GENERAL: The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's view of future interest income and net loans, management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "may", "will", or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, those risk factors identified in the Corporation's Form 10-K for the year ended December 31, 2008 and those risk factors included in any subsequent Forms 10-Q in 2009.

The Corporation assumes no responsibility to update such forward-looking statements in the future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES: "Management's Discussion and Analysis of Financial Condition and Results of Operations" is based upon the Corporation's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Corporation's Audited Consolidated Financial Statements included in the December 31, 2008 Annual Report on Form 10-K, contains a summary of the Corporation's significant accounting policies. Management believes the Corporation's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors.

The provision for loan losses is based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. 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 provision for loan losses. Such agencies may require the Corporation to make additional provisions for loan losses based upon 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. Accordingly, the collectibility of a substantial portion of the carrying value of the Corporation's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or should New Jersey experience adverse economic conditions. Future adjustments to the provision for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Corporation's control.

Securities are evaluated on at least a quarterly basis to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, Management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and the intent and ability of the Corporation to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. "Other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. No other-than-temporary impairment charges have been recognized for the three or six months ended June 30, 2009 and 2008. However, impairment charges of $56.1 million were recognized for the fourth quarter of 2008.

EXECUTIVE SUMMARY: The Corporation recorded net income of $1.9 million for the second quarter of 2009 as compared to $3.6 million for the same quarter of 2008, a decline of $1.6 million, or 46.1 percent. Diluted earnings per common share, after giving effect for the preferred dividend, were $0.17 in the second quarter of 2009 as compared to $0.41 per diluted share for the same quarter of 2008. The decrease in 2009 earnings per share was primarily due to an increase in the provision for loan losses, an increase in the industry-wide FDIC assessment and the dividends on preferred stock. Annualized return on average assets for the quarter was 0.54 percent and annualized return on average common equity was 6.75 percent for the three months ended June 30, 2009.

For the second quarter of 2009, net interest income, on a fully tax-equivalent basis, was $12.4 million, an increase of $691 thousand or 5.9 percent from the same quarter last year. On a fully tax-equivalent basis, the net interest margin was 3.71 percent for the second quarter of 2009 as compared to 3.63 percent for the second quarter of 2008.

Average loans increased $40.6 million or 4.1 percent to $1.03 billion for the second quarter of 2009, as compared to the same quarter of 2008. For the second quarter of 2009 the yield on loans was 5.44 percent, declining 33 basis points from the second quarter of 2008.

For the second quarter of 2009, total deposits averaged $1.28 billion, rising $89.4 million or 7.5 percent over the levels of the same quarter in 2008. Average costs of interest-bearing deposits were 1.55 percent and 2.34 percent in the second quarters of 2009 and 2008, respectively, a decline of 79 basis points.

For the six months ended June 30, 2009, the Corporation recorded net income of $4.4 million compared to $7.0 million for the same period of 2008, a decline of $2.6 million, or 37.3 percent. Diluted earnings per common share after effect of the preferred stock dividend were $0.43 for the first six months of 2009 as compared to $0.80 per diluted share for the same six months of 2008. As noted above, the increases in the provision for loan losses, FDIC assessment and dividends on preferred stock have had a negative impact on the Corporation's earnings per share. Annualized return on average assets for the six months ended June 30, 2009 was 0.62 percent and annualized return on average common equity was 8.58 percent.

Net interest income, on a fully tax-equivalent basis, was $24.5 million for the six months ended June 30, 2009, an increase of $2.0 million or 8.8 percent from the same six months last year. On a fully tax-equivalent basis, the net interest margin was 3.70 percent for the first half of 2009 as compared to 3.48 percent for the same period of 2008.

Loans averaged $1.04 billion for the six months ended June 30, 2009, an increase of $52.9 million or 5.4 percent over the same period last year. For the six months ended June 30, 2009, the yield on loans was 5.44 percent, declining 44 basis points from the same six months of 2008.

Total deposits averaged $1.26 billion and $1.19 billion for the six months ended June 30, 2009 and 2008, respectively, rising $64.8 million or 5.4 percent. Average costs of interest-bearing deposits were 1.66 percent for the six months ended June 30, 2009, declining 99 basis points from the 2.65 percent in the same period of 2008.

EARNINGS ANALYSIS

NET INTEREST INCOME: The Corporation recorded net interest income, on a tax-equivalent basis, of $12.4 million for the second quarter of 2009 as compared to $11.7 million for the same quarter of 2008, an increase of $691 thousand or 5.9 percent. On a fully tax-equivalent basis, the net interest margin was 3.71 percent and 3.63 percent in the second quarters of 2009 and 2008, respectively, an increase of eight basis points.

For the second quarter of 2009, average loans increased $40.6 million or 4.1 percent to $1.03 billion from $992 million for the second quarter of 2008. The average commercial mortgage loan portfolio grew $23.5 million or 9.3 percent and the average commercial construction loan portfolio grew $18.7 million or 36.3 percent. The home equity portfolio averaged $34.3 million, increasing $13.1 million or 62.0 percent. The Corporation focused on the origination of these higher-yielding, shorter-maturity loans and loan originations outpaced principal pay downs over the year. Since December 31, 2008, however, the loan portfolio has declined slightly, principally the residential mortgage loan portfolio, as the Corporation opted to sell its longer-term, fixed-rate production as an interest rate risk management strategy in the lower rate environment.

For the three months ended June 30, 2009, deposits averaged $1.28 billion as compared to $1.19 billion for the same period in 2008, an increase of $89.4 million, or 7.5 percent. Average non-interest bearing demand deposits remained relatively flat while all categories of interest-bearing deposits increased from the second quarter of 2008 to the second quarter of this year. Average interest-bearing checking accounts increased to $193.2 million for the second quarter of 2009, rising $56.6 million or 41.4 percent from the same period in 2008 due to the Corporation's focus on core deposit growth coupled with the introduction of the Ultimate Checking product, which provides customers with a low-cost checking product and a higher yield for greater balances. Money market accounts averaged $414.1 million for the three months ended June 30, 2009, an increase of $19.8 million or 5.0 percent from the same quarter in 2008 as certain customers tend to "park" funds in money market accounts in the lower interest rate environment. Certificates of deposit averaged $406.5 million for the second quarter of 2009, rising $9.5 million or 2.4 percent when compared to the 2008 quarter. Since December 2008, lower costing interest-bearing checking accounts and money market accounts have continued to increase and higher costing certificates of deposit have declined as the Corporation has

opted not to pay higher rates on maturing certificates of deposit, as the Corporation believes it has ample liquidity from other core deposits and principal pay downs on loans. Average borrowings decreased $7.1 million to $38.9 million for the second quarter of 2009 as compared to the same period a year ago.

Average yields on interest-earning assets, on a tax-equivalent basis, declined 48 basis points to 5.07 percent for the second quarter of 2009 from 5.55 percent for the same quarter of 2008. Average yields earned on investment securities declined 78 basis points to 4.17 percent for the second quarter of 2009 as compared to the year ago period. For the second quarter of 2009 and 2008, average yields on the loan portfolio were 5.44 percent and 5.77 percent, respectively, a 33 basis point decline.

For the second quarter of 2009, average costs of interest-bearing deposits declined 79 basis points to 1.55 percent as compared to 2.34 percent for the second quarter of 2008. For the second quarter of 2009, costs of money market products averaged 1.09 percent, declining 78 basis points, while certificates of deposit costs averaged 2.60 percent, declining 107 basis points, each as compared to the same quarter of 2008.

The cost of funds decreased 62 basis points to 1.38 percent for the second quarter of 2009 from 2.00 percent for the same quarter of 2008. Net interest income and the net interest margin have increased marginally due to the reduction of rates paid on interest-bearing deposits, offset in part by the reduction of rates earned on investments and loans, as in the declining rate environment over the year, the cost of the Corporation's interest-bearing liabilities repriced downward faster than the yield on interest-earning assets, resulting in improved net interest margin and net interest income. This gap is closing, however, as liability rates are very low and the Corporation may not be able to lower the rates much more.

Net interest income for the first half of 2009 and 2008, on a tax-equivalent basis, was $24.5 million and $22.5 million, respectively, an increase of $2.0 million or 8.8 percent. On a fully tax-equivalent basis, the net interest margin increased 22 basis points to 3.70 percent for the six months ended June 30, 2009 as compared to 3.48 percent for the same period of this year. The overall increase in the net interest income is almost entirely due to rate. As noted earlier, the decline in average liability rates was only partially offset by smaller declines in asset rates, in the declining rate environment.

Average loans increased by $52.9 million to $1.04 billion for the six months ended June 30, 2009 over the same period last year. For the first six months of 2009, the commercial mortgage loan portfolio grew $27.5 million or 11.1 percent to $274.7 million and the average commercial construction loan portfolio grew $15.5 million or 28.6 percent to $69.7 million for the prior year period. The home equity portfolio also grew during this time period, increasing $13.4 million or 67.9 percent to $33.2 million.

For the six months ended June 30, 2009 and 2008, total deposits averaged $1.26 billion and $1.19 billion, respectively, increasing $64.8 million or 5.4 percent. Interest-bearing checking for the first half of 2009 averaged $180.7 million, an increase of $44.2 million or 32.3 percent over the same period of 2008, while certificate of deposits averaged $416.7 million, an increase of $16.3 million or 4.1 percent for the same time periods.

On a tax-equivalent basis, average yields on interest-earning assets, were 5.15 percent for the first half of 2009, declining 50 basis points from 5.65 percent for the same period of 2008. Average yields earned on investment securities declined 59 basis points to 4.49 percent for the six months ended June 30, 2009 as compared to the year ago period. Average yields on the loan portfolio for the first six months of 2009 were 5.44 percent as compared to 5.88 percent, a 44 basis point decline from the same prior year period.

Average costs of interest-bearing deposits for the first six months of 2009 declined 99 basis points to 1.66 percent as compared to 2.65 percent for the same period of 2008. The rates on money market products averaged 1.16 percent and 2.25 percent for the six months ended June 30, 2009 and 2008,

respectively, declining 109 basis points, while certificates of deposit costs averaged 2.75 percent for the first half of 2009, declining 132 basis points, from the same period of 2008.

The cost of funds decreased 80 basis points to 1.47 percent for the first half of 2009 from 2.27 percent for the same period of 2008. The net interest margin has increased 22 basis points for the first six months of 2009 to 3.70 percent from 3.48 percent for the same six months of 2008. As noted above, the increase is mostly due to the changes in interest rates and the margin may begin to suffer should the Corporation be unable to lower liability rates any more while asset rates continue to decline.

The following tables reflect the components of net interest income for the periods indicated:

                             Average Balance Sheet
                                   Unaudited
                               Three Months Ended
                  (Tax-Equivalent Basis, Dollars in Thousands)

                                         June 30, 2009                            June 30, 2008
                                Average       Income/                    Average       Income/
                                Balance       Expense       Yield        Balance       Expense       Yield
ASSETS:
Interest-earnings assets:
  Investments:
   Taxable (1)                $   229,392     $  2,286        3.99 %   $   226,594     $  2,703        4.77 %
   Tax-exempt (1) (2)              49,031          618        5.05          58,617          828        5.65
  Loans (2) (3)                 1,032,665       14,046        5.44         992,032       14,309        5.77
  Federal funds sold                  200            -        0.20             849            5        2.15
  Interest-earning deposits        27,574            9        0.13          14,406           76        2.10
  Total interest-earning
assets                          1,338,862     $ 16,959        5.07 %     1,292,498     $ 17,921        5.55 %
Noninterest -earning
assets:
  Cash and due from banks          31,381                                   20,731
  Allowance for loan losses        (9,853 )                                 (7,771 )
  Premises and equipment           26,890                                   26,484
  Other assets                     55,486                                   25,984
  Total noninterest-earning
assets                            103,904                                   65,428
Total assets                  $ 1,442,766                              $ 1,357,926

LIABILITIES:
Interest-bearing deposits:
  Checking                    $   193,245     $    349        0.72 %   $   136,649     $    214        0.63 %
  Money markets                   414,082        1,127        1.09         394,267        1,848        1.87
  Savings                          70,802           81        0.46          65,993          100        0.61
  Certificates of deposit         406,518        2,638        2.60         396,969        3,642        3.67
   Total interest-bearing
deposits                        1,084,647        4,195        1.55         993,878        5,804        2.34
  Borrowings                       38,925          348        3.58          45,975          391        3.40
  Total interest-bearing
liabilities                     1,123,572        4,543        1.62       1,039,853        6,195        2.38
Noninterest bearing
liabilities
  Demand deposits                 197,565                                  198,924
  Accrued expenses and
   other liabilities                5,438                                   13,227
  Total noninterest-bearing
   liabilities                    203,003                                  212,151
Shareholders' equity              116,191                                  105,922
  Total liabilities and
   shareholders' equity       $ 1,442,766                              $ 1,357,926
  Net Interest income
   (tax-equivalent basis)                       12,416                                   11,726
   Net interest spread                                        3.45 %                                   3.17 %
   Net interest margin (4)                                    3.71 %                                   3.63 %
Tax equivalent adjustment                         (252 )                                   (309 )
Net interest income                           $ 12,164                                 $ 11,417

(1) Average balances for available-for sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

(3) Loans are stated net of unearned income and include non-accrual loans.

(4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

                             Average Balance Sheet
                                   Unaudited
                                Six Months Ended
                  (Tax-Equivalent Basis, Dollars in Thousands)

                                         June 30, 2009                            June 30, 2008
                                Average       Income/                    Average       Income/
                                Balance       Expense       Yield        Balance       Expense       Yield
ASSETS:
Interest-earnings assets:
  Investments:
   Taxable (1)                $   204,487     $  4,426        4.33 %   $   229,155     $  5,686        4.96 %
   Tax-exempt (1) (2)              49,501        1,272        5.14          57,719        1,603        5.56
  Loans (2) (3)                 1,040,246       28,304        5.44         987,328       29,014        5.88
  Federal funds sold                  200            -        0.20           7,001          112        3.19
  Interest-earning deposits        27,813           18        0.13          11,113          124        2.22
  Total interest-earning
assets                          1,322,247     $ 34,020        5.15 %     1,292,316     $ 36,539        5.65 %
Noninterest -earning
assets:
  Cash and due from banks          25,571                                   20,770
  Allowance for loan losses        (9,733 )                                 (7,617 )
  Premises and equipment           26,872                                   26,478
  Other assets                     54,945                                   27,210
  Total noninterest-earning
assets                             97,655                                   66,841
Total assets                  $ 1,419,902                              $ 1,359,157

LIABILITIES:
Interest-bearing deposits:
  Checking                    $   180,712     $    646        0.71 %   $   136,544     $    424        0.62 %
  Money markets                   397,898        2,298        1.16         400,168        4,497        2.25
  Savings                          69,452          159        0.46          65,373          199        0.61
  Certificates of deposit         416,708        5,728        2.75         400,441        8,145        4.07
   Total interest-bearing
deposits                        1,064,770        8,831        1.66       1,002,526       13,265        2.65
  Borrowings                       40,278          698        3.47          43,495          761        3.50
  Total interest-bearing
liabilities                     1,105,048        9,529        1.72       1,046,021       14,026        2.68
Noninterest bearing
liabilities
  Demand deposits                 194,880                                  192,371
  Accrued expenses and
   other liabilities                5,954                                   13,747
  Total noninterest-bearing
   liabilities                    200,834                                  206,118
Shareholders' equity              114,020                                  107,018
  Total liabilities and
   shareholders' equity       $ 1,419,902                              $ 1,359,157
  Net Interest income
   (tax-equivalent basis)                       24,491                                   22,513
   Net interest spread                                        3.43 %                                   2.97 %
   Net interest margin (4)                                    3.70 %                                   3.48 %
Tax equivalent adjustment                         (516 )                                   (582 )
Net interest income                           $ 23,975                                 $ 21,931

(1) Average balances for available-for sale securities are based on amortized cost.

(2) Interest income is presented on a tax-equivalent basis using a 35 percent federal tax rate.

(3) Loans are stated net of unearned income and include non-accrual loans.

(4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.

OTHER INCOME: Other income, excluding fee income from the Trust Division, totaled $1.2 million for the second quarter of 2009 as compared to $996 thousand for the same quarter of 2008, rising $226 thousand or 22.7 percent. For the second quarter of 2009, income from bank owned life insurance declined $90 thousand or 29.6 percent to $214 thousand as compared to 2008 due primarily to the lower interest rate environment. The Corporation recorded net securities gains of $108 thousand and $69 thousand for the second quarters of 2009 and 2008, respectively. Income earned on the sale of mortgage loans at origination totaled $240 thousand for the second quarter of 2009 as compared to $18 thousand for the same three-month period in 2009. More customers are interested in longer-term, fixed-rate mortgages in the current low rate environment. These mortgages are sold rather than retained in portfolio for interest rate risk management purposes. Other income for the second quarter of 2008 also includes $83 thousand in loss on disposal of assets resulting from the closure of the New Vernon Branch.

The Corporation recorded other income, excluding the Trust Division income, of $2.2 million for both six month periods ended June 30, 2009 and 2008. Income earned on the sale of mortgage loans at origination totaled $333 thousand for the six months ended June 30, 2009 and $80 thousand for the same six-month period in 2009. Income from bank owned life insurance declined $145 thousand or 25.3 percent from the first half of 2008 to $428 thousand for the same period in 2009. In the first half of 2009, the Corporation recorded net securities gains of $113 thousand as compared $379 thousand for the same period last year. In 2008, relocating the Shunpike Branch to Green Village Road and closing the New Vernon Branch resulted in a $153 thousand loss on disposal of fixed assets.

OTHER EXPENSES: For the second quarter of 2009, other expenses totaled $11.2 million, an increase of $2.1 million or 22.6 percent when compared to the $9.1 million recorded in the same quarter of 2008. The primary reason for this increase was due to an increase in the industry-wide FDIC assessment. Due to a substantial increase in the FDIC assessment rates, as well as a one-time special assessment of all institutions in the second quarter, which totaled $657 thousand for the Corporation, total FDIC assessment expense of $1.4 million was recorded for the second quarter of 2009 as compared to $130 thousand recorded for the same quarter of 2008. The FDIC has indicated that an additional special assessment in 2009 is possible. Salaries and benefits expense was $5.4 million and $4.8 million for second quarters of 2009 and 2008, respectively, an increase of $597 thousand or 12.4 percent. In addition to salary increases, the Corporation added staff for two new branches opened in 2008 as well as a new trust office opened in Bethlehem, Pennsylvania in 2009. In addition, during the second quarter, the Corporation recorded $265 thousand in additional write-down on an OREO property whose value has declined.

. . .