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ConnectOne Bancorp, Inc. 10-Q 2012

  

  

 

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 March 31, 2012

OR

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

For the transition period from  to 

Commission File Number: 000-11486



 

CENTER BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 
New Jersey   52-1273725
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)

2455 Morris Avenue
Union, New Jersey 07083-0007

(Address of Principal Executive Offices) (Zip Code)

(908) 688-9500

(Registrant’s Telephone Number, Including Area Code)



 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

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

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:   16,333,195 shares
(Title of Class)   (Outstanding as of April 30, 2012)
 

 


 
 

TABLE OF CONTENTS

Table of Contents

 
  Page
PART I — FINANCIAL INFORMATION     1  

Item 1.

Financial Statements

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

Item 2.

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

    38  

Item 3.

Qualitative and Quantitative Disclosures about Market Risks

    57  

Item 4.

Controls and Procedures

    58  
PART II — OTHER INFORMATION
        

Item 1.

Legal Proceedings

    59  

Item 6.

Exhibits

    59  
SIGNATURES     60  

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PART I — FINANCIAL INFORMATION

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

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TABLE OF CONTENTS

Item 1. Financial Statements

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

   
(in thousands, except for share data)   March 31,
2012
  December 31,
2011
ASSETS
                 
Cash and due from banks   $ 78,207     $ 111,101  
Investment securities:
                 
Available for sale     454,994       414,507  
Held to maturity (fair value of $72,403 and $74,922)     69,610       72,233  
Loans     790,622       756,010  
Less: Allowance for loan losses     9,754       9,602  
Net loans     780,868       746,408  
Restricted investment in bank stocks, at cost     9,233       9,233  
Premises and equipment, net     12,266       12,327  
Accrued interest receivable     5,964       6,219  
Bank-owned life insurance     29,194       28,943  
Goodwill and other intangible assets     16,889       16,902  
Prepaid FDIC assessments     1,644       1,884  
Other real estate owned     558       591  
Due from brokers for investment securities     5,823        
Other assets     11,345       12,390  
Total assets   $ 1,476,595     $ 1,432,738  
LIABILITIES
                 
Deposits:
                 
Non-interest bearing   $ 172,342     $ 167,164  
Interest-bearing:
                 
Time deposits $100 and over     113,256       137,998  
Interest-bearing transaction, savings and time deposits less than $100     867,875       816,253  
Total deposits     1,153,473       1,121,415  
Long-term borrowings     161,000       161,000  
Subordinated debentures     5,155       5,155  
Due to brokers for investment securities     3,968        
Accounts payable and accrued liabilities     10,918       9,252  
Total liabilities     1,334,514       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 March 31, 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 March 31, 2012 and December 31, 2011; outstanding 16,332,327 shares at March 31, 2012 and December 31, 2011
    110,056       110,056  
Additional paid-in capital     4,722       4,715  
Retained earnings     36,293       32,695  
Treasury stock, at cost (2,145,085 common shares at March 31, 2012 and December 31, 2011)     (17,354 )      (17,354 ) 
Accumulated other comprehensive loss     (2,886 )      (5,446 ) 
Total stockholders’ equity     142,081       135,916  
Total liabilities and stockholders’ equity   $ 1,476,595     $ 1,432,738  

 
 
See accompanying notes to unaudited consolidated financial statements.

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TABLE OF CONTENTS

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

   
  Three Months Ended
March 31,
(in thousands, except for share and per share data)   2012   2011
Interest income
                 
Interest and fees on loans   $ 9,385     $ 9,217  
Interest and dividends on investment securities:
                 
Taxable     3,088       3,378  
Tax-exempt     773       88  
Dividends     149       184  
Total interest income     13,395       12,867  
Interest expense
                 
Interest on certificates of deposit $100 or more     252       265  
Interest on other deposits     1,156       1,002  
Interest on borrowings     1,642       1,655  
Total interest expense     3,050       2,922  
Net interest income     10,345       9,945  
Provision for loan losses     107       878  
Net interest income after provision for loan losses     10,238       9,067  
Other income
                 
Service charges, commissions and fees     446       449  
Annuities and insurance commissions     44       6  
Bank-owned life insurance     251       260  
Loan related fees     236       87  
Other     41       29  
Other-than-temporary impairment losses on investment securities     (58 )      (95 ) 
Net other-than-temporary impairment losses on investment securities     (58 )      (95 ) 
Net gains on sale of investment securities     995       861  
Net investment securities gains     937       766  
Total other income     1,955       1,597  
Other expense
                 
Salaries and employee benefits     3,118       2,867  
Occupancy and equipment     700       866  
FDIC insurance     299       528  
Professional and consulting     246       241  
Stationery and printing     84       101  
Marketing and advertising     31       21  
Computer expense     353       339  
Other real estate owned, net     62       (1 ) 
All other     914       973  
Total other expense     5,807       5,935  
Income before income tax expense     6,386       4,729  
Income tax expense     2,155       1,711  
Net Income     4,231       3,018  
Preferred stock dividends and accretion     141       146  
Net income available to common stockholders   $ 4,090     $ 2,872  
Earnings per common share
                 
Basic   $ 0.25     $ 0.18  
Diluted   $ 0.25     $ 0.18  
Weighted Average Common Shares Outstanding
                 
Basic     16,332,327       16,290,391  
Diluted     16,338,162       16,300,604  
Dividend paid per common share   $ 0.03     $ 0.03  

 
 
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
March 31,
(in thousands)   2012   2011
Net income   $ 4,231     $ 3,018  
Other comprehensive income:
                 
Unrealized gains and losses on securities available-for-sale
                 
Gains arising during the period, net of tax     3,507       2,060  
Reclassification adjustment on OTTI losses included in income     58       95  
Reclassification adjustment for net gains arising during the period     (995 )      (861 ) 
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities     (10 )       
Net unrealized gains on investment securities     2,560       1,294  
Change in minimum pension liability           (85 ) 
Total other comprehensive income (see Note 6)     2,560       1,209  
Total comprehensive income   $ 6,791     $ 4,227  

 
 
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 data)   Preferred
Stock
  Common
Stock
  Additional
Paid In
Capital
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comprehensive
Loss
  Total
Stockholders’
Equity
Balance – December 31, 2010   $ 9,700     $ 110,056     $ 4,941     $ 21,633     $ (17,698 )    $ (7,675 )    $ 120,957  
Net income                                3,018                         3,018  
Other comprehensive income, net of tax and reclassification adjustment                                                  1,209       1,209  
Accretion of discount on preferred stock     21                         (21 )                         
Issuance cost of common stock                                (1 )                        (1 ) 
Cash dividend on series A preferred stock                                (125 )                        (125 ) 
Cash dividends declared on common stock ($0.03 per share)                                (489 )                        (489 ) 
Stock issued for options exercise                                         7                7  
Stock-based compensation expense                       8                                  8  
Balance – March 31, 2011   $ 9,721     $ 110,056     $ 4,949     $ 24,015     $ (17,691 )    $ (6,466 )    $ 124,584  
Balance – December 31, 2011   $ 11,250     $ 110,056     $ 4,715     $ 32,695     $ (17,354 )    $ (5,446 )    $ 135,916  
Net income                                4,231                         4,231  
Other comprehensive income, net of tax and reclassification adjustment                                                  2,560       2,560  
Dividend on series B preferred stock                                (141 )                        (141 ) 
Issuance cost of common stock                                (2 )                        (2 ) 
Cash dividends declared on common stock ($0.03 per share)                                (490 )                        (490 ) 
Stock-based compensation expense                       7                                  7  
Balance – March 31, 2012   $ 11,250     $ 110,056     $ 4,722     $ 36,293     $ (17,354 )    $ (2,886 )    $ 142,081  

 
 
See accompanying notes to unaudited consolidated financial statements.

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

   
  Three Months Ended
March 31,
(in thousands)   2012   2011
Cash flows from operating activities:
                 
Net income   $ 4,231     $ 3,018  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Amortization of premiums and accretion of discounts on investment securities, net     1,211       1,056  
Depreciation and amortization     210       241  
Stock-based compensation     7       8  
Provision for loan losses     107       878  
Net other-than-temporary impairment losses on investment securities     58       95  
Gains on sales of investment securities, net     (995 )      (861 ) 
Loans originated for resale     (6,437 )      (2,449 ) 
Proceeds from sale of loans held for sale     5,558       2,481  
Gains on sale of loans held for sale     (126 )      (32 ) 
Decrease (increase) in accrued interest receivable     255       (622 ) 
Decrease in prepaid FDIC insurance assessments     240       473  
Increase in cash surrender value of bank-owned life insurance     (251 )      (260 ) 
(Increase) decrease in other assets     (647 )      349  
Increase in other liabilities     1,700       418  
Net cash provided by operating activities     5,121       4,793  
Cash flows from investing activities:
                 
Investment securities available-for-sale:
                 
Purchases     (88,332 )      (109,956 ) 
Sales     41,513       76,551  
Maturities, calls and principal repayments     8,658       20,867  
Investment securities held-to-maturity:
                 
Purchases     (4,844 )       
Maturities and principal repayments     7,288        
Net redemption of restricted investment in bank stocks           450  
Net increase in loans     (33,562 )      (7,806 ) 
Purchases of premises and equipment     (136 )      (35 ) 
Net cash used in investing activities     (69,415 )      (19,929 ) 
Cash flows from financing activities:
                 
Net increase in deposits     32,058       74,314  
Net decrease in short-term borrowings           (5,938 ) 
Repayments of long-term borrowings           (10,000 ) 
Cash dividends on preferred stock     (166 )      (125 ) 
Cash dividends on common stock     (490 )      (489 ) 
Issuance cost of common stock     (2 )      (1 ) 
Proceeds from exercise of stock options           7  
Net cash provided by financing activities     31,400       57,768  
Net change in cash and cash equivalents     (32,894 )      42,632  
Cash and cash equivalents at beginning of period     111,101       37,497  
Cash and cash equivalents at end of period   $ 78,207     $ 80,129  
Supplemental disclosures of cash flow information:
                 
Cash payments for:
                 
Interest paid on deposits and borrowings   $ 3,097     $ 3,006  
Supplemental disclosures of non-cash investing activities:
                 
Trade date accounting settlements for investments, net   $ 1,855     $ 17,892  

 
 
See accompanying notes to unaudited consolidated financial statements.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

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

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

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

Note 2. Earnings per Common Share

Basic earnings per common share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Corporation’s weighted average common shares outstanding for diluted EPS include the effect of stock options and warrants outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. There were 79,343 and 102,806 antidilutive stock options shares outstanding for the three months ended March 31, 2012 and March 31, 2011, respectively.

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

   
  Three Months Ended
March 31,
(in thousands, except per share amounts)   2012   2011
Net income   $ 4,231     $ 3,018  
Preferred stock dividends and accretion     (141 )      (146 ) 
Net income available to common shareholders   $ 4,090     $ 2,872  
Basic weighted average common shares outstanding     16,332       16,290  
Plus: effect of dilutive options and warrants     6       11  
Diluted weighted average common shares outstanding     16,338       16,301  
Earnings per common share:
                 
Basic   $ 0.25     $ 0.18  
Diluted   $ 0.25     $ 0.18  

Note 3. Stock-Based Compensation

The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock option plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 394,417 shares are available for grant and issuance as of March 31, 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 March 31, 2012 and are authorized for issuance. Such shares may be treasury shares, newly issued shares or a combination thereof.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation  – (continued)

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

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

For the three months ended March 31, 2012, the Corporation’s income before income taxes and net income were reduced by $7,000 and $4,000, respectively, as a result of the compensation expense related to stock options. For the three months ended March 31, 2011, the Corporation’s income before income taxes and net income were reduced by $8,000 and $5,000, respectively, as a result of the compensation expense related to stock options.

Under the principal option plans, the Corporation may also grant restricted stock awards to certain employees. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The Corporation expenses the cost of restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. There were no restricted stock awards outstanding at March 31, 2012 or March 31, 2011.

There were 27,784 and 30,564 shares of common stock underlying granted options for the three months ended March 31, 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:

   
  Three Months Ended
March 31,
     2012   2011
Weighted average fair value of grants   $ 2.03     $ 1.89  
Risk-free interest rate     2.03 %      2.19 % 
Dividend yield     1.24 %      1.32 % 
Expected volatility     22.04 %      22.25 % 
Expected life in months     68       65  

Activity under the principal option plans as of March 31, 2012 and changes during the three months ended March 31, 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                    
Outstanding at March 31, 2012     199,162       9.96       6.27     $ 146,074  
Exercisable at March 31, 2012     130,574     $ 10.42       4.87     $ 80,894  

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation  – (continued)

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the first 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 March 31, 2012. This amount changes based on the fair value of the Corporation’s stock.

As of March 31, 2012, there was approximately $102,000 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 May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets; ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks; this exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for the Corporation’s interim reporting period beginning on or after December 15, 2011. The adoption of ASU No. 2011-04 had no impact on the Corporation’s statements of income or statements of condition. See Note 8 to the Corporation’s consolidated financial statements for the enhanced disclosures required by ASU No. 2011-04.

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Recent Accounting Pronouncements  – (continued)

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 is expected to result in presentation changes to the Corporation’s statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 had no impact on the Corporation’s statements of condition.

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

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

Note 5. Loans and the Allowance for Loan Losses

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

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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

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

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

Impaired Loans

The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective 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 all non-homogeneous loans in each instance above an established dollar threshold of $200,000 for impairment internally classified as substandard or below. Smaller impaired non-homogeneous loans and impaired homogeneous loans are not measured for specific reserves and are covered under the Corporation’s general reserve.

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

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

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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.

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.

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

Composition of Loan Portfolio

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

   
  March 31,
2012
  December 31,
2011
     (Dollars in Thousands)
Commercial and industrial   $ 171,630     $ 146,711  
Commercial real estate     425,855       408,164  
Construction     34,093       39,388  
Residential mortgage     158,600       160,771  
Installment     385       959  
Subtotal     790,563       755,993  
Net deferred loan costs     59       17  
Total loans   $ 790,622     $ 756,010  

At March 31, 2012 and December 31, 2011, loans to executive officers and directors aggregated approximately $20,053,000 and $10,279,000, respectively. During the quarter ended March 31, 2012, the Corporation made new loans to executive officers and directors in the amount of $5,000; payments by such persons during 2012 aggregated $141,000. On March 30, 2012, the Corporation appointed Frederick S. Fish to the Board of Directors. Mr. Fish had a prior lending relationship with the Bank, and as of March 31, 2012, total loans to Mr. Fish were approximately $9,910,000.

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

At March 31, 2012 and December 31, 2011, loan balances of approximately $495.8 million and $469.5 million, respectively, were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances.

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

Loans Receivable on Non-Accrual Status

   
  March 31, 2012   December 31, 2011
     (Dollars in Thousands)
Commercial and industrial   $ 245     $ 125  
Commercial real estate     408       225  
Construction     3,044       3,044  
Residential mortgage     3,428       3,477  
Total loans receivable on non-accrual status   $ 7,125     $ 6,871  

The amount of interest income that would have been recorded on non-accrual loans during the three months ended March 31, 2012 and the year ended December 31, 2011, had payments remained in accordance with the original contractual terms, was $61,000 and $378,000, respectively.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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 March 31, 2012 and December 31, 2011:

Credit Quality Indicators

         
  March 31, 2012
(Dollars in Thousands)
     Pass   Special
Mention
  Substandard   Doubtful   Total
Commercial and industrial   $ 167,539     $ 2,568     $ 1,523     $     —     $ 171,630  
Commercial real estate     397,528       15,810       12,517             425,855  
Construction     31,049             3,044             34,093  
Residential mortgage     151,708       393       6,499             158,600  
Installment     385                         385  
Total loans   $ 748,209     $ 18,771     $ 23,583     $     $ 790,563  

Credit Quality Indicators

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

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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

         
  March 31, 2012
(Dollars in Thousands)
No Related Allowance Recorded   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
Commercial real estate   $ 2,100     $ 2,549           $—     $ 2,105           $30  
Total   $ 2,100     $ 2,549     $     $ 2,105     $ 30  

         
With An Allowance Recorded   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
Commercial real estate   $ 4,180     $ 4,180     $ 549     $ 4,180     $   35  
Construction     3,044       3,584       200       3,044        
Residential mortgage     4,062       4,062       329       4,469       26  
Total   $ 11,286     $ 11,826     $ 1,078     $ 11,693     $ 61  
Total
                                            
Commercial real estate   $ 6,280     $ 6,729     $ 549     $ 6,285     $ 65  
Construction     3,044       3,584       200       3,044        
Residential mortgage     4,062       4,062       329       4,469       26  
Total (including related allowance)   $ 13,386     $ 14,375     $ 1,078     $ 13,798     $ 91  

         
  December 31, 2011
(Dollars in Thousands)
No Related Allowance Recorded   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
Commercial and industrial   $     $     $   —     $ 292     $   11  
Commercial real estate     2,121       2,570             3,390       149  
Construction                       3,156        
Total   $ 2,121     $ 2,570     $     $ 6,838     $ 160  

         
With An Allowance Recorded   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
Commercial real estate   $ 4,180     $ 4,180     $ 567     $ 4,583     $ 258  
Construction     3,044       3,584       200       3,048       18  
Residential mortgage     4,601       4,601       318       4,572       102  
Total   $ 11,825     $ 12,365     $ 1,085     $ 12,203     $ 378  
Total
                                            
Commercial and industrial   $     $     $     $ 292     $ 11  
Commercial real estate     6,301       6,750       567       7,973       407  
Construction     3,044       3,584       200       6,204       18  
Residential mortgage     4,601       4,601       318       4,572       102  
Total (including related allowance)   $ 13,946     $ 14,935     $ 1,085     $ 19,041     $ 538  

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

The Corporation defines an impaired loan as a loan for which it is probable, based on information available at the determination date, that the Corporation will not collect all amounts due under the contractual terms of the loan. At March 31, 2012, impaired loans were primarily collateral dependent, and totaled $13.4 million. Specific allowance for loan loss of $1.1 million was assigned to impaired loans of $11.3 million. Loans in the amount of $2.1 million had no specific allowance allocation. At March 31, 2011, average impaired loans were 16.7 million and related interest income recognized was $64,000.

Loans are considered to have been modified in a troubled debt restructuring when due to a borrower’s financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Included in impaired loans at March 31, 2012 are loans that are deemed troubled debt restructurings. Of these loans, $6.9 million, 79.7% of which are included in the tables above, are performing under the restructured terms and are accruing interest.

The following table provides an analysis of the aging of loans, excluding deferred fees and costs that are past due at March 31, 2012 and December 31, 2011:

Aging Analysis

             
  March 31, 2012
(Dollars in Thousands)
     30 – 59 Days
Past Due
  60 – 89 Days
Past Due
  Greater Than
90 Days
  Total
Past Due
  Current   Total
Loans
Receivable
  Loans
Receivable
> 90 Days And
Accruing
Commercial and Industrial   $ 1,441     $ 32     $ 245     $ 1,718     $ 169,912     $ 171,630     $  
Commercial Real Estate           15       1,438       1,453       424,402       425,855       1,030  
Construction                 3,044       3,044       31,049       34,093        
Residential Mortgage     2,371       48       3,460       5,879       152,721       158,600       32  
Installment     4                   4       381       385        
Total   $ 3,816     $ 95     $ 8,187     $ 12,098     $ 778,465     $ 790,563     $ 1,062  

             
  December 31, 2011
(Dollars in Thousands)
     30 – 59 Days
Past Due
  60 – 89 Days
Past Due
  Greater Than
90 Days
  Total
Past Due
  Current   Total
Loans
Receivable
  Loans
Receivable
> 90 Days And
Accruing
Commercial and Industrial   $ 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  

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TABLE OF CONTENTS

CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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

Allowance for loan and lease losses

             
  March 31, 2012
(Dollars in Thousands)
     C & I   Comm R/E   Construction   Res Mtge   Installment   Unallocated   Total
Allowance for loan and lease losses:
                                                              
Individually evaluated for impairment   $     $ 549     $ 200     $ 329     $   —     $   —     $ 1,078  
Collectively evaluated for impairment     1,784       5,327       437       905       54       169       8,676  
Total   $ 1,784     $ 5,876     $ 637     $ 1,234     $ 54     $ 169     $ 9,754  
Loans Receivable
                                                              
Individually evaluated for impairment   $ 1,021     $ 12,634     $ 3,044     $ 4,511     $     $     $ 21,210  
Collectively evaluated for impairment     170,609       413,221       31,049       154,089       385             769,353  
Total   $ 171,630     $ 425,855     $ 34,093     $ 158,600     $ 385     $     $ 790,563  

Allowance for loan and lease losses

             
  December 31, 2011
(Dollars in Thousands)
     C & I   Comm R/E   Construction   Res Mtge   Installment   Unallocated   Total
Allowance for loan and lease losses:
                                                              
Individually evaluated for impairment   $     $ 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  

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.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

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

             
  Three Months Ended March 31, 2012
(Dollars in Thousands)
     C & I   Comm R/E   Construction   Res Mtge   Installment   Unallocated   Total
Balance at January 1,   $ 1,527     $ 5,972     $ 707     $ 1,263     $   51     $   82     $ 9,602  
Charge offs                             (3 )            (3 ) 
Recoveries                       47       1             48  
Provision     257       (96 )      (70 )      (76 )      5       87       107  
Balance at March 31,   $ 1,784     $ 5,876     $ 637     $ 1,234     $ 54     $ 169     $ 9,754  

             
  Three Months Ended March 31, 2011
(Dollars in Thousands)
     C & I   Comm R/E   Construction   Res Mtge   Installment   Unallocated   Total
Balance at January 1,   $ 1,272     $ 5,715     $ 551     $ 1,038     $   52     $   239     $ 8,867  
Charge offs     (165 )                  (23 )      (3 )            (191 ) 
Recoveries     35                         2             37  
Provision     236       468       349       (63 )            (112 )      878  
Balance at March 31,   $ 1,378     $ 6,183     $ 900     $ 952     $ 51     $ 127     $ 9,591  

At March 31, 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 March 31, 2012
     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       711  
Total     2     $ 939     $ 936  

The Corporation charged off $3,000 in connection with loan modifications at the time of the modification during the three months ended March 31, 2012.

The Corporation had no loan modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2012.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Loans and the Allowance for Loan Losses  – (continued)

The Corporation adopted ASU No. 2011-02 on July 1, 2011 which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In general, a modification or restructuring of a loan constitutes a TDR if the Corporation grants a concession to a borrower experiencing financial difficulty. Loans modified in TDRs are placed on non-accrual status until the Corporation determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Loans modified in a troubled debt restructuring totaled $11.5 million at March 31, 2012 of which $4.6 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 March 31, 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 $9.8 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.

Note 6. Comprehensive Income

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

Disclosure of comprehensive income for the three months ended March 31, 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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CENTER BANCORP, INC. AND SUBSIDIARIES
  
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:

   
  Three Months Ended
March 31,
     2012   2011
     (in thousands)
Reclassification adjustment of OTTI losses included in income   $ 58     $ 95  
Unrealized holding gains on available-for-sale securities     4,966       2,921  
Reclassification adjustment for net gains arising during this period     (995 )      (861 ) 
Net unrealized gains on available-for-sale securities     4,029       2,155  
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity     (10 )       
Net unrealized gain on securities     4,019       2,155  
Tax effect     (1,459 )      (861 ) 
Net of tax amount     2,560       1,294  
Change in minimum pension liability           (142 ) 
Tax effect           57  
Net of tax amount           (85 ) 
Other comprehensive income, net of tax   $ 2,560     $ 1,209  

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

   
  March 31,
2012
  December 31,
2011
     (in thousands)
Investment securities available-for-sale, net of tax   $ 370     $ (2,196 ) 
Unamortized component of securities transferred from
available-for-sale to held-to-maturity, net of tax
    157       163  
Defined benefit pension and post-retirement plans, net of tax     (3,413 )      (3,413 ) 
Total accumulated other comprehensive loss   $ (2,886 )    $ (5,446 ) 

Note 7. Investment Securities

The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at March 31, 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.

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.

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CENTER BANCORP, INC. AND SUBSIDIARIES
  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities  – (continued)

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

       
  March 31, 2012
     Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
     (in thousands)
Investment Securities Available-for-Sale:
                                   
U.S. treasury notes   $ 5,851     $ 34     $     $ 5,885  
Federal agency obligations     25,069       168       (138 )      25,099  
Residential mortgage-backed securities     94,763       1,777       (4 )      96,536  
Commercial mortgage-backed securities     4,087             (200 )      3,887  
Obligations of U.S. states and political subdivisions     71,127       2,880       (269 )      73,738  
Trust preferred securities     20,603       43       (2,115 )      18,531  
Corporate bonds and notes     203,466       2,191       (2,358 )      203,299  
Asset-backed securities     19,392       110       (7 )      19,495  
Collateralized mortgage obligations     3,110             (1,287 )      1,823  
Equity securities     6,929       16       (244 )      6,701  
Total   $ 454,397     $ 7,219     $ (6,622 )    $ 454,994  
Investment Securities Held-to-Maturity:
                                   
Federal agency obligations   $ 4,190     $     $ (10 )    $ 4,180  
Residential mortgage-backed securities     22,376       168       (52 )      22,492  
Commercial mortgage-backed securities     4,742             (108 )      4,634  
Obligations of U.S. states and political subdivisions     38,302       2,795             41,097  
Total   $ 69,610     $ 2,963     $ (170 )    $ 72,403  
Total investment securities   $ 524,007     $ 10,182     $ (6,792 )    $ 527,397  

       
  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 &nbs