
Net income available to common stockholders	$	2,872		$	136
Earnings per common share
Basic	$	0.18		$	0.01
Diluted	$	0.18		$	0.01
Weighted Average Common Shares Outstanding
Basic		16,290,391			14,574,832
Diluted		16,300,604			14,579,871

See accompanying notes to consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except for share data)	Preferred Stock		Common Stock		Additional Paid In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance—December 31, 2009	$	9,619	$	97,908	$	5,650	$	17,068		$	(17,720	)	$	(10,776	)	$	101,749
Comprehensive income:
Net income								281									281
Other comprehensive loss, net of tax														3,087			3,087
Total comprehensive income																	3,368
Accretion of discount on preferred stock		20						(20	)								—
Cash dividends on preferred stock								(125	)								(125	)
Cash dividends declared on common stock ($0.03 per share)								(438	)								(438	)
Restricted stock awarded (2,083 shares)						3					22						25
Taxes related to stock-based compensation						8											8
Stock-based compensation expense						16											16

Balance—March 31, 2010	$	9,639	$	97,908	$	5,677	$	16,766		$	(17,698	)	$	(7,689	)	$	104,603

Balance—December 31, 2010	$	9,700	$	110,056	$	4,941	$	21,633		$	(17,698	)	$	(7,675	)	$	120,957
Comprehensive income:
Net income								3,018									3,018
Other comprehensive income, net of tax														1,209			1,209
Total comprehensive income																	4,227
Accretion of discount on preferred stock		21						(21	)								—
Issuance cost of common stock								(1	)								(1	)
Cash dividends on preferred stock								(125	)								(125	)
Cash dividends declared on common stock ($0.03 per share)								(489	)								(489	)
Stock issued for options exercise											7						7
Stock-based compensation expense						8											8

Balance—March 31, 2011	$	9,721	$	110,056	$	4,949	$	24,015		$	(17,691	)	$	(6,466	)	$	124,584

See accompanying notes to consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	3,018		$	281
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on investment securities, net		1,056			339
Depreciation and amortization		241			312
Stock-based compensation		8			16
Provision for loan losses		878			940
Provision for deferred taxes		—			193
Net other-than-temporary impairment losses on investment securities		95			4,390
Gains on sales of investment securities, net		(861	)		(1,046	)
Loans originated for resale		(2,449	)		—
Proceeds from sale of loans held for sale		2,481			—
Gains on sale of loans held for sale		(32	)		—
Net gain on sales and dispositions of premises and equipment		—			(10	)
Increase in accrued interest receivable		(622	)		(35	)
Decrease in prepaid FDIC insurance assessments		473			374
Increase in cash surrender value of bank-owned life insurance		(260	)		(264	)
Decrease in other assets		349			1,697
Increase (decrease) in other liabilities		418			(960	)
Net cash provided by operating activities		4,793			6,227
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(109,956	)		(153,302	)
Sales		76,551			141,511
Maturities, calls and principal repayments		20,867			16,663
Net redemption of restricted investment in bank stocks		450			121
Net decrease (increase) in loans		(7,797	)		4,189
Purchases of premises and equipment		(35	)		(59	)
Increase in principal portion of lease		(9	)		—
Proceeds from sale of premises and equipment		—			1
Net cash (used in) provided by investing activities		(19,929	)		9,124
Cash flows from financing activities:
Net increase (decrease) in deposits		74,314			(21,195	)
Net decrease in short-term borrowings		(5,938	)		(5,892	)
Repayments of long-term borrowings		(10,000	)		(10,039	)
Cash dividends on preferred stock		(125	)		(125	)
Cash dividends on common stock		(489	)		(438	)
Issuance cost of common stock		(1	)		—
Issuance cost of restricted stock award		—			25
Proceeds from exercise of stock options		7			—
Taxes related to stock based awards		—			8
Net cash provided by (used in) financing activities		57,768			(37,656	)
Net change in cash and cash equivalents		42,632			(22,305	)
Cash and cash equivalents at beginning of period		37,497			89,168
Cash and cash equivalents at end of period	$	80,129		$	66,863
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowings	$	3,006		$	4,310
Income taxes		—			40
Supplemental disclosures of non-cash investing activities:
Trade date accounting settlements for investments, net	$	17,892		$	27,624

See accompanying notes to consolidated financial statements.

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 date 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.

Earnings per common share have been computed based on the following:

	Three Months Ended March 31,
(in thousands, except per share amounts)	2011			2010
Net income	$	3,018		$	281
Preferred stock dividends and accretion		(146	)		(145	)
Net income available to common shareholders	$	2,872		$	136
Basic weighted average common shares outstanding		16,290			14,575
Plus: effect of dilutive options and warrants		11			5
Diluted weighted average common shares outstanding		16,301			14,580
Earning per common share:
Basic	$	0.18		$	0.01
Diluted	$	0.18		$	0.01

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 issuance. Under the 2003 Non-Employee Director Stock Option Plan, a total of 431,003 shares remain available for grant under the plan as of March 31, 2011 and are authorized for issuance. Such shares may be treasury shares, newly issued shares or a combination thereof.

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. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation—(continued)

For the three months ended March 31, 2011, the Corporation’s income before income taxes and net income were reduced by $8,000 and $5,000, respectively, as a result of the compensation expense related to stock options. For the three months ended March 31, 2010, the Corporation’s income before income taxes and net income were reduced by $16,000 and $10,000, 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 March 31, 2011 and 2010.

There were 30,564 and 38,203 shares of common stock underlying granted options for the three months ended March 31, 2011 and 2010, 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:

	Three Months Ended March 31,
	2011			2010
Weighted average fair value of grants	$	1.89		$	2.16
Risk-free interest rate		2.19	%		2.29	%
Dividend yield		1.32	%		1.41	%
Expected volatility		22.25	%		28.6	%
Expected life in months		65			62

Activity under the principal option plans as of March 31, 2011 and changes during the three months ended March 31, 2011 were as follows:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		198,946		$	9.75
Granted		30,564			8.28
Exercised		(3,648	)		1.83
Forfeited/cancelled/expired		(12,857	)		11.75
Outstanding at March 31, 2011		213,005		$	9.56		5.56	$	173,071
Exercisable at March 31, 2011		144,408		$	9.78		3.98	$	114,313

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 first quarter of 2011 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 March 31, 2011. This amount changes based on the fair value of the Corporation’s stock.

As of March 31, 2011, there was approximately $89,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 1.6 years.

Note 4. Recent Accounting Pronouncements

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolio by expanding credit risk disclosures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

In December 2010, the FASB issued ASU No. 2010-28, "When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." Under GAAP, the evaluation of goodwill impairment is a two-step test. In Step 1, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value. If it does, an entity must perform Step 2 of the goodwill impairment test to determine whether goodwill has been impaired and to calculate the amount of that impairment. The provisions of this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The provisions of this ASU are effective for the Corporation's reporting period ended March 31, 2011. As of March 31, 2011, the Corporation had no reporting units with zero or negative carrying amounts or reporting units where there was a reasonable possibility of failing Step 1 of the goodwill impairment test. As a result, the adoption of this ASU did not have a material impact on the Corporation's statements of income and condition.

In January 2011, the FASB issued ASU No. 2011-01, "Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20." The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the Allowance for the period ended March 31, 2011. The amendments in this ASU defer the effective date related to these disclosures, enabling creditors to provide those disclosures after the FASB completes its project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU will have no impact on the Corporation's statements of income and condition.

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about trouble debt restructuring as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 are effective for the Corporation’s reporting period ending September 30, 2011. The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s statements of income and condition.

Note 5 — 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2010, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," which requires that the Corporation provide a greater level of disaggregated information about the credit quality of the Corporation’s loans and leases and the allowance for loan and lease losses (the "Allowance"). This ASU also requires the Corporation to disclose on a prospective basis, additional information related to credit quality indicators, non-accrual loans and leases, and past due information. The Corporation adopted the provisions of this ASU in preparing the Consolidated Financial Statements as of and for the year ended December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption of this ASU for the quarter and year ended March 31, 2011 and December 31, 2010, respectively, had no impact on the Corporation’s statements of income and condition. The required disclosures are presented in the following tables and related discussion later in this Note.

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. 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 (previously SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures”). The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective 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, the Corporation reviews all non-homogeneous loans for impairment internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (“allowance”) 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.

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.

The following table sets forth the composition of the Corporation’s loan portfolio including net deferred fees and costs, at March 31, 2011 and December 31, 2010:

	March 31,		December 31,
	2011		2010
	(Dollars in Thousands)
Commercial and industrial	$	127,131	$	121,034
Commercial real estate		386,241		372,001
Construction		44,944		49,744
Residential mortgage		157,455		165,154
Installment		325		511
Total loans	$	716,096	$	708,444

Included in the loan balances above are net deferred loan costs of $207,000 and $258,000 at March 31, 2011 and December 31, 2010, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At March 31, 2011 and December 31, 2010, loans to officers and directors aggregated approximately $3,504,000 and $5,456,000, respectively. During the period ended March 31, 2011, the Corporation made no new loans to officers and directors; payments by such persons during 2011 aggregated $1,952,000.

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 March 31, 2011 and December 31, 2010, loan balances of approximately $391.9 million and $435.9 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 March 31, 2011 and December 31, 2010:

Loans Receivable on Non-Accrual Status

	March 31, 2011		December 31, 2010
	(Dollars in Thousands)
Commercial and Industrial	$	—	$	456
Commercial Real Estate		3,532		3,563
Construction		6,303		5,865
Residential Mortgage		2,501		1,290
Total loans receivable on non-accrual status	$	12,336	$	11,174

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. 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 about the loan credit quality at March 31, 2011 and December 31, 2010:

Credit Quality Indicators
	March 31, 2011
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	122,369	$	3,224	$	1,538	$	—	$	127,131
Commercial real estate		348,263		22,036		15,942		—		386,241
Construction		38,642		—		4,025		2,277		44,944
Residential mortgage		152,965		—		4,490		—		157,455
Installment		325		—		—		—		325
Total loans	$	662,564	$	25,260	$	25,995	$	2,277	$	716,096

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality Indicators
	December 31, 2010
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	116,741	$	1,929	$	2,364	$	—	$	121,034
Commercial real estate		345,096		15,383		11,522		—		372,001
Construction		43,879		—		3,588		2,277		49,744
Residential mortgage		161,558		—		3,596		—		165,154
Installment		511		—		—		—		511
Total loans	$	667,785	$	17,312	$	21,070	$	2,277	$	708,444

The following table provides an analysis of the impaired loans at March 31, 2011 and December 31, 2010:


Impaired Loans

	At or for the three months ended March 31, 2011
No Related Allowance Recorded	(Dollars in Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	908	$	908	$	—	$	908	$	11
Commercial real estate		3,953		4,594		—		3,966		5
Construction		2,277		5,054		—		2,277		—
Residential mortgage		—		—		—		—		—
Total	$	7,138	$	10,556	$	—	$	7,151	$	16

With An Allowance Recorded
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	4,180	$	4,180	$	609	$	4,180	$	34
Construction		4,025		4,025		413		4,036		—
Residential mortgage		1,354		1,354		14		1,354		14
Total	$	9,559	$	9,559	$	1,036	$	9,570	$	48

Total
Commercial and industrial	$	908	$	908	$	—	$	908	$	11
Commercial real estate		8,133		8,774		609		8,146		39
Construction		6,302		9,079		413		6,313		—
Residential mortgage		1,354		1,354		14		1,354		14
Total (including related allowance)	$	16,697	$	20,115	$	1,036	$	16,721	$	64

Impaired Loans

	At or for the year ended December 31, 2010
No Related Allowance Recorded	(Dollars in Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,364	$	1,908	$	—	$	1,933	$	87
Commercial real estate		3,984		4,625		—		4,274		78
Construction		5,865		8,642		—		6,855		112
Residential mortgage		1,462		1,765		—		1,711		27
Total	$	12,675	$	16,940	$	—	$	14,773	$	304

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

With An Allowance Recorded
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	4,180	$	4,180	$	618	$	4,181	$	204
Residential mortgage		1,354		1,354		21		1,356		76
Total	$	5,534	$	5,534	$	639	$	5,537	$	280

Total
Commercial and industrial	$	1,364	$	1,908	$	—	$	1,933	$	87
Commercial real estate		8,164		8,805		618		8,455		282
Construction		5,865		8,642		—		6,855		112
Residential mortgage		2,816		3,119		21		3,067		103
Total (including related allowance)	$	18,209	$	22,474	$	639	$	20,310	$	584

The Corporation defines an impaired loan as a loan for which it is probable, based on information available at the determination date, that the Corporation will not collect all amounts due under the contractual terms of the loan. At March 31, 2011 impaired loans were primarily collateral dependent, and totaled $16.7 million. Specific allowance for loan loss of $1.04 million was assigned to impaired loans of $9.6 million. Loans in the amount of $7.1 million had no specific allowance allocation.

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 March 31, 2011 are loans that are deemed troubled debt restructurings. Of these loans, $7.0 million, 99% of which are included in the tables above, are performing under the restructured terms and are accruing interest.

The following table provides an analysis of the age of loans that are past due at March 31, 2011 and December 31, 2010:

Aging Analysis

	March 31, 2011
	(Dollars in Thousands)
	30-59 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
Commercial and Industrial	$	579	$	177	$	224	$	980	$	126,151	$	127,131	$	224
Commercial Real Estate		2,080		857		3,532		6,469		379,772		386,241		—
Construction		—		—		6,303		6,303		38,641		44,944		—
Residential Mortgage		3,081		626		2,964		6,671		150,784		157,455		463
Installment		11		—		—		11		314		325		—
Total	$	5,751	$	1,660	$	13,023	$	20,434	$	695,662	$	716,096	$	687

	December 31, 2010
	(Dollars in Thousands)
	30-59 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
Commercial and Industrial	$	1,509	$	476	$	456	$	2,441	$	118,593	$	121,034	$	—
Commercial Real Estate		4,290		2,229		3,563		10,082		361,919		372,001		—
Construction		170		449		5,865		6,484		43,260		49,744		—
Residential Mortgage		1,814		309		2,004		4,127		161,027		165,154		714
Installment		9		—		—		9		502		511		—
Total	$	7,792	$	3,463	$	11,888	$	23,143	$	685,301	$	708,444	$	714

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	March 31, 2011
	(Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	609	$	413	$	14	$	—	$	—	$	1,036
Collectively evaluated for impairment		1,378		5,574		487		938		51		127		8,555
Total	$	1,378	$	6,183	$	900	$	952	$	51	$	127	$	9,591

Loans Receivable
Individually evaluated for impairment	$	2,010	$	16,182	$	6,302	$	1,354	$	—	$	—	$	25,848
Collectively evaluated for impairment		125,121		370,059		38,642		156,101		325		—		690,248
Total	$	127,131	$	386,241	$	44,944	$	157,455	$	325	$	—	$	716,096

Allowance for loan and lease losses

	December 31, 2010
	(Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	618	$	—	$	21	$	—	$	—	$	639
Collectively evaluated for impairment		1,272		5,097		551		1,017		52		239		8,228
Total	$	1,272	$	5,715	$	551	$	1,038	$	52	$	239	$	8,867

Loans Receivable
Individually evaluated for impairment	$	2,748	$	11,960	$	5,865	$	1,354	$	—	$	—	$	21,927
Collectively evaluated for impairment		118,286		360,041		43,879		163,800		511		—		686,517
Total	$	121,034	$	372,001	$	49,744	$	165,154	$	511	$	—	$	708,444

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, 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the activity in the allowance for loan losses is as follows:

	March 31, 2011
	(Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge			Installment		Unallocated			Total

Balance at January 1,	$	1,272	$	5,715	$	551	$	1,038		$	52	$	239		$	8,867

Charge offs		165		—		—		23			3		—			191

Recoveries		35		—		—		—			2		—			37

Provision		236		468		349		(63	)		—		(112	)		878

Balance at March 31,	$	1,378	$	6,183	$	900	$	952		$	51	$	127		$	9,591

The amount of interest income that would have been recorded on non-accrual loans during the three months ended March 31, 2011, the year ended December 31, 2010 and the year ended December 31, 2009, had payments remained in accordance with the original contractual terms, was $215,000, $598,000 and $431,000, respectively.

At March 31, 2011, 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.

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.

Disclosure of comprehensive income for the three months ended March 31, 2011, and 2010 is presented in the Consolidated Statements of Changes in Stockholders’ Equity. The table below provides a reconciliation of the components of other comprehensive income (loss) to the data provided in the Consolidated Statements of Changes in Stockholders’ Equity.

The components of other comprehensive income (loss), net of tax, were as follows for the periods indicated:

	Three Months Ended March 31,
	2011			2010
	(in thousands)
Reclassification adjustment of OTTI losses included in income	$	(95	)	$	(4,390	)
Unrealized gains on available-for-sale securities		1,389			8,461
Reclassification adjustment for net gains arising during this period		861			1,046
Net unrealized gains		2,155			5,117
Tax effect		(861	)		(2,030	)
Net of tax amount		1,294			3,087
Change in minimum pension liability		(142	)		—
Tax effect		57			—
Net of tax amount		(85	)		—
Other comprehensive income, net of tax	$	1,209		$	3,087

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated other comprehensive loss at March 31, 2011 and December 31, 2010 consisted of the following:

	March 31, 2011			December 31, 2010
	(in thousands)
Investment securities available-for-sale, net of tax	$	(4,033	)	$	(5,327	)
Defined benefit pension and post-retirement plans, net of tax		(2,433	)		(2,348	)
Total accumulated other comprehensive loss	$	(6,466	)	$	(7,675	)

Note 7. Investment Securities

All of the Corporation’s investment securities are classified as available-for-sale at March 31, 2011 and December 31, 2010. 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 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.

The following tables present information related to the Corporation’s investment securities available-for-sale at March 31, 2011 and December 31, 2010.


	March 31, 2011
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	—	$	—	$	—		$	—
Federal agency obligations		64,917		1,070		(496	)		65,491
Mortgage-backed securities		210,472		194		(2,976	)		207,690
Obligations of U.S. states and political subdivisions		56,644		164		(814	)		55,994
Trust preferred securities		22,247		98		(1,738	)		20,607
Corporate bonds and notes		53,846		74		(897	)		53,023
Collateralized mortgage obligations		3,748		—		(1,040	)		2,708
Equity securities		5,135		52		(324	)		4,863
Total	$	417,009	$	1,652	$	(8,285	)	$	410,376

	December 31, 2010
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	7,123	$	—	$	(128	)	$	6,995
Federal agency obligations		68,051		1,071		(641	)		68,481
Mortgage-backed securities		180,037		115		(2,419	)		177,733
Obligations of U.S. states and political subdivisions		38,312		1		(1,088	)		37,225
Trust preferred securities		21,222		26		(2,517	)		18,731
Corporate bonds and notes		63,047		—		(l,613	)		61,434
Collateralized mortgage obligations		3,941		—		(1,213	)		2,728
Equity securities		5,135		—		(382	)		4,753
Total	$	386,868	$	1,213	$	(10,001	)	$	378,080

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents information for investment securities available-for-sale at March 31, 2011, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

	March 31, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		22,530		22,204
Due after five years through ten years		37,601		36,814
Due after ten years		141,270		138,805
Mortgage-backed securities (1)		210,473		207,690
Equity securities		5,135		4,863
Total investment securities available-for-sale	$	417,009	$	410,376

(1) Debt securities without stated maturities.

For the three months ended March 31, 2011, investment securities sold amounted to approximately $76.6 million. Gross realized gains on investment securities sold amounted to approximately $930,000, while gross realized losses on investment securities sold amounted to approximately $69,000 for the period. For the three months ended March 31, 2010, securities sold from the Corporation’s available-for-sale portfolio amounted to approximately $141.5 million. Gross realized gains on securities sold amounted to approximately $1,057,000, while gross realized losses on securities sold amounted to approximately $11,000 for the period. In addition, during the first quarter of 2010, the Corporation recorded other-than temporary impairment charges of $1,109,000 on two pooled trust preferred securities, $281,000 on three variable rate private label CMOs, and $3,000,000 on one trust preferred security.

For the three months ended March 31, 2011, the Corporation recorded other-than temporary impairment (“OTTI”) charges of approximately $9,000 and principal losses of $86,000 on a variable rate private label collateralized mortgage obligation (“CMO”). During the first quarter of 2010, the Corporation recorded OTTI charges of $1,109,000 on two pooled trust preferred securities, $281,000 on three variable rate private label CMOs, and $3,000,000 on one trust preferred security.

The following summarizes OTTI charges for the periods indicated.

	Three Months Ended
	March 31, 2011		March 31, 2010
	(in thousands)
Debt securities	$	95	$	4,390
Total other-than-temporary impairment charges	$	95	$	4,390

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents detailed information for each trust preferred security held by the Corporation at March 31, 2011 which has at least one rating below investment grade.

Deal Name	Single Issuer or Pooled	Class/ Tranche		Adjusted Cost Basis		Fair Value		Gross Unrealized Gain (Loss)			Lowest Credit Rating Assigned	Number of Banks Currently Performing			Deferrals and Defaults as % of Original Collateral		Expected Deferrals/Defaults as % of Remaining Performing Collateral
	(dollars in thousands)
Countrywide Capital IV	Single		—	$	1,769	$	1,764	$	(5	)	BB+		1		None		None
Countrywide Capital V	Single		—		2,747		2,752		5		BB+		1		None		None
Countrywide Capital V	Single		—		250		250		—		BB+		1		None		None
NPB Capital Trust II	Single		—		868		894		26		NR		1		None		None
Citigroup Cap IX	Single		—		991		908		(83	)	BB+		1		None		None
Citigroup Cap IX	Single		—		1,903		1,752		(151	)	BB+		1		None		None
Citigroup Cap XI	Single		—		245		243		(2	)	BB+		1		None		None
BAC Capital Trust X	Single		—		2,500		2,342		(158	)	BB+		1		None		None
NationsBank Cap Trust III	Single		—		1,570		1,228		(342	)	BB+		1		None		None
Morgan Stanley Cap Trust IV	Single		—		2,500		2,388		(112	)	BB+		1		None		None
Morgan Stanley Cap Trust IV	Single		—		1,741		1,670		(71	)	BB+		1		None		None
Saturns-GS 2004-06	Single		—		242		246		4		BBB-		1		None		None
Saturns-GS 2004-06	Single		—		312		317		5		BBB-		1		None		None
Saturns-GS 2004-04	Single		—		778		732		(46	)	BBB-		1		None		None
Saturns-GS 2004-04	Single		—		22		21		(1	)	BBB-		1		None		None
USB Capital VII	Single		—		1,214		1,252		38		BBB+		1		None		None
USB Capital VII	Single		—		561		579		18		BBB+		1		None		None
Goldman Sachs	Single		—		999		968		(31	)	BBB-		1		None		None
ALESCO Preferred Funding VI	Pooled		C2		243		114		(129	)	Ca	43 of 66		(1)	34.2	%	43.5	%
ALESCO Preferred Funding VII	Pooled		C1		792		187		(605	)	Ca	59 of 78		(1)	30.0	%	54.9	%

(1)

Includes banks and insurance companies.

(2)

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 6, has incurred its eighth 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 three months ended March 31, 2011 and $466,000 for the three months ended March 31, 2010. The new cost basis for this security has been written down to $243,000 and has a par amount of $3.2 million. The other Pooled TRUP, ALESCO 7, incurred its sixth 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 three months ended March 31, 2011 , and $643,000 for the three months ended March 31, 2010. The new cost basis for this security has been written down to $792,000 and has a par amount of $3.1 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities

	Quarter Ended March 31, 2011		Year Ended December 31, 2010
	(in thousands)
Balance of credit-related OTTI at January 1,	$	6,197	$	3,621
Addition:
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized		95		5,576
Reduction:
Credit losses on investment securities sold during the period		—		(3,000	)
Balance of credit-related OTTI at period end	$	6,292	$	6,197

The Corporation owns three variable rate private label collateralized mortgage obligations (CMOs), which were also evaluated for impairment. These CMOs were originally issued in 2006 and are 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 $86,000 in principal losses on these bonds for the three months ended March 31, 2011 and $33,000 for the three months ended March 31, 2010, and expects additional losses in future periods. As such, management determined that an other-than-temporary impairment charge exists and recorded a $9,000 write down to the bonds, which represents 0.21 percent of the par amount of $4.3 million. The new cost basis for these securities has been written down to $3.7 million.

At March 31, 2011, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VI and VII investments were -43.8 percent and -34.2 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.

During 2011, the Corporation did not record other-than-temporary impairment charges relating to equity holdings in bank stocks for the three months ended March 31, 2011 and March 31, 2010.

The Corporation’s investment portfolio also includes overnight investments that were made into the Reserve Primary Fund (the “Fund”), a money market fund registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation could be effected for the protection of the Fund’s investors. Through December 31, 2009, the Corporation has received five distributions from the Fund, totaling approximately 92 percent of its outstanding balance, leaving a remaining outstanding balance in the Fund of $2.943 million. On January 29, 2010, as part of the court order liquidation of the Fund, the Corporation received a sixth distribution or $2.446 million, bringing total distributions to date to approximately 99 percent. During the fourth quarter of 2009, the Corporation recorded a $364,000, or approximately 1 percent, other-than-temporary impairment charge to earnings relating to a court-ordered liquidation of the Fund. The Corporation’s outstanding carrying balance in the Fund as of January 31, 2010 totaled $133,000. The Corporation’s outstanding carrying balance in the Fund as of December 31, 2010 was zero after recording to earnings approximately $30,000 as partial recovery of the OTTI charge. Future liquidation distributions received by the Corporation, if any, will be recorded to earnings. As of March 31, 2011 there had been no change in the status of the Fund from December 31, 2010.

For the three months ended March 31, 2011, securities sold from the Corporation’s available-for-sale portfolio amounted to approximately $76.6 million. The gross realized gains on securities sold amounted to approximately $930,000, while the gross realized losses amounted to approximately $69,000 for the period. During the three months ended March 31, 2011, the Corporation recorded $9,000 in a variable rate private label CMO and $86,000 on principal losses on a variable rate private label CMO. For the three months ended March 31, 2010, securities sold from the Corporation’s available-for-sale portfolio amounted to approximately $141.5 million. Gross realized gains on securities sold amounted to approximately $1,057,000, while gross realized losses on securities sold amounted to approximately $11,000 for the period. In addition, during the first quarter of 2010, the Corporation recorded other-than temporary impairment charges of $1,109,000 on two pooled trust preferred securities, $281,000 on three variable rate private label CMOs, and $3,000,000 on one trust preferred security.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Temporarily Impaired Investments

For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 109 investment securities as of March 31, 2011, represent an other-than-temporary impairment. The gross unrealized losses associated with U.S. Treasury and 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.

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 mortgage-backed securities category consist primarily of U.S. agency and 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. 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 private label CMOs were not other-than-temporarily impaired at March 31, 2011. 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 affect 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 is subject to numerous risks as cited above.

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 March 31, 2011 and December 31, 2010:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	March 31, 2011
	Total					Less Than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury and agency securities	$	—	$	—		$	—	$	—		$	—	$	—
Federal agency obligations		34,003		(496	)		27,649		(422	)		6,354		(74	)
Mortgage-backed securities		163,242		(2,976	)		163,242		(2,976	)		—		—
Obligations of U.S. states and political subdivisions		31,005		(814	)		31,005		(814	)		—		—
Trust preferred securities		14,317		(1,738	)		—		—			14,317		(1,739	)
Corporate bonds and notes		34,245		(897	)		34,245		(896	)		—		—
Collateralized mortgage obligations		2,708		(1,040	)		—		—			2,708		(1,040	)
Equity securities		3,211		(324	)		2,920		(80	)		291		(244	)
Total temporarily impaired investment securities	$	282,731	$	(8,285	)	$	259,061	$	(5,188	)	$	23,670	$	(3,097	)

	December 31, 2010
	Total					Less Than 12 Months					12 Months or Longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
U.S. Treasury and agency securities	$	6,995	$	(128	)	$	6,995	$	(128	)	$	—	$	—
Federal agency obligations		35,799		(641	)		32,113		(622	)		3,686		(19	)
Mortgage-backed securities		166,820		(2,419	)		166,820		(2,419	)		—		—
Obligations of U.S. states and political subdivisions		19,699		(1,088	)		19,699		(1,088	)		—		—
Trust preferred securities		16,058		(2,517	)		—		—			16,058		(2,517	)
Corporate bonds and notes		61,434		(1,613	)		52,985		(1,175	)		8,449		(438	)
Collateralized mortgage obligations		2,728		(1,213	)		—		—			2,728		(1,213	)
Equity securities		4,653		(382	)		3,427		(73	)		1,226		(309	)
Total temporarily impaired investment securities	$	314,186	$	(10,001	)	$	282,039	$	(5,505	)	$	32,147	$	(4,496	)

Investment securities having a carrying value of approximately $128.4 million and $125.6 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, short-term borrowings, and Federal Home Loan Bank advances and for other purposes required or permitted by law.

Note 8. 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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 March 31, 2011 and December 31, 2010.

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.

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 March 31, 2011, management made adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

At March 31, 2011, the Corporation’s two pooled trust preferred securities and a 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 March 31, 2011 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, during the quarter ended March 31, 2011 the private label CMO had interruptions of its scheduled principal payments and the Corporation recorded a principal loss of $86,000.

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 March 31, 2011 and December 31, 2010 are as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

			Fair Value Measurements at Reporting Date Using
Assets and Liabilities Measured at Fair Value on a Recurring Basis	March 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)
U.S. Treasury & agency securities	$	—	$	—	$	—	$	—
Federal agency obligations		65,491		—		65,491		—
Mortgage backed securities		207,690		3,138		204,552		—
Obligations of U.S. states and political subdivisions		55,994		13,599		42,395		—
Trust preferred securities		20,607		—		20,306		301
Collateralized mortgage obligations		2,708		—		—		2,708
Corporate bonds and notes		53,023		7,096		45,927		—
Equity securities		4,863		4,863		—		—
Investment securities available-for-sale	$	410,376	$	28,696	$	378,671	$	3,009

			Fair Value Measurements at Reporting Date Using
Assets and Liabilities Measured at Fair Value on a Recurring Basis	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury & agency securities	$	6,995	$	6,995	$	—	$	—
Federal agency obligations		68,481		—		68,481		—
Mortgage backed securities		177,733		—		177,733		—
Obligations of U.S. states and political subdivisions		37,225		16,936		20,289		—
Trust preferred securities		18,731		—		18,589		142
Collateralized mortgage obligations		2,728		—		—		2,728
Corporate bonds and notes		61,434		—		61,434		—
Equity securities		4,753		4,753		—		—
Investment securities available-for-sale	$	378,080	$	28,864	$	346,526	$	2,870

The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010.

	Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)
Balance at January 1,	$	2,870		$	2,349
Transfers into Level 3		—			8,197
Principal interest deferrals		29			28
Principal repayments		(184	)		(161	)
Total net unrealized gains (loss)		294			(1,982	)
Balance at March 31	$	3,009		$	8,431

For the three months ended March 31, 2011, there were no transfers of investment securities available-for-sale into or out of Level 3 assets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans Held for Sale. Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. There were no loans held for sale at March 31, 2011 or December 31, 2010.

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 March 31, 2011 and December 31, 2010 were as follows:

			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis	March 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	$	8,523	$	—	$	—	$	8,523

			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis	December 31, 2010		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	$	4,895	$	—	$	—	$	4,895

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 March 31, 2011 and December 31, 2010.

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.

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. At March 31, 2011 and December 31, 2010 the Corporation held no OREO.

Fair Value of Financial Instruments

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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated fair values have been determined using the best available data and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and the recorded book balances at March 31, 2011 and December 31, 2010, were as follows:

	March 31, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	80,129	$	80,129	$	37,497	$	37,497
Investment securities available-for-sale		410,376		410,376		378,080		378,080
Net loans		706,505		716,996		699,577		706,309
Restricted investment in bank stocks		9,146		9,146		9,596		9,596
Accrued interest receivable		4,756		4,756		4,134		4,134
Financial liabilities:
Non interest-bearing deposits	$	154,910	$	154,910	$	144,210	$	144,210
Interest-bearing deposits		779,736		767,962		716,122		716,887
Short-term borrowings		35,917		35,917		41,855		41,855
Long-term borrowings		161,000		173,120		171,000		179,570
Subordinated debentures		5,155		5,157		5,155		5,157
Accrued interest payable		957		957		1,041		1,041

Financial instruments actively traded in a secondary market have been valued using quoted available market prices. Cash and due from banks, interest-bearing time deposits in other banks, federal funds sold, loans held-for-sale and interest receivable are valued at book value, which approximates fair value. Financial liability instruments with stated maturities have been valued using a present value discounted cash flow analysis with a discount rate approximating current market for similar liabilities. Interest payable is valued at book value, which approximates fair value. Financial liability instruments with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is the current rate at which similar loans would be made to borrowers with similar credit ratings, same remaining maturities, and assumed prepayment risk.

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Corporation’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Corporation’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. 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 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 March 31, 2011, the net investment in direct financing lease consists of a minimum lease receivable of $4,987,000 and unearned interest income of $1,269,000, for a net investment in direct financing lease of $3,718,000. 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:

For years ending December 31,	(in thousands)
2011	$	117
2012		166
2013		216
2014		216
2015		224
Thereafter		2,779
Total minimum future lease receipts	$	3,718

Note 10. 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 Ended March 31,
(in thousands)	2011			2010

Interest cost	$	147		$	150
Net amortization and deferral		(50	)		(71	)
Net periodic pension cost	$	97		$	79

Contributions

The Corporation presently estimates it will contribute $467,000 to its Pension Trust in 2011.

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 $467,000, as noted above, by December 31, 2011with 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.

Note 11. Income Taxes

For the quarter ended March 31, 2011, the Corporation recorded income tax expense of $1.7 million, compared with $1.6 million income tax benefit for the quarter ended March 31, 2010. The effective tax rates for the quarterly periods ended March 31, 2011 and 2010 were 36.2 percent and -122.1 percent, respectively. The atypical effective tax rate for the three months ended March 31, 2010 was due to the pre-tax loss for the quarter and the recognition of a tax benefit of $853,000 pertaining to prior uncertain tax positions for 2006 and 2007.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. 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.

	March 31, 2011
	(dollars in thousands)
Average interest rate:
At quarter end		0.30	%
For the quarter		0.27	%
Average amount outstanding during the quarter	$	47,287
Maximum amount outstanding at any month end in the quarter	$	71,732
Amount outstanding at quarter end	$	35,917

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $161.0 million and mature within one to eight years. The FHLB advances are secured by pledges of FHLB stock, 1-4 family mortgages and U.S. Government and Federal agency obligations.

At March 31, 2011, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.46 percent and 5.31 percent, respectively.

At March 31, 2011, FHLB advances and securities sold under agreements to repurchase are contractually scheduled for repayment as follows:

	March 31, 2011
	(in thousands)
2013	$	5,000
2015		10,000
Thereafter		146,000
Total	$	161,000

Note 13. 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 reprices quarterly. The rate at March 31, 2011 was 3.15 percent.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Stockholders’ Equity

On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock 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 previously announced, the Corporation's voluntary participation in the Capital Purchase Program represented approximately 50 percent of the dollar amount that the Corporation qualified to receive under the Treasury program. The Corporation believes that its participation in this program strengthened its capital position. The funding will be used to support future loan growth.

The Corporation’s senior preferred stock and the warrants issued under the Capital Purchase Program qualify and are accounted for as equity on the consolidated statements of condition. Of the $10 million in issuance proceeds, $9.5 million and $0.5 million were allocated to the senior preferred shares and the warrants, respectively, based upon their estimated relative fair values as of January 12, 2009. The discount of the $0.5 million recorded for the senior preferred shares is being amortized to retained earnings over a five year estimated life of the securities based on the likelihood of their redemption by the Corporation within that timeframe.

In July 2009, the Corporation’s Board of Directors authorized a rights offering of up to approximately $11 million of common stock to existing stockholders. As a result of the rights offering, in October 2009 the Corporation issued 1,137,896 shares of its common stock, at a subscription price of $7.00 per share and for gross proceeds of approximately $8.0 million, to the holders of record of its common stock as of the close of business on September 1, 2009 who exercised their subscription rights. In addition, the Corporation sold 433,532 shares of common stock to standby purchasers for $7.00 per share and for gross proceeds of approximately $3.0 million. The standby purchasers consisted of Lawrence B. Seidman, an existing shareholder and member of the Corporation's Board of Directors, and certain of his affiliates.

As a result of the successful completion of the rights offering in October 2009, the number of shares underlying the warrants held by the Treasury under the Capital Purchase Program was reduced to 86,705 shares, or 50 percent of the original 173,410 shares.

In September 2010, the Corporation sold an aggregate of 1,715,000 shares of its common stock under its previously filed shelf registration statement which was declared effective by the Securities and Exchange Commission on May 5, 2010. The Corporation sold 1,430,000 shares of common stock at a price of $7.00 per share, with underwriting discounts and commissions of $0.39 per share, for gross proceeds from this offering of $10,010,000. The Corporation also sold 285,000 shares of common stock directly to certain of its directors at a price of $7.50 per share, for gross proceeds from this offering of $2,137,500. After underwriting discounts and commissions of $557,700 and offering expenses of approximately $200,000 which consisted primarily of legal and accounting fees, net proceeds from both offerings totaled $11,389,800.

In April 2009, the Corporations’ Board of Directors voted unanimously to reduce its quarterly common cash dividend from $0.09 per share to $0.03 per share, beginning with the second quarter 2009 dividend declaration.

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 March 31, 2011 and December 31, 2010. 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; and (10) 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.

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.

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 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 7 of the Notes to Consolidated Financial Statements for further discussion.

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 three months ended March 31, 2011 and 2010.

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 March 31, 2011 amounted to $2,872,000 compared to $136,000 for the comparable three-month period ended March 31, 2010. The Corporation recorded earnings per diluted common share of $0.18 for the three months ended March 31, 2011 as compared with earnings of $0.01 per diluted common share for the same three months in 2010. 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 0.98 percent for the three months ended March 31, 2011, compared to 0.09 percent for three months ended March 31, 2010.

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.

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 March 31,
							Increase			Percent
(dollars in thousands)	2011			2010			(Decrease)			Change
Interest income:
Investment securities	$	3,552		$	3,186		$	366			11.5	%
Loans, including net costs		9,217			9,368			(151	)		(1.6	)
Restricted investment in bank stocks, at cost		143			178			(35	)		(19.7	)
Total interest income		12,912			12,732			180			1.4
Interest expense:
Time deposits $100 or more		265			414			(149	)		(36.0	)
All other deposits		1,002			1,264			(262	)		(20.7	)
Borrowings		1,655			2,485			(830	)		(33.4	)
Total interest expense		2,922			4,163			(1,241	)		(29.8	)
Net interest income on a fully tax-equivalent basis		9,990			8,569			1,421			16.6
Tax-equivalent adjustment (1)		(45	)		(60	)		15			(25.0	)
Net interest income	$	9,945		$	8,509		$	1,436			16.9	%

(1) Computed using a federal income tax rate of 34 percent.

Net interest income on a fully tax-equivalent basis increased $1.4 million or 16.9 percent to $9.9 million for the three months ended March 31, 2011 as compared to the same period in 2010. For the three months ended March 31, 2011, the net interest margin increased 20 basis points to 3.55 percent from 3.35 percent during the three months ended March 31, 2010. For the three months ended March 31, 2011, a decrease in the average yield on interest-earning assets of 40 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 56 basis points, resulting in an increase in the Corporation’s net interest spread of 16 basis points for the period. Net interest spread and margin have been impacted by a high level of uninvested excess cash, which accumulated due to strong deposit growth experienced predominantly over the last nine months of 2009. 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.

For the three-month period ended March 31, 2011, interest income on a tax-equivalent basis increased by $180,000 or 0.16 percent compared to the same three-month period in 2010. This increase in interest income was due primarily to a volume increase in investment securities coupled with a decline in yields due to the lower interest rate environment. Average investment securities volume increased during the current three-month period by $100.9 million, to $400.9 million, compared to the first quarter of 2010. The loan portfolio increased on average $4.7 million, to $716.6 million, from an average of $711.9 million in the same quarter in 2010, primarily driven by growth in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 63.6 percent of average interest-earning assets during the first quarter of 2011 compared to 69.6 percent in the same quarter in 2010.

For the three months ended March 31, 2011, interest expense declined $1.2 million, or 29.8 percent from the same period in 2010. The average rate of interest-bearing liabilities decreased 0.56 basis points to 1.23 percent for the three months ended March 31, 2011, from 1.79 percent for the three months ended March 31, 2010. At the same time, average interest-bearing liabilities increased by $20.7 million. This increase was primarily in Money Markets, Savings, and Other interest-bearing deposits of $50.5 million, $11.3 million and $38.9 million, respectively, and was partially offset by decreases in Time deposits of $25.0 million, and in borrowings, which decreased by $55.1 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 and an improvement in net interest spread. For the three months ended March 31, 2011, the Corporation’s net interest spread on a tax-equivalent basis increased to 3.35 percent, from 3.19 percent for the three months ended March 31, 2010.

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 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 Ended March 31, 2011 and 2010 Increase (Decrease) Due to Change In:
(tax-equivalent basis, in thousands)	Average Volume			Average Rate			Net Change

Interest-earning assets:
Investment securities:
Taxable	$	960		$	(550	)	$	410
Tax-exempt		(35	)		(9	)		(44	)
Total investment securities		925			(559	)		366
Loans		62			(213	)		(151	)
Restricted investment in bank stocks		(23	)		(12	)		(35	)
Total interest-earning assets		964			(784	)		180

Interest-bearing liabilities:
Money market deposits		83			(94	)		(11	)
Savings deposits		21			(102	)		(81	)
Time deposits		(84	)		(234	)		(318	)
Other interest-bearing deposits		63			(64	)		(1	)
Total interest-bearing deposits		83			(494	)		(411	)
Borrowings and subordinated debentures		(465	)		(365	)		(830	)
Total interest-bearing liabilities		(382	)		(859	)		(1,241	)
Change in net interest income	$	1,346		$	75		$	1,421

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three months ended March 31, 2011 and 2010, 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 March 31,
	2011									2010
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1):
Taxable	$	391,022		$	3,419			3.50	%	$	287,547		$	3,009			4.18	%
Tax-exempt		9,833			133			5.40			12,407			177			5.70
Total investment securities		400,855			3,552			3.54			299,954			3,186			4.25
Loans (2)		716,568			9,217			5.15			711,860			9,368			5.26
Restricted investment in bank stocks		9,158			143			6.22			10,571			178			6.74
Total interest-earning assets		1,126,581			12,912			4.58			1,022,385			12,732			4.98
Non interest-earning assets:
Cash and due from banks		34,074									79,958
Bank-owned life insurance		28,010									26,414
Intangible assets		16,952									17,020
Other assets		32,653									41,316
Allowance for loan losses		(9,139	)								(8,378	)
Total non interest-earning assets		102,550									156,330
Total assets	$	1,229,131								$	1,178,715
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	166,875		$	225			0.54	%	$	116,358		$	236			0.81	%
Savings deposits		173,010			237			0.55			161,748			318			0.79
Time deposits		203,948			523			1.02			228,903			841			1.47
Other interest-bearing deposits		193,363			282			0.58			154,426			283			0.73
Total interest-bearing deposits		737,196			1,267			0.69			661,435			1,678			1.01
Short-term and long-term borrowings		208,509			1,629			3.12			263,620			2,446			3.71
Subordinated debentures		5,155			26			2.32			5,155			39			3.03
Total interest-bearing liabilities		950,860			2,922			1.23			930,210			4,163			1.79
Non interest-bearing liabilities:
Demand deposits		152,074									135,552
Other liabilities		3,705									8,315
Total non interest-bearing liabilities		155,779									143,869
Stockholders’ equity		122,492									104,636
Total liabilities and stockholders’ equity	$	1,229,131								$	1,178,715
Net interest income (tax-equivalent basis)					9,990									8,569
Net interest spread								3.35	%								3.19	%
Net interest margin (3)								3.55	%								3.35	%
Tax-equivalent adjustment (4)					(45	)								(60	)
Net interest income				$	9,945								$	8,509

(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 34 percent.

Investment Portfolio

At March 31, 2011, 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, and other debt and equity securities.

At one point, the Corporation’s investment securities portfolio also included overnight investments that were made into the Reserve Primary Fund (the “Fund”), a money market fund registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation could be effected for the protection of the Fund’s investors. During the fourth quarter of 2009, the Corporation recorded a $364,000 other-than-temporary impairment charge to earnings relating to this court ordered liquidation. Through March 31, 2011, the Corporation has received seven distributions from the Fund’s liquidation which resulted in reducing the carrying balance in the Fund to zero and the recording to earnings of approximately $30,000 as partial recovery of the OTTI charge. Future liquidation distributions received by the Corporation, if any, will be recorded to earnings.

During the three months ended March 31, 2011, approximately $76.6 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 fund loans and 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 March 31, 2011, average investment securities increased $100.9 million to approximately $400.9 million, or 35.6 percent of average interest-earning assets, from $300.0 million on average, or 29.3 percent of average interest-earning assets, for the comparable period in 2010. The Corporation has a continuing strategy to maintain the overall size of the investment securities portfolio, as a percentage of interest-earning assets, at a lower level with a focus instead on loan growth.

During the three-month period ended March 31, 2011, the volume-related factors applicable to the investment portfolio increased interest income by approximately $925,000 while rate-related changes resulted in a decrease in interest income of approximately $559,000 from the same period in 2010. The tax-equivalent yield on investments decreased by 71 basis points to 3.54 percent from a yield of 4.25 percent during the comparable period in 2010. A portion of the decline in tax-equivalent yield is attributable to a decrease of $2.6 million, on average, in tax-exempt securities during the period.

For the three months ended March 31, 2011, the Corporation recorded $9,000 in other-than-temporary impairment charges and principal losses of $86,000 on a private label collateralized mortgage obligation. See Note 7 of the Notes to the Consolidated Financial Statements for further discussion.

At March 31, 2011, net unrealized losses 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 $4.0 million as compared with net unrealized losses of $5.3 million at December 31, 2010. The gross unrealized losses associated with U.S. Treasury and 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 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 March 31, 2011, total loans amounted to $716.1 million, an increase of $7.7 million or 1.1 percent as compared to December 31, 2010. Growth of $20.3 million in the commercial and industrial and commercial real estate portfolios was partially offset by decreases of $12.5 million, primarily in the residential and construction loan portfolios. Total gross loans recorded in the quarter included $41.7 million of new loans and $16.4 million in advances, partially offset by payoffs and principal payments of $50.4 million.

At March 31, 2011, the Corporation had $12.2 million in outstanding loan commitments which are expected to fund over the next 90 days.

Average total loans increased $4.7 million or 0.66 percent for the three months ended March 31, 2011 as compared to the same period in 2010, while the average yield on loans decreased by 11 basis points as compared with the same period in 2010. 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 $62,000, while the rate-related changes decreased interest income by $213,000.

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 March 31, 2011, the level of the allowance was $9,591,000 as compared to $8,867,000 at December 31, 2010. Provisions to the allowance for the three-month period ended March 31, 2011 totaled $878,000 compared to $940,000 for the same period in 2010. Net charge-offs were $154,000 and $1,512,000 for the three months ended March 31, 2011 and 2010, respectively. The allowance for loan losses as a percentage of total loans amounted to 1.34 percent and 1.25 percent at March 31, 2011 and December 31, 2010, respectively.

The level of the allowance for the respective periods of 2011 and 2010 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowance at March 31, 2011 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.

	Three Months Ended March 31,
	2011			2010
	(dollars in thousands)
Average loans for the period	$	716,568		$	711,860
Total loans at end of period		716,096			713,906

Analysis of the Allowance for Loan Losses:
Balance—beginning of year	$	8,867		$	8,711
Charge-offs:
Commercial loans		(165	)		(1,145	)
Residential mortgage loans		(23	)		(362	)
Installment loans		(3	)		(14	)
Total charge-offs		(191	)		(1,521	)
Recoveries:
Commercial loans		35			5
Residential mortgage loans		—			1
Installment loans		2			3
Total recoveries		37			9
Net charge-offs		(154	)		(1,512	)
Provision for loan losses		878			940
Balance—end of period	$	9,591		$	8,139
Ratio of net charge-offs during the period to average loans during the period (1)		0.09	%		0.85	%
Allowance for loan losses as a percentage of total loans		1.34	%		1.14	%

(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.

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 on which a concession was granted to a borrower, 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.

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.

	March 31, 2011		December 31, 2010
	(in thousands)
Non-accrual loans	$	12,336	$	11,174
Accruing loans past due 90 days or more		687		714
Total non-performing loans		13,023		11,888
Other non-performing assets		327
Total non-performing assets	$	13,350	$	11,888
Troubled debt restructured loans	$	7,035	$	7,035

The increase of $1.5 million in non-performing assets at March 31, 2011 from December 31, 2010 was primarily attributable to the addition of 3 residential mortgages and one construction loan in the amount of $1.8 million, and the purchase of $327,000 in tax lien certificates and was partially offset by charge-offs of $191,000 and payments of approximately $400,000.

Other real estate owned at March 31, 2011 amounted to zero. The Corporation held no other real estate owned at December 31, 2010.

Troubled debt restructured loans totaled $7,035,000 at March 31, 2011 and December 31, 2010. Troubled debt restructured loans at March 31, 2011 and December 31, 2010 were all performing according to the restructured terms.

Overall credit quality in the Bank’s loan portfolio at March 31, 2011 remained relatively strong. Other known “potential problem loans” (as defined by SEC regulations), some of which non-performing loans are identified in the table above, as of March 31, 2011 have been identified and internally risk-rated as assets specially mentioned or substandard. Such loans amounted to $51.3 million and $38.4 million at March 31, 2011 and December 31, 2010, respectively. 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. All such loans are currently performing. The Corporation has no foreign loans.

At March 31, 2011, 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.

Other Income

The following table presents the principal categories of other income for the periods indicated.

	Three Months Ended March 31,
						Increase			Percent
(dollars in thousands)	2011		2010			(Decrease)			Change
Service charges, commissions and fees	$	449	$	430		$	19			4.4	%
Annuities and insurance commissions		6		93			(87	)		(93.5	)
Bank-owned life insurance		260		264			(4	)		(1.5	)
Net investment securities gains (losses)		766		(3,344	)		4,110			122.9
All other		116		108			8			7.4
Total other income (loss)	$	1,597	$	(2,449	)	$	4,046			165.2	%

For the three months ended March 31, 2011, total other income amounted to $1.6 million, compared to a net charge of $2.4 million for the same period in 2010. The increase of $4.0 million for the three months ended March 31, 2011 was primarily as a result of net investment securities gains of $766,000 compared to net investment losses of $3.3 million for the same period last year. Net investment securities gains in the first quarter of 2011 included $861,000 in net gains on the sale of investment securities, reduced by $95,000 in other-than-temporary impairment charges. Excluding net investment securities gains, the Corporation recorded total other income of $831,000 for the three months ended March 31, 2011, compared to $895,000 for the three months ended March 31, 2010, a decrease of $64,000 or 7.2 percent, which was primarily in Annuities and insurance commissions of $87,000 partially offset by an increase in service charges on deposit accounts of $19,000.

Other Expense

The following table presents the principal categories of other expense for the periods indicated.

	Three Months Ended March 31,
							Increase			Percent
(dollars in thousands)	2011			2010			(Decrease)			Change
Salaries and employee benefits	$	2,867		$	2,657		$	210			7.9	%
Occupancy and equipment		866			889			(23	)		(2.6	)
FDIC insurance		528			618			(90	)		(14.6	)
Professional and consulting		241			274			(33	)		(12.0	)
Stationery and printing		101			84			17			20.2
Marketing and advertising		21			93			(72	)		(77.4	)
Computer expense		339			340			(1	)		(0.3	)
Other real estate owned expense		(1	)		—			(1	)		—
Loss on fixed asset net		—			(10	)		10			100.0
Repurchase agreement termination fee		—			594			(594	)		(100.0	)
All other		973			853			120			14.1
Total other expense	$	5,935		$	6,392		$	(457	)		(7.1	)%

For the three months ended March 31, 2011, total other expense decreased $457,000, or 7.1 percent, from the comparable three months ended March 31, 2010. This was primarily attributable to a decrease in a one time cost of $594,000 relative to the termination of a structured repurchase agreement partially offset by increases in salaries and employee benefits expense.

Salaries and employee benefits expense for the quarter ended March 31, 2011 increased $210,000 or 7.9 percent over the comparable period in the prior year. The increase was primarily due to additions to staff, merit increases and one time severance payments. Full-time equivalent staffing levels were 165 at March 31, 2011, 159 at December 31, 2010 and 162 at March 31, 2010.

Occupancy and equipment expense for the quarter ended March 31, 2011 decreased $23,000, or 2.6 percent, from the comparable three-month period in 2010. The decrease for the quarter was primarily attributable to expense reductions pertaining to the Corporation’s former operations facility that resulted from vacating and leasing the facility earlier in 2010. The decrease was primarily attributable to reductions of $68,000 in depreciation expense, $42,000 in building and equipment maintenance expense and $18,000 in real estate taxes, largely associated with the Corporation’s former operations facility. These decreases were offset by higher weather related maintenance cost in 2011.

FDIC insurance expense decreased $90,000 or 14.6% for the three months ended March 31, 2011 compared to the same period in 2010.

Professional and consulting expense for the three months ended March 31, 2011 decreased $33,000 or 12.0 percent compared to the comparable quarter of 2010. Expense decreases primarily occurred in legal fees related to the termination of a structured repurchase agreement in 2010.

Marketing and advertising expense for the three months ended March 31, 2011 decreased $72,000 or 77.4 percent, from the comparable period in 2010, primarily due to a reduction in print media costs.

All other expense for the three months ended March 31, 2011 increased $120,000 compared to the same quarter of 2010. The increase was primarily due to real estate taxes of $50,000 related to a loan in non accrual status and deposit and lending related fee expenses of $34,000 and $13,000, respectively.

Provision for Income Taxes

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 March 31, 2011, the Corporation reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.18:1.00 at the cumulative one-year position. Based on management’s perception of interest rates remaining low through 2011, 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 available-for-sale investment securities. These are all recorded at either fair value or the lower of 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 March 31, 2011, the Parent Corporation had $3.4 million in cash and short-term investments compared to $4.3 million at December 31, 2010. 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 March 31, 2011, the Corporation was in compliance with all covenants and provisions of these agreements.

Deposits

Total deposits increased to $934.6 million at March 31, 2011 from $860.3 million at December 31, 2010. Total non interest-bearing deposits increased from $144.2 million at December 31, 2010 to $154.9 million at March 31, 2011, an increase of $10.7 million or 7.4 percent. Interest-bearing demand, savings and time deposits under $100,000 increased a total of $17.7 million at March 31, 2011 as compared to December 31, 2010. Time deposits $100,000 and over also increased $45.9 million as compared to year-end 2010 primarily due to an increase in deposits received at the end of the quarter. Time deposits $100,000 and over represented 17.7 percent of total deposits at March 31, 2011 compared to 13.9 percent at December 31, 2010.

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 $714.1 million at March 31, 2011 increased by $27.8 million, or 4.1 percent, from December 31, 2010. At March 31, 2011, total demand deposits, savings and money market accounts were 76.4 percent of total deposits compared to 79.8 percent at year-end 2010. 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 decreased by $5.9 million, or 1.25 percent, from $475.1 million at December 31, 2010 to $469.2 million at March 31, 2011 and represented 50.2 percent of total deposits at March 31, 2011 as compared with 55.2 percent at March 31, 2010.

The Corporation continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. 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 quarter.

The following table depicts the Corporation’s core deposit mix at March 31, 2011 and December 31, 2010 based on the Corporation’s alternative calculation:

	March 31, 2011					December 31, 2010					Dollar Change
	Amount		Percentage			Amount		Percentage			2011 vs. 2010
	(dollars in thousands)
Non interest-bearing demand	$	154,910		33.0	%	$	144,210		30.4	%	$	10,700
Interest-bearing demand		179,980		38.4			186,509		39.2			(6,529	)
Regular savings		99,529		21.2			112,305		23.6			(12,776	)
Money market deposits under $100		34,775		7.4			32,105		6.8			2,670
Total core deposits	$	469,194		100.0	%	$	475,129		100.0	%	$	(5,935	)

Total deposits	$	934,646				$	860,332				$	74,314
Core deposits to total deposits				50.2	%				55.2	%

Borrowings

Total borrowings amounted to $202.1 million at March 31, 2011, reflecting a decrease of $15.9 million from December 31, 2010. The decrease was primarily the result of the maturity of a Federal Home Loan Bank advance and the repayment of a Federal Funds Purchase, offset by an increase in overnight customer repurchase agreement activity. Overnight customer repurchase transactions covering commercial customer sweep accounts totaled $35.9 million at March 31, 2011, compared with $28.9 million at December 31, 2010. The shift in the volume of repurchase agreements also accounted for a portion of the change in the Corporation’s non interest-bearing commercial checking account balance during the period.

Short-Term Borrowings

	March 31, 2011
	(dollars in thousands)
Average interest rate:
At quarter end		0.30	%
For the quarter		0.27	%
Average amount outstanding during the quarter	$	47,287
Maximum amount outstanding at any month end in the quarter	$	71,732
Amount outstanding at quarter end	$	35,917

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $161.0 million at March 31, 2011, and mature within one to eight years. The FHLB advances are secured by pledges of FHLB stock, 1-4 family mortgages and U.S. government and Federal agency obligations. At March 31, 2011, 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 March 31, 2011 was 3.15 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 three months ended March 31, 2011, cash and cash equivalents increased by $13.3 million over the balance at March 31, 2010. Net cash of $4.8 million was provided by operating activities, namely, net income as adjusted to net cash. Net income of $3.1 million was adjusted principally by net gains on sales of investment securities of $861,000, provision for loan losses of $878,000, a decrease in prepaid FDIC insurance assessments of $473,000 and a decrease in other assets of $349,000. Net cash used in investing activities amounted to approximately $19.9 million, primarily reflecting a net increase in investment securities of $12.5 million, along with a net increase in loans of $7.8 million. Net cash of $57.8 million was provided by financing activities, primarily from the increase in deposits of $74.3 million offset in part by the funding of decreases in short and long term borrowings during the period of $15.9 million.

Stockholders’ Equity

Total stockholders’ equity amounted to $124.6 million, or 9.67 percent of total assets, at March 31, 2011, compared to $121.0 million or 10.02 percent of total assets at December 31, 2010. Book value per common share was $7.05 at March 31, 2011, compared to $6.83 at December 31, 2010. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $6.01 at March 31, 2011, compared to $5.79 at December 31, 2010.

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 March 31, 2011 and December 31, 2010.

	March 31,		December 31,
	2011		2010
	(in thousands, except for share data)
Stockholders’ equity	$	124,584	$	120,957
Less: Preferred stock		9,721		9,700
Less: Goodwill and other intangible assets		16,942		16,959
Tangible common stockholders’ equity	$	97,921	$	94,298

Book value per common share	$	7.05	$	6.83
Less: Goodwill and other intangible assets		1.04		1.04
Tangible book value per common share	$	6.01	$	5.79

In January 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under its Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the U.S. Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. The Corporation's voluntary participation in the Capital Purchase Program represented approximately 50 percent of the dollar amount that the Corporation qualified to receive under the U. S. Treasury program.

In October 2009, the Corporation successfully raised approximately $11 million in a rights offering to existing stockholders and private placement with its standby purchaser. As a result of the successful completion of the rights offering, the number of shares underlying the warrants held by the U.S. Treasury under the Capital Purchase Program was reduced by 50 percent, to 86,705 shares.

During the three months ended March 31, 2011, the Corporation had no purchases of common stock associated with its stock buyback programs. At March 31, 2011, there were 652,868 shares available for repurchase under the Corporation’s stock buyback programs. As described in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2010, the Corporation is restricted from repurchasing its Common Stock while its issued preferred stock is held by the U. S. Treasury.

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 of 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 March 31, 2011 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 Provisions
At March 31, 2011	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)

Tier 1 leverage capital	$	119,099		9.83	%	$	48,488		4.00	%		N/A		N/A
Tier 1 risk-based capital		119,099		13.25	%		35,946		4.00	%		N/A		N/A
Total risk-based capital		128,690		14.32	%		71,893		8.00	%		N/A		N/A

	Union Center National Bank					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
At March 31, 2011	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)

Tier 1 leverage capital	$	115,652		9.54	%	$	48,471		4.00	%	$	60,589		5.00	%
Tier 1 risk-based capital		115,652		12.87	%		35,938		4.00	%		53,906		6.00	%
Total risk-based capital		125,243		13.94	%		71,875		8.00	%		89,844		10.00	%

N/A - not applicable

The Office of the Comptroller of the Currency (“OCC”) has established higher minimum capital ratios for the Bank effective as of December 31, 2009: Tier 1 leverage capital of 8.0 percent, Tier 1 risk-based capital of 10.0 percent and Total risk-based capital of 12.0 percent. As of March 31, 2011, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which it is subject, including those established for the Bank by the OCC.

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 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:

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, 2010.

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 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 March 31, 2011, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 0.95 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 2011. 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 $4.9 million and $4.8 million at March 31, 2011 and December 31, 2010, 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 months ended March 31, 2011 and 2010, 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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In December 2009, the Corporation took steps to terminate a participation agreement with another New Jersey bank at December 31, 2009. Under the terms of the agreement, the participation ended on December 31, 2009, and, in the Corporation’s view, the lead bank is required to repurchase the remaining balance. The lead bank questioned our enforcement of the participation agreement. Therefore, the Corporation filed suit against Highlands State Bank (“Highlands”) in the Superior Court of New Jersey, Chancery Division, in Morris County, New Jersey (Docket No. MRS-C-189-09), for the return of the outstanding principal. Highlands has answered the complaint and filed a counterclaim. The initial pleadings have been filed and the discovery phase is ongoing. For additional information regarding this matter, see Item 3 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

There are no other 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 1A. Risk Factors

There have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors” in Center Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 6. Exhibits

Exhibit No.		Description

31.1		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.

* = Furnished and not filed.

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. Weagley	By:	/s/ Vincent N. Tozzi
	Anthony C. Weagley President and Chief Executive Officer		Vincent N. Tozzi Vice President, Treasurer and Chief Financial Officer

	Date: May 10, 2011		Date: May 10, 2011

Attached files

Stock widget

Investing forum

ConnectOne Bancorp, Inc. Reports

Also read