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EX-32.1 - EXHIBIT 32.1 - ConnectOne Bancorp, Inc.v320536_ex32x1.htm

 

 

 

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM 10-Q



 

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

For the Quarterly Period Ended June 30, 2012

OR

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

For the transition period from             to            

Commission File Number: 000-11486



 

CENTER BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)



 

 
New Jersey   52-1273725
(State or Other Jurisdiction
of Incorporation or Organization)
  (IRS 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

     
Large accelerated filer o   Accelerated filer x   Non-accelerated filer o   Smaller reporting company o
     (Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Common Stock, no par value:   16,347,088 shares
(Title of Class)   (Outstanding as of July 31, 2012)
 

 


 
 

TABLE OF CONTENTS

Table of Contents

 
  Page
PART I – FINANCIAL INFORMATION     1  

Item 1.

Financial Statements

    2  
Consolidated Statements of Condition at June 30, 2012 and December 31,
2011 (unaudited)
    2  
Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 (unaudited)     3  
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011 (unaudited)     4  
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011 (unaudited)     5  
Consolidated Statements of Cash Flows for the six months ended June 30, 2012
and 2011 (unaudited)
    6  
Notes to Consolidated Financial Statements     7  

Item 2.

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

    39  

Item 3.

Qualitative and Quantitative Disclosures about Market Risks

    59  

Item 4.

Controls and Procedures

    60  
PART II – OTHER INFORMATION     61  

Item 1.

Legal Proceedings

    61  

Item 6.

Exhibits

    61  
SIGNATURES     62  

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TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012, or for any other interim period. The Center Bancorp, Inc. 2011 Annual Report on Form 10-K, should be read in conjunction with these financial statements.

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TABLE OF CONTENTS

Item 1. Financial Statements

CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)

   
(in thousands, except for share data)   June 30,
2012
  December 31,
2011
ASSETS
                 
Cash and due from banks   $ 73,668     $ 111,101  
Interest bearing deposits with banks     12,000        
Total cash and cash equivalents     85,668       111,101  
Investment securities:
                 
Available for sale     467,190       414,507  
Held to maturity (fair value of $66,562 and $74,922)     62,997       72,233  
Loans     807,454       756,010  
Less: Allowance for loan losses     10,221       9,602  
Net loans     797,233       746,408  
Restricted investment in bank stocks, at cost     9,139       9,233  
Premises and equipment, net     12,218       12,327  
Accrued interest receivable     6,465       6,219  
Bank-owned life insurance     29,440       28,943  
Goodwill and other intangible assets     16,804       16,902  
Prepaid FDIC assessments     1,350       1,884  
Other real estate owned     453       591  
Other assets     12,065       12,390  
Total assets   $ 1,501,022     $ 1,432,738  
LIABILITIES
                 
Deposits:
                 
Non-interest bearing   $ 181,282     $ 167,164  
Interest-bearing:
                 
Time deposits $100 and over     106,452       137,998  
Interest-bearing transaction, savings and time deposits less than $100     886,915       816,253  
Total deposits     1,174,649       1,121,415  
Short-term borrowings     107        
Long-term borrowings     161,000       161,000  
Subordinated debentures     5,155       5,155  
Due to brokers for investment securities     1,545        
Accounts payable and accrued liabilities     10,583       9,252  
Total liabilities     1,353,039       1,296,822  
STOCKHOLDERS’ EQUITY
                 
Preferred stock, $1,000 liquidation value per share, authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at June 30, 2012 and December 31, 2011     11,250       11,250  
Common stock, no par value, authorized 25,000,000 shares; issued 18,477,412 shares at June 30, 2012 and December 31, 2011; outstanding 16,347,088 shares at June 30, 2012 and 16,332,327 shares at December 31, 2011     110,056       110,056  
Additional paid-in capital     4,742       4,715  
Retained earnings     39,663       32,695  
Treasury stock, at cost (2,130,324 common shares at June 30, 2012 and 2,145,085 common shares at December 31, 2011)     (17,234 )      (17,354 ) 
Accumulated other comprehensive loss     (494 )      (5,446 ) 
Total stockholders’ equity     147,983       135,916  
Total liabilities and stockholders’ equity   $ 1,501,022     $ 1,432,738  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

       
  Three Months Ended
June 30,
  Six Months Ended
June 30,
(in thousands, except for share and per share data)   2012   2011   2012   2011
Interest income
                                   
Interest and fees on loans   $ 9,414     $ 8,950     $ 18,799     $ 18,167  
Interest and dividends on investment securities:
                                   
Taxable     3,112       3,428       6,200       6,806  
Tax-exempt     826       351       1,599       439  
Dividends     140       149       289       333  
Interest on federal funds sold and other short-term investment     4             4        
Total interest income     13,496       12,878       26,891       25,745  
Interest expense
                                   
Interest on certificates of deposit $100 or more     182       348       434       613  
Interest on other deposits     1,126       1,072       2,282       2,074  
Interest on borrowings     1,642       1,665       3,284       3,320  
Total interest expense     2,950       3,085       6,000       6,007  
Net interest income     10,546       9,793       20,891       19,738  
Provision for loan losses     (107 )      250             1,128  
Net interest income after provision for loan losses     10,653       9,543       20,891       18,610  
Other income
                                   
Service charges, commissions and fees     421       461       867       910  
Annuities and insurance commissions     48       33       92       39  
Bank-owned life insurance     246       261       497       521  
Loan related fees     195       145       431       232  
Other     181       31       222       60  
Other-than-temporary impairment losses on investment securities     (140 )      (142 )      (198 )      (237 ) 
Net other-than-temporary impairment losses on investment securities     (140 )      (142 )      (198 )      (237 ) 
Net gains on sale of investment securities     653       943       1,648       1,804  
Net investment securities gains     513       801       1,450       1,567  
Total other income     1,604       1,732       3,559       3,329  
Other expense
                                   
Salaries and employee benefits     3,055       2,903       6,173       5,770  
Occupancy and equipment     606       667       1,306       1,533  
FDIC insurance     270       528       569       1,056  
Professional and consulting     294       245       540       486  
Stationery and printing     96       99       180       200  
Marketing and advertising     56       65       87       86  
Computer expense     362       350       715       689  
Other real estate owned, net     22             84       (1 ) 
All other     929       900       1,843       1,873  
Total other expense     5,690       5,757       11,497       11,692  
Income before income tax expense     6,567       5,518       12,953       10,247  
Income tax expense     2,214       1,934       4,369       3,645  
Net Income     4,353       3,584       8,584       6,602  
Preferred stock dividends and accretion     84       145       225       291  
Net income available to common stockholders   $ 4,269     $ 3,439     $ 8,359     $ 6,311  
Earnings per common share
                                   
Basic   $ 0.26     $ 0.21     $ 0.51     $ 0.39  
Diluted   $ 0.26     $ 0.21     $ 0.51     $ 0.39  
Weighted Average Common Shares Outstanding
                                   
Basic     16,333,653       16,290,700       16,332,990       16,290,547  
Diluted     16,341,767       16,315,667       16,340,011       16,309,026  
Dividend paid per common share   $ 0.03     $ 0.03     $ 0.06     $ 0.06  

 
 
See accompanying notes to unaudited consolidated financial statements.

3


 
 

TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

       
  Three Months Ended
June 30,
  Six Months Ended
June 30,
(in thousands)   2012   2011   2012   2011
Net income   $ 4,353     $ 3,584     $ 8,584     $ 6,602  
Other comprehensive income, net of tax:
                                   
Unrealized gains and losses on securities available-for-sale
                                   
Unrealized holding gains arising during the period     2,721       2,855       5,909       4,637  
Reclassification adjustment on OTTI losses included in income     93       92       131       153  
Reclassification adjustment for net gains arising during the period     (432 )      (613 )      (1,092 )      (1,162 ) 
Unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities           205             205  
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities     10       2       4       2  
Net unrealized gains on investment securities     2,392       2,541       4,952       3,835  
Change in minimum pension liability                       (85 ) 
Total other comprehensive income (see Note 6)     2,392       2,541       4,952       3,750  
Total comprehensive income   $ 6,745     $ 6,125     $ 13,536     $ 10,352  

 
 
See accompanying notes to unaudited consolidated financial statements.

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CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

             
(in thousands, except for share and per share data)   Preferred Stock   Common Stock   Additional Paid In Capital   Retained Earnings   Treasury Stock   Accumulated Other
Comprehensive Loss
  Total
Stockholders’ Equity
Balance as of December 31, 2010   $ 9,700     $ 110,056     $ 4,941     $ 21,633     $ (17,698 )    $ (7,675 )    $ 120,957  
Net income                                6,602                         6,602  
Other comprehensive income, net of tax                                                  3,750       3,750  
Accretion of discount on preferred stock     41                         (41 )                         
Issuance cost of common stock                                (3 )                        (3 ) 
Cash dividend on series A preferred stock                                (250 )                        (250 ) 
Cash dividends declared on common stock ($0.06 per share)                                (978 )                        (978 ) 
Stock issued for options exercise (868 shares)                                         7                7  
Stock-based compensation expense                       19                                  19  
Balance as of June 30, 2011   $ 9,741     $ 110,056     $ 4,960     $ 26,963     $ (17,691 )    $ (3,925 )    $ 130,104  
Balance as of December 31, 2011   $ 11,250     $ 110,056     $ 4,715     $ 32,695     $ (17,354 )    $ (5,446 )    $ 135,916  
Net income                                8,584                         8,584  
Other comprehensive income, net of tax                                                  4,952       4,952  
Dividend on series B preferred stock                                (225 )                        (225 ) 
Issuance cost of common stock                                (3 )                        (3 ) 
Cash dividends declared on common stock ($0.085 per share)                                (1,388 )                        (1,388 ) 
Stock issued for options exercise (14,761 shares)                       12                120                132  
Stock-based compensation expense                       15                                  15  
Balance as of June 30, 2012   $ 11,250     $ 110,056     $ 4,742     $ 39,663     $ (17,234 )    $ (494 )    $ 147,983  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
  Six Months Ended
June 30,
(in thousands)   2012   2011
Cash flows from operating activities:
                 
Net income   $ 8,584     $ 6,602  
Adjustments to reconcile net income to net cash provided by
operating activities:
                 
Amortization of premiums and accretion of discounts on investment
securities, net
    2,339       2,036  
Depreciation and amortization     421       484  
Stock-based compensation     15       19  
Provision for loan losses           1,128  
Net other-than-temporary impairment losses on investment securities     198       237  
Gains on sales of investment securities, net     (1,648 )      (1,804 ) 
Loans originated for resale     (10,833 )      (2,827 ) 
Proceeds from sale of loans held for sale     11,587       2,481  
Gains on sale of loans held for sale     (226 )      (32 ) 
Increase in accrued interest receivable     (246 )      (1,095 ) 
Decrease in prepaid FDIC insurance assessments     534       1,061  
Increase in cash surrender value of bank-owned life insurance     (497 )      (521 ) 
(Increase) decrease in other assets     (2,533 )      1,352  
Increase (decrease) in other liabilities     923       (1,277 ) 
Net cash provided by operating activities     8,618       7,844  
Cash flows from investing activities:
                 
Investment securities available-for-sale:
                 
Purchases     (134,679 )      (213,875 ) 
Sales     71,162       158,201  
Maturities, calls and principal repayments     18,184       30,180  
Investment securities held-to-maturity:
                 
Purchases     (5,866 )      (5,843 ) 
Maturities and principal repayments     16,325        
Net redemption of restricted investment in bank stocks     94       402  
Net (increase) decrease in loans     (51,353 )      10,515  
Purchases of premises and equipment     (288 )      (93 ) 
Proceeds from sale of other real estate owned     105        
Net cash used in investing activities     (86,316 )      (20,513 ) 
Cash flows from financing activities:
                 
Net increase in deposits     53,234       105,344  
Net increase (decrease) in short-term borrowings     107       (9,481 ) 
Repayments of long-term borrowings           (10,000 ) 
Cash dividends on preferred stock     (225 )      (250 ) 
Cash dividends on common stock     (980 )      (978 ) 
Issuance cost of common stock     (3 )      (3 ) 
Proceeds from exercise of stock options     132       7  
Net cash provided by financing activities     52,265       84,639  
Net change in cash and cash equivalents     (25,433 )      71,970  
Cash and cash equivalents at beginning of period     111,101       37,497  
Cash and cash equivalents at end of period   $ 85,668     $ 109,467  
Supplemental disclosures of cash flow information:
                 
Cash payments for:
                 
Interest paid on deposits and borrowings   $ 6,080     $ 6,037  
Income taxes   $ 3,885     $ 2,564  
Supplemental disclosures of non-cash investing activities:
                 
Trade date accounting settlements for investments, net   $ 1,545     $ 3,761  
Transfer from investment securities available-for-sale to investment securities held-to-maturity   $     $ 35,987  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 1. Basis of Presentation

The consolidated financial statements of Center Bancorp, Inc. (the “Parent Corporation”) are prepared on the accrual basis and include the accounts of the Parent Corporation and its wholly-owned subsidiary, Union Center National Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s other direct and indirect subsidiaries, the “Corporation”). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment evaluation of securities, the evaluation of the impairment of goodwill and the valuation of deferred tax assets.

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

Note 2. Earnings per Common Share

Basic earnings per common share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Corporation’s weighted average common shares outstanding for diluted EPS include the effect of stock options and warrants outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. Anti-dilutive stock option shares outstanding were 79,343 and 79,343, respectively, for the three and six months ended June 30, 2012 and 79,343 and 79,343, respectively, for three and six months ended June 30, 2011, respectively.

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

       
  Three Months Ended
June 30,
  Six Months Ended
June 30,
(in thousands, except per share amounts)   2012   2011   2012   2011
Net income   $ 4,353     $ 3,584     $ 8,584     $ 6,602  
Preferred stock dividends and accretion     84       145       225       291  
Net income available to common shareholders   $ 4,269     $ 3,439     $ 8,359     $ 6,311  
Basic weighted average common shares
outstanding
    16,334       16,291       16,333       16,291  
Plus: effect of dilutive options and warrants     8       25       7       18  
Diluted weighted average common shares outstanding     16,342       16,316       16,340       16,309  
Earnings per common share:
                                   
Basic   $ 0.26     $ 0.21     $ 0.51     $ 0.39  
Diluted   $ 0.26     $ 0.21     $ 0.51     $ 0.39  

Note 3. Stock-Based Compensation

The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock option plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 394,417 shares are available for grant and issuance as of June 30, 2012. Under the 2003 Non-Employee Director Stock Option Plan, a total of 403,219 shares remain available for grant and issuance under the plan as of June 30, 2012. Such shares may be treasury shares, newly issued shares or a combination thereof.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 3. Stock-Based Compensation  – (continued)

Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable over a three year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.

Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718-10-10 “Stock Based Compensation”. The Corporation recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of 3 years. The Corporation estimated the forfeiture rate based on its historical experience during the preceding seven fiscal years.

For the six months ended June 30, 2012, the Corporation’s income before income taxes and net income were reduced by $15,000 and $9,000, respectively, as a result of the compensation expense related to stock options. For the six months ended June 30, 2011, the Corporation’s income before income taxes and net income were reduced by $19,000 and $11,000, respectively, as a result of the compensation expense related to stock options.

Under the principal option plans, the Corporation may also grant restricted stock awards to certain employees. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The Corporation expenses the cost of restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. There were no restricted stock awards outstanding at June 30, 2012 and June 30, 2011.

There were 27,784 and 30,564 shares of common stock underlying granted options for the six months ended June 30, 2012 and 2011, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:

   
  Six Months Ended
June 30,
     2012   2011
Weighted average fair value of grants   $ 2.03     $ 1.89  
Risk-free interest rate     2.03 %      2.19 % 
Dividend yield     1.24 %      1.32 % 
Expected volatility     22.04 %      22.25 % 
Expected life in months     68       65  

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

       
  Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Term
(Years)
  Aggregate Intrinsic Value
Outstanding at December 31, 2011     171,378     $ 10.01                    
Granted     27,784       9.64                    
Exercised     14,761       8.89              
Outstanding at June 30, 2012     184,401       10.04       6.48     $ 282,988  
Exercisable at June 30, 2012     115,813     $ 10.61       5.16     $ 134,131  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 3. Stock-Based Compensation  – (continued)

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the second quarter of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2012. This amount changes based on the fair value of the Corporation’s stock.

As of June 30, 2012, there was approximately $119,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 1.65 years.

Note 4. Recent Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Corporation accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU had no impact on the Corporation’s statements of income and condition.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Corporation’s interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 resulted in presentation changes to the Corporation’s statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 had no impact on the Corporation’s statements of condition.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment”, which permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. The provisions of ASU No. 2011-08 are effective for the Corporation’s interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, provided that the entity has not yet performed its annual impairment test for goodwill. The Corporation performs its annual impairment test for goodwill in the fourth quarter of each year. The adoption of ASU No. 2011-08 is not expected to have a material impact on the Corporation’s statements of income and statements of condition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 4. Recent Accounting Pronouncements  – (continued)

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220) : Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 .” The Update defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. ASU No. 2011-12, which shares the same effective date as ASU No. 2011-05, does not defer the requirement for entities to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Corporation adopted the provisions of ASU No. 2011-12 which resulted in a new statement of comprehensive income for the interim period ended March 31, 2012. The adoption of ASU No. 2011-12 had no impact onto the Corporation’s statements of income and condition.

Note 5. Subsequent Event

On August 1, 2012, Union Center National Bank (the “Bank”) assumed all of the deposits and acquired certain assets of Saddle River Valley Bank, a New Jersey State-chartered bank, pursuant to the terms of the Purchase and Assumption Agreement, dated as of February 1, 2012, among the Bank, Saddle River Valley Bank and Saddle River Valley Bancorp.

The Bank assumed approximately $85.6 million in deposits and $87.2 million in loans and securities from Saddle River Valley Bank.

Note 6. Comprehensive Income

Total comprehensive income includes all changes in equity during a period arising from transactions and other events and circumstances from non-owner sources. The Corporation’s other comprehensive income is comprised of unrealized holding gains and losses on investment securities available-for-sale, and actuarial losses of defined benefit plans, net of taxes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 6. Comprehensive Income  – (continued)

Disclosure of comprehensive income for the six months ended June 30, 2012, and 2011 is presented in the Consolidated Statements of Comprehensive Income. The table below provides a reconciliation of the components of other comprehensive income to the data provided in the Consolidated Statements of Comprehensive Income.

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

   
  Six Months Ended
June 30,
     2012   2011
     (in thousands)
Unrealized holding gains on available-for-sale securities   $ 9,372     $ 7,543  
Tax effect     (3,463 )      (2,906 ) 
Net of tax amount     5,909       4,637  
Reclassification adjustment of OTTI losses included in income     198       237  
Tax effect     (67 )      (84 ) 
Net of tax amount     131       153  
Reclassification adjustment for net gains arising during this period     (1,648 )      (1,804 ) 
Tax effect     556       642  
Net of tax amount     (1,092 )      (1,162 ) 
Unrealized holding gains on securities transferred from
available-for-sale to held-to-maturity
          330  
Tax effect           (125 ) 
Net of tax amount           205  
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity     6       3  
Tax effect     (2 )      (1 ) 
Net of tax amount     4       2  
Change in minimum pension liability           (142 ) 
Tax effect           57  
Net of tax amount           (85 ) 
Other comprehensive income, net of tax   $ 4,952     $ 3,750  

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

   
  June 30,
2012
  December 31,
2011
     (in thousands)
Investment securities available-for-sale, net of tax   $ 2,752     $ (2,196 ) 
Unamortized component of securities transferred from
available-for-sale to held-to-maturity, net of tax
    167       163  
Defined benefit pension and post-retirement plans, net of tax     (3,413 )      (3,413 ) 
Total accumulated other comprehensive loss   $ (494 )    $ (5,446 ) 

Note 7. Investment Securities

The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at June 30, 2012 and December 31, 2011. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

The following tables present information related to the Corporation’s investment securities at June 30, 2012 and December 31, 2011.

       
  June 30, 2012
     Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value
          (in thousands)     
Investment Securities Available-for-Sale:
                                   
Federal agency obligations   $ 18,301     $ 382     $     $ 18,683  
Residential mortgage-backed securities     86,792       2,002             88,794  
Commercial mortgage-backed securities     9,742       74       (17 )      9,799  
Obligations of U.S. states and political subdivisions     81,898       3,449       (203 )      85,144  
Trust preferred securities     20,610       42       (1,827 )      18,825  
Corporate bonds and notes     210,859       3,432       (1,587 )      212,704  
Asset-backed securities     19,643       117       (127 )      19,633  
Collateralized mortgage obligations     2,854             (1,102 )      1,752  
Equity securities     772       16       (187 )      601  
Other securities     11,229       47       (21 )      11,255  
Total   $ 462,700     $ 9,561     $ (5,071 )    $ 467,190  
Investment Securities Held-to-Maturity:
                                   
Federal agency obligations   $ 17,532     $ 103     $ (22 )    $ 17,613  
Commercial mortgage-backed securities     6,182       93       (8 )      6,267  
Obligations of U.S. states and political subdivisions     39,283       3,400       (1 )      42,682  
Total   $ 62,997     $ 3,596     $ (31 )    $ 66,562  
Total investment securities   $ 525,697     $ 13,157     $ (5,102 )    $ 533,752  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

       
  December 31, 2011
     Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value
          (in thousands)     
Investment Securities Available-for-Sale:
                                   
Federal agency obligations   $ 24,781     $ 188     $     $ 24,969  
Residential mortgage-backed securities     113,213       2,157       (6 )      115,364  
Obligations of U.S. states and political subdivisions     66,309       2,900       (36 )      69,173  
Trust preferred securities     20,567       14       (4,394 )      16,187  
Corporate bonds and notes     175,812       1,382       (4,077 )      173,117  
Collateralized mortgage obligations     3,226             (1,327 )      1,899  
Asset-backed securities     7,614       52       (13 )      7,653  
Equity securities     535       21       (273 )      262  
Other securities     5,882       21       (20 )      5,883  
Total   $ 417,939     $ 6,714     $ (10,146 )    $ 414,507  
Investment Securities Held-to-Maturity:
                                   
Federal agency obligations   $ 28,262     $ 177     $ (34 )    $ 28,405  
Commercial mortgage-backed securities     6,276             (69 )      6,207  
Obligations of U.S. states and political subdivisions     37,695       2,615             40,310  
Total   $ 72,233     $ 2,792     $ (103 )    $ 74,922  
Total investment securities   $ 490,172     $ 9,506     $ (10,249 )    $ 489,429  

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

   
  June 30, 2012
     Amortized Cost   Fair Value
     (in thousands)
Investment Securities Available-for-Sale:
                 
Due in one year or less   $ 14,556     $ 14,476  
Due after one year through five years     96,758       97,606  
Due after five years through ten years     116,072       117,896  
Due after ten years     126,779       126,763  
Residential mortgage-backed securities     86,792       88,794  
Commercial mortgage-backed securities     9,742       9,799  
Equity securities     772       601  
Other securities     11,229       11,255  
Total   $ 462,700     $ 467,190  
Investment Securities Held-to-Maturity:
                 
Due after five years through ten years   $ 5,498     $ 5,607  
Due after ten years     51,317       54,688  
Commercial mortgage-backed securities     6,182       6,267  
Total   $ 62,997     $ 66,562  
Total investment securities   $ 525,697     $ 533,752  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

During the six months ended June 30, 2011, the Corporation reclassified at fair value approximately $36.0 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax gains of approximately $218,000 remained in accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to be appropriate as the Corporation has the positive intent and ability to hold these securities to maturity.

For the six months ended June 30, 2012, proceeds of available for sale investment securities sold amounted to approximately $71.2 million. Gross realized gains on investment securities sold amounted to approximately $1.6 million, while gross realized losses amounted to approximately $198,000, which were impairment charges, for the period. For the six months ended June 30, 2011, proceeds of investment securities sold amounted to approximately $158.2 million. Gross realized gains on investment securities sold amounted to approximately $1.9 million, while gross realized losses, which included impairment charges of $237,000, amounted to approximately $306,000 for the period.

The following summarizes OTTI charges for the periods indicated.

   
  Six Months Ended
June 30,
     2012   2011
     (in thousands)
Other than temporary impairment charges   $ 28     $ 18  
Principal losses on a variable rate CMO     170       219  
Total other-than-temporary impairment charges   $ 198     $ 237  

The Corporation performs regular analysis on all its investment securities to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record OTTI charges, through earnings, if they have the intent to sell, or if it is more likely than not that they will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation’s assessment of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result from credit rating downgrades.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

The following table presents detailed information for each trust preferred security held by the Corporation at June 30, 2012 which has at least one rating below investment grade.

                 
                 
Deal Name   Single Issuer or Pooled   Class/ Tranche   Amortized Cost   Fair Value   Gross Unrealized Gain (Loss)   Lowest Credit Rating Assigned   Number of Banks Currently Performing   Deferrals and Defaults as % of Original Collateral   Expected Deferral/Defaults as % of Remaining Performing Collateral
     (dollars in thousands)
Countrywide Capital IV     Single           $ 1,770     $ 1,747     $ (23 )      BB+       1       None       None  
Countrywide Capital V     Single             2,747       2,731       (16 )      BB+       1       None       None  
Countrywide Capital V     Single             250       248       (2 )      BB+       1       None       None  
NPB Capital Trust II     Single             868       894       26       NR        1       None       None  
Citigroup Cap IX     Single             992       980       (12 )      BB        1       None       None  
Citigroup Cap IX     Single             1,904       1,891       (13 )      BB        1       None       None  
Citigroup Cap XI     Single             246       244       (2 )      BB        1       None       None  
BAC Capital Trust X     Single             2,500       2,508       8       BB+       1       None       None  
Nationsbank Cap Trust III     Single             1,571       1,125       (446 )      BB+       1       None       None  
Morgan Stanley Cap Trust IV     Single             2,500       2,380       (120 )      BB+       1       None       None  
Morgan Stanley Cap Trust IV     Single             1,742       1,665       (77 )      BB+       1       None       None  
Saturns — GS 2004 – 06     Single             242       244       2       BB+       1       None       None  
Saturns — GS 2004 – 06     Single             312       314       2       BB+       1       None       None  
Saturns — GS 2004 – 04     Single             780       785       5       BB+       1       None       None  
Saturns — GS 2004 – 04     Single             22       22             BB+       1       None       None  
Goldman Sachs     Single             1,000       942       (58 )      BB+       1       None       None  
ALESCO Preferred
Funding VI
    Pooled       C2       325       69       (256 )      Ca        36 of 56       36.1 %      46.7 % 
ALESCO Preferred
Funding VII
    Pooled       C1       839       36       (803 )      Ca        48 of 62       35.9 %      47.7 % 
Total               $ 20,610     $ 18,825     $ (1,785 )                         

(1) Includes banks and insurance companies.

The Corporation owns two pooled trust preferred securities (“Pooled TRUPS”), which consist of securities issued by financial institutions and insurances companies. The Corporation holds the mezzanine tranche of such securities. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. The Corporation’s analysis of these Pooled TRUPS falls within the scope of EITF 99-20, ASC 320-40 and uses a discounted cash flow model to determine the total OTTI loss. The model considers the structure, and term and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers and the allocation of the payments to the note classes according to a priority of payments specified in the offering circular and indenture. The current estimate of expected cash flows is based on the most recent trustee reports and other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include defaults rates, default rate timing profile and recovery rates. We assume no prepayments, as these Pooled TRUPS were issued at comparatively tight spreads and as such, there is little incentive, if any, to prepay.

One of the Pooled TRUPS, ALESCO VI, has incurred its fourteenth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded no other-than-temporary impairment charge for the six months ended June 30, 2012 and June 30, 2011. The other Pooled TRUP, ALESCO VII,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

incurred its twelfth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded an other-than-temporary impairment charge of $28,000 for the six months ended June 30, 2012 and none for the six months ended June 30, 2011.

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities

   
  Six Months Ended June 30,
2012
  Year Ended December 31, 2011
     (in thousands)
Balance of credit-related OTTI at January 1,   $ 6,539     $ 6,197  
Addition:
                 
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized     198       342  
Reduction:
                 
Credit losses on investment securities sold during the period            
Balance of credit-related OTTI at period end   $ 6,737     $ 6,539  

The Corporation owns one variable rate private label CMO, which was also evaluated for impairment. This CMO was originally issued in 2006 and collateralized by 30 year Adjustable Rate Mortgage loans secured by a first lien, fully amortizing one-to-four residential mortgage loans. The tranche purchased was a Super Senior with an original credit rating of AAA/AAA. The top five states geographic concentration comprised in the deal were California 18.2 percent, Arizona 10.5 percent, Virginia 6.1 percent, Florida 6.5 percent and Nevada 6.3 percent. No one state exceeded a 25 percent concentration. These states have been heavily impacted by the financial crises and as such have sustained heavy delinquencies affecting the credit rating of the security. Management had applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. The Corporation recorded $112,000 and $170,000 in principal losses on this bond for the three and six months ended June 30, 2012, and $133,000 and $219,000 in principal losses for the three and six months ended June 30, 2011, respectively, and expects additional losses in future periods. As such, management determined that no an other-than-temporary impairment charge exists for this period.

At June 30, 2012, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VI and VII investments were -47.6 percent and -49.5 percent, respectively. Excess subordination is the amount of performing collateral above the amount of outstanding collateral underlying each class of the security. The excess subordination as a percent of remaining performing collateral reflects the difference between the performing collateral and the collateral underlying each security divided by the performing collateral. A negative number results when the paying collateral is less than the collateral underlying each class of the security. A low or negative number decreases the likelihood of full repayment of principal and interest accordingly to original contractual terms.

The Corporation did not record other-than-temporary impairment charges relating to equity holdings in bank stocks for the six months ended June 30, 2012 and June 30, 2011.

Temporarily Impaired Investments

For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 76 investment securities as of June 30, 2012, represent an other-than-temporary impairment. The gross unrealized losses associated with federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified.

The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.

The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the collateralized mortgage obligations category consist primarily of private issue collateralized mortgage obligations. Unrealized losses in the corporate debt securities category consist of single issuer corporate trust preferred securities, pooled trust preferred securities and corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. The unrealized loss in equity securities consists primarily of other bank equities. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. For collateralized mortgage obligations, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid. None of the corporate issuers have defaulted on interest payments. Management concluded that these securities, other than the previously mentioned two Pooled TRUPS and one private label CMO were not other-than-temporarily impaired at June 30, 2012. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.

In determining that the securities giving rise to the previously mentioned unrealized losses were not other than temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly there can be no assurance that the actual results will not differ from the Corporation’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Corporation’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security are subject to numerous risks as cited above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:

           
  June 30, 2012
     Total   Less than 12 Months   12 Months or Longer
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
     (in thousands)
Investment Securities Available-for-Sale:
                                                     
Commercial mortgage-backed securities   $ 3,080     $ (17 )    $ 3,080     $ (17 )    $     $  
Obligations of U.S. states and political subdivisions     13,166       (203 )      13,166       (203 )             
Trust preferred securities     14,059       (1,827 )                  14,059       (1,827 ) 
Corporate bonds and notes     85,953       (1,587 )      54,310       (517 )      31,643       (1,070 ) 
Collateralized mortgage obligations     1,752       (1,102 )                  1,752       (1,102 ) 
Asset-backed securities     8,352       (127 )      8,352       (127 )             
Equity securities     349       (187 )                  349       (187 ) 
Other securities     978       (21 )                  978       (21 ) 
Total     127,689       (5,071 )      78,908       (864 )      48,781       (4,207 ) 
Investment Securities
Held-to-Maturity:
                                                     
Federal agency obligations     5,138       (22 )      5,138       (22 )             
Commercial mortgage-backed securities     1,538       (8 )      1,538       (8 )             
Obligations of U.S. states and political subdivisions     1,021       (1 )      1,021       (1 )             
Total     7,697       (31 )      7,697       (31 )             
Total Temporarily Impaired Securities   $ 135,386     $ (5,102 )    $ 86,605     $ (895 )    $ 48,781     $ (4,207 ) 

           
  December 31, 2011
     Total   Less than 12 Months   12 Months or Longer
     Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses   Fair
Value
  Unrealized Losses
     (in thousands)
Investment Securities
Available-for-Sale:
                                                     
Residential mortgage pass-through securities   $ 2,013     $ (6 )    $ 2,013     $ (6 )    $     $  
Obligations of U.S. states and political subdivisions     4,352       (36 )      4,352       (36 )             
Trust preferred securities     15,272       (4,394 )      4,325       (996 )      10,947       (3,398 ) 
Corporate bonds and notes     97,043       (4,077 )      89,534       (3,663 )      7,509       (414 ) 
Collateralized mortgage obligations     1,899       (1,327 )                  1,899       (1,327 ) 
Asset-backed securities     3,884       (13 )      3,884       (13 )             
Equity securities     262       (273 )                  262       (273 ) 
Other securities     980       (20 )                  980       (20 ) 
Total     125,705       (10,146 )      104,108       (4,714 )      21,597       (5,432)  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 7. Investment Securities  – (continued)

           
  December 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)
Investment Securities Held-to-Maturity:
                                                     
Federal agency obligations     11,980       (34 )      11,980       (34 )             
Collateralized mortgage obligations     6,207       (69 )      6,207       (69 )             
Total     18,187       (103 )      18,187       (103 )             
Total Temporarily Impaired Securities   $ 143,892     $ (10,249 )    $ 122,295     $ (4,817 )    $ 21,597     $ (5,432 ) 

Investment securities having a carrying value of approximately $128.1 million and $98.7 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, securities sold under agreement to repurchase, and Federal Home Loan Bank advances and for other purposes required or permitted by law.

Note 8. Loans and the Allowance for Loan Losses

Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.

Portfolio segments are defined as the level at which an entity develops and documents a systematic methodology to determine its Allowance. Management has determined that the Corporation has two portfolio segments of loans and leases (commercial and consumer) in determining the Allowance. Both quantitative and qualitative factors are used by management at the portfolio segment level in determining the adequacy of the Allowance for the Corporation. Classes of loans and leases are a disaggregation of a Corporation's portfolio segments. Classes are defined as a group of loans and leases which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Corporation has five classes of loans and leases commercial and industrial (including lease financing), commercial — real estate, construction, residential mortgage (including home equity) and installment.

Generally, all classes of commercial and consumer loans and leases are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal or interest (unless loans and leases are adequately secured by collateral, are in the process of collection, and are reasonably expected to result in repayment), when terms are renegotiated below market levels, or where substantial doubt about full repayment of principal or interest is evident. For certain installment loans the entire outstanding balance on the loan is charged-off when the loan becomes 60 days past due.

Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected and six months of payments to demonstrate that the borrower can continue to meet the loan terms. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan’s yield using the level yield method.

Impaired Loans

The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

interest rate or, as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

The Corporation has defined its population of impaired loans to include all non-accrual and troubled debt restructuring loans. As part of the evaluation of the value of impaired loans, the Corporation reviews for impairment all non-homogeneous loans (in each instance, above an established dollar threshold of $200,000) internally classified as substandard or below. Smaller impaired non-homogeneous loans and impaired homogeneous loans are not measured for specific reserves and are covered under the Corporation’s general reserve.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. Impaired loans include all classes of commercial and consumer non-accruing loans and all loans modified in a troubled debt restructuring (“TDR”).

When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), an impairment is recognized by creating or adjusting an existing allocation of the Allowance, or by recording a partial charge-off of the loan to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.

Loans Modified in a Troubled Debt Restructuring

Loans are considered to have been modified in a TDR when due to a borrower's financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Reserve for Credit Losses

The Corporation's reserve for credit losses is comprised of two components, the allowance and the reserve for unfunded commitments (the “Unfunded Commitments”).

Allowance for Loan Losses

The allowance for loan losses is maintained at a level determined adequate to provide for probable loan losses. The allowance is increased by provisions charged to operations and reduced by loan charge-offs, net of recoveries. The allowance is based on management’s evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

The ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers.

Management believes that the allowance for loan losses is adequate. Management uses available information to recognize loan losses; however, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.

Risk Related to Representation and Warranty Provisions

The Corporation sells residential mortgage loans in the secondary market primarily to Fannie Mae. The Corporation sells residential mortgage loans to Fannie Mae that includes various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters.

As of June 30, 2012, the unpaid principal balance of the Corporation’s portfolio of residential mortgage loans sold to Fannie Mae was $9.4 million. These loans are generally sold on a non-recourse basis. The agreements under which the Corporation sells residential mortgage loans require the Corporation to deliver various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, the Corporation may be obligated to repurchase residential mortgage loans where required documents are not delivered or are defective. Investors may require the immediate repurchase of a mortgage loan when an early payment default discovered in an underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. As of June 30, 2012, there were no pending repurchase requests related to representation and warranty provisions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

Composition of Loan Portfolio

The following table sets forth the composition of the Corporation’s loan portfolio, including net deferred fees and costs, at June 30, 2012 and December 31, 2011:

   
  June 30,
2012
  December 31,
2011
     (in thousands)
Commercial and industrial   $ 168,137     $ 146,711  
Commercial real estate     448,624       408,164  
Construction     33,521       39,388  
Residential mortgage     156,664       160,771  
Installment     345       959  
Subtotal     807,291       755,993  
Net deferred loan costs     163       17  
Total loans   $ 807,454     $ 756,010  

At June 30, 2012 and December 31, 2011, loans to executive officers and directors aggregated approximately $19,616,000 and $10,279,000, respectively. During the six months ended June 30, 2012, the Corporation made new loans to executive officers and directors in the amount of $2,850,000; payments by such persons during 2012 aggregated $3,423,000. On March 30, 2012, the Corporation appointed Frederick S. Fish to the Board of Directors. Mr. Fish had a prior lending relationship with the Bank, and as of June 30, 2012, total loans to Mr. Fish were approximately $9,705,000 and were reflected in the aggregate amount for June 30, 2012.

Management is of the opinion that the above loans were made on the same terms and conditions as those prevailing for comparable transactions with non-related borrowers.

At June 30, 2012 and December 31, 2011, loan balances of approximately $526.8 million and $469.5 million, respectively, were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances.

The following table presents information about loan receivables on non-accrual status at June 30, 2012 and December 31, 2011:

Loans Receivable on Non-Accrual Status

   
  June 30,
2012
  December 31,
2011
     (in thousands)
Commercial and industrial   $ 233     $ 125  
Commercial real estate     408       225  
Construction           3,044  
Residential mortgage     3,302       3,477  
Total loans receivable on non-accrual status   $ 3,943     $ 6,871  

The amount of interest income that would have been recorded on non-accrual loans during the six months ended June 30, 2012 and the year ended December 31, 2011, had payments remained in accordance with the original contractual terms, was $103,000 and $378,000, respectively.

The Corporation continuously monitors the credit quality of its loans receivable. In addition to the internal staff, the Corporation utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporation’s credit position at some future date. Assets are classified “Substandard” if the asset has a well defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or more and all impaired loans are included in the appropriate category below. The following table presents information, including deferred fees and costs, about the loan credit quality at June 30, 2012 and December 31, 2011:

Credit Quality Indicators

         
  June 30, 2012
     Pass   Special Mention   Substandard   Doubtful   Total
     (in thousands)
Commercial and industrial   $ 164,073     $ 2,744     $ 1,320     $     $ 168,137  
Commercial real estate     416,855       17,028       14,741             448,624  
Construction     33,521                         33,521  
Residential mortgage     149,437       392       6,835             156,664  
Installment     345                         345  
Total loans   $ 764,231     $ 20,164     $ 22,896     $     $ 807,291  

Credit Quality Indicators

         
  December 31, 2011
     Pass   Special Mention   Substandard   Doubtful   Total
     (in thousands)
Commercial and industrial   $ 143,097     $ 2,022     $ 1,592     $     $ 146,711  
Commercial real estate     371,519       24,282       12,363             408,164  
Construction     36,344             3,044             39,388  
Residential mortgage     155,098             5,673             160,771  
Installment     959                         959  
Total loans   $ 707,017     $ 26,304     $ 22,672     $     $ 755,993  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

The following table provides an analysis of the impaired loans at June 30, 2012 and December 31, 2011:

     
  Six Months Ended June 30, 2012
     Recorded Investment   Unpaid Principal Balance   Related Allowance
     (in thousands)
No Related Allowance Recorded
                          
Commercial real estate   $ 2,093     $ 2,542     $  
Total   $ 2,093     $ 2,542     $  
With An Allowance Recorded
                          
Commercial real estate   $ 4,180     $ 4,180     $ 531  
Residential mortgage     4,046       4,046       340  
Total   $ 8,226     $ 8,226     $ 871  
Total
                 
Commercial real estate   $ 6,273     $ 6,722     $ 531  
Residential mortgage     4,046       4,046       340  
Total (including related allowance)   $ 10,319     $ 10,768     $ 871  

     
  Year Ended December 31, 2011
     Recorded Investment   Unpaid Principal Balance   Related Allowance
     (in thousands)
No Related Allowance Recorded
                          
Commercial real estate     2,121       2,570        
Total   $ 2,121     $ 2,570     $  
With An Allowance Recorded
                          
Commercial real estate   $ 4,180     $ 4,180     $ 567  
Construction     3,044       3,584       200  
Residential mortgage     4,601       4,601       318  
Total   $ 11,825     $ 12,365     $ 1,085  
Total
                          
Commercial real estate     6,301       6,750       567  
Construction     3,044       3,584       200  
Residential mortgage     4,601       4,601       318  
Total (including related allowance)   $ 13,946     $ 14,935     $ 1,085  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

Note 8. Loans and the Allowance for Loan Losses  – (continued)

           
  Three Months Ended
June 30, 2012
  Six Months Ended
June 30, 2012
  Year Ended
December 31, 2011
     Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized   Average Recorded
Investment
  Interest
Income
Recognized
     (in thousands)
Impaired loans with no related allowance recorded: