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 September 30, 2012


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 October 31, 2012)

TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION		1
Item 1. Financial Statements
Consolidated Statements of Condition at September 30, 2012 and December 31, 2011 (unaudited)		2
Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)		3
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (unaudited)		4
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011 (unaudited)		5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)		6
Notes to Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3. Qualitative and Quantitative Disclosures about Market Risks		63
Item 4. Controls and Procedures		64
PART II — OTHER INFORMATION		65
Item 1. Legal Proceedings		65
Item 6. Exhibits		65
SIGNATURES		66

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 three and nine months ended September 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.

TABLE OF CONTENTS

Item 1. Financial Statements

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


(in thousands, except for share and per share data)	September 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	100,106		$	111,101
Interest bearing deposits with banks		2,002			—
Total cash and cash equivalents		102,108			111,101
Investment securities:
Available for sale		509,605			414,507
Held to maturity (fair value of $60,946 and $74,922)		56,503			72,233
Loans		871,053			756,010
Less: Allowance for loan losses		10,240			9,602
Net loans		860,813			746,408
Restricted investment in bank stocks, at cost		8,964			9,233
Premises and equipment, net		13,564			12,327
Accrued interest receivable		6,428			6,219
Bank-owned life insurance		29,679			28,943
Goodwill and other intangible assets		16,868			16,902
Prepaid FDIC assessments		1,107			1,884
Other real estate owned		—			591
Other assets		6,440			12,390
Total assets	$	1,612,079		$	1,432,738
LIABILITIES
Deposits:
Non-interest bearing	$	192,321		$	167,164
Interest-bearing:
Time deposits $100 and over		114,416			137,998
Interest-bearing transaction, savings and time deposits less than $100		986,276			816,253
Total deposits		1,293,013			1,121,415
Short-term borrowings		50			—
Long-term borrowings		146,000			161,000
Subordinated debentures		5,155			5,155
Accounts payable and accrued liabilities		10,676			9,252
Total liabilities		1,454,894			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 September 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 September 30, 2012 and December 31, 2011; outstanding 16,347,088 shares at September 30, 2012 and 16,332,327 shares at December 31, 2011		110,056			110,056
Additional paid-in capital		4,754			4,715
Retained earnings		43,186			32,695
Treasury stock, at cost (2,130,324 common shares at September 30, 2012 and 2,145,085 common shares at December 31, 2011)		(17,234	)		(17,354	)
Accumulated other comprehensive income (loss)		5,173			(5,446	)
Total stockholders’ equity		157,185			135,916
Total liabilities and stockholders’ equity	$	1,612,079		$	1,432,738

See accompanying notes to unaudited consolidated financial statements.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except for share and per share data)	2012			2011			2012			2011
Interest income
Interest and fees on loans	$	10,039		$	8,956		$	28,838		$	27,123
Interest and dividends on investment securities:
Taxable		3,047			3,273			9,247			10,079
Tax-exempt		892			544			2,491			983
Dividends		137			146			426			479
Interest on federal funds sold and other short-term investment		3			—			7			—
Total interest income		14,118			12,919			41,009			38,664
Interest expense
Interest on certificates of deposit $100 or more		203			332			637			945
Interest on other deposits		1,124			1,059			3,406			3,133
Interest on borrowings		1,608			1,678			4,892			4,998
Total interest expense		2,935			3,069			8,935			9,076
Net interest income		11,183			9,850			32,074			29,588
Provision for loan losses		225			1,020			225			2,148
Net interest income after provision for loan losses		10,958			8,830			31,849			27,440
Other income
Service charges, commissions and fees		459			505			1,326			1,415
Annuities and insurance commissions		45			42			137			81
Bank-owned life insurance		239			259			736			780
Loan related fees		173			203			604			435
Bargain gain on acquisition		899			—			899			—
Other		57			24			279			84
Other-than-temporary impairment losses on investment securities		(134	)		(66	)		(332	)		(303	)
Net other-than-temporary impairment losses on investment securities		(134	)		(66	)		(332	)		(303	)
Net gains on sale of investment securities		897			1,316			2,545			3,120
Net investment securities gains		763			1,250			2,213			2,817
Total other income		2,635			2,283			6,194			5,612
Other expense
Salaries and employee benefits		3,193			2,848			9,366			8,618
Occupancy and equipment		739			713			2,045			2,246
FDIC insurance		292			328			861			1,384
Professional and consulting		277			319			817			805
Stationery and printing		69			73			249			273
Marketing and advertising		64			30			151			116
Computer expense		366			300			1,081			989
Other real estate owned, net		65			—			149			(1	)
Repurchase agreement prepayment and termination fees		1,012			—			1,012			—
Acquisition cost		472			—			472			—
All other		958			918			2,801			2,791
Total other expense		7,507			5,529			19,004			17,221
Income before income tax expense		6,086			5,584			19,039			15,831
Income tax expense		1,632			1,882			6,001			5,527
Net Income		4,454			3,702			13,038			10,304
Preferred stock dividends and accretion		28			145			253			436
Net income available to common stockholders	$	4,426		$	3,557		$	12,785		$	9,868
Earnings per common share
Basic	$	0.27		$	0.22		$	0.78		$	0.61
Diluted	$	0.27		$	0.22		$	0.78		$	0.61
Weighted Average Common Shares Outstanding
Basic		16,347,088			16,290,700			16,337,724			16,290,598
Diluted		16,362,635			16,313,366			16,346,739			16,310,557
Dividend paid per common share	$	0.055		$	0.030		$	0.115		$	0.090

See accompanying notes to unaudited consolidated financial statements.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2012			2011			2012			2011
Net income	$	4,454		$	3,702		$	13,038		$	10,304
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on securities available-for-sale
Unrealized holding gains arising during the period		6,223			225			12,132			4,862
Reclassification adjustment on OTTI losses included in income		96			44			227			197
Reclassification adjustment for net gains arising during the period		(651	)		(869	)		(1,743	)		(2,031	)
Unrealized holding losses/gains on securities transferred from available-for-sale to held-to-maturity securities		—			(31	)		—			181
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities		(1	)		(9	)		3			(14	)
Net unrealized gains (losses) on investment securities		5,667			(640	)		10,619			3,195
Change in minimum pension liability		—			—			—			(85	)
Total other comprehensive income (loss) (see Note 6)		5,667			(640	)		10,619			3,110
Total comprehensive income	$	10,121		$	3,062		$	23,657		$	13,414

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 Income (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									10,304									10,304
Other comprehensive income, net of tax															3,110			3,110
Accretion of discount on preferred stock		62							(62	)								—
Redemption of preferred stock series A		(10,000	)															(10,000	)
Proceeds from issuance of series B preferred stock		11,250																11,250
Accrual of dividend on series B preferred stock									(23	)								(23	)
Issuance cost of common stock									(4	)								(4	)
Cash dividend on series A preferred stock									(354	)								(354	)
Cash dividends declared on common stock ($0.09 per share)									(1,466	)								(1,466	)
Stock issued for options exercise (868 shares)												7						7
Stock-based compensation expense							27											27
Balance as of September 30, 2011	$	11,012		$	110,056	$	4,968	$	30,028		$	(17,691	)	$	(4,565	)	$	133,808
Balance as of December 31, 2011	$	11,250		$	110,056	$	4,715	$	32,695		$	(17,354	)	$	(5,446	)	$	135,916
Net income									13,038									13,038
Other comprehensive income, net of tax															10,619			10,619
Dividend on series B preferred stock									(253	)								(253	)
Issuance cost of common stock									(6	)								(6	)
Cash dividends declared on common stock ($0.14 per share)									(2,288	)								(2,288	)
Stock issued for options exercise (14,761 shares)							12					120						132
Stock-based compensation expense							27											27
Balance as of September 30, 2012	$	11,250		$	110,056	$	4,754	$	43,186		$	(17,234	)	$	5,173		$	157,185

See accompanying notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

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


	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash flows from operating activities:
Net income	$	13,038		$	10,304
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on investment securities, net		3,539			2,983
Depreciation and amortization		656			725
Stock-based compensation		27			27
Provision for loan losses		225			2,148
Provision for deferred taxes		—			249
Net other-than-temporary impairment losses on investment securities		332			303
Net loss on sale of other real estate owned		9			—
Gains on sales of investment securities, net		(2,545	)		(3,120	)
Loans originated for resale		(14,578	)		(7,589	)
Proceeds from sale of loans held for sale		14,871			7,541
Gains on sale of loans held for sale		(313	)		(152	)
Decrease (increase) in accrued interest receivable		180			(1,482	)
Decrease in prepaid FDIC insurance assessments		777			1,534
Increase in cash surrender value of bank-owned life insurance		(736	)		(780	)
Increase in other assets		(2,005	)		(3,104	)
Increase in other liabilities		890			5,492
Net cash provided by operating activities		14,367			15,079
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(184,562	)		(341,429	)
Sales		114,583			236,388
Maturities, calls and principal repayments		28,324			35,979
Investment securities held-to-maturity:
Purchases		(7,407	)		(5,843	)
Maturities and principal repayments		22,685			2,375
Net redemption of restricted investment in bank stocks		319			402
Net increase in loans		(62,418	)		(14,443	)
Purchases of premises and equipment		(596	)		(130	)
Proceeds from sale of other real estate owned		500			—
Cash and cash equivalent acquired in acquisition		6,195			—
Cash consideration paid in acquisition		(10,251	)		—
Net cash used in investing activities		(92,628	)		(86,701	)
Cash flows from financing activities:
Net increase in deposits		86,362			199,690
Net increase (decrease) in short-term borrowings		50			(41,855	)
Repayments of long-term borrowings		(15,000	)		(10,000	)
Cash dividends on preferred stock		(391	)		(417	)
Cash dividends on common stock		(1,879	)		(1,466	)
Proceeds from issuance of SBLF preferred stock		—			11,250
Redemption of preferred stock		—			(10,000	)
Issuance cost of common stock		(6	)		(4	)
Proceeds from exercise of stock options		132			7
Net cash provided by financing activities		69,268			147,205
Net change in cash and cash equivalents		(8,993	)		75,583
Cash and cash equivalents at beginning of period		111,101			37,497
Cash and cash equivalents at end of period	$	102,108		$	113,080
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowings	$	9,028		$	9,192
Income taxes	$	5,507		$	3,529

See accompanying notes to unaudited consolidated financial statements.

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


	Nine Months Ended September 30,
(in thousands)	2012		2011
Supplemental disclosures of non-cash investing activities:
Trade date accounting settlements for investments, net	$	—	$	2,999
Transfer from investment securities available-for-sale to investment securities held-to-maturity	$	—	$	66,833
Business combinations:
Non-cash assets acquired:
Investment securities available-for-sale	$	37,143	$	—
Loans		52,192		—
Premises and equipment, net		1,262		—
Accrued interest receivable		389		—
Total non-cash assets acquired	$	90,986	$	—
Liabilities assumed:
Deposits	$	85,236	$	—
Other liabilities		795		—
Total liabilities assumed	$	86,031	$	—
Net non-cash assets acquired	$	4,056	$	—
Bargain gain on acquisition	$	899	$	—
Net cash and cash equivalents acquired	$	6,195	$	—
Cash consideration paid in acquisition	$	10,251	$	—

See accompanying notes to unaudited consolidated financial statements.

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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.

Super storm Sandy made landfall along the coast of New York and New Jersey metropolitan area on October 30, 2012, and significantly impacted the region, including the primary operating areas of the Corporation. Although none of the Corporation’s facilities were damaged as a result of the storm, we are currently assessing the impact, if any, of the storm on our borrowers’ ability to repay their loans and whether the storm had any adverse impact on collateral values. On most collateral dependent loans, our exposure is limited due to the existence of flood and property insurance. While we do not anticipate lost revenue from the storm to materially impact our results for the fourth quarter of 2012 or for subsequent periods, we can make no assurances that the economic impact on our customers and the local communities we serve will not have a material adverse effect on future earnings.

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 20,838 and 75,208, respectively, for the three and nine months ended September 30, 2012 and 79,343 for the three and nine months ended September 30, 2011.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Net income	$	4,454	$	3,702	$	13,038	$	10,304
Preferred stock dividends and accretion		28		145		253		436
Net income available to common shareholders	$	4,426	$	3,557	$	12,785	$	9,868
Basic weighted average common shares outstanding		16,347		16,291		16,338		16,291
Plus: effect of dilutive options and warrants		16		22		9		20
Diluted weighted average common shares outstanding		16,363		16,313		16,347		16,311
Earnings per common share:
Basic	$	0.27	$	0.22	$	0.78	$	0.61
Diluted	$	0.27	$	0.22	$	0.78	$	0.61

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation

The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock based compensation 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 September 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 September 30, 2012. Such shares may be treasury shares, newly issued shares or a combination thereof.

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

Stock-based compensation expense for share-based payment awards 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 nine months ended September 30, 2012, the Corporation’s income before income taxes and net income were reduced by $27,000 and $16,000, respectively, as a result of the compensation expense related to stock options. For the nine months ended September 30, 2011, the Corporation’s income before income taxes and net income were reduced by $27,000 and $16,000, respectively, as a result of the compensation expense related to stock options.

Under the principal option plans, the Corporation may also grant stock awards to certain employees. Stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of any applicable restrictions. Unless fully vested at the time of grant, 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 and stock awards that are fully vested at the time of grant have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The Corporation expenses the cost of 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 any restrictions lapse. There were no restricted stock awards outstanding at September 30, 2012 and September 30, 2011.

There were 27,784 and 30,564 shares of common stock underlying options that were granted during the nine months ended September 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:


	Nine Months Ended September 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation – (continued)

Activity under the principal option plans as of September 30, 2012 and changes during the nine months ended September 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 September 30, 2012		184,401		10.04		6.22	$	392,575
Exercisable at September 30, 2012		115,813	$	10.61		4.91	$	197,764

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 third 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 September 30, 2012. This amount changes based on the fair value of the Corporation’s stock.

As of September 30, 2012, there was approximately $107,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 1.58 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Recent Accounting Pronouncements – (continued)

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.

Note 5. Business Combinations

On August 1, 2012, Union Center National Bank (the “Bank”) assumed all of the deposits and certain other liabilities 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. This purchase and assumption was in keeping with the Bank’s strategy to expand its base of operations into Northern New Jersey.

The Bank assumed approximately $85.2 million in deposits and acquired approximately $89.3 million in loans and securities from Saddle River Valley Bank. The bank paid total consideration of $10.3 million in cash. Acquisition costs, totaling $472,000 for the three and nine months ended September 30, 2012 are reported on the consolidated statements of income.

The following table sets forth assets acquired and liabilities assumed at their estimated fair values, and resulting Bargain gain on acquisition, as of closing date of the transaction:


	August 1, 2012
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	6,195
Investment securities available-for-sale		37,143
Loans		52,192
Premises and equipment, net		1,262
Accrued interest receivable		389
Total assets acquired	$	97,181
Liabilities assumed:
Deposits:	$	85,236
Other liabilities		795
Total liabilities assumed	$	86,031
Net assets acquired	$	11,150
Cash consideration paid in acquisition	$	10,251
Bargain gain on acquisition	$	899

The fair value estimates are subject to change for up to one year after closing date of the transaction if additional information relative to closing date fair values becomes available. As the Bank continues to analyze the acquired assets and liabilities, there may be adjustments to the recorded carrying values.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Business Combinations – (continued)

Fair Value of Measurement of Assets Acquired and Liabilities Assumed

Described below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash and cash equivalents. The estimated fair values of cash and cash equivalents approximate their stated face amounts.

Investment securities available-for-sale. The estimated fair values of the investment securities available for sale were calculated utilizing Level 2 inputs. The prices for these instruments are obtained through an independent pricing service and are derived from market quotations and matrix pricing. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Management reviewed the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

Loans. A discounted cash flow of each individual loan was calculated. The discounted cash flows, at an account level, were then aggregated together by category type to determine the mark-to-market value of each loan type. The market values of all loan categories were added together to determine the total market value of the loan portfolio. The price of the portfolio is then determined by dividing the market value of the portfolio by the purchased face value of the portfolio. The discount rate utilized for the discounted cash flow of each loan category was based upon Bankrate and a survey of three local market competitors and the Bank’s offerings.

Deposits. The discount rate utilized for the discounted cash flow of each time deposit category was calculated based upon the market interest rate for the term nearest to the weighted average remaining maturity for each time deposit category. The time deposit market interest rate was derived from a Financial Market Focus Report for New Jersey as of August 1, 2012.

Accrued interest receivable. The carrying amounts of accrued interest approximate fair value based on the asset with which the accrual is associated.

Other liabilities. The estimated fair values of other liabilities approximate their stated face amounts.

In accordance with GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Saddle River.

In connection with the Saddle River asset/liability purchase and assumption, the Corporation recorded a net deferred income tax liability of $620,000 related to the tax attributes of the transaction.

The following table presents actual operating results attributable to Saddle River since the August 1, 2012 assumption date through September 30, 2012. This information does not include purchase accounting adjustments or acquisition integration costs.


	SRVB Financial August 1, 2012 to September 30, 2012
	(in thousands)
Net interest income	$	401
Non-interest income		8
Non-interest expense and income taxes		(282	)
Net income	$	127

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Business Combinations – (continued)

The Corporation has not provided pro forma information for the nine month periods ended September 30, 2012 and 2011 as if the asset/liability purchase and assumption of Saddle River had occurred as of both January 1, 2011 and 2012 as there is no consistent level base for objective comparison as product balances declined on a steady basis from the agreement date to assumption date and the closing date and accordingly such disclosures are considered impractical as the application of those disclosures would require a significant estimate of amounts, and it is impossible to distinguish objective information about those estimates that both provide evidence of circumstances that existed at the reporting dates, and would have been available when the financial statements for the prior periods were issued. The Company will continue to evaluate information, and provide the required disclosures in future filings if deemed practical.

Certain loans, for which specific credit-related deterioration was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation of the timing and amount of cash flows to be collected. The timing of the sale of loan collateral was estimated for acquired loans deemed impaired and considered collateral dependent. For these collateral dependent impaired loans, the excess of the future expected cash flow over the present value of the future expected cash flow represents the accretable yield, which will be accreted into interest income over the estimated liquidation period using the effective interest method. The following table details the loans that are accounted for in accordance with FASB ASC 310-30 as of August 1, 2012:


(in thousands)
Contractually required principal and interest at acquisition	$	2,101
Contractual cash flows not expected to be collected (nonaccretable difference)		(982	)
Expected cash flows at acquisition		1,119
Interest component of expected cash flows (accretable discount)		(161	)
Fair value of acquired loans accounted for under FASB ASC 310-30	$	958

Acquired loans not subject to the requirements of FASB ASC 310-30 are recorded at fair value. The fair value mark on each of these loans will be accreted into interest income over the remaining life of the loan. The following table details loans that are not accounted for in accordance with FASB ASC 310-30 as of August 1, 2012:


(in thousands)
Contractually required principal and interest at acquisition	$	50,917
Contractual cash flows not expected to be collected (credit mark)		(807	)
Expected cash flows at acquisition		50,110
Interest rate premium mark		1,313
Fair value of acquired loans not accounted for under FASB ASC 310-30	$	51,423

Note 6. Comprehensive Income

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

Disclosure of comprehensive income for the nine months ended September 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Comprehensive Income – (continued)

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


	Nine Months Ended September 30,
	2012			2011
	(in thousands)
Unrealized holding gains on available-for-sale securities	$	19,391		$	8,051
Tax effect		(7,259	)		(3,189	)
Net of tax amount		12,132			4,862
Reclassification adjustment of OTTI losses included in income		332			303
Tax effect		(105	)		(106	)
Net of tax amount		227			197
Reclassification adjustment for net gains arising during this period		(2,545	)		(3,120	)
Tax effect		802			1,089
Net of tax amount		(1,743	)		(2,031	)
Unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		—			291
Tax effect		—			(110	)
Net of tax amount		—			181
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		4			(24	)
Tax effect		(1	)		10
Net of tax amount		3			(14	)
Change in minimum pension liability		—			(142	)
Tax effect		—			57
Net of tax amount		—			(85	)
Other comprehensive income, net of tax	$	10,619		$	3,110

Accumulated other comprehensive income (loss) at September 30, 2012 and December 31, 2011 consisted of the following:


	September 30, 2012			December 31, 2011
	(in thousands)
Investment securities available-for-sale, net of tax	$	8,420		$	(2,196	)
Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax		166			163
Defined benefit pension and post-retirement plans, net of tax		(3,413	)		(3,413	)
Total accumulated other comprehensive income (loss)	$	5,173		$	(5,446	)

Note 7. Investment Securities

The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at September 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

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 September 30, 2012 and December 31, 2011.


	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	20,571	$	111	$	(50	)	$	20,632
Federal agency obligations		27,928		514		(4	)		28,438
Residential mortgage-backed securities		57,695		1,804		—			59,499
Commercial mortgage-backed securities		9,734		267		—			10,001
Obligations of U.S. states and political subdivisions		91,037		5,222		(7	)		96,252
Trust preferred securities		18,113		118		(1,492	)		16,739
Corporate bonds and notes		228,865		8,262		(412	)		236,715
Asset-backed securities		19,609		253		—			19,862
Collateralized mortgage obligations		2,673		—		(736	)		1,937
Certificates of deposit		3,005		28		(6	)		3,027
Equity securities		635		7		(186	)		456
Other securities		15,994		68		(15	)		16,047
Total	$	495,859	$	16,654	$	(2,908	)	$	509,605
Investment Securities Held-to-Maturity:
Federal agency obligations	$	11,663	$	80	$	—		$	11,743
Commercial mortgage-backed securities		5,598		179		(9	)		5,768
Obligations of U.S. states and political subdivisions		39,242		4,193		—			43,435
Total	$	56,503	$	4,452	$	(9	)	$	60,946
Total investment securities	$	552,362	$	21,106	$	(2,917	)	$	570,551

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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		—		(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 September 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.


	September 30, 2012
	Amortized Cost		Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
Due in one year or less	$	22,762	$	22,775
Due after one year through five years		108,756		111,597
Due after five years through ten years		138,074		143,806
Due after ten years		142,209		145,424
Residential mortgage-backed securities		57,695		59,499
Commercial mortgage-backed securities		9,734		10,001
Equity securities		635		456
Other securities		15,994		16,047
Total	$	495,859	$	509,605
Investment Securities Held-to-Maturity:
Due after five years through ten years	$	6,741	$	6,971
Due after ten years		44,164		48,207
Commercial mortgage-backed securities		5,598		5,768
Total	$	56,503	$	60,946
Total investment securities	$	552,362	$	570,551

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

During the nine months ended September 30, 2011, the Corporation reclassified at fair value approximately $66.8 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax gains of approximately $166,000 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 nine months ended September 30, 2012, proceeds of available for sale investment securities sold amounted to approximately $114.6 million. Gross realized gains on investment securities sold amounted to approximately $2.5 million, while gross realized losses amounted to approximately $332,000, which were impairment charges, for the period. For the nine months ended September 30, 2011, proceeds of investment securities sold amounted to approximately $236.4 million. Gross realized gains on investment securities sold amounted to approximately $3.2 million, while gross realized losses, which included impairment charges of $303,000, amounted to approximately $372,000 for the period.

Gross gains and losses from the sales of investment securities for the three and nine month periods ended September 30, 2012 and 2011 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Gross gains on sales of investment securities	$	897	$	1,316	$	2,545	$	3,189
Gross losses on sales of investment securities		—		—		—		69
Net gains on sales of investment securities	$	897	$	1,316	$	2,545	$	3,120

The following summarizes OTTI charges for the periods indicated.


	Nine Months Ended September 30,
	2012		2011
	(in thousands)
Other than temporary impairment charges	$	60	$	18
Principal losses on a variable rate CMO		272		285
Total other-than-temporary impairment charges	$	332	$	303

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

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.

The following table presents detailed information for each trust preferred security held by the Corporation at September 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	$	1,780	$	10			BB+		1			None			None
Countrywide Capital V		Single		—		2,747		2,773		26			BB+		1			None			None
Countrywide Capital V		Single		—		250		252		2			BB+		1			None			None
NPB Capital Trust II		Single		—		868		896		28			NR		1			None			None
Citigroup Cap IX		Single		—		992		998		6			BB		1			None			None
Citigroup Cap IX		Single		—		1,905		1,926		21			BB		1			None			None
Citigroup Cap XI		Single		—		246		248		2			BB		1			None			None
Nationsbank Cap Trust III		Single		—		1,572		1,151		(421	)		BB+		1			None			None
Morgan Stanley Cap Trust IV		Single		—		2,500		2,484		(16	)		BB+		1			None			None
Morgan Stanley Cap Trust IV		Single		—		1,742		1,738		(4	)		BB+		1			None			None
Saturns – GS 2004 – 06		Single		—		242		246		4			BB+		1			None			None
Saturns – GS 2004 – 06		Single		—		313		317		4			BB+		1			None			None
Saturns – GS 2004 – 04		Single		—		780		789		9			BB+		1			None			None
Saturns – GS 2004 – 04		Single		—		22		22		—			BB+		1			None			None
Goldman Sachs		Single		—		999		1,005		6			BB+		1			None			None
ALESCO Preferred Funding VI		Pooled		C2		343		79		(264	)		Ca		36 of 56	⁽¹⁾		36.1	%		41.9	%
ALESCO Preferred Funding VII		Pooled		C1		822		35		(787	)		Ca		48 of 62	⁽¹⁾		35.9	%		49.4	%
Total					$	18,113	$	16,739	$	(1,374	)

(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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

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 fifteenth 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 nine months ended September 30, 2012 and September 30, 2011. The other Pooled TRUP, ALESCO VII, incurred its thirteenth 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 $60,000 for the nine months ended September 30, 2012 and none for the nine months ended September 30, 2011.

At September 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 -49.6 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 according to original contractual terms.

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 $102,000 and $272,000 in principal losses on this bond for the three and nine months ended September 30, 2012, respectively, and $66,000 and $285,000 in principal losses for the three and nine months ended September 30, 2011, respectively, and expects additional losses in future periods. Management determined that no an other-than-temporary impairment charge exists for this period.

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities


	Nine Months Ended September 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		332		342
Reduction:
Credit losses on investment securities sold during the period		—		—
Balance of credit-related OTTI at period end	$	6,871	$	6,539

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

Temporarily Impaired Investments

For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 48 investment securities as of September 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.

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 September 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 September 30, 2012 and December 31, 2011:


	September 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:
U.S. Treasury and agency securities	$	10,098	$	(50	)	$	10,098	$	(50	)	$	—	$	—
Federal agency obligations		624		(4	)		624		(4	)		—		—
Obligations of U.S. states and political subdivisions		2,100		(7	)		2,100		(7	)		—		—
Trust preferred securities		5,508		(1,492	)		4,243		(21	)		1,265		(1,471	)
Corporate bonds and notes		39,081		(412	)		14,775		(38	)		24,306		(374	)
Collateralized mortgage obligations		1,937		(736	)		—		—			1,937		(736	)
Certificates of deposit		391		(6	)		391		(6	)		—		—
Equity securities		349		(186	)		—		—			349		(186	)
Other securities		985		(15	)		—		—			985		(15	)
Total		61,073		(2,908	)		32,231		(126	)		28,842		(2,782	)
Investment Securities Held-to-Maturity:
Commercial mortgage-backed securities		989		(9	)		989		(9	)		—		—
Total		989		(9	)		989		(9	)		—		—
Total Temporarily Impaired Securities	$	62,062	$	(2,917	)	$	33,220	$	(135	)	$	28,842	$	(2,782	)


	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	)
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	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

Investment securities having a carrying value of approximately $104.0 million and $98.7 million at September 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 the 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 include 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 September 30, 2012, the unpaid principal balance of the Corporation’s portfolio of residential mortgage loans sold to Fannie Mae was $9.6 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 September 30, 2012, there were no pending repurchase requests related to representation and warranty provisions.

Composition of Loan Portfolio

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


	September 30, 2012		December 31, 2011
	(in thousands)
Commercial and industrial	$	171,493	$	146,711
Commercial real estate		484,143		408,164
Construction		40,883		39,388
Residential mortgage		173,857		160,771
Installment		522		959
Subtotal		870,898		755,993
Net deferred loan costs		155		17
Total loans	$	871,053	$	756,010

At September 30, 2012 and December 31, 2011, loans to executive officers and directors aggregated approximately $19,490,000 and $10,279,000, respectively. During the nine months ended September 30, 2012, the Corporation made new loans to executive officers and directors in the amount of $3,969,000; payments by such persons during 2012 aggregated $4,668,000. The increase in loans to executive officers and directors from December 31, 2011 to September 30, 2012 principally reflects the addition to the Board during that period of a director who had a prior lending relationship with the Bank.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 September 30, 2012 and December 31, 2011, loan balances of approximately $545.3 million and $469.5 million, respectively, were pledged to secure short term borrowings from the Federal Reserve Bank of New York and both long and short term borrowings from the Federal Home Loan Bank of New York.

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

Loans Receivable on Non-Accrual Status


	September 30, 2012		December 31, 2011
	(in thousands)
Commercial and industrial	$	224	$	125
Commercial real estate		418		225
Construction		314		3,044
Residential mortgage		4,011		3,477
Total loans receivable on non-accrual status	$	4,967	$	6,871

The amount of interest income that would have been recorded on non-accrual loans during the nine months ended September 30, 2012 and the year ended December 31, 2011, had payments remained in accordance with the original contractual terms, was $182,000 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. 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 September 30, 2012 and December 31, 2011:

Credit Quality Indicators


	September 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial and industrial	$	166,387	$	3,405	$	1,701	$	—	$	171,493
Commercial real estate		448,039		19,190		16,914		—		484,143
Construction		38,921		804		1,158		—		40,883
Residential mortgage		167,910		391		5,556		—		173,857
Installment		389		—		133		—		522
Total loans	$	821,646	$	23,790	$	25,462	$	—	$	870,898

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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


	Nine Months Ended September 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
No Related Allowance Recorded
Commercial real estate	$	2,081	$	2,531	$	—
Total	$	2,081	$	2,531	$	—
With An Allowance Recorded
Commercial real estate	$	4,180	$	4,180	$	512
Residential mortgage		2,684		2,684		246
Total	$	6,864	$	6,864	$	758
Total
Commercial real estate	$	6,261	$	6,711	$	512
Residential mortgage		2,684		2,684		246
Total (including related allowance)	$	8,945	$	9,395	$	758


	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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


	Year Ended December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
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


	Three Months Ended September 30, 2012				Nine Months Ended September 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:
Commercial and industrial	$	—	$	—	$	—	$	—	$	292	$	11
Commercial real estate		2,246		28		2,246		86		3,390		149
Construction		—		—		—		—		3,156		—
Total	$	2,246	$	28	$	2,246	$	86	$	6,838	$	160
Impaired loans with an allowance recorded:
Commercial real estate	$	4,180	$	34	$	4,180	$	103	$	4,583	$	258
Construction		—		—		2,066		16		3,048		18
Residential mortgage		4,304		—		3,876		26		4,572		102
Total	$	8,484	$	34	$	10,122	$	145	$	12,203	$	378
Total impaired loans:
Commercial and industrial	$	—	$	—	$	—	$	—	$	292	$	11
Commercial real estate		6,426		62		6,426		189		7,973		407
Construction		—		—		2,066		16		6,204		18
Residential mortgage		4,304		—		3,876		26		4,572		102
Total	$	10,730	$	62	$	12,368	$	231	$	19,041	$	538

Loans are considered to have been modified in a troubled debt restructuring when due to a borrower's financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Included in impaired loans at September 30, 2012 are loans that are deemed troubled debt restructurings. Of these loans, $6.9 million, 88.4 percent of which are included in the tables above, are performing under the restructured terms and are accruing interest.

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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 aging of loans, excluding deferred fees and costs that are past due at September 30, 2012 and December 31, 2011:

Aging Analysis


	September 30, 2012
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
	(in thousands)
Commercial and Industrial	$	54	$	—	$	224	$	278	$	171,215	$	171,493	$	—
Commercial Real Estate		—		1,434		988		2,422		481,721		484,143		570
Construction		—		—		314		314		40,569		40,883		—
Residential Mortgage		58		937		4,011		5,006		168,851		173,857		—
Installment		6		—		—		6		516		522		—
Total	$	118	$	2,371	$	5,537	$	8,026	$	862,872	$	870,898	$	570


	December 31, 2011
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
	(in thousands)
Commercial and Industrial	$	137	$	1,544	$	125	$	1,806	$	144,905	$	146,711	$	—
Commercial Real Estate		1,331		5,335		1,254		7,920		400,244		408,164		1,029
Construction		—		—		3,044		3,044		36,344		39,388		—
Residential Mortgage		2,174		99		3,477		5,750		155,021		160,771		—
Installment		16		—		—		16		943		959		—
Total	$	3,658	$	6,978	$	7,900	$	18,536	$	737,457	$	755,993	$	1,029

The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan loss that is allocated to each loan portfolio segment:

Allowance for loan and lease losses


	September 30, 2012
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	512	$	—	$	246	$	—	$	—	$	758
Collectively evaluated for impairment		1,692		5,764		492		918		64		552		9,482
Total	$	1,692	$	6,276	$	492	$	1,164	$	64	$	552	$	10,240

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


	September 30, 2012
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
	(in thousands)
Loans Receivable
Individually evaluated for impairment	$	827	$	14,312	$	—	$	3,116	$	—	$	—	$	18,255
Collectively evaluated for impairment		166,838		448,039		38,475		148,892		390		—		802,634
Loans acquired with discounts related to credit quality		3,828		21,792		2,408		21,849		132		—		50,009
Total	$	171,493	$	484,143	$	40,883	$	173,857	$	522	$	—	$	870,898

Allowance for loan and lease losses


	December 31, 2011
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	567	$	200	$	318	$	—	$	—	$	1,085
Collectively evaluated for impairment		1,527		5,405		507		945		51		82		8,517
Total	$	1,527	$	5,972	$	707	$	1,263	$	51	$	82	$	9,602
Loans Receivable
Individually evaluated for impairment	$	953	$	12,769	$	3,044	$	5,050	$	—	$	—	$	21,816
Collectively evaluated for impairment		145,758		395,395		36,344		155,721		959		—		734,177
Total	$	146,711	$	408,164	$	39,388	$	160,771	$	959	$	—	$	755,993

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Corporation’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

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


	Three Months Ended September 30, 2012
	C & I			Comm R/E		Construction		Res Mtge			Installment			Unallocated		Total
	(in thousands)
Balance at July 1,	$	1,747		$	6,173	$	449	$	1,300		$	59		$	493	$	10,221
Charge offs		—			—		—		(207	)		(3	)		—		(210	)
Recoveries		—			—		—		—			4			—		4
Provision		(55	)		103		43		71			4			59		225
Balance at September 30,	$	1,692		$	6,276	$	492	$	1,164		$	64		$	552	$	10,240


	Nine Months Ended September 30, 2012
	C & I		Comm R/E		Construction			Res Mtge			Installment			Unallocated		Total
	(in thousands)
Balance at January 1,	$	1,527	$	5,972	$	707		$	1,263		$	51		$	82	$	9,602
Charge offs		—		—		—			(207	)		(11	)		—		(218	)
Recoveries		—		—		540			85			6			—		631
Provision		165		304		(755	)		23			18			470		225
Balance at September 30,	$	1,692	$	6,276	$	492		$	1,164		$	64		$	552	$	10,240


	Three Months Ended September 30, 2011
	C & I			Comm R/E			Construction			Res Mtge		Installment			Unallocated		Total
	(in thousands)
Balance at July 1,	$	1,376		$	6,155		$	1,130		$	1,005	$	56		$	114	$	9,836
Charge offs		—			(940	)		(631	)		—		(7	)		—		(1,578	)
Recoveries		205			—			—			51		2			—		258
Provision		(205	)		667			206			182		(3	)		173		1,020
Balance at September 30,	$	1,376		$	5,882		$	705		$	1,238	$	48		$	287	$	9,536


	Nine Months Ended September 30, 2011
	C & I			Comm R/E			Construction			Res Mtge			Installment			Unallocated		Total
	(in thousands)
Balance at January 1,	$	1,272		$	5,715		$	551		$	1,038		$	52		$	239	$	8,867
Charge offs		(185	)		(940	)		(631	)		(23	)		(14	)		—		(1,793	)
Recoveries		240			15			—			53			6			—		314
Provision		49			1,092			785			170			4			48		2,148
Balance at September 30,	$	1,376		$	5,882		$	705		$	1,238		$	48		$	287	$	9,536

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2012, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status or were contractually past due in excess of 90 days and still accruing interest.

The policy of the Corporation is to generally grant commercial, mortgage and installment loans to New Jersey residents and businesses within its market area. The borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Corporation. The Corporation is therefore subject to risk of loss. The Corporation believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans.

The following table presents information about the troubled debt restructurings (TDRs) by class for the period indicated:


	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Commercial Real Estate		—	$	—	$	—		1	$	225	$	225
Residential Mortgage		—		—		—		1		714		699
Installment		—		—		—		1		1,354		139
Total		—	$	—	$	—		3	$	2,293	$	1,063

The Corporation had no loan charge offs in connection with loan modifications at the time of the modification, and one loan charge-off of $133,000 after modification during the nine months ended September 30, 2012. One TDR in the amount of $1,354,000 at the time of restructuring originated as a conventional residential mortgage loan. The restructuring agreement allowed the borrowers to sell their home and in the event a deficiency balance remained after the sale, a portion of that deficiency balance would continue as an obligation of these borrowers on an unsecured basis. The borrowers did sell their home in the 3^rd quarter 2012. At September 30, 2012, $139,000 remained as an unsecured obligation of these borrowers. This activity is reflected in the table above.

The Corporation had two loans modified as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2012. One residential mortgage TDR of $588,000 that defaulted during the three and nine months period ended September 30, 2012 was 60 – 89 days past due at period end. This loan is still past due 60 – 89 days even though a payment has been received in October 2012. A second residential mortgage TDR of $699,000 that defaulted during the three and nine months period ended September 30, 2012 was to have cleared all payment arrearages as of August 1, 2012 and did not do so. The Corporation entered into an amended settlement agreement with this borrower on October 26, 2012 wherein performance is first expected in November 2012.

On July 1, 2011, the Corporation adopted ASU No. 2011-02, which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In general, a modification or restructuring of a loan constitutes a TDR if the Corporation grants a concession to a borrower experiencing financial difficulty. Loans modified in TDRs are placed on non-accrual status until the Corporation determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. However, performance prior to the modification, or significant events that coincide with

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Loans modified in a troubled debt restructuring totaled $8.4 million at September 30, 2012 of which $1.6 million were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. At December 31, 2011, loans modified in a troubled debt restructuring totaled $11.1 million of which $3.7 million were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement.

In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of September 30, 2012, loans on which concessions were made with respect to adjusted repayment terms amounted to $1.6 million. Loans on which combinations of two or more concessions were made amounted to $6.8 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.

Note 9. Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Corporation’s financial and non-financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial and non-financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective period-end dates indicated herein and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial and non-financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

•

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

•

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

•

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011.

Investment Securities Available-for-Sale

Where quoted prices are available in an active market, investment securities are classified in Level 1 of the valuation hierarchy. Level 1 inputs include investment securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value and are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Corporation treated certain investment securities as Level 3 assets in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Corporation’s evaluations are based on market data and the Corporation employs combinations of these approaches for its valuation methods depending on the asset class. In certain cases where there were limited or less transparent information provided by the Corporation’s third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

On a quarterly basis, management reviews the pricing information received from the Corporation’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Corporation’s third-party pricing service.

Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of September 30, 2012, management made adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

At September 30, 2012, the Corporation’s two pooled trust preferred securities, ALESCO VI and ALESCO VII, and one variable rate CMO were classified as Level 3. Market pricing for these Level 3 securities varied widely from one pricing service to another based on the lack of trading. As such, these securities were not considered to have readily observable market data that was accurate to support a fair value as prescribed by FASB ASC 820-10-05. The Corporation determined that significant adjustments using unobservable inputs are required to determine fair value at the measurement date.

The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value.

The fair value as of September 30, 2012 was determined by discounting the expected cash flows over the life of the security. The discount rate was determined by deriving a discount rate when the markets were considered more active for this type of security. To this estimated discount rate, additions were made for more liquid markets and increased credit risk as well as assessing the risks in the security, such as default risk and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

severity risk. However, the private label CMO had interruptions of its scheduled principal payments and the Corporation recorded principal loss of $102,000 and $272,000 for the three and nine months ended September 30, 2012, respectively.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2012 and December 31, 2011 are as follows:


			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Recurring Basis	September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury and agency securities	$	20,632	$	20,632	$	—	$	—
Federal agency obligations		28,438		—		28,438		—
Residential mortgage-backed securities		59,499		—		59,499		—
Commercial mortgage-backed securities		10,001		—		10,001		—
Obligations of U.S. states and political subdivisions		96,252		—		96,252		—
Trust preferred securities		16,739		—		16,625		114
Corporate bonds and notes		236,715		—		236,715		—
Collateralized mortgage obligations		1,937		—		—		1,937
Asset-backed securities		19,862		—		19,862		—
Certificates of deposit		3,027		—		3,027		—
Equity securities		456		456		—		—
Other securities		16,047		16,047		—		—
Investment securities available-for-sale	$	509,605	$	37,135	$	470,419	$	2,051


			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Recurring Basis	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Federal agency obligations	$	24,969	$	2,004	$	22,965	$	—
Residential mortgage pass-through securities		115,364		—		115,364		—
Obligations of U.S. states and political subdivisions		69,173		397		68,776		—
Trust preferred securities		16,187		—		15,971		216
Corporate bonds and notes		173,117		2,000		171,117		—
Collateralized mortgage obligations		1,899		—		—		1,899
Asset-backed securities		7,653		—		7,653		—
Equity securities		262		262		—		—
Other securities		5,883		5,883		—		—
Securities available-for-sale	$	414,507	$	10,546	$	401,846	$	2,115

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair values used by the Corporation are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2). The fair values of the federal agency obligations, obligations of states and political subdivisions and corporate bonds and notes measured at fair value using Level 1 inputs at September 30, 2012 and December 31, 2011 represented the purchase price of the securities since they were acquired near quarter-end September 30, 2012 and year-end 2011.

The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012 and 2011.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Balance, beginning of the period	$	1,856		$	2,695		$	2,115		$	2,870
Principal interest deferrals		33			29			101			88
Principal repayments		(102	)		(179	)		(272	)		(631	)
Total net losses included in net income		(32	)		—			(60	)		—
Total net unrealized gains (losses)		296			(149	)		167			69
Balance, end of the period	$	2,051		$	2,396		$	2,051		$	2,396

For the nine months ended September 30, 2012, there were no transfers of investment securities available-for-sale into or out of Level 1, Level 2, or Level 3 assets.

Assets Measured at Fair Value on a Non-Recurring Basis

For assets measured at fair value on a non-recurring basis, the fair value measurements used at September 30, 2012 and December 31, 2011 were as follows:


			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis	September 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Impaired loans	$	6,106	$	—	$	—	$	6,106


			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Impaired loans	$	10,740	$	—	$	—	$	10,740
Other real estate owned		591		—		—		591

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a non-recurring basis at September 30, 2012 and December 31, 2011.

Impaired Loans. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Impaired loans at September 30, 2012 that required a valuation allowance were $6,864,000 with a related valuation allowance of $758,000 compared to $11,825,000 with related valuation allowance of $1,085,000 at December 31, 2011. Impaired loans of $2,081,000 and $2,121,000 didn’t record a valuation allowance for September 30, 2012 and December 31, 2011, respectively.

Fair Value of Financial Instruments

Other Real Estate Owned. Other real estate owned (“OREO”) is measured at fair value less costs to sell. The Corporation believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation. Costs to sell associated with OREO is based on estimation per the terms and conditions of the sales agreements or appraisals.

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Corporation’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Corporation for the purposes of this disclosure.

Investment Securities Held-to-Maturity. The fair value of the Corporation’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Corporation’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

Loans. The fair value of the Corporation’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Interest-Bearing Deposits. The fair values of the Corporation’s interest-bearing deposits were estimated using discounted cash flow analyses. The discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Corporation’s interest-bearing deposits do not take into consideration the value of the Corporation’s long-term relationships with depositors, which may have significant value.

Term Borrowings and Subordinated Debentures. The fair value of the Corporation’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments as of September 30, 2012 and December 31, 2011.


					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
September 30, 2012
Financial assets
Cash and due from banks	$	100,106	$	100,106	$	100,106	$	—	$	—
Interest bearing deposits with banks		2,002		2,002		2,002		—		—
Investment securities held-to-maturity		56,503		60,946		—		60,946		—
Restricted investment in bank stocks		8,964		8,964		8,964		—		—
Net loans (including loans held for sale)		860,813		873,548		1,055		—		872,493
Accrued interest receivable		6,428		6,428		—		3,996		2,432
Financial liabilities
Non interest-bearing deposits		192,321		192,321		—		192,321		—
Interest-bearing deposits		1,100,692		1,101,765		—		1,101,765		—
Short-term borrowings		50		50		—		50		—
Long-term borrowings		146,000		164,468		—		164,468		—
Subordinated debentures		5,155		5,088		—		5,088		—
Accrued interest payable		899		899		—		899		—
December 31, 2011
Financial assets
Cash and due from banks	$	111,101	$	111,101	$	111,101	$	—	$	—
Investment securities held-to-maturity		72,233		74,922		—		74,922		—
Restricted investment in bank stocks		9,233		9,233		9,233		—		—
Net loans (including loans held for sale)		746,408		752,252		1,029		—		751,223
Accrued interest receivable		6,219		6,219		—		3,894		2,325
Financial liabilities
Non interest-bearing deposits		167,164		167,164		—		167,164		—
Interest-bearing deposits		954,251		928,777		—		928,777		—
Long-term borrowings		161,000		175,933		—		175,933		—
Subordinated debentures		5,155		5,159		—		5,159		—
Accrued interest payable		992		992		—		992		—

Note 10. Net Investment in Direct Financing Lease

During the second quarter of 2010, the Corporation entered into a lease of its former operations facility under a direct financing lease. The lease has a 15 year term with no renewal options. According to the terms of the lease, the lessee has an obligation to purchase the property underlying the lease in either year seven (7),

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Net Investment in Direct Financing Lease – (continued)

ten (10) or fifteen (15) at predetermined prices for those years as provided in the lease. The structure of the minimum lease payments and the purchase prices as provided in the lease provide an inducement to the lessee to purchase the property in year seven (7).

At September 30, 2012 and December 31, 2011, the net investment in direct financing lease consists of a minimum lease receivable of $4,753,000 and $4,870,000, respectively, and unearned interest income of $977,000 and $1,123,000, respectively, for a net investment in direct financing lease of $3,776,000 and $3,747,000, respectively. The net investment in direct financing lease is carried as a component of loans in the Corporation’s consolidated statements of condition.

Minimum future lease receipts of the direct financing lease are as follows:


	September 30, 2012
	(in thousands)
For years ending December 31,
2012	$	54
2013		216
2014		216
2015		228
2016		265
Thereafter		2,797
Total minimum future lease receipts	$	3,776

Note 11. Components of Net Periodic Pension Cost

The Corporation maintained a non-contributory pension plan for substantially all of its employees until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. The following table sets forth the net periodic pension cost of the Corporation’s pension plan for the periods indicated.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Interest cost	$	139		$	147		$	417		$	441
Net amortization and deferral		(21	)		(51	)		(63	)		(151	)
Net periodic pension cost	$	118		$	96		$	354		$	290

Contributions

The Corporation presently estimates it will contribute $450,000 to its Pension Trust for the 2012 plan year.

The Preservation of Access to Care for Medical Beneficiaries and Pension Relief Act of 2010, signed into law on June 25, 2010, permits single employer and multiple employer defined benefit plan sponsors to elect to extend the plan’s amortization period of a Shortfall Amortization Base over either a nine year period or a fifteen year period, rather than the seven year period required under the Pension Protection Act of 2006. The Bank had elected to apply the Pension Relief Act Fifteen Year amortization of the Shortfall Amortization Base for its 2011 minimum funding requirement. The minimum amount to be funded was $453,000, as noted above, by December 31, 2012 with the understanding that fully funding the plan earlier than this date would lower this amount and that funding the plan after this date would increase this amount. As noted, this amount is the minimum required funding amount. The Corporation does have the option of funding above this amount but has contributed the minimum historically.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Components of Net Periodic Pension Cost – (continued)

The Moving Ahead for Progress in the 21^st Century Act which was enacted on July 6, 2012 contained special rules related to funding stabilization for single employer defined benefit plans. Under these provisions, the interest rates used to calculate the plan’s funding percentages and minimum required contribution are adjusted as necessary to fall within a specified range that is determined based on an average of rates for the 25 year period ending on September 30 of the calendar year preceding the first day of the Plan Year. For Plan years beginning in 2012, the range is 90% – 110% of the 25 year average. The effect of the application of the adjusted rates was to reduce the 2012 required minimum contribution to the Plan to approximately $300,000. However, the actuary has recommended that the contribution for the 2012 plan year be at least $450,000 in order to continue to make progress toward fully funding Plan liabilities.

Note 12. Income Taxes

For the nine months ended September 30, 2012, the Corporation recorded income tax expense of $6.0 million, compared with a $5.5 million income tax expense for the nine months ended September 30, 2011. The effective tax rates for the nine-month period ended September 30, 2012 and 2011 were 31.5 percent and 34.9 percent, respectively. The lower effective tax rate reflects non-taxable bargain gain of $899,000 on the acquisition.

For the quarter ended September 30, 2012, the Corporation recorded income tax expense of $1.6 million, compared with $1.9 million of income tax expense for the quarter ended September 30, 2011. The effective tax rates for the quarterly periods ended September 30, 2012 and 2011 were 26.8 percent and 33.7 percent, respectively. The lower effective tax rate reflects non-taxable bargain gain of $899,000 on the acquisition.

Note 13. Borrowed Funds

Short-Term Borrowings

Short-term borrowings, which consist primarily of securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances and federal funds purchased, generally have maturities of less than one year. The details of these short-term borrowings are presented in the following table.


	September 30, 2012			September 30, 2011
	(dollars in thousands)
Average interest rate:
At quarter end		6.00	%		—	%
For the quarter		0.80	%		0.25	%
Average amount outstanding during the quarter	$	150		$	33,592
Maximum amount outstanding at any month end in the quarter	$	5,050		$	34,506
Amount outstanding at quarter end	$	50		$	—

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $146.0 million at September 30, 2012 and mature within one to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Borrowed Funds – (continued)

At September 30, 2012, FHLB advances had a weighted average interest rate of 3.45 percent and are contractually scheduled for repayment as follows:


	September 30, 2012
	(in thousands)
2016		20,000
Thereafter		95,000
Total	$	115,000

The Corporation has entered into agreements under which it has sold securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated statement of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts and are delivered to and held as collateral by third party trustees. At September 30, 2012, securities sold under agreements to repurchase had a weighted average interest rate of 5.90 percent and are contractually scheduled for repayment as follows:


	September 30, 2012
	(in thousands)
After 2016	$	31,000
Total	$	31,000

Note 14. Subordinated Debentures

During 2003, the Corporation formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Corporation; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10. Distributions on the subordinated debentures owned by the subsidiary trusts below have been classified as interest expense in the Consolidated Statements of Income.

The characteristics of the business trusts and capital securities have not changed with the deconsolidation of the trusts. The capital securities provide an attractive source of funds since they constitute Tier 1 capital for regulatory purposes and have the same tax advantages as debt for Federal income tax purposes.

The subordinated debentures are redeemable in whole or part prior to maturity on January 23, 2034. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and resets quarterly. The rate at September 30, 2012 was 3.30 percent.

Note 15. Stockholders’ Equity

On January 12, 2009, the Corporation issued $10 million in nonvoting Fixed Rate Cumulative Perpetual Preferred Stock, Series A to the U.S. Department of Treasury (“Treasury”) under its Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As a result of the successful completion of the Corporation’s rights offering in October 2009, the number of shares underlying the warrants held by the U.S. Treasury was reduced to 86,705 shares, or 50 percent of the original 173,410 shares as outlined by the provisions of the Capital Purchase Program.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Stockholders’ Equity – (continued)

On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the Treasury under the Small Business Lending Fund Program (“SBLF Program”). Under the Securities Purchase Agreement, the Corporation issued to the Treasury a total of 11,250 shares of the Corporation’s Senior Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the Corporation redeemed from the Treasury, all 10,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provided the Corporation with approximately $1.25 million additional Tier 1 capital. The capital received under the program will allow the Corporation to continue to serve its small business clients through the commercial lending program.

On December 7, 2011, the Corporation repurchased the warrants issued on January 12, 2009 to the U.S. Treasury as part of its participation in the U.S. Treasury’s TARP Capital Purchase Program. In the repurchase, the Corporation paid the U.S. Treasury $245,000 for the warrants.

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

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporation’s results of operations for the periods presented herein and financial condition as of September 30, 2012 and December 31, 2011. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which Center Bancorp is engaged, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (7) changes and trends in the securities markets may adversely impact Center Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by Center Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) Center Bancorp may experience unforeseen difficulties in integrating Saddle River Valley Bank’s operations into its own following its August 1, 2012 acquisition of certain assets and assumption of certain liabilities of Saddle River Valley Bank; and (11) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of Center Bancorp is included in Item 1A. of Center Bancorp’s Annual Report on Form 10-K and in Center Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from Center Bancorp, Inc.

Critical Accounting Policies and Estimates

The accounting and reporting policies followed by Center Bancorp, Inc. and its subsidiaries (the “Corporation”) conform, in all material respects, to U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and for the periods indicated in the statements of operations. Actual results could differ significantly from those estimates.

The Corporation’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“MD&A”) of financial condition and results of operations. The Corporation has identified the determination of the allowance for loan losses, the other-than-temporary impairment evaluation of securities, the valuation of the impairment of goodwill and deferred tax assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies is provided below.

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Allowance for Loan Losses and Related Provision

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition.

The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.

Other-Than-Temporary Impairment of Investment Securities

Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management assesses whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert that it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Fair Value of Investment Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Corporation applied the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 6 of the Notes to Consolidated Financial Statements for further discussion.

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FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

Goodwill

The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the nine months ended September 30, 2012 and 2011.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporation’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Corporation’s consolidated financial condition or results of operations. Note 11 of the Notes to Consolidated Financial Statements includes additional discussion on the accounting for income taxes.

Earnings

Net income available to common stockholders for the three months ended September 30, 2012 amounted to $4,426,000 compared to $3,557,000 for the comparable three-month period ended September 30, 2011. The Corporation recorded earnings per diluted common share of $0.27 for the three months ended September 30, 2012 as compared with earnings of $0.22 per diluted common share for the same three months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.002 and $0.01 per fully diluted common share for the three month periods. The annualized return on average assets was 1.13 percent for the three months ended September 30, 2012, compared to 1.10 percent for three months ended September 30, 2011. The annualized return on average stockholders’ equity was 11.67 percent for the three-month period ended September 30, 2012, compared to 11.12 percent for the three months ended September 30, 2011.

Net income available to common stockholders for the nine months ended September 30, 2012 amounted to $12,785,000 compared to $9,868,000 for the comparable nine-month period ended September 30, 2011. The Corporation recorded earnings per diluted common share of $0.78 for the nine months ended September 30, 2012 as compared with earnings of $0.61 per diluted common share for the same nine months in 2011. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, reduced earnings by approximately $0.015 and $0.03 per fully diluted common share for the nine months ended September 30, 2012 and 2011, respectively. The annualized return on average assets was 1.15 percent for the nine months ended September 30, 2012, compared to 1.06 percent for the nine months ended September 30, 2011. The annualized return on average stockholders’ equity was 11.88 percent for the nine-month period ended September 30, 2012, compared to 10.73 percent for the nine months ended September 30, 2011.

Net Interest Income and Margin

Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. Net interest income is presented on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. Net interest margin is defined as net interest income on a fully tax-equivalent basis as a percentage of total average interest-earning assets.

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The following table presents the components of net interest income on a fully tax-equivalent basis for the periods indicated.

Net Interest Income
(tax-equivalent basis)


	Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)	2012			2011			Increase (Decrease)			Percent Change			2012			2011			Increase (Decrease)			Percent Change
Interest income:
Investment securities AFS	$	3,814		$	3,327		$	487			14.6	%	$	11,140		$	10,530		$	610			5.8	%
Investment securities HTM		632			806			(174	)		(21.6	)		2,023			1,155			868			75.2
Loans, including net costs		10,039			8,956			1,083			12.1			28,838			27,123			1,715			6.3
Restricted investment in bank stocks, at cost		110			110			—			—			342			362			(20	)		(5.5	)
Other interest bearing deposits		3			—			3			—			7			—			7			—
Total interest income		14,598			13,199			1,399			10.6			42,350			39,170			3,180			8.1
Interest expense:
Time deposits $100 or more		203			332			(129	)		(38.9	)		637			945			(308	)		(32.6	)
All other deposits		1,124			1,059			65			6.1			3,406			3,133			273			8.7
Borrowings		1,608			1,678			(70	)		(4.2	)		4,892			4,998			(106	)		(2.1	)
Total interest expense		2,935			3,069			(134	)		(4.4	)		8,935			9,076			(141	)		(1.6	)
Net interest income on a fully tax-equivalent basis		11,663			10,130			1,533			15.1			33,415			30,094			3,321			11.0
Tax-equivalent adjustment⁽¹⁾		(480	)		(280	)		(200	)		(71.4	)		(1,341	)		(506	)		(835	)		(165.0	)
Net interest income	$	11,183		$	9,850		$	1,333			13.5	%	$	32,074		$	29,588		$	2,486			8.4	%

(1)

Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.

Net interest income on a fully tax-equivalent basis increased $1.5 million or 15.1 percent to $11.7 million for the three months ended September 30, 2012 as compared to the same period in 2011. For the three months ended September 30, 2012, the net interest margin contracted 26 basis points to 3.28 percent from 3.54 percent during the three months ended September 30, 2011. For the three months ended September 30, 2012, a decrease in the average yield on interest-earning assets of 51 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 23 basis points, resulting in a decrease in the Corporation’s net interest spread of 28 basis points for the period. Net interest margin compression during the third quarter period of 2012, occurred primarily as result of a high liquidity pool carried during the quarter and the timing of a substantial portion of the Corporation’s loan growth, which occurred in the latter part of the quarter. This, coupled with a continued high level of prepayment speeds on mortgage-backed securities in the investment portfolio and a high level of loan modifications during the quarter, dampened other actions (including a growth in the Corporation’s customer base and enhancement the Corporation’s liquidity position, effected while the Company increased its earning assets base) taken to improve the margin.

Net interest income on a fully tax-equivalent basis increased $3.3 million or 11.0 percent to $33.4 million for the nine months ended September 30, 2012 as compared to the same period in 2011. For the nine months ended September 30, 2012, the net interest margin contracted 22 basis points to 3.32 percent from 3.54 percent during the nine months ended September 30, 2011. For the nine months ended September 30, 2012, a

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decrease in the average yield on interest-earning assets of 41 basis points was partially offset by a decrease in the average cost of interest-bearing liabilities of 20 basis points, resulting in a decrease in the Corporation’s net interest spread of 21 basis points for the period.

For the three-month period ended September 30, 2012, interest income on a tax-equivalent basis increased by $1,399,000 or 10.6 percent compared to the same three-month period in 2011. This increase in interest income was due primarily to a volume increase in investment securities and loans partially offset by a decline in yields due to the lower interest rate environment. Average investment securities volume increased during the current three-month period by $132.0 million, to $560.0 million, compared to the third quarter of 2011. The loan portfolio increased on average $142.1 million, to $850.1 million, from an average of $707.9 million in the same quarter in 2011, reflecting net increases in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 59.7 percent of average interest-earning assets during the third quarter of 2012 compared to 61.8 percent in the same quarter in 2011.

For the nine-month period ended September 30, 2012, interest income on a tax-equivalent basis increased by $3.2 million or 8.1 percent from the comparable nine-month period in 2011. This increase in interest income was due primarily to higher volume of earning assets of $209.7 million offset in part by lower rates in a lower interest rate environment. Average investment securities volume increased during the current nine-month period by $116.2 million, to $532.7 million, compared to the nine months ended September 30, 2011. The average loan portfolio increased $90.5 million, to $798.9 million, from $708.5 million for the same nine months in 2011, reflecting net increases in commercial loans and commercial real estate. Average loans represented approximately 59.5 percent of average interest-earning assets during the nine months of 2012 compared to 62.5 percent for the same nine months in 2011.

For the three months ended September 30, 2012, interest expense decreased $134,000, or 4.4 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 23 basis points to 0.95 percent for the three months ended September 30, 2012, from 1.18 percent for the three months ended September 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $192.9 million. This increase was primarily in money market, savings, and other interest-bearing deposits of $195.9 million, $13.4 million and $70.6 million, respectively, and was partially offset by decreases in borrowings of $35.3 million and time deposits of $51.7 million. Since 2009 steps have been taken to improve the Corporation’s net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further high-costing cash outflows. The result of these actions, together with the reduction in market interest rates, has been a decline in the Corporation’s average cost of funds. For the three months ended September 30, 2012, the Corporation’s net interest spread on a tax-equivalent basis decreased to 3.15 percent, from 3.43 percent for the three months ended September 30, 2011.

For the nine months ended September 30, 2012, interest expense declined $141,000, or 1.6 percent from the same period in 2011. The average rate of interest-bearing liabilities decreased 20 basis points to 1.01 percent for the nine months ended September 30, 2012, from 1.21 percent for the nine months ended September 30, 2011. At the same time, the volume of average interest-bearing liabilities increased by $81.6 million. This increase included increases in money market deposits of $179.2 million, savings deposits of $10.2 million and other interest-bearing deposits of $71.0 million, offset by decreases in borrowings of $39.7 million and time deposits of $39.0 million. The result of this was an improvement in the Corporation’s average cost of funds for the period. For the nine months ended September 30, 2012, the Corporation’s net interest spread on a tax-equivalent basis decreased to 3.19 percent, from 3.40 percent for the nine months ended September 30, 2011.

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The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the three and nine month periods presented. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category.

Analysis of Variance in Net Interest Income Due to Changes in Volume and Rates


	Three Months Ended September 30, 2012 and 2011 Increase (Decrease) Due to Change in:									Nine Months Ended September 30, 2012 and 2011 Increase (Decrease) Due to Change in:
(tax-equivalent basis, in thousands)	Average Volume			Average Rate			Net Change			Average Volume			Average Rate			Net Change
Interest-earning assets:
Investment securities:
Available for sale
Taxable	$	735		$	(743	)	$	(8	)	$	774		$	(1,879	)	$	(1,105	)
Tax-exempt		577			(82	)		495			1,854			(139	)		1,715
Held to maturity
Taxable		(99	)		(129	)		(228	)		434			(194	)		240
Tax-exempt		23			31			54			598			30			628
Total investment securities		1,236			(923	)		313			3,660			(2,182	)		1,478
Loans		1,708			(625	)		1,083			3,592			(1,877	)		1,715
Restricted investment in bank stocks		(1	)		1			—			—			(20	)		(20	)
Other interest-bearing deposits		3			—			3			7			—			7
Total interest-earning assets		2,946			(1,547	)		1,399			7,259			(4,079	)		3,180
Interest-bearing liabilities:
Money market deposits		211			(57	)		154			606			(146	)		460
Savings deposits		16			(79	)		(63	)		39			(234	)		(195	)
Time deposits		136			(262	)		(126	)		(296	)		1			(295	)
Other interest-bearing deposits		86			(115	)		(29	)		263			(268	)		(5	)
Total interest-bearing deposits		449			(513	)		(64	)		612			(647	)		(35	)
Borrowings and subordinated debentures		(325	)		255			(70	)		(1,069	)		963			(106	)
Total interest-bearing liabilities		124			(258	)		(134	)		(457	)		316			(141	)
Change in net interest income	$	2,822		$	(1,289	)	$	1,533		$	7,716		$	(4,395	)	$	3,321

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The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 2012 and 2011, the Corporation’s average assets, liabilities and stockholders’ equity. The Corporation’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates


	Three Months Ended September 30,
	2012									2011
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Investment securities⁽¹⁾:
Available for sale
Taxable	$	420,423		$	2,903			2.76	%	$	326,139		$	2,911			3.57	%
Tax-exempt		79,298			911			4.60			30,089			416			5.53
Held to maturity
Taxable		30,554			171			2.24			43,593			399			3.66
Tax-exempt		29,721			461			6.20			28,195			407			5.77
Total investment securities		559,996			4,446			3.18			428,016			4,133			3.86
Loans⁽²⁾		850,059			10,039			4.72			707,935			8,956			5.06
Restricted investment in bank stocks		9,143			110			4.81			9,194			110			4.79
Other interest-bearing deposits		3,816			3			0.31			—			—			—
Total interest-earning assets		1,423,014			14,598			4.10			1,145,145			13,199			4.61
Non interest-earning assets:
Cash and due from banks		90,385									127,959
Bank-owned life insurance		29,539									28,533
Intangible assets		16,874									16,922
Other assets		31,418									33,444
Allowance for loan losses		(10,197	)								(10,383	)
Total non interest-earning assets		158,019									196,475
Total assets	$	1,581,033								$	1,341,620
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	400,026		$	415			0.41	%	$	204,102		$	261			0.51	%
Savings deposits		195,302			165			0.34			181,857			228			0.50
Time deposits		189,468			469			0.99			241,123			595			0.99
Other interest-bearing deposits		282,053			278			0.39			211,425			307			0.58
Total interest-bearing deposits		1,066,849			1,327			0.50			838,507			1,391			0.66
Short-term and long-term borrowings		159,139			1,566			3.94			194,592			1,638			3.37
Subordinated debentures		5,155			42			3.26			5,155			40			3.10
Total interest-bearing liabilities		1,231,143			2,935			0.95			1,038,254			3,069			1.18
Non interest-bearing liabilities:
Demand deposits		183,858									161,744
Other liabilities		13,346									8,471
Total non interest-bearing liabilities		197,204									170,215
Stockholders’ equity		152,686									133,151
Total liabilities and stockholders’ equity	$	1,581,033								$	1,341,620
Net interest income (tax-equivalent basis)					11,663									10,130
Net interest spread								3.15	%								3.43	%
Net interest margin⁽³⁾								3.28	%								3.54	%
Tax-equivalent adjustment⁽⁴⁾					(480	)								(280	)
Net interest income				$	11,183								$	9,850

(1)

Average balances are based on amortized cost.

(2)

Average balances include loans on non-accrual status.

(3)

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

(4)

Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.

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Average Statements of Condition with Interest and Average Rates


	Nine Months Ended September 30,
	2012									2011
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Investment securities⁽¹⁾:
Available for sale
Taxable	$	395,273		$	8,612			2.90	%	$	364,465		$	9,717			3.55	%
Tax-exempt		70,989			2,528			4.75			19,403			813			5.59
Held to maturity
Taxable		37,287			719			2.57			16,845			479			3.79
Tax-exempt		29,125			1,304			5.97			15,739			676			5.73
Total investment securities		532,674			13,163			3.29			416,452			11,685			3.74
Loans⁽²⁾		798,939			28,838			4.81			708,489			27,123			5.10
Restricted investment in bank stocks		9,173			342			4.97			9,181			362			5.26
Other interest-bearing deposits		3,022			7			0.31			—			—			—
Total interest-earning assets		1,343,808			42,350			4.20			1,134,122			39,170			4.61
Non interest-earning assets:
Cash and due from banks		101,974									88,623
Bank-owned life insurance		29,296									28,274
Intangible assets		16,885									16,937
Other assets		31,703									32,946
Allowance for loan losses		(9,899	)								(9,712	)
Total non interest-earning assets		169,959									157,068
Total assets	$	1,513,767								$	1,291,190
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	363,159		$	1,190			0.44	%	$	183,952		$	730			0.53	%
Savings deposits		189,294			533			0.38			179,140			728			0.54
Time deposits		190,105			1,442			1.01			229,099			1,737			1.01
Other interest-bearing deposits		272,976			878			0.43			201,999			883			0.58
Total interest-bearing deposits		1,015,534			4,043			0.53			794,190			4,078			0.68
Short-term and long-term borrowings		160,496			4,765			3.96			200,232			4,879			3.25
Subordinated debentures		5,155			127			3.28			5,155			119			3.08
Total interest-bearing liabilities		1,181,185			8,935			1.01			999,577			9,076			1.21
Non interest-bearing liabilities:
Demand deposits		175,041									156,976
Other liabilities		11,283									6,587
Total non interest-bearing liabilities		186,324									163,563
Stockholders’ equity		146,258									128,050
Total liabilities and stockholders’ equity	$	1,513,767								$	1,291,190
Net interest income (tax-equivalent basis)					33,415									30,094
Net interest spread								3.19	%								3.40	%
Net interest margin⁽³⁾								3.32	%								3.54	%
Tax-equivalent adjustment⁽⁴⁾					(1,341	)								(506	)
Net interest income				$	32,074								$	29,588

(1)

Average balances are based on amortized cost.

(2)

Average balances include loans on non-accrual status.

(3)

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

(4)

Computed using a federal income tax rate of 35 percent for 2012 and 34 percent for 2011.

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Investment Portfolio

At September 30, 2012, the principal components of the investment securities portfolio were U.S. Government agency obligations, federal agency obligations including mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, trust preferred securities, asset backed securities and equity securities.

During the nine months ended September 30, 2012, approximately $114.6 million in investment securities were sold from the available-for-sale portfolio. The cash flow from the sale of investment securities was primarily used to purchase new securities. The Corporation’s sales from its available-for-sale investment portfolio reflect continued volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Bank to protect itself from interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Bank must sell in order to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities.

For the three months ended September 30, 2012, average investment securities increased $132.0 million to approximately $560.0 million, or 39.4 percent of average interest-earning assets, from $428.0 million on average, or 37.4 percent of average interest-earning assets, for the comparable period in 2011. This increase reflects, in part, the acquisition of $37.1 million of investment securities from Saddle River Valley Bank on August 1, 2012. For the nine months ended September 30, 2012, average investment securities increased $116.2 million to approximately $532.7 million, or 39.6 percent of average interest-earning assets, from $416.5 million on average, or 36.7 percent of average interest-earning assets, for the comparable period in 2011.

During the three-month period ended September 30, 2012, the volume-related factors applicable to the investment portfolio increased interest income by approximately $1.2 million while rate-related changes resulted in a decrease in interest income of approximately $923,000 from the same period in 2011. The tax-equivalent yield on investments decreased by 68 basis points to 3.18 percent from a yield of 3.86 percent during the comparable period in 2011. An 85 basis point decrease in taxable yield was partially offset by an increase in the purchase of tax exempt municipal securities during the period.

During the nine-month period ended September 30, 2012, the volume-related factors applicable to the investment portfolio increased interest income by approximately $3.7 million while rate-related changes resulted in a decrease in interest income of approximately $2.2 million from the same period in 2011. The tax-equivalent yield on investments decreased by 45 basis points to 3.29 percent from a yield of 3.74 percent during the comparable period in 2011. A 69 basis point decrease in taxable yield was partially offset by an increase in the purchase of tax exempt municipal securities during the period. On August 1, 2012, the Corporation acquired $37.1 million in investment securities with a tax-equivalent yield of 2.95 percent from Saddle River Valley Bank.

For the nine months ended September 30, 2012, the Corporation recorded principal losses of $272,000 on a private label collateralized mortgage obligation. The Corporation expects that there may be additional losses on this obligation. See Note 7 of the Notes to the Consolidated Financial Statements for further discussion.

At September 30, 2012, net unrealized gains on investment securities available-for-sale, which is carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to $8.4 million as compared with net unrealized losses of $2.2 million at December 31, 2011. At September 30, 2012, net unrealized gains on investment securities held to maturity, transferred from securities available-for-sale, which is carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $166,000. The gross unrealized losses associated with agency securities and federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Loan Portfolio

Lending is one of the Corporation’s primary business activities. The Corporation’s loan portfolio consists of commercial, residential and retail loans, serving the diverse customer base in its market area. The composition of the Corporation’s portfolio continues to change due to the local economy. Factors such as the

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economic climate, interest rates, real estate values and employment all contribute to these changes. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets.

The Corporation seeks to create growth in commercial lending by offering customer-focused products and competitive pricing and by capitalizing on the positive trends in its market area. Products offered are designed to meet the financial requirements of the Corporation’s customers. It is the objective of the Corporation’s credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry.

At September 30, 2012, total loans amounted to $871.1 million, an increase of $115.0 million or 15.2 percent as compared to December 31, 2011. For the nine-month period ended September 30, 2012, growth of $27.8 million and $66.3 million in the commercial and industrial and commercial real estate portfolios and increases of $9.5 million and $11.4 million in the construction and residential mortgage portfolios were partially offset by a decrease of $112,000 in the installment loan portfolio. Total gross loans recorded in the quarter included $131.8 million of new loans and advances, which also included approximately $50.0 million in loans acquired from Saddle River Valley Bank at fair value, partially offset by payoffs and principal payments of $68.3 million.

At September 30, 2012, the Corporation had $74.0 million in outstanding loan commitments which are expected to fund over the next 90 days.

Average total loans increased $142.1 million or 16.7 percent for the three months ended September 30, 2012 as compared to the same period in 2011, while the average yield on loans decreased by 34 basis points as compared with the same period in 2011. The decrease in the average yield on loans was primarily the result of lower market interest rates on the repricing of existing loans and the origination of new loans. The increase in average total loan volume was due primarily to increased customer activity and new lending relationships. The volume increase also reflects the acquisition of $52.2 million of loans from Saddle River Valley Bank on August 1, 2012. The volume-related factors during the period contributed increased interest income of $1.7 million, while the rate-related changes decreased interest income by $625,000.

Average total loans increased $90.5 million or 12.8 percent for the nine months ended September 30, 2012 as compared to the same period in 2011, while the average yield on loans decreased by 45 basis points as compared with the same period in 2011.

Allowance for Loan Losses and Related Provision

The purpose of the allowance for loan losses (the “allowance”) is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for probable credit losses inherent in the loan portfolio based upon a periodic evaluation of the portfolio’s risk characteristics. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions and peer group statistics are also reviewed. Given the extraordinary economic volatility impacting national, regional and local markets, the Corporation’s analysis of its allowance for loan losses takes into consideration the potential impact that current trends may have on the Corporation’s borrower base.

Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Corporation’s loans are secured by real estate in the State of New Jersey. Future adjustments to the allowance may be necessary due to economic factors impacting New Jersey real estate and the economy in general, as well as operating, regulatory and other conditions beyond the Corporation’s control.

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At September 30, 2012, the level of the allowance was $10,240,000 as compared to $9,602,000 at December 31, 2011. Provisions to the allowance for the nine-month period ended September 30, 2012 totaled $225,000 compared to $2,148,000 for the same period in 2011. The net charge offs were $206,000 for the three months ended September 30, 2012 compared to a $1,320,000 net charge offs for the three months ended September 30, 2011, bringing the Corporation’s net recoveries to $413,000 for the nine months of 2012 compared to net charge offs of $1,479,000 for the same period of 2011. The allowance for loan losses as a percentage of total loans amounted to 1.18 percent at September 30, 2012. Excluding loans acquired from Saddle River Valley Bank and carried at fair value, the coverage ratio of the allowance for loan losses to total loans was 1.25 percent at September 30, 2012 compared to 1.27 percent at December 31, 2011.

The level of the allowance for the respective periods of 2012 and 2011 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowance at September 30, 2012 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

Changes in the allowance for loan losses are presented in the following table for the periods indicated.


	Nine Months Ended September 30,
	2012			2011
	(dollars in thousands)
Average loans for the period	$	798,939		$	708,489
Total loans at end of period		871,053			721,608
Analysis of the Allowance for Loan Losses:
Balance – beginning of year	$	9,602		$	8,867
Charge-offs:
Commercial and industrial loans		—			(185	)
Commercial real estate		—			(940	)
Construction		—			(631	)
Residential mortgage loans		(207	)		(23	)
Installment loans		(11	)		(14	)
Total charge-offs		(218	)		(1,793	)
Recoveries:
Commercial and industrial loans		—			240
Commercial real estate		—			15
Construction		540			—
Residential mortgage loans		85			53
Installment loans		6			6
Total recoveries		631			314
Net recoveries (charge-offs)		413			(1,479	)
Provision for loan losses		225			2,148
Balance – end of period	$	10,240		$	9,536
Ratio of net (recoveries) charge-offs during the period to average loans during the period⁽¹⁾		(0.07	)%		0.28	%
Allowance for loan losses as a percentage of total loans		1.18	%		1.32	%

(1)

Annualized.

Asset Quality

The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record

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charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times.

It is generally the Corporation’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may be restored to an accruing basis when it again becomes well-secured, all past due amounts have been collected and the borrower continues to make payments for the next six months on a timely basis. Accruing loans past due 90 days or more are generally well-secured and in the process of collection.

Non-Performing Assets and Troubled Debt Restructured Loans

Non-performing loans include non-accrual loans and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned. Troubled debt restructured loans represent loans to borrowers experiencing financial difficulties on which a concession was granted, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms. Such loans, as restructured, are not included within the Corporation’s non-performing loans.

The following table sets forth, as of the dates indicated, the amount of the Corporation’s non-accrual loans, accruing loans past due 90 days or more, other real estate owned and troubled debt restructured loans.


	September 30, 2012		December 31, 2011
	(in thousands)
Non-accrual loans	$	4,967	$	6,871
Accruing loans past due 90 days or more		570		1,029
Total non-performing loans		5,537		7,900
Other real estate owned		—		591
Total non-performing assets	$	5,537	$	8,491
Troubled debt restructured loans – performing	$	6,851	$	7,459

Subsequent to September 30, 2012 the Corporation received a payoff of a commercial mortgage loan totaling $570,000, reducing loans past due 90 days or more and stilling accruing to zero and non-performing assets to $5.0 million, or 0.31 percent of total assets as asset quality continues to improve.

Non-performing assets decreased by $2,954,000 at September 30, 2012 from December 31, 2011. The decrease was attributable to loans returned to performing status of $3.9 million, payoffs of $451,000, payments of $57,000, other real estate owned sales proceeds of $500,000 and other real estate owned write downs of $91,000, offset in part by the addition of four new residential loans (totaling approximately $1.4 million) and four commercial and instruction loans (totaling approximately $612,000) into non-performing status.

The Corporation held no other real estate owned at September 30, 2012 and $591,000 at December 31, 2011, respectively.

Troubled debt restructured loans totaled $8.4 million at September 30, 2012 and $11.1 million at December 31, 2011. A total of $6.9 million and $7.5 million of troubled debt restructured loans were performing pursuant to the terms of their respective modifications at September 30, 2012 and December 31, 2011, respectively.

Overall credit quality in the Bank’s loan portfolio at September 30, 2012 remained relatively strong. Other known “potential problem loans” (as defined by SEC regulations), some of which are non-performing loans and are included in the table above, as of September 30, 2012 have been identified and internally risk-rated as assets specially mentioned or substandard. Such loans amounted to $49.3 million and

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$49.0 million at September 30, 2012 and December 31, 2011, respectively. The slight decrease in credit quality occurred as the commercial and industrial loans increased $1.4 million in special mention and $109,000 in the substandard category. Commercial real estate loans decreased $5.1 million in special mention but increased $4.6 million in the substandard category. Residential mortgage loans increased $391,000 in special mention and decreased in the substandard category by $117,000. Construction loans increased $804,000 in the special mention category and decreased $1.9 million in the substandard category. Installment loans increased $133,000 in the substandard category. These loans are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers. The Corporation has no foreign loans.

At September 30, 2012, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.

Other Income

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


	Three Months Ended September 30,										Nine Months Ended September 30,
(dollars in thousands)	2012		2011		Increase (Decrease)			Percent Change			2012		2011		Increase (Decrease)			Percent Change
Service charges, commissions and fees	$	459	$	505	$	(46	)		(9.1	)%	$	1,326	$	1,415	$	(89	)		(6.3	)%
Annuities and insurance commission		45		42		3			7.1			137		81		56			69.1
Bank-owned life insurance		239		259		(20	)		(7.7	)		736		780		(44	)		(5.6	)
Net investment securities gains		763		1,250		(487	)		(39.0	)		2,213		2,817		(604	)		(21.4	)
Loan related fees		173		203		(30	)		(14.8	)		604		435		169			38.9
Bargain gain on acquisition		899		—		899			—			899		—		899			—
All other		57		24		33			137.5			279		84		195			232.1
Total other income	$	2,635	$	2,283	$	352			15.4	%	$	6,194	$	5,612	$	582			10.4	%

For the three months ended September 30, 2012, total other income amounted to $2.6 million, compared to total other income of $2.3 million for the same period in 2011. The increase of $352,000 for the three months ended September 30, 2012 was primarily as a result of the bargain gain of $899,000 on the acquisition of Saddle River Valley Bank assets offset by a reduction in net investment securities gains (decreasing to $763,000 for the three months ended September 30, 2012 from net investment gains of $1,250,000 for the same period last year. Net investment securities gains in the third quarter of 2012 included $897,000 in net gains on the sale of investment securities, reduced by $134,000 in net other-than-temporary impairment charges. Excluding net investment securities gains and the bargain gain on acquisition, the Corporation recorded total other income of $973,000 for the three months ended September 30, 2012, compared to $1.0 million for the three months ended September 30, 2011. This decrease reflected decreases of $30,000 in loan related fees, $46,000 in service charges on deposits attributable to higher deposit balance and $20,000 in bank owned life insurance due to lower crediting rates, partially offset by increases of $33,000 in all other income related to the sale of a judgment and a $3,000 increase in annuity and insurance commissions.

For the nine months ended September 30, 2012, total other income increased $582,000 compared to the same period in 2011, primarily as a result of the bargain gain on acquisition offset by lower net investment securities gains and losses including other-than-temporary impairment charges. Excluding the bargain gain on acquisition and net investment securities gains and losses, the Corporation recorded other income of $3.1 million for the nine months ended September 30, 2012 compared to $2.8 million for the comparable period in 2011, an increase of $287,000 or 10.3 percent. Increases in other income for the nine months ended September 30, 2012 were recorded primarily in all other income which increased $195,000, primarily related to the sale of a judgment, $169,000 in loan related fees and $56,000 in annuity and insurance commissions, offset by lower service charges of $89,000 and bank owned life insurance income of $44,000.

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Other Expense

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


	Three Months Ended September 30,										Nine Months Ended September 30,
(dollars in thousands)	2012		2011		Increase (Decrease)			Percent Change			2012		2011			Increase (Decrease)			Percent Change
Salaries and employee benefits	$	3,193	$	2,848	$	345			12.1	%	$	9,366	$	8,618		$	748			8.7	%
Occupancy and equipment		739		713		26			3.6			2,045		2,246			(201	)		(8.9	)
FDIC insurance		292		328		(36	)		(11.0	)		861		1,384			(523	)		(37.8	)
Professional and consulting		277		319		(42	)		(13.2	)		817		805			12			1.5
Stationery and printing		69		73		(4	)		(5.5	)		249		273			(24	)		(8.8	)
Marketing and advertising		64		30		34			113.3			151		116			35			30.2
Computer expense		366		300		66			22.0			1,081		989			92			9.3
Other real estate owned, net		65		—		65			—			149		(1	)		150			1,500.0
Repurchase agreement prepayment and termination fees		1,012		—		1,012			—			1,012		—			1,012			—
Acquisition cost		472		—		472			—			472		—			472			—
All other		958		918		40			4.4			2,801		2,791			10			0.4
Total other expense	$	7,507	$	5,529	$	1,978			35.8	%	$	19,004	$	17,221		$	1,783			10.4	%

For the three months ended September 30, 2012, total other expense increased $2.0 million, or 35.8 percent, from the comparable three months ended September 30, 2011. This was primarily attributable to the recording of $177,000 prepayment fee and $835,000 termination fee in repurchase agreement and $472,000 in acquisition cost, and increases in salaries and employee benefits of $345,000, occupancy and equipment of $26,000, marketing and advertising of $34,000, computer expense of $66,000 primarily due to additional charges of approximately $44,000 in connection with maintaining Saddle River until conversion, and other real estate owned of $65,000 partially offset by decreases in FDIC insurance expense of $36,000 and professional and consulting of $42,000. For the nine months ended September 30, 2012, total other expense increased $1.8 million, or 10.4 percent from the same period in 2011.

Salaries and employee benefits expense for the quarter ended September 30, 2012 increased $345,000 or 12.1 percent over the comparable period in the prior year. For the nine months ended September 30, 2012, salaries and employee benefits expense increased $748,000, or 8.7 percent. These increases were primarily due to additions to staff including the Saddle River Valley Bank acquisition and Englewood New Jersey branch, merit increases and higher benefit costs. Full-time equivalent staffing levels were 174 at September 30, 2012 and 161 at September 30, 2011, in part reflecting the hiring of nine persons formerly employed by Saddle River Valley Bank.

Occupancy and equipment expense for the quarter ended September 30, 2012 increased $26,000, or 3.6 percent, from the comparable three-month period in 2011. The increase for the quarter was primarily attributable to higher rent expense of $41,000 and real estate taxes of $11,000. These increases were partially offset by a decrease of $16,000 in utility expense, $3,000 in building expense and $5,000 in depreciation expense. For the nine months ended September 30, 2012, occupancy and equipment expense decreased $201,000, or 8.9 percent from the same period last year. The decrease was primarily attributable to reductions of $134,000 in repair and maintenance, $59,000 in depreciation expense, $14,000 in rent expense, $13,000 in utility expense, and $14,000 in insurance related to occupancy. These decreases were partially offset by an increase of $36,000 in real estate taxes due to a real estate tax appeal benefit recognized in 2011. For the three and nine months ended September 30, 2012, occupancy expense related to Saddle River increased $45,000.

FDIC insurance expense decreased $36,000, or 11.0 percent, for the three months ended September 30, 2012 compared to the same period in 2011. For the nine months ended September 30, 2012, FDIC insurance

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expense decreased $523,000 compared to the same period in 2011. The decreases were caused by a new assessment formula which resulted in a more favorable rating category for the Corporation.

Professional and consulting expense for the three months ended September 30, 2012 decreased $42,000 or 13.2 percent compared to the comparable quarter of 2011. For the nine months ended September 30, 2012, professional and consulting expense increased $12,000, or 1.5 percent, from the comparable period in 2011, reflecting higher expenses related to enterprise risk management implementation.

All other expense for the three months ended September 30, 2012 increased $40,000, or 4.4 percent, compared to the same quarter of 2011. For the nine months ended September 30, 2012, all other expense decreased $10,000, or 0.4 percent compared to the same period in 2011.

Provision for Income Taxes

For the nine months ended September 30, 2012, income tax expense amounted to $6.0 million compared with $5.5 million of income tax expense for the comparable period in 2011. The effective tax rates for the respective nine-month periods ended September 30, 2012 and 2011 were 31.5 percent and 34.9 percent, respectively. The lower effective tax rate reflects non-taxable bargain gain of $899,000 on the acquisition.

Recent Accounting Pronouncements

Note 4 of the Notes to Consolidated Financial Statements discusses the expected impact of accounting pronouncements recently issued or proposed but not yet required to be adopted.

Asset and Liability Management

Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation’s statement of condition is planned and monitored by the Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring the components of the statement of condition and the interaction of interest rates.

Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different than that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different than that of an earning asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest-sensitive assets and interest-sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending in part on management’s judgment as to projected interest rate trends.

The Corporation’s interest rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (“RSA”) and rate sensitive liabilities (“RSL”). For example, a short-funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset-sensitive position and a ratio less than 1 indicates a liability-sensitive position.

A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive

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gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.

At September 30, 2012, the Corporation reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.79:1.00 at the cumulative one-year position. Based on management’s perception of interest rates remaining low through 2012, emphasis has been, and is expected to continue to be, placed on controlling liability costs while extending the maturities of liabilities in order to insulate the net interest spread from rising interest rates in the future. However, no assurance can be given that this objective will be met.

Estimates of Fair Value

The estimation of fair value is significant to a number of the Corporation’s assets, including loans held for sale and investment securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Corporation’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

The liquidity position of the Corporation is dependent primarily on successful management of the Bank’s assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers’ requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit inflows, can satisfy such needs. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner.

Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. Under its liquidity risk management program, the Corporation regularly monitors correspondent bank funding exposure and credit exposure in accordance with guidelines issued by the banking regulatory authorities. Management uses a variety of potential funding sources and staggering maturities to reduce the risk of potential funding pressure. Management also maintains a detailed contingency funding plan designed to respond adequately to situations which could lead to stresses on liquidity. Management believes that the Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable investment securities, the Corporation also maintains borrowing capacity through the Federal Reserve Bank Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities.

The Corporation’s primary sources of short-term liquidity consist of cash and cash equivalents and unpledged investment securities available-for-sale.

At September 30, 2012, the Parent Corporation had $680,000 in cash and short-term investments compared to $2.0 million at December 31, 2011. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation presently has adequate liquidity to fund its obligations.

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Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of September 30, 2012, the Corporation was in compliance with all covenants and provisions of these agreements.

Deposits

Total deposits increased to $1.29 billion at September 30, 2012 from $1.12 billion at December 31, 2011. Total non interest-bearing deposits increased from $167.2 million at December 31, 2011 to $192.3 million at September 30, 2012, an increase of $25.2 million ($6.6 million acquired from Saddle River Valley Bank) or 15.0 percent. Interest-bearing demand, savings and time deposits under $100,000 increased $170.0 million ($58.5 million acquired from Saddle River Valley Bank) to a total of $986.3 million at September 30, 2012 as compared to $816.3 million at December 31, 2011. Time deposits $100,000 and over decreased $23.6 million ($16.0 million acquired from Saddle River Valley Bank) as compared to year-end 2011 primarily due to an outflow of municipal certificates of deposit. Time deposits $100,000 and over represented 8.8 percent of total deposits at September 30, 2012 compared to 12.3 percent at December 31, 2011.

Core Deposits

The Corporation derives a significant proportion of its liquidity from its core deposit base. Total demand deposits, savings and money market accounts of $1.12 billion at September 30, 2012 increased by $187.0 million, or 20.0 percent, from December 31, 2011. At September 30, 2012, total demand deposits, savings and money market accounts were 86.8 percent of total deposits compared to 83.4 percent at year-end 2011. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally, which calculation consists of total demand, savings accounts and money market accounts (excluding money market accounts greater than $100,000 and time deposits) as a percentage of total deposits. This number increased by $168.2 million, or 25.2 percent, from $668.2 million at December 31, 2011 to $836.3 million at September 30, 2012 and represented 64.7 percent of total deposits at September 30, 2012 as compared with 59.6 percent at December 31, 2011. The Corporation acquired approximately $85.2 million in total deposits including $69.1 million certificate of deposits greater than $100,000 from Saddle River Valley Bank.

The Corporation continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. Management believes that the emphasis on serving the needs of our communities will provide a long term relationship base that will allow the Corporation to efficiently compete for business in its market. The success of this strategy is reflected in the growth of the demand, savings and money market balances during the third quarter of 2012.

The following table depicts the Corporation’s core deposit mix at September 30, 2012 and December 31, 2011 based on the Corporation’s alternative calculation:


	September 30, 2012					December 31, 2011					Dollar Change 2012 vs. 2011
	Amount		Percentage			Amount		Percentage			Dollar Change 2012 vs. 2011
	(dollars in thousands)
Non interest-bearing demand	$	192,321		23.0	%	$	167,164		25.0	%	$	25,157
Interest-bearing demand		222,660		26.6			215,523		32.3			7,137
Regular savings		116,775		14.0			135,703		20.3			(18,928	)
Money market deposits under $100		304,557		36.4			149,760		22.4			154,797
Total core deposits	$	836,313		100.0	%	$	668,150		100.0	%	$	168,163
Total deposits	$	1,293,013				$	1,121,415				$	171,598
Core deposits to total deposits				64.7	%				59.6	%

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Borrowings

Short-Term Borrowings


	September 30, 2012
	(dollars in thousands)
Average interest rate:
At quarter end		6.00	%
For the quarter		0.80	%
Average amount outstanding during the quarter	$	150
Maximum amount outstanding at any month end in the quarter	$	5,050
Amount outstanding at quarter end	$	50

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $146.0 million at September 30, 2012 and $161.0 million at December 31, 2011, and mature within one to eight years. The FHLB advances are secured by pledges of certain collateral, including but not limited to U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans. At September 30, 2012, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.45 percent and 5.90 percent, respectively.

Subordinated Debentures

On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and reprices quarterly. The rate at September 30, 2012 was 3.30 percent. The capital securities qualify as Tier 1 capital for regulatory capital purposes.

Cash Flows

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents resulting from the Corporation’s operating, investing and financing activities. During the nine months ended September 30, 2012, cash and cash equivalents decreased by $9.0 million over the balance at December 31, 2011. Net cash of $14.1 million was provided by operating activities, primarily, net income as adjusted to net cash. Net income of $13.0 million was adjusted principally by net gains on sales of investment securities of $2.5 million, amortization of premiums and accretion of discounts on investment securities net of $3.5 million, a decrease in prepaid FDIC insurance assessments of $777,000, an increase in other assets of $2.0 million and an increase in other liabilities of $890,000. Net cash used in investing activities amounted to approximately $92.4 million, primarily reflecting a net increase in loans of $62.2 million, a net increase in investment securities of $26.4 million, cash and cash equivalent acquired from Saddle River Valley Bank of $6.2 million, and cash consideration paid in acquisition of $10.3 million. Net cash of $69.3 million was provided by financing activities, primarily from the increase in deposits of $86.4 million offset in part by prepayment of long-term borrowings of $15.0 million and the funding of dividends.

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Stockholders’ Equity

Total stockholders’ equity amounted to $157.2 million, or 9.75 percent of total assets, at September 30, 2012, compared to $135.9 million or 9.49 percent of total assets at December 31, 2011. Book value per common share was $8.93 at September 30, 2012, compared to $7.63 at December 31, 2011. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $7.90 at September 30, 2012, compared to $6.60 at December 31, 2011.

Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders’ equity (or tangible book value) calculated on a per common share basis. The Corporation believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporation’s book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of September 30, 2012 and December 31, 2011.


	September 30, 2012		December 31, 2011
	(in thousands, except for share data)
Stockholders’ equity	$	157,185	$	135,916
Less: Preferred stock		11,250		11,250
Less: Goodwill and other intangible assets		16,868		16,902
Tangible common stockholders’ equity	$	129,067	$	107,764
Book value per common share	$	8.93	$	7.63
Less: Goodwill and other intangible assets		1.03		1.03
Tangible book value per common share	$	7.90	$	6.60

On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the U.S. Treasury (the “Treasury”) under the Small Business Lending Fund Program (“SBLF Program”). Under the Securities Purchase Agreement, the Corporation issued to the Treasury a total of 11,250 shares of the Corporation’s Senior Non-Cumulative Perpetual Preferred Stock, Series B, having a liquidation value of $1,000 per share. Simultaneously, using the proceeds from the issuance of the SBLF Preferred Stock, the Corporation redeemed from the Treasury, all 10,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation amount $1,000 per share, for a redemption price of $10,041,667, including accrued but unpaid dividends up to the date of redemption. The investment in the SBLF program provided the Corporation with approximately $1.25 million additional Tier 1 capital. The capital that the Corporation received under the program will allow it to continue to serve small business clients through the commercial lending program.

On December 7, 2011, the Corporation repurchased the warrants issued on January 12, 2009 to the Treasury as part of its participation in the U.S. Treasury’s TARP Capital Purchase Program. In the repurchase, the Corporation paid the Treasury $245,000 for the warrants.

During the three and nine months ended September 30, 2012, the Corporation had no purchases of common stock associated with its stock buyback programs. At September 30, 2012, there were 652,868 shares available for repurchase under the Corporation’s stock buyback programs.

Regulatory Capital and Capital Adequacy

The maintenance of a solid capital foundation is a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The Corporation’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.

The Corporation and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.

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The following is a summary of regulatory capital amounts and ratios as of September 30, 2012 for the Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.


	Center Bancorp, Inc.					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
At September 30, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
Tier 1 leverage capital	$	140,217		8.96	%	$	62,597		4.00	%		N/A		N/A
Tier 1 risk-based capital		140,217		11.40	%		49,199		4.00	%		N/A		N/A
Total risk-based capital		150,667		12.25	%		98,395		8.00	%		N/A		N/A


	Union Center National Bank					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
At September 30, 2012	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
Tier 1 leverage capital	$	139,642		8.93	%	$	62,550		4.00	%	$	78,187		5.00	%
Tier 1 risk-based capital		139,642		11.36	%		49,170		4.00	%		73,755		6.00	%
Total risk-based capital		150,127		12.21	%		98,363		8.00	%		122,954		10.00	%

N/A — not applicable

The Office of the Comptroller of the Currency (“OCC”) had established higher minimum capital ratios for the Bank effective as of December 31, 2009; however, those higher capital ratios were removed during the second quarter of 2012. As of September 30, 2012, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which they are subject.

Basel III

The Basel Committee on Banking Supervision (the “Basel Committee”) provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

The Basel Committee released a comprehensive list of proposals for changes to capital, leverage, and liquidity requirements for banks in December 2009 (commonly referred to as “Basel III”). In July 2010, the Basel Committee announced the design for its capital and liquidity reform proposals and in September 2010, the oversight body of the Basel Committee announced minimum capital ratios and transition periods.

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Union Center National Bank. As of the date of this filing, final regulations have not been issued.

For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

•

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

•

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

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•

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

•

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

•

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

•

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

•

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

•

For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.

The Basel III provisions on liquidity include complex criteria establishing the LCR (liquidity coverage ratio) and NSFR (net stable funding ratio). Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.

Looking Forward

One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:

The financial marketplace is rapidly changing and currently is in flux. The Treasury and banking regulators have implemented, and may continue to implement, a number of programs under new legislation to address capital and liquidity issues in the banking system. In addition, new financial system reform legislation may affect banks’ abilities to compete in the marketplace. It is difficult to assess whether these programs and actions will have short-term and/or long-term positive effects.

Banks are not the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.

Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations can be mitigated by appropriate asset/liability management strategies, significant changes in interest rates can have a material adverse impact on profitability.

The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses when the Board determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.

Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is

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approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.

This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect the Corporation’s earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation’s net interest income and capital, while structuring the Corporation’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities and has been focusing its efforts on increasing the Corporation’s yield-cost spread through wholesale and retail growth opportunities.

The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation’s exposure to differential changes in interest rates between assets and liabilities is the Corporation’s analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts.

The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over multiple-year time horizons enables management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on a ramped rise and fall in interest rates based on a parallel yield curve shift over a twelve month time horizon and then maintained at those levels over the remainder of the model time horizon, which provides a rate shock to the two-year period and beyond. The model is based on the actual maturity and repricing characteristics of interest rate-sensitive assets and liabilities. The model incorporates assumptions regarding earning asset and deposit growth, prepayments, interest rates and other factors.

Management believes that both individually and taken together, these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturities or payment schedules.

Based on the results of the interest simulation model as of September 30, 2012, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 1.42 percent in net interest income if interest rates increased by 200 basis points from current rates in a gradual and parallel rate ramp over a twelve month period. These results and other analyses indicate to management that the Corporation’s net interest income is presently minimally sensitive to rising interest rates.

Based on management’s perception that financial markets will continue to be volatile, interest rates that are projected to continue at low levels will generate increased downward repricing of earning assets. Emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with an overall objective of improving the net interest spread and margin over the next twelve months. However, no assurance can be given that this objective will be met.

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Equity Price Risk

The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $635,000 and $535,000 at September 30, 2012 and December 31, 2011, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three and nine months ended September 30, 2012 and 2011, the Corporation recorded no other-than-temporary impairment charges on its equity security holdings.

Item 4. Controls and Procedures

Disclosure controls and procedures. As of the end of the Corporation’s most recently completed fiscal quarter covered by this report, the Corporation carried out an evaluation, with the participation of the Corporation’s management, including the Corporation’s chief executive officer and chief financial officer, of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Corporation’s chief executive officer and chief financial officer concluded that the Corporation’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and are operating in an effective manner and that such information is accumulated and communicated to management, including the Corporation’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting: There have been no changes in the Corporation’s internal controls over financial reporting that occurred during the Corporation’s last fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

There are no significant pending legal proceedings involving the Corporation other than those arising out of routine operations. Based upon the information currently available, it is the opinion of management that the disposition or ultimate determination of such other claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Corporation. This statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including the uncertainties arising in proving facts within the context of the legal processes.

Item 6. Exhibits


Exhibit No.		Description
31.1		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Chief Financial Officer of the Parent Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**		Definition Taxonomy Extension Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

* =

Furnished and not filed.

** =

Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.

CENTER BANCORP, INC.
(Registrant)

By:

/s/ Anthony C. Weagley

Anthony C. Weagley
President and Chief Executive Officer

By:

/s/ Vincent N. Tozzi

Vincent N. Tozzi
Vice President, Treasurer and
Chief Financial Officer

Date: November 15, 2012

ConnectOne Bancorp, Inc. - Quarter Report: 2012 September (Form 10-Q)

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

FORM 10-Q

Commission File Number: 000-11486

CENTER BANCORP, INC.

2455 Morris Avenue Union, New Jersey 07083-0007

(908) 688-9500

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

Note 2. Earnings per Common Share

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation – (continued)

Note 4. Recent Accounting Pronouncements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Recent Accounting Pronouncements – (continued)

Note 5. Business Combinations

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Business Combinations – (continued)

Fair Value of Measurement of Assets Acquired and Liabilities Assumed

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Business Combinations – (continued)

Note 6. Comprehensive Income

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Comprehensive Income – (continued)

Note 7. Investment Securities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

Temporarily Impaired Investments

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities – (continued)

Note 8. Loans and the Allowance for Loan Losses

Impaired Loans

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Loans Modified in a Troubled Debt Restructuring

Reserve for Credit Losses

Allowance for Loan Losses

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Reserve for Unfunded Commitments

Risk Related to Representation and Warranty Provisions

Composition of Loan Portfolio

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Loans Receivable on Non-Accrual Status

Credit Quality Indicators

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Credit Quality Indicators

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Aging Analysis

Allowance for loan and lease losses

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2455 Morris Avenue
Union, New Jersey 07083-0007

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

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

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

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

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

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

Net Interest Income
(tax-equivalent basis)