CNOB 10-Q Quarterly Report Sept. 30, 2011

CONNECTONE BANCORP, INC.

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10-Q 1 v239781_10q.htm FORM 10-Q Unassociated Document

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-11486

CENTER BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

2455 Morris Avenue

Union, New Jersey 07083-0007

(Address of Principal Executive Offices) (Zip Code)

(908) 688-9500

(Registrant’s Telephone Number, Including Area Code)

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

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

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

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

(Do not check if smaller

reporting company)

Smaller reporting company ¨

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

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

Common Stock, no par value:	16,290,700 shares
(Title of Class)	(Outstanding as of October 31, 2011)

Table of Contents

		Page

PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements
	Consolidated Statements of Condition at September 30, 2011 and December 31, 2010 (unaudited)	2
	Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)	5
	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	52

Item 4.	Controls and Procedures	53

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 1A.	Risk Factors	53

Item 6.	Exhibits	54

SIGNATURES		55

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 nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011, or for any other interim period. The Center Bancorp, Inc. 2010 Annual Report on Form 10-K, should be read in conjunction with these financial statements.

Item 1. Financial Statements

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(Unaudited)

( in thousands, except for share data)	September 30, 2011			December 31, 2010

ASSETS
Cash and due from banks	$	113,080		$	37,497
Investment securities:
Available for sale		388,858			378,080
Held to maturity (fair value of $72,371 in 2011 and $0 in 2010)		70,142			—
Loans		721,608			708,444
Less: Allowance for loan losses		9,536			8,867
Net loans		712,072			699,577
Restricted investment in bank stocks, at cost		9,194			9,596
Premises and equipment, net		12,386			12,937
Accrued interest receivable		5,616			4,134
Bank-owned life insurance		28,685			27,905
Goodwill and other intangible assets		16,915			16,959
Prepaid FDIC assessments		2,048			3,582
Other assets		17,521			17,118
Total assets	$	1,376,517		$	1,207,385

LIABILITIES
Deposits:
Non interest-bearing	$	161,340		$	144,210
Interest-bearing:
Time deposits $100 and over		141,421			119,651
Interest-bearing transaction, savings and time deposits $100 and less		757,261			596,471
Total deposits		1,060,022			860,332
Short-term borrowings		—			41,855
Long-term borrowings		161,000			171,000
Subordinated debentures		5,155			5,155
Accounts payable and accrued liabilities		16,532			8,086
Total liabilities		1,242,709			1,086,428

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, 2011 and 0 at December 31, 2010; and issued and outstanding 0 shares of Series A Preferred Stock at September 30, 2011 and 10,000 shares at December 31, 2010		11,012			9,700
Common stock, no par value, authorized 25,000,000 shares; issued 18,477,412, outstanding 16,290,700 shares at September 30, 2011 and 16,289,832 shares at December 31, 2010		110,056			110,056
Additional paid-in capital		4,968			4,941
Retained earnings		30,028			21,633
Treasury stock, at cost (2,186,712 common shares at September 30, 2011 and 2,187,580 common shares at December 31, 2010)		(17,691	)		(17,698	)
Accumulated other comprehensive loss		(4,565	)		(7,675	)
Total stockholders’ equity		133,808			120,957
Total liabilities and stockholders’ equity	$	1,376,517		$	1,207,385

See accompanying notes to consolidated financial statements.

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 data)	2011			2010			2011			2010

Interest income
Interest and fees on loans	$	8,956		$	9,378		$	27,123		$	28,165
Interest and dividends on investment securities:
Taxable		3,273			2,464			10,079			8,337
Tax-exempt		544			21			983			194
Dividends		146			172			479			499
Total interest income		12,919			12,035			38,664			37,195
Interest expense
Interest on certificates of deposit $100 or more		332			282			945			1,036
Interest on other deposits		1,059			1,213			3,133			3,712
Interest on borrowings		1,678			2,158			4,998			6,899
Total interest expense		3,069			3,653			9,076			11,647
Net interest income		9,850			8,382			29,588			25,548
Provision for loan losses		1,020			1,307			2,148			3,028
Net interest income after provision for loan losses		8,830			7,075			27,440			22,520
Other income
Service charges, commissions and fees		505			535			1,415			1,424
Annuities and insurance commissions		42			3			81			119
Bank-owned life insurance		259			429			780			957
Other		227			135			519			322
Other-than-temporary impairment losses on investment securities		(66	)		(23	)		(303	)		(8,495	)
Portion of losses recognized in other comprehensive income, before taxes		—			—			—			3,377
Net other-than-temporary impairment losses on investment securities		(66	)		(23	)		(303	)		(5,118	)
Net gains on sale of investment securities		1,316			1,056			3,120			3,464
Net investment securities gains (losses)		1,250			1,033			2,817			(1,654	)
Total other income		2,283			2,135			5,612			1,168
Other expense
Salaries and employee benefits		2,848			2,721			8,618			8,106
Occupancy and equipment		713			754			2,246			2,377
FDIC insurance		328			510			1,384			1,586
Professional and consulting		319			153			805			849
Stationery and printing		73			68			273			242
Marketing and advertising		30			36			116			234
Computer expense		300			320			989			1,001
Other real estate owned, net		—			20			(1	)		63
Loss on fixed assets, net		—			—			—			427
Repurchase agreement termination fee		—			—			—			594
All other		918			860			2,791			2,622
Total other expense		5,529			5,442			17,221			18,101
Income before income tax expense		5,584			3,768			15,831			5,587
Income tax expense		1,882			1,629			5,527			1,153
Net Income		3,702			2,139			10,304			4,434
Preferred stock dividends and accretion		145			146			436			437
Net income available to common stockholders	$	3,557		$	1,993		$	9,868		$	3,997
Earnings per common share
Basic	$	0.22		$	0.14		$	0.61		$	0.27
Diluted	$	0.22		$	0.14		$	0.61		$	0.27
Weighted Average Common Shares Outstanding
Basic		16,290,700			14,649,397			16,290,598			14,599,919
Diluted		16,313,366			14,649,397			16,310,557			14,601,478
Dividend paid per common share	$	0.03		$	0.03		$	0.09		$	0.09

See accompanying notes to consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except for share data)	Preferred Stock			Common Stock		Additional Paid In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance — December 31, 2009	$	9,619		$	97,908	$	5,650		$	17,068		$	(17,720	)	$	(10,776	)	$	101,749
Comprehensive income:
Net income										4,434									4,434
Other comprehensive income, net of tax																6,203			6,203
Total comprehensive income																			10,637
Accretion of discount on preferred stock		61								(61	)								—
Issuance cost of common stock										(4	)								(4	)
Proceeds from common stock offering (1,715,000 shares)					12,148		(758	)											11,390
Cash dividends on preferred stock										(375	)								(375	)
Cash dividends declared on common stock ($0.09 per share)										(1,312	)								(1,312	)
Restricted stock awarded (2,083 shares)							3						22						25
Taxes related to stock-based compensation							8												8
Stock-based compensation expense							39												39
Balance —September 30, 2010	$	9,680		$	110,056	$	4,942		$	19,750		$	(17,698	)	$	(4,573	)	$	122,157

Balance — December 31, 2010	$	9,700		$	110,056	$	4,941		$	21,633		$	(17,698	)	$	(7,675	)	$	120,957
Comprehensive income, net of tax:
Net income										10,304									10,304
Other comprehensive income, net of tax																3,110			3,110
Total comprehensive income																			13,414
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 dividends on preferred stock series A										(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 —September 30, 2011	$	11,012		$	110,056	$	4,968		$	30,028		$	(17,691	)	$	(4,565	)	$	133,808

See accompanying notes to consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	10,304		$	4,434
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums and accretion of discounts on investment securities, net		2,983			1,400
Depreciation and amortization		725			874
Stock-based compensation		27			39
Provision for loan losses		2,148			3,028
Provision for deferred taxes		249			193
Net other-than-temporary impairment losses on investment securities		303			5,118
Gains on sales of investment securities, net		(3,120	)		(3,464	)
Net Loans originated for resale		(200	)		—
Net loss on sales and dispositions of premises and equipment		—			427
(Increase) in accrued interest receivable		(1,482	)		(58	)
Decrease in prepaid FDIC insurance assessments		1,534			1,332
Increase in cash surrender value of bank-owned life insurance		(780	)		(957	)
(Increase) decrease in other assets		(3,104	)		1,949
Increase in other liabilities		5,492			10
Net cash provided by operating activities		15,079			14,325
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(341,429	)		(620,693	)
Sales		236,388			547,733
Maturities, calls and principal repayments		35,979			37,605
Investment securities held-to-maturity:
Purchases		(5,843	)		—
Maturities and principal repayments		2,375			—
Net redemption of restricted investment in bank stocks		402			417
Net decrease (increase) in loans		(14,443	)		16,474
Purchases of premises and equipment		(130	)		(266	)
Redemption of bank-owned life insurance		—			5,610
Purchase of bank-owned life insurance		—			(6,000	)
Proceeds from life insurance death benefit		—			15
Proceeds from sale of premises and equipment		—			1
Net cash used in investing activities		(86,701	)		(19,104	)
Cash flows from financing activities:
Net increase in deposits		199,690			23,197
Net decrease in short-term borrowings		(41,855	)		(9,723	)
Repayments of long-term borrowings		(10,000	)		(32,117	)
Cash dividends on preferred stock		(417	)		(375	)
Cash dividends on common stock		(1,466	)		(1,312	)
Proceeds from issuance of SBLF preferred stock		11,250			—
Redemption of preferred stock		(10,000	)		—
Proceeds from insurance of common stock from common stock offerings		—			12,148
Issuance cost of common stock from common stock offerings		—			(758	)
Issuance cost of common stock		(4	)		(4	)
Issuance cost of restricted stock award		—			25
Proceeds from exercise of stock options		7			—
Taxes related to stock based awards		—			8
Net cash provided by (used in) financing activities		147,205			(8,911	)
Net change in cash and cash equivalents		75,583			(13,690	)
Cash and cash equivalents at beginning of period		37,497			89,168
Cash and cash equivalents at end of period	$	113,080		$	75,478
Supplemental disclosures of cash flow information:
Cash payments for:
Interest paid on deposits and borrowings	$	9,192		$	12,193
Income taxes		3,529			433
Supplemental disclosures of non-cash investing activities:
Trade date accounting settlements for investments, net	$	2,999		$	22,195
Transfer of loan to other real estate owned	$	—		$	1,927
Net investment in direct financing lease	$	—		$	3,700
Transfer from investment securities available-for-sale to investment securities Held-to-maturity	$	66,833		$	—

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

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

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the 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.

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)	2011		2010		2011		2010
Net income	$	3,702	$	2,139	$	10,304	$	4,434
Preferred stock dividends and accretion		145		146		436		437
Net income available to common shareholders	$	3,557	$	1,993	$	9,868	$	3,997
Basic weighted average common shares outstanding		16,291		14,649		16,291		14,600
Plus: effect of dilutive options and warrants		22		—		20		1
Diluted weighted average common shares outstanding		16,313		14,649		16,311		14,601
Earning per common share:
Basic	$	0.22	$	0.14	$	0.61	$	0.27
Diluted	$	0.22	$	0.14	$	0.61	$	0.27

Note 3. Stock-Based Compensation

The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock option plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 394,417 shares are available for issuance. Under the 2003 Non-Employee Director Stock Option Plan, a total of 431,003 shares remain available for grant under the plan as of September 30, 2011 and are authorized for issuance. Such shares may be treasury shares, newly issued shares or a combination thereof.

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

Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718-10-10 “ 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Stock-Based Compensation—(continued)

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. For the nine months ended September 30, 2010, the Corporation’s income before income taxes and net income were reduced by $39,000 and $23,000, 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 September 30, 2011 or December 31, 2010.

There were 30,564 and 38,203 shares of common stock underlying granted options for the nine months ended September 30, 2011 and 2010, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:

	Nine Months Ended September 30,
	2011			2010
Weighted average fair value of grants	$	1.89		$	2.16
Risk-free interest rate		2.19	%		2.29	%
Dividend yield		1.32	%		1.41	%
Expected volatility		22.25	%		28.6	%
Expected life in months		65			62

Activity under the principal option plans as of September 30, 2011 and changes during the nine months ended September 30, 2011 were as follows:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		198,946		$	9.75
Granted		30,564			8.28
Exercised		(3,648	)		1.83
Forfeited/cancelled/expired		(12,857	)		11.75
Outstanding at September 30, 2011		213,005		$	9.56		5.06	$	181,091
Exercisable at September 30, 2011		147,015		$	9.89		3.52	$	118,686

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 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2011. This amount changes based on the fair value of the Corporation’s stock.

As of September 30, 2011, there was approximately $67,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 2.0 years.

Note 4. Recent Accounting Pronouncements

In January 2011, the FASB issued ASU No. 2011-01, "Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20." The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the Allowance for the period ended September 30, 2011. The amendments in this ASU defer the effective date related to these disclosures, enabling creditors to provide those disclosures after the FASB completes its project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU will have no impact on the Corporation's statements of income and condition.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 is not expected to have a material 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 is not expected to have a material impact on the Corporation’s statements of income or statements of 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 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 will have no impact on the Corporation’s statements of condition.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 — 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.

In July 2010, the FASB issued ASU No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses," which requires that the Corporation provide a greater level of disaggregated information about the credit quality of the Corporation’s loans and leases and the allowance for loan and lease losses (the "Allowance"). This ASU also requires the Corporation to disclose on a prospective basis, additional information related to credit quality indicators, non-accrual loans and leases, and past due information. The Corporation adopted the provisions of this ASU in preparing the Consolidated Financial Statements as of and for the year ended December 31, 2010. As this ASU amends only the disclosure requirements for loans and leases and the Allowance, the adoption of this ASU for the quarter and nine month period ended September 30, 2011 and the year ended December 31, 2010, respectively, had no impact on the Corporation’s statements of income and condition. The required disclosures are presented in the following tables and related discussion later in this Note.

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

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

Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired Loans

The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35 (previously SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures”). The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

The Corporation has defined its population of impaired loans to include all non-accrual and troubled debt restructuring loans. As part of the evaluation 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.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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, 2011 and December 31, 2010:

	September 30 ,		December 31 ,
	2011		2010
	(Dollars in Thousands)
Commercial and industrial	$	125,970	$	121,034
Commercial real estate		388,204		372,001
Construction		39,606		49,744
Residential mortgage		167,604		165,154
Installment		224		511
Total loans	$	721,608	$	708,444

Included in the loan balances above are net deferred loan costs of $45,000 and $258,000 at September 30, 2011 and December 31, 2010, respectively.

At September 30, 2011 and December 31, 2010, loans to executive officers and directors aggregated approximately $2,790,000 and $5,456,000, respectively. During the period ended September 30, 2011, the Corporation made no new loans to executive officers and directors; payments by such persons during 2011 aggregated $2,666,000.

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 September 30, 2011 and December 31, 2010, loan balances of approximately $322.5 million and $435.9 million, respectively, were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances.

The following table presents information about loan receivables on non-accrual status at September 30, 2011 and December 31, 2010:

Loans Receivable on Non-Accrual Status
	September 30, 2011		December 31, 2010
	(Dollars in Thousands)
Commercial and industrial	$	100	$	456
Commercial real estate		3,854		3,563
Construction		5,660		5,865
Residential mortgage		4,469		1,290
Total loans receivable on non-accrual status	$	14,083	$	11,174

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2011 and December 31, 2010:

Credit Quality Indicators
	September 30, 2011
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	122,334	$	2,181	$	1,455	$	—	$	125,970
Commercial real estate		353,977		21,214		13,013		—		388,204
Construction		33,947		—		5,659		—		39,606
Residential mortgage		159,972		—		7,632		—		167,604
Installment		224		—		—		—		224
Total loans	$	670,454	$	23,395	$	27,759	$	—	$	721,608

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

The following table provides an analysis of the impaired loans at September 30, 2011 and December 31, 2010:

Impaired Loans
	September 30, 2011
	(Dollars in Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded:

Commercial real estate	$	1,671	$	1,992	$	—
Construction		5,234		8,642		—
Total	$	6,905	$	10,634	$	—

With An Allowance Recorded

Commercial real estate	$	7,680	$	8,600	$	935
Construction		426		426		221
Residential mortgage		4,604		4,604		262
Total	$	12,710	$	13,630	$	1,418

Total
Commercial real estate		9,351		10,592		935
Construction		5,660		9,068		221
Residential mortgage		4,604		4,604		262
Total	$	19,615	$	24,264	$	1,418

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impaired Loans
	December 31, 2010
	(Dollars in Thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded:

Commercial and industrial	$	1,364	$	1,908	$	—
Commercial real estate		3,984		4,625		—
Construction		5,865		8,642		—
Residential mortgage		1,462		1,765		—
Total	$	12,675	$	16,940	$	—

With An Allowance Recorded

Commercial real estate	$	4,180	$	4,180	$	618
Residential mortgage		1,354		1,354		21
Total	$	5,534	$	5,534	$	639

Total
Commercial and industrial	$	1,364	$	1,908	$	—
Commercial real estate		8,164		8,805		618
Construction		5,865		8,642		—
Residential mortgage		2,816		3,119		21
Total	$	18,209	$	22,474	$	639

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011				For the Year Ended December 31, 2010
	(Dollars in Thousands)
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Impaired loans with no related allowance recorded:

Commercial and industrial	$	—	$	—	$	466	$	11	$	1,933	$	87
Commercial real estate		1,444		64		3,027		148		4,274		78
Construction		5,234		—		3,395		—		6,855		112
Residential mortgage		—		—		—		—		1,711		27
Total	$	6,678	$	64	$	6,888	$	159	$	14,773	$	304

Impaired loans with an allowance recorded:

Commercial real estate	$	5,039	$	156	$	4,715	$	224	$	4,181	$	204
Construction		437		—		2,276		—		—		—
Residential mortgage		3,675		46		3,364		76		1,356		76
Total	$	9,151	$	202	$	10,355	$	300	$	5,537	$	280

Total impaired loans:

Commercial and industrial	$	—	$	—	$	466	$	11	$	1,933	$	87
Commercial real estate		6,483		220		7,742		372		8,455		282
Construction		5,671		—		5,671		—		6,855		112
Residential mortgage		3,675		46		3,364		76		3,067		103
Total	$	15,829	$	266	$	17,243	$	459	$	20,310	$	584

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2011 impaired loans were primarily collateral dependent, and totaled $19.6 million. Specific allowance for loan loss of $1.4 million was assigned to impaired loans of $12.7 million. Loans in the amount of $6.9 million had no specific allowance allocation.

Loans are considered to have been modified in a troubled debt restructuring when due to a borrower's financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower's ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Included in impaired loans at September 30, 2011 are loans that are deemed troubled debt restructurings. Of these loans, $8.9 million, 87% 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, including deferred fees and costs that are past due at September 30, 2011 and December 31, 2010:

Aging Analysis
	September 30, 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	$	1,055	$	121	$	100	$	1,276	$	124,694	$	125,970	$	—
Commercial Real Estate		1,013		—		4,305		5,318		382,886		388,204		451
Construction		—		—		5,660		5,660		33,946		39,606		—
Residential Mortgage		222		116		4,469		4,807		162,797		167,604		—
Installment		3		—		—		3		221		224		—
Total	$	2,293	$	237	$	14,534	$	17,064	$	704,544	$	721,608	$	451

	December 31, 2010
	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
Commercial and Industrial	$	1,509	$	476	$	456	$	2,441	$	118,593	$	121,034	$	—
Commercial Real Estate		4,290		2,229		3,563		10,082		361,919		372,001		—
Construction		170		449		5,865		6,484		43,260		49,744		—
Residential Mortgage		1,814		309		2,004		4,127		161,027		165,154		714
Installment		9		—		—		9		502		511		—
Total	$	7,792	$	3,463	$	11,888	$	23,143	$	685,301	$	708,444	$	714

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:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Allowance for loan and lease losses
	September 30, 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	$	—	$	935	$	221	$	262	$	—	$	—	$	1,418
Collectively evaluated for impairment		1,376		4,947		484		976		48		287		8,118

Total	$	1,376	$	5,882	$	705	$	1,238	$	48	$	287	$	9,536

Loans Receivable
Individually evaluated for impairment	$	1,052	$	13,187	$	5,660	$	4,604	$	—	$	—	$	24,503
Collectively evaluated for impairment		124,918		375,017		33,946		163,000		224		—		697,105
Total	$	125,970	$	388,204	$	39,606	$	167,604	$	224	$	—	$	721,608

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

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

The Corporation’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

	Three Months Ended September 30, 2011 ( Dollars in Thousands )
	C & I			Comm R/E			Construction			Res Mtge		Installment			Unallocated		Total

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended September 30, 2011 ( Dollars in thousands)
	C & I			Comm R/E			Construction			Res Mtg			Installment			Unallocated		Total

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

	Three and Nine Months Ended September 30, 2011 and 2010 ( Dollars in Thousands )
	3 months			3 months			9 months			9 months
	2011			2010			2011			2010
Balance at Beginning of Period,	$	9,836		$	8,595		$	8,867		$	8,711

Charge offs		(1,578	)		(1,135	)		(1,793	)		(2,985	)

Recoveries		258			3			314			16

Provision		1,020			1,307			2,148			3,028

Balance at September 30,	$	9,536		$	8,770		$	9,536		$	8,770

The amount of interest income that would have been recorded on non-accrual loans during the nine months ended September 30, 2011 and the year ended December 31, 2010, had payments remained in accordance with the original contractual terms, was $534,000 and $598,000, respectively.

At September 30, 2011, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status or were contractually past due in excess of 90 days and still accruing interest.

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

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

	Three Months Ended September 30, 2011								Nine Months Ended September 30, 2011
	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			1,719			1,318
Residential Mortgage		1			340			340		4			1,545			1,496
Total		1		$	340		$	340		5		$	3,264		$	2,814

The Corporation charged off $477,000 in connection with loan modifications at the time of the modification.

The Corporation had no loan modified as a TDR within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2011.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans modified in a troubled debt restructuring totaled $12.4 million at September 30, 2011 of which $3.5 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, 2010, loans modified in a troubled debt restructuring totaled $13.1 million of which $6.1 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, 2011, loans on which concessions were made with respect to adjusted repayment terms amounted to $2.3 million. Loans on which combinations of two or more concessions were made amounted to $10.1 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 nine months ended September 30, 2011, and 2010 is presented in the Consolidated Statements of Changes in Stockholders’ Equity. The table below provides a reconciliation of the components of other comprehensive income (loss) to the data provided in the Consolidated Statements of Changes in Stockholders’ Equity.

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

	Nine Months Ended September 30,
	2011			2010
	(in Thousands)
Reclassification adjustment of OTTI losses included in income	$	303		$	8,495
Unrealized gains on available-for-sale securities		8,051			5,246
Reclassification adjustment for net gains arising during this period		(3,120	)		(3,464	)
Net unrealized gains on available-for-sale securities		5,234			10,277
Unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		261			—
Net unrealized gain on securities		5,495			10,277
Tax effect		(2,300	)		(4,074	)
Net of tax amount		3,195			6,203
Change in minimum pension liability		(142	)		—
Tax effect		57			—
Net of tax amount		(85	)		—
Other comprehensive income, net of tax	$	3,110		$	6,203

Accumulated other comprehensive loss at September 30, 2011 and December 31, 2010 consisted of the following:

	September 30, 2011			December 31, 2010
	(in Thousands)
Investment securities available-for-sale, net of tax	$	(2,299	)	$	(5,327	)
Unamortized component from transfer of securities from available-for-sale to held-to-maturity, net of tax		167			—
Defined benefit pension and post-retirement plans, net of tax		(2,433	)		(2,348	)
Total accumulated other comprehensive loss	$	(4,565	)	$	(7,675	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Investment Securities

The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at September 30, 2011 and available-for-sale at December 31, 2010. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion.

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, 2011 and December 31, 2010.

	September 30, 2011
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Investment Securities Available-for-Sale:
Federal agency obligations	$	18,431	$	181	$	(13	)	$	18,599
Residential mortgage backed securities		118,604		2,008		—			120,612
Obligations of U.S. states and political subdivisions		50,722		1,885		(24	)		52,583
Trust preferred securities		24,244		58		(4,341	)		19,961
Corporate bonds and notes		171,498		1,077		(2,892	)		169,683
Collateralized mortgage obligations		3,291		—		(1,221	)		2,070
Equity securities		5,622		34		(306	)		5,350
Total	$	392,412	$	5,243	$	(8,797	)	$	388,858

Investment Securities Held-to-Maturity:
Federal agency obligations	$	32,407	$	130	$	(13	)	$	32,524
Obligations of U.S. states and political subdivisions		37,735		2,112		—			39,847
Total	$	70,142	$	2,242	$	(13	)	$	72,371

Total investment securities	$	462,554	$	7,485	$	(8,810	)	$	461,229

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 $185,000 (on a pre-tax basis of $292,000) 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. During the three months ended September 30, 2011, the Corporation reclassified at fair value approximately $30.8 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax losses of approximately $33,000 (on a pre-tax basis of $47,000) remained in accumulated other comprehensive income and will be amortized over the remaining life of the securities. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The following table presents information for investment securities available-for-sale at September 30, 2011, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

	September 30, 2011
	Amortized Cost		Fair Value
Investment Securities Available-for-Sale :	(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		75,097		74,544
Due after five years through ten years		105,628		104,820
Due after ten years		87,461		83,532
Residential mortgage-backed securities (1)		118,604		120,612
Equity securities		5,622		5,350
Total	$	392,412	$	388,858
Investment Securities Held-to-Maturity :
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		985		1,039
Due after ten years		69,157		71,332
Total	$	70,142	$	72,371

Total investment securities	$	462,554	$	461,229

(1) Debt securities without stated maturities.

For the nine months ended September 30, 2011, proceeds of available for sale 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 on investment securities sold amounted to approximately $69,000 for the period. For the nine months ended September 30, 2010, proceeds of investment securities sold amounted to approximately $547.7 million. Gross realized gains on investment securities sold amounted to approximately $4.3 million, while gross realized losses on investment securities sold amounted to approximately $804,000 for the period.

For the nine months ended September 30, 2011, the Corporation recorded other-than temporary impairment (“OTTI”) charges of approximately $18,000 and principal losses of $285,000 on a variable rate private label collateralized mortgage obligation (“CMO”). For the nine months ended September 30, 2010, the Corporation recorded OTTI charges of $1,786,000 on two pooled trust preferred securities, $332,000 on one variable rate private label CMO, and $3,000,000 on one trust preferred security.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes OTTI charges for the periods indicated.

	Nine Months Ended
	September 30,
	2011		2010
	(in thousands)
Other than temporary impairment charges

1 variable rate private label CMO	$	18	$	332
1 Trust Preferred security		—		3,000
2 Pooled trust preferred securities		—		1,786
Principal losses on a variable rate CMO		285		—
Total other-than-temporary impairment charges	$	303	$	5,118

The Corporation performs regular analysis on all its investment securities to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB

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

The Corporation’s assessment of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has

disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result from credit rating downgrades.

The following table presents detailed information for each trust preferred security held by the Corporation at September 30, 2011 which has at least one rating below investment grade.

Deal Name	Single Issuer or Pooled	Class/ Tranche	Adjusted Cost Basis		Fair Value		Gross Unrealized Gain (Loss)			Lowest Credit Rating Assigned	Number of Banks Currently Performing			Deferrals and Defaults as % of Original Collateral	Expected Deferrals/Defaults as % of Remaining Performing Collateral
	(dollars in thousands)
Countrywide Capital IV	Single	—	$	1,770	$	1,366	$	(404	)	BB+		1		None	None
Countrywide Capital V	Single	—		2,747		2,110		(637	)	BB+		1		None	None
Countrywide Capital V	Single	—		250		192		(58	)	BB+		1		None	None
NPB Capital Trust II	Single	—		868		871		3		NR		1		None	None
Citigroup Cap IX	Single	—		991		867		(124	)	BB+		1		None	None
Citigroup Cap IX	Single	—		1,903		1,674		(229	)	BB+		1		None	None
Citigroup Cap XI	Single	—		245		217		(28	)	BB+		1		None	None
BAC Capital Trust X	Single	—		2,500		1,935		(565	)	BB+		1		None	None
NationsBank Cap Trust III	Single	—		1,570		983		(587	)	BB+		1		None	None
Morgan Stanley Cap Trust IV	Single	—		2,500		2,073		(427	)	BB+		1		None	None
Morgan Stanley Cap Trust IV	Single	—		1,741		1,450		(291	)	BB+		1		None	None
Saturns-GS 2004-06	Single	—		242		231		(11	)	BBB-		1		None	None
Saturns-GS 2004-06	Single	—		312		298		(14	)	BBB-		1		None	None
Saturns-GS 2004-04	Single	—		779		722		(57	)	BBB-		1		None	None
Saturns-GS 2004-04	Single	—		22		20		(2	)	BBB-		1		None	None
Goldman Sachs	Single	—		999		859		(140	)	BBB-		1		None	None
ALESCO Preferred Funding VI	Pooled	C2		274		211		(63	)	Ca	43 of 65		(1)	33.4 %	29.9 %
ALESCO Preferred Funding VII	Pooled	C1		820		116		(704	)	Ca	57 of 78		(1)	33.2 %	28.1 %
Total				20,533		16,195		(4,338	)

(1)

Includes banks and insurance companies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

One of the Pooled TRUPS, ALESCO 6, has incurred its tenth 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, 2011 and $466,000 for the nine months ended September 30, 2010. The new cost basis for this security has been written down to $274,000 and has a par amount of $3.2 million. The other Pooled TRUP, ALESCO 7, incurred its eighth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded no other-than-temporary impairment charge for the nine months ended September 30, 2011, and $1,320,000 for the nine months ended September 30, 2010. The new cost basis for this security has been written down to $820,000 and has a par amount of $3.1 million.

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities

	Three Months Ended September 30, 2011		Nine Months Ended September 30, 2011		Year Ended December 31, 2010
			(in thousands)
Balance of credit-related OTTI at January 1,	$	6,434	$	6,197	$	3,621
Addition:
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized		66		303		5,576
Reduction:
Credit losses on investment securities sold during the period		—		—		(3,000	)
Balance of credit-related OTTI at period end	$	6,500	$	6,500	$	6,197

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 $66,000 in principal losses on this bond for the three months and $285,000 for the nine months ended September 30, 2011, and $126,000 in principal losses for the three months and $231,000 for the nine months ended September 30, 2010, and expects additional losses in future periods. As such, management determined that an other-than-temporary impairment charge exists and recorded a cumulative $566,000 write down to the bond, which represents 9.6 percent of the par amount of $3.9 million. The new cost basis for this security has been written down to $3.3 million.

At Sptember 30, 2011, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VI and VII investments were -41.8 percent and -42.5 percent, respectively. Excess subordination is the amount of performing collateral above the amount of outstanding collateral underlying each class of the security. The Excess Subordination as a Percent of Remaining Performing Collateral reflects the difference between the performing collateral and the collateral underlying each security divided by the performing collateral. A negative number results when the paying collateral is less than the collateral underlying each class of the security. A low or negative number decreases the likelihood of full repayment of principal and interest accordingly to original contractual terms.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Corporation did not record other-than-temporary impairment charges relating to equity holdings in bank stocks for the nine month period ended September 30, 2011 or September 30, 2010.

Temporarily Impaired Investments

For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 84 investment securities as of September 30, 2011, 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 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 consist 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, 2011. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.

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

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010:

	September 30, 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:
Federal agency obligations	$	10,838	$	(13	)	$	10,838	$	(13	)	$	—	$	—
Obligations of U.S. states and political subdivisions		3,370		(24	)		3,370		(24	)		—		—
Trust preferred securities		15,326		(4,341	)		14,016		(2,986	)		1,310		(1,355	)
Corporate bonds and notes		107,850		(2,892	)		104,685		(2,621	)		3,165		(271	)
Collateralized mortgage obligations		2,070		(1,221	)		—		—			2,070		(1,221	)
Equity securities		1,229		(306	)		—		—			1,229		(306	)
Total	$	140,683	$	(8,797	)	$	132,909	$	(5,644	)	$	7,774	$	(3,153	)
Investment Securities Held-to-Maturity:
Obligations of U.S. states and political subdivisions		7,440		(13	)		7,440		(13	)		—		—
Total	$	7,440	$	(13	)	$	7,440	$	(13	)	$	—	$	—

Total temporarily impaired investment securities	$	148,123	$	(8,810	)	$	140,349	$	(5,657	)	$	7,774	$	(3,153	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Investment securities having a carrying value of approximately $91.5 million and $125.6 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, short-term borrowings, and Federal Home Loan Bank advances and for other purposes required or permitted by law.

Note 8. Fair Value Measurements and Fair Value of Financial Instruments

Fair Value Measurements

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010.

Investment Securities Available-for-Sale

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

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

Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the securities being valued. As of September 30, 2011, management made adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

At September 30, 2011, the Corporation’s two pooled trust preferred securities and a variable rate CMO were classified as Level 3. Market pricing for these Level 3 securities varied widely from one pricing service to another based on the lack of trading. As such, these securities were not considered to have readily observable market data that was accurate to support a fair value as prescribed by FASB ASC 820-10-05. The Corporation determined that significant adjustments using unobservable inputs are required to determine fair value at the measurement date.

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

The fair value as of September 30, 2011 was determined by discounting the expected cash flows over the life of the security. The discount rate was determined by deriving a discount rate when the markets were considered more active for this type of security. To this estimated discount rate, additions were made for more liquid markets and increased credit risk as well as assessing the risks in the security, such as default risk and severity risk. However, during the quarter ended September 30, 2011 the private label CMO had interruptions of its scheduled principal payments and the Corporation recorded principal loss of $66,000. For the nine month ended September 30, 2011, principal loss amounted to $285,000.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2011 and December 31, 2010 are as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Recurring Basis	September 30, 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	$	18,599	$	999	$	17,600	$	—
Residential mortgage backed securities		120,612		—		120,612		—
Obligations of U.S. states and political subdivisions		52,583		2,340		50,243		—
Trust preferred securities		19,961		—		19,635		326
Collateralized mortgage obligations		2,070		—		—		2,070
Corporate bonds and notes		169,683		—		169,683		—
Equity securities		5,350		5,350		—		—
Investment securities available-for-sale	$	388,858	$	8,689	$	377,773	$	2,396

			Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Recurring Basis	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
U.S. Treasury & agency securities	$	6,995	$	6,995	$	—	$	—
Federal agency obligations		68,481		—		68,481		—
Residential mortgage backed securities		177,733		—		177,733		—
Obligations of U.S. states and political subdivisions		37,225		16,936		20,289		—
Trust preferred securities		18,731		—		18,589		142
Collateralized mortgage obligations		2,728		—		—		2,728
Corporate bonds and notes		61,434		—		61,434		—
Equity securities		4,753		4,753		—		—
Investment securities available-for-sale	$	378,080	$	28,684	$	346,526	$	2,870

The following tables present the changes in investment securities available-for-sale with significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended
	September 30,
	2011			2010
	(in Thousands)
Balance at July 1,	$	2,695		$	3,275
Principal interest deferrals		29			34
Principal repayments		(179	)		(285	)
Total net losses included in net income		—			—
Total net unrealized gains (loss)		(149	)		361
Balance at period end,	$	2,396		$	3,385

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended
	September 30,
	2011			2010
	(in Thousands)
Balance at January 1,	$	2,870		$	2,349
Transfers into Level 3		—			8,197
Transfers out of Level 3		—			(5,174	)
Principal interest deferrals		88			90
Principal repayments		(631	)		(599	)
Total net losses included in net income		—			(3,000	)
Total net unrealized gains		69			1,522
Balance at period end,	$	2,396		$	3,385

For the nine months ended September 30, 2011, 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, 2011 and December 31, 2010 were as follows:

				Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis		September 30, 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		$	11,292	$	—	$	—	$	11,292

				Fair Value Measurements at Reporting Date Using
Assets Measured at Fair Value on a Non-Recurring Basis		December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Impaired loans		$	4,895	$	—	$	—	$	4,895

The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a non-recurring basis at September 30, 2011 and December 31, 2010.

Impaired Loans. The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Impaired loans at September 30, 2011 were $12,710,000 with a specific reserve of $1,418,000 compared to $5,534,000 with a specific reserve of $639,000 at December 31, 2010.

Other Real Estate Owned. Other real estate owned (“OREO”) is measured at fair value less costs to sell. The Corporation believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. The fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation. Costs to sell associated with OREO is based on estimation per the terms and conditions of the sales agreements or appraisals. At September 30, 2011 and December 31, 2010 the Corporation held no OREO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A $3.5 million participation loan secured by an office property in Union County, New Jersey went non-accrual on September 30, 2011after the borrower informed the lead bank that it had no intention of making any additional loan payments. Subsequently the bank group received a deed in lieu of foreclosure on October 5, 2011. The Corporation has taken its pro rata share into OREO on that date at a fair value, less cost to sell, of $3.4 million, net of a $100,000 charge-off. The property is a 42,000 square foot two story office building. In October 2011 the property was listed for sale with a well known commercial brokerage firm and although no assurances can be made as to the disposition of the property, the Corporation feels confident that the property will be sold over the next six months. In the interim, this partially tenanted property does have cash flow that is expected to contribute significantly to defraying the building’s normal operating expenses.

Fair Value of Financial Instruments

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

Estimated fair values have been determined using the best available data and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and the recorded book balances at September 30, 2011 and December 31, 2010, were as follows:

	September 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	113,080	$	113,080	$	37,497	$	37,497
Investment securities available-for-sale		388,858		388,858		378,080		378,080
Investment securities held-to-maturity		70,142		72,371		—		—
Net loans		712,072		715,087		699,577		706,309
Restricted investment in bank stocks		9,194		9,194		9,596		9,596
Accrued interest receivable		5,616		5,616		4,134		4,134
Financial liabilities:
Non interest-bearing deposits	$	161,340	$	161,340	$	144,210	$	144,210
Interest-bearing deposits		898,682		899,469		716,122		716,887
Short-term borrowings		—		—		41,855		41,855
Long-term borrowings		161,000		170,104		171,000		179,570
Subordinated debentures		5,155		5,249		5,155		5,157
Accrued interest payable		925		925		1,041		1,041

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

The fair value of the Corporation’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. Quoted prices in active markets were used whenever available. If quoted prices were not available, fair values were measured using pricing models or other valuation techniques such as the present value of future cash flows, adjusted for credit loss assumptions.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. There was $200,000 in loans held for sale at September 30, 2011 and none at December 31, 2010.

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

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

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

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

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

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

Note 9. Net Investment in Direct Financing Lease

During the second quarter of 2010, the Corporation entered into a lease of its former operations facility under a direct financing lease. The lease has a 15 year term with no renewal options. According to the terms of the lease, the lessee has an obligation to purchase the property underlying the lease in either year seven (7), ten (10) or fifteen (15) at predetermined prices for those years as provided in the lease. The structure of the minimum lease payments and the purchase prices as provided in the lease provide an inducement to the lessee to purchase the property in year seven (7).

At September 30, 2011, the net investment in direct financing lease consists of a minimum lease receivable of $4,909,000 and unearned interest income of $1,172,000, for a net investment in direct financing lease of $3,737,000. The net investment in direct financing lease is carried as a component of loans in the Corporation’s consolidated statements of condition.

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

For years ending December 31,	(in thousands)
2011	$	39
2012		166
2013		216
2014		216
2015		224
Thereafter		2,876
Total minimum future lease receipts	$	3,737

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Components of Net Periodic Pension Cost

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010

Interest cost	$	147		$	150		$	441		$	450
Net amortization and deferral		(51	)		(71	)		(151	)		(212	)
Net periodic pension cost	$	96		$	79		$	290		$	238

Contributions

The Corporation presently estimates it will contribute $500,000 to its Pension Trust in 2011.

The Preservation of Access to Care for Medical Beneficiaries and Pension Relief Act of 2010, signed into law on June 25, 2010, permits single employer and multiple employer defined benefit plan sponsors to elect to extend the plan’s amortization period of a Shortfall Amortization Base over either a nine year period or a fifteen year period, rather than the seven year period required under the Pension Protection Act of 2006.

The Bank has elected to apply the Pension Relief Act Fifteen Year amortization of the Shortfall Amortization Base for its 2011 minimum funding requirement. The minimum amount to be funded is $500,000, as noted above, by December 31, 2011 with the understanding that fully funding the plan earlier than this date will lower this amount and that funding the plan after this date will increase this amount. As noted, this amount is the minimum required funding amount. The Corporation does have the option of funding above this amount but has contributed the minimum historically.

Note 11. Income Taxes

For the nine months ended September 30, 2011, the Corporation recorded income tax expense of $5.5 million, compared with a $1.2 million income tax expense for the nine months ended September 30, 2010. The effective tax rates for the nine month periods ended September 30, 2011 and 2010 were 34.9 percent and 20.6 percent, respectively. The atypical effective tax rate for the nine months ended September 30, 2010 was due to the pre-tax loss for the first quarter of 2010 and the recognition of a tax benefit of $1.1 million pertaining to prior uncertain tax positions for 2006 and 2007.

Note 12. Borrowed Funds

Short-Term Borrowings

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

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

Long-Term Borrowings

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2011, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.46 percent and 5.31 percent, respectively.

At September 30, 2011, FHLB advances and securities sold under agreements to repurchase are contractually scheduled for repayment as follows:

	September 30, 2011
	(in thousands)
2013	$	5,000
2015		10,000
Thereafter		146,000
Total	$	161,000

Note 13. Subordinated Debentures

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

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

The subordinated debentures are redeemable in whole or part prior to maturity on January 23, 2034. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85 percent and reprices quarterly. The rate at September 30, 2011 was 3.10 percent.

Note 14. Stockholders’ Equity

On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury (“Treasury”) under its Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As previously announced, the Corporation's voluntary participation in the Capital Purchase Program represented approximately 50 percent of the dollar amount that the Corporation qualified to receive under the Treasury program. The Corporation believed that its participation in this program strengthened its capital position. The funding was used to support future loan growth.

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

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 provides 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a result of the successful completion of the rights offering in October 2009, the number of shares underlying the warrants held by the Treasury under the Capital Purchase Program was reduced to 86,705 shares, or 50 percent of the original 173,410 shares. The warrant is still outstanding at September 30, 2011.

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

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, 2011 and December 31, 2010. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

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

Allowance for Loan Losses and Related Provision

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

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

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

Other-Than-Temporary Impairment of Investment Securities

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

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

Fair Value of Investment Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. The Corporation applied the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation’s private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 7 of the Notes to Consolidated Financial Statements for further discussion.

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

Goodwill

The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the three months ended September 30, 2011 and 2010.

Income Taxes

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

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

Earnings

Net income available to common stockholders for the three months ended September 30, 2011 amounted to $3,557,000 compared to $1,993,000 for the comparable three-month period ended September 30, 2010. The Corporation recorded earnings per diluted common share of $0.22 for the three months ended September 30, 2011 as compared with earnings of $0.14 per diluted common share for the same three months in 2010. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, including SBLF shares, reduced earnings by approximately $0.01 per fully diluted common share for both periods. The annualized return on average assets was 1.10 percent for the three months ended September 30, 2011, compared to 0.72 percent for three months ended September 30, 2010. The annualized return on average stockholders’ equity was 11.12 percent for the three-month period ended September 30, 2011, compared to 7.74 percent for the three months ended September 30, 2010.

Net income available to common stockholders for the nine months ended September 30, 2011 amounted to $9,868,000, compared to $3,997,000 for the comparable nine-month period ended September 30, 2010. Earnings per diluted common share of $0.61 for the nine months ended September 30, 2011 compared with earnings of $0.27 per diluted common share for the nine months ended September 30, 2010. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury, including SBLF shares, reduced earnings by approximately $0.03 per fully diluted common share for both periods. The annualized return on average assets was 1.06 percent for the nine months ended September 30, 2011, compared to 0.50 percent for the nine months ended September 30, 2010. The annualized return on average stockholders’ equity was 10.73 percent for the nine-month period ended September 30, 2011, compared to 5.52 percent for the nine months ended September 30, 2010.

Net Interest Income and Margin

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

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

Net Interest Income

(tax-equivalent basis)

	Three Months Ended September 30,												Nine Months Ended September 30,
							Increase			Percent									Increase			Percent
(dollars in thousands)	2011			2010			(Decrease)			Change			2011			2010			(Decrease)			Change
Interest income:
Investment securities AFS	$	3,327		$	2,539		$	788			31.0	%	$	10,530		$	8,728		$	1,802			20.6	%
Investment securities HTM		806			—			806			—			1,155			—			1,155			—
Loans, including net costs		8,956			9,378			(422	)		(4.5	)		27,123			28,165			(1,042	)		(3.7	)
Restricted investment in bank stocks, at cost		110			129			(19	)		(14.7	)		362			402			(40	)		(10.0	)
Total interest income		13,199			12,046			1,153			9.6			39,170			37,295			1,875			5.0
Interest expense:
Time deposits $100 or more		332			282			50			17.7			945			1,036			(91	)		(8.8	)
All other deposits		1,059			1,213			(154	)		(12.7	)		3,133			3,712			(579	)		(15.6	)
Borrowings		1,678			2,158			(480	)		(22.2	)		4,998			6,899			(1,901	)		(27.6	)
Total interest expense		3,069			3,653			(584	)		(16.0	)		9,076			11,647			(2,571	)		(22.1	)
Net interest income on a fully tax-equivalent basis		10,130			8,393			1,737			20.7			30,094			25,648			4,446			17.3
Tax-equivalent adjustment (1)		(280	)		(11	)		(269	)		(2,445.5	)		(506	)		(100	)		(406	)		406.0
Net interest income	$	9,850		$	8,382		$	1,468			17.5	%	$	29,588		$	25,548		$	4,040			15.8	%

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

Net interest income on a fully tax-equivalent basis increased $1.7 million or 20.7 percent to $10.1 million for the three months ended September 30, 2011 as compared to the same period in 2010. For the three months ended September 30, 2011, the net interest margin increased 24 basis points to 3.54 percent from 3.30 percent during the three months ended September 30, 2010. For the three months ended September 30, 2011, a decrease in the average yield on interest-earning assets of 13 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 40 basis points, resulting in an increase in the Corporation’s net interest spread of 27 basis points for the period. Net interest spread and margin have been impacted by a high level of uninvested excess cash, which accumulated due to strong deposit growth experienced predominantly over the last nine months of 2010. This represented growth in the Corporation’s customer base and enhanced the Corporation’s liquidity position while the Corporation continued to expand its earning assets base.

Net interest income on a fully tax-equivalent basis increased $4.0 million or 15.8 percent to $29.6 million for the nine months ended September 30, 2011 as compared to the same period in 2010. For the nine months ended September 30, 2011, the net interest margin increased 20 basis points to 3.54 percent from 3.34 percent during the nine months ended September 30, 2010. For the nine months ended September 30, 2011, a decrease in the average yield on interest-earning assets of 0.25 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 0.47 basis points, resulting in an increase in the Corporation’s net interest spread of 0.22 basis points for the period.

For the three-month period ended September 30, 2011, interest income on a tax-equivalent basis increased by $1,153,000 or 9.6 percent compared to the same three-month period in 2010. This increase in interest income was due primarily to a volume increase in investment securities 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 $137.0 million, to $428.0 million, compared to the third quarter of 2010. The loan portfolio decreased on average $7.9 million, to $707.9 million, from an average of $715.8 million in the same quarter in 2010, reflecting net decreases in commercial loans and commercial real estate related sectors of the loan portfolio. Average loans represented approximately 61.8 percent of average interest-earning assets during the third quarter of 2011 compared to 70.4 percent in the same quarter in 2010.

For the nine-month period ended September 30, 2011, interest income on a tax-equivalent basis increased by $1,875,000 or 5.0 percent from the comparable nine-month period in 2010. This increase in interest income was due primarily to higher volume of earning assets of $2.4 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 118.5 million, to $416.5 million, compared to the nine months ended September 30, 2010. The average loan portfolio decreased $5.4 million, to $708.5 million, from $713.9 million for the same nine months in 2010, reflecting net decreases in commercial loans and commercial real estate. Average loans represented approximately 62.5 percent of average interest-earning assets during the first nine months of 2011 compared to 69.8 percent for the same nine months in 2010.

For the three months ended September 30, 2011, interest expense declined $584,000, or 16.0 percent from the same period in 2010. The average rate of interest-bearing liabilities decreased 0.40 basis points to 1.18 percent for the three months ended September 30, 2011, from 1.58 percent for the three months ended September 30, 2010. At the same time, average interest-bearing liabilities increased by $114.2 million. This increase was primarily in money markets, savings, time deposits, and other interest-bearing deposits of $76.2 million, $8.2 million, $39.0 million and $29.3 million, respectively, and was partially offset by decreases in borrowings of $38.5 million. Since 2009 steps have been taken to improve the Corporation’s net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further high-costing cash outflows. The result has been a decline in the Corporation’s average cost of funds and an improvement in net interest spread. For the three months ended September 30, 2011, the Corporation’s net interest spread on a tax-equivalent basis increased to 3.43 percent, from 3.16 percent for the three months ended September 30, 2010.

For the nine months ended September 30, 2011, interest expense declined $2.6 million, or 22.1 percent from the same period in 2010. The average rate of interest-bearing liabilities decreased 0.47 basis points to 1.21 percent for the nine months ended September 30, 2011, from 1.68 percent for the nine months ended September 30, 2010. At the same time, average interest-bearing liabilities increased by $76.0 million. This increase included an increase in time deposits of $14.0 million ,money market deposits of $60.5 million, savings deposits of $13.3 million and other interest-bearing deposits of $37.3 million, offset by a decrease in borrowings of $49.1 million. The result of this was an improvement in the Corporation’s average cost of funds for the period. As a result of these factors, for the nine months ended September 30, 2011, the Corporation’s net interest spread on a tax-equivalent basis increased to3.40 percent, from 3.18 percent for the nine months ended September 30, 2010.

The following table quantifies the impact on net interest income on a tax-equivalent basis resulting from changes in average balances and average rates during the three 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, 2011 and 2010 Increase (Decrease) Due to Change In:									Nine Months Ended September 30, 2011 and 2010 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	$	333		$	71		$	404		$	1,998		$	(715	)	$	1,283
Tax-exempt		386			(2	)		384			522			(3	)		519
Held to maturity
Taxable		399			—			399			479			—			479
Tax-exempt		407			—			407			676			—			676
Total investment securities		1,525			69			1,594			3,675			(718	)		2,957
Loans		(103	)		(319	)		(422	)		(37	)		(1,005	)		(1,042	)
Restricted investment in bank stocks		(15	)		(4	)		(19	)		(54	)		14			(40	)
Total interest-earning assets		1,407			(254	)		1,153			3,584			(1,709	)		1,875

Interest-bearing liabilities:
Money market deposits		113			(91	)		22			288			(290	)		(2	)
Savings deposits		15			(112	)		(97	)		72			(301	)		(229	)
Time deposits		80			(108	)		(28	)		133			(564	)		(431	)
Other interest-bearing deposits		46			(47	)		(1	)		181			(189	)		(8	)
Total interest-bearing deposits		254			(358	)		(104	)		674			(1,344	)		(670	)
Borrowings and subordinated debentures		(332	)		(148	)		(480	)		(1,250	)		(651	)		(1,901	)
Total interest-bearing liabilities		(78	)		(506	)		(584	)		(576	)		(1,995	)		(2,571	)
Change in net interest income	$	1,485		$	252		$	1,737		$	4,160		$	286		$	4,446

The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 2011 and 2010, the Corporation’s average assets, liabilities and stockholders’ equity. The Corporation’s net interest income, net interest spread and net interest margin are also reflected.

Average Statements of Condition with Interest and Average Rates

	Three Months Ended September 30,
	2011									2010
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1) :
Available for sale
Taxable	$	326,139		$	2,911			3.57	%	$	288,695		$	2,507			3.47	%
Tax-exempt		30,089			416			5.53			2,242			32			5.71
Held to maturity
Taxable		43,593			399			3.66			—			—			—
Tax-exempt		28,195			407			5.77			—			—			—
Total investment securities		428,016			4,133			3.86			290,937			2,539			3.49
Loans (2)		707,935			8,956			5.06			715,850			9,378			5.24
Restricted investment in bank stocks		9,194			110			4.79			10,378			129			4.97
Total interest-earning assets		1,145,145			13,199			4.61			1,017,165			12,046			4.74
Non interest-earning assets:
Cash and due from banks		127,959									101,933
Bank-owned life insurance		28,533									27,316
Intangible assets		16,922									16,984
Other assets		33,444									34,741
Allowance for loan losses		(10,383	)								(8,738	)
Total non interest-earning assets		196,475									172,236
Total assets	$	1,341,620								$	1,189,401
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	204,102		$	261			0.51	%	$	127,922		$	239			0.75	%
Savings deposits		181,857			228			0.50			173,642			325			0.75
Time deposits		241,123			595			0.99			202,159			623			1.23
Other interest-bearing deposits		211,425			307			0.58			182,106			308			0.68
Total interest-bearing deposits		838,507			1,391			0.66			685,829			1,495			0.87
Short-term and long-term borrowings		194,592			1,638			3.37			233,111			2,116			3.63
Subordinated debentures		5,155			40			3.10			5,155			42			3.26
Total interest-bearing liabilities		1,038,254			3,069			1.18			924,095			3,653			1.58
Non interest-bearing liabilities:
Demand deposits		161,744									142,829
Other liabilities		8,471									11,933
Total non interest-bearing liabilities		170,215									154,762
Stockholders’ equity		133,151									110,544
Total liabilities and stockholders’ equity	$	1,341,620								$	1,189,401
Net interest income (tax-equivalent basis)					10,130									8,393
Net interest spread								3.43	%								3.16	%
Net interest margin (3)								3.54	%								3.30	%
Tax-equivalent adjustment (4)					(280	)								(11	)
Net interest income				$	9,850								$	8,382

(1)	Average balances are based on amortized cost.

(2)	Average balances include loans on non-accrual status.

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

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

Average Statements of Condition with Interest and Average Rates

	Nine Months Ended September 30,
	2011									2010
(tax-equivalent basis)	Average Balance			Interest Income/ Expense			Average Rate			Average Balance			Interest Income/ Expense			Average Rate
	(dollars in thousands)
Assets
Interest-earning assets:
Investment securities (1) :
Available for sale
Taxable	$	364,465		$	9,717			3.55	%	$	291,062		$	8,434			3.86	%
Tax-exempt		19,403			813			5.59			6,935			294			5.65
Held to maturity
Taxable		16,845			479			3.79			—			—			—
Tax-exempt		15,739			676			5.73			—			—			—
Total investment securities		416,452			11,685			3.74			297,997			8,728			3.91
Loans (2)		708,489			27,123			5.10			713,904			28,165			5.26
Restricted investment in bank stocks		9,181			362			5.26			10,551			402			5.08
Total interest-earning assets		1,134,122			39,170			4.61			1,022,452			37,295			4.86
Non interest-earning assets:
Cash and due from banks		88,623									84,489
Bank-owned life insurance		28,274									26,806
Intangible assets		16,937									17,001
Other assets		32,946									38,641
Allowance for loan losses		(9,712	)								(8,490	)
Total non interest-earning assets		157,068									158,447
Total assets	$	1,291,190								$	1,180,899
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Money market deposits	$	183,952		$	730			0.53	%	$	123,420		$	732			0.79	%
Savings deposits		179,140			728			0.54			165,807			957			0.77
Time deposits		229,099			1,737			1.01			215,145			2,168			1.34
Other interest-bearing deposits		201,999			883			0.58			164,675			891			0.72
Total interest-bearing deposits		794,190			4,078			0.68			669,047			4,748			0.95
Short-term and long-term borrowings		200,232			4,879			3.25			249,365			6,778			3.62
Subordinated debentures		5,155			119			3.08			5,155			121			3.13
Total interest-bearing liabilities		999,577			9,076			1.21			923,567			11,647			1.68
Non interest-bearing liabilities:
Demand deposits		156,976									139,407
Other liabilities		6,587									10,861
Total non interest-bearing liabilities		163,563									150,268
Stockholders’ equity		128,050									107,064
Total liabilities and stockholders’ equity	$	1,291,190								$	1,180,899
Net interest income (tax-equivalent basis)					30,094									25,648
Net interest spread								3.40	%								3.18	%
Net interest margin (3)								3.54	%								3.34	%
Tax-equivalent adjustment (4)					(506	)								(100	)
Net interest income				$	29,588								$	25,548

(1)	Average balances are based on amortized cost.

(2)	Average balances include loans on non-accrual status.

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

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

Investment Portfolio

At September 30, 2011, the principal components of the investment securities portfolio were U.S. Government agency obligations, federal agency obligations including mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, and other debt and equity securities including trust preferred securities.

During the nine months ended September 30, 2011, the Corporation reclassified at fair value approximately $70.1 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax gains of approximately $185,000 (on a pre-tax basis of $292,000) 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. During the three months ended September 30, 2011, the Corporation reclassified at fair value approximately $30.8 million in available-for-sale investment securities to the held-to-maturity category. The related after-tax losses of approximately $33,000 (on a pre-tax basis of $47,000) remained in accumulated other comprehensive income and will be amortized over the remaining life of the securities. 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.

During the nine months ended September 30, 2011, approximately $236.4 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 were made in the ordinary course of business.

For the three months ended September 30, 2011, average investment securities increased $137.1 million to approximately $428.0 million, or 37.4 percent of average interest-earning assets, from $290.9 million on average, or 28.6 percent of average interest-earning assets, for the comparable period in 2010.

During the three-month period ended September 30, 2011, the volume-related factors applicable to the investment portfolio increased interest income by approximately $1.5 million while rate-related changes resulted in an increase in interest income of approximately $69,000 from the same period in 2010. The tax-equivalent yield on investments increased by 0.37 basis points to 3.86 percent from a yield of 3.49 percent during the comparable period in 2010. A portion of the increase in tax-equivalent yield is attributable to an increase in the purchase of tax exempt municipal securities during the period.

During the nine-month period ended September 30, 2011, 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 $718,000 from the same period in 2010. The average tax-equivalent yield on investments decreased by 0.17 basis points to 3.74 percent from a yield of 3.91 percent during the comparable period in 2010. A portion of the decline in tax-equivalent yield is attributable to a decrease of 31 basis points on taxable securities during the period.

For the nine months ended September 30, 2011, the Corporation recorded $18,000 in other-than-temporary impairment charges and principal losses of $285,000 on a private label collateralized mortgage obligation and as such the Corporation expects there may be additional losses. For the nine months ended September 30, 2010, the Corporation recorded a $5.1 million other-than-temporary impairment charge on four bond holdings in the investment securities portfolio. See Note 7 of the Notes to the Consolidated Financial Statements for further discussion.

At September 30, 2011, net unrealized losses on investment securities available-for-sale, which is carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $2.3 million as compared with net unrealized losses of $5.3 million at December 31, 2010. At September 30, 2011, 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 $167,000. The gross unrealized losses associated with U.S. Treasury and Agency securities and Federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Loan Portfolio

Lending is one of the Corporation’s primary business activities. The Corporation’s loan portfolio consists of commercial, residential and retail loans, serving the diverse customer base in its market area. The composition of the Corporation’s portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes. Growth is generated through business development efforts, repeat customer requests for new financings, penetration into existing markets and entry into new markets.

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

At September 30, 2011, total loans amounted to $721.6 million, an increase of $13.2 million or 1.9 percent as compared to December 31, 2010. For the nine-month period ended September 30, 2011, growth of $4.9 million, $16.2 million, and $2.5 in the commercial and industrial, commercial real estate, and residential portfolios were partially offset by decreases of $10.1 million, and $287,000 in the construction and installment loan portfolios. Total gross loans recorded in the quarter included $58.4 million of new loans and advances, partially offset by payoffs and principal payments of $34.4 million.

At September 30, 2011, the Corporation had $45.4 million in outstanding loan commitments which are expected to fund over the next 90 days.

Average total loans decreased $7.9 million or 1.11 percent for the three months ended September 30, 2011 as compared to the same period in 2010, while the average yield on loans decreased by 18 basis points as compared with the same period in 2010. The decrease in the average yield on loans was primarily the result of lower market interest rates on the repricing of existing loans and the origination of new loans. The decrease in average total loan volume was due primarily to paydowns by borrowers which could not be offset by increased customer activity and new lending relationships. The volume-related factors during the period contributed decreased interest income of $103,000, while the rate-related changes decreased interest income by $319,000.

Average total loans for the nine months ended September 30, 2011 decreased $5.4 million or 0.76 percent as compared to the same period in 2010. The average yield on loans decreased 16 basis points in the current nine-month period compared to the same period in 2010.

Allowance for Loan Losses and Related Provision

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

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

At September 30, 2011, the level of the allowance was $9,536,000 as compared to $8,867,000 at December 31, 2010. Provisions to the allowance for the nine-month period ended September 30, 2011 totaled $2,148,000 compared to $3,028,000 for the same period in 2010. Net charge-offs were $1,320,000 and $1,132,000 for the three months ended September 30, 2011 and 2010, respectively, bringing the Corporation’s net charge-offs to $1,479,000 for the nine months of 2011 compared to $2,969,000 for the same period in 2010. The allowance for loan losses as a percentage of total loans amounted to 1.32 percent and 1.25 percent at September 30, 2011 and December 31, 2010, respectively.

The level of the allowance for the respective periods of 2011 and 2010 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the allowance at September 30, 2011 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.

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

	Nine Months Ended September 30,
	2011			2010
	(In Thousands)
Average loans for the period	$	708,489		$	713,904
Total loans at end of period		721,608			701,936

Analysis of the Allowance for Loan Losses:
Balance — beginning of year	$	8,867		$	8,711
Charge-offs:
Commercial and industrial loans		(185	)		—
Commercial real estate		(940	)		—
Construction		(631	)		(1,678	)
Residential mortgage loans		(23	)		(1,271	)
Installment loans		(14	)		(36	)
Total charge-offs		(1,793	)		(2,985	)
Recoveries:
Commercial and industrial loans		240			10
Commercial real estate loans		15			—
Residential mortgage loans		53			1
Installment loans		6			5
Total recoveries		314			16
Net charge-offs		(1,479	)		(2,969	)
Provision for loan losses		2,148			3,028
Balance — end of period	$	9,536		$	8,770
Ratio of net charge-offs during the period to average loans during the period (1)		0.28	%		0.55	%
Allowance for loan losses as a percentage of total loans		1.32	%		1.25	%

(1)	Annualized.

Asset Quality

The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for loan losses at all times.

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

Non-Performing Assets and Troubled Debt Restructured Loans

Non-performing loans include non-accrual loans and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of loans at the point they become past due in excess of 90 days, with the exception of loans that are both well-secured and in the process of collection. Non-performing assets include non-performing loans and other real estate owned. Troubled debt restructured loans represent loans on which a concession was granted to a borrower, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks, or modified repayment terms, and are performing under the restructured terms.

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

	September 30, 2011		December 31, 2010
	(in thousands)
Non-accrual loans	$	14,083	$	11,174
Accruing loans past due 90 days or more		451		714
Total non-performing loans		14,534		11,888
Other non-performing assets		327		—
Total non-performing assets	$	14,861	$	11,888
Troubled debt restructured loans	$	8,898	$	7,035

Non-performing assets increased by $3.0 million at September 30, 2011 from December 31, 2010. The increase was attributable to the addition of several new residential loans (totaling approximately $3.4 million) and commercial loans (totaling approximately $6.0 million) into non-performing status. This was partially offset by decreases from pay-downs of $2.4 million, total charge-offs of $1.8 million of existing loans, the transfer to performing troubled debt restructured from non-accrual status of $1.6 million and transfer to performing status of $0.5 million. The other non-performing asset represents a tax lien assignment related to the Highlands participation loan.

The Corporation held no other real estate owned at September 30, 2011 and December 31, 2010.

Troubled debt restructured loans totaled $8,898,000 at September 30, 2011 and $7,035,000 at December 31, 2010. Troubled debt restructured loans at September 30, 2011 and December 31, 2010 were all performing according to the restructured terms.

Overall credit quality in the Bank’s loan portfolio at September 30, 2011 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, 2011 have been identified and internally risk-rated as assets specially mentioned or substandard. Such loans amounted to $51.2 million and $38.4 million at September 30, 2011 and December 31, 2010, respectively. The decrease in credit quality occurred in the Commercial real estate category which increased $5.9 million in Special Mention and $1.5 million, $2.1 million, and $4.0 million in the substandard category for Commercial real estate, Construction and Residential real estate categories, respectively. These loans are considered potential problem loans due to a variety of changing conditions affecting the credits, including general economic conditions and/or conditions applicable to the specific borrowers. The Corporation has no foreign loans.

At September 30, 2011, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the tables or descriptions above.

Other Income

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

	Three Months Ended September 30,										Nine Months Ended September 30,
					Increase			Percent								Increase			Percent
(dollars in thousands)	2011		2010		(Decrease)			Change			2011		2010			(Decrease)			Change
Service charges, commissions and fees	$	505	$	535	$	(30	)		(5.8	)%	$	1,415	$	1,424		$	(9	)		(0.6	)%
Annuities and insurance		42		3		39			1,300.0			81		119			(38	)		(31.9	)
Bank-owned life insurance		259		429		(170	)		(39.6	)		780		957			(177	)		(18.5	)
Net investment securities gains (losses)		1,250		1,033		217			21.0			2,817		(1,654	)		4,471			270.3
All other		227		135		92			68.1			519		322			197			61.2
Total other income	$	2,283	$	2,135	$	148			6.9	%	$	5,612	$	1,168		$	4,444			380.5	%

For the three months ended September 30, 2011, total other income amounted to $2.28 million, compared to total other income of $2.14 million for the same period in 2010. The increase of $148,000 for the three months ended September 30, 2011 was primarily as a result of net investment securities gains of $1,250,000 compared to net investment gains of $1,033,000 for the same period last year. Net investment securities gains in the third quarter of 2011 included $1,316,000 in net gains on the sale of investment securities, reduced by $66,000 in other-than-temporary impairment charges. Excluding net investment securities gains, the Corporation recorded total other income of $1.0 million for the three months ended September 30, 2011, compared to $1.1 million for the three months ended September 30, 2010. This decrease reflects declines in service charges on deposits of $44,000 and a decline in Bank Owned Life Insurance of $170,000, partially offset by an increase of $99,000 in loan related fees and an increase of $39,000 in commissions on Annuities and Insurance contracts.

For the nine months ended September 30, 2011, total other income increased $4.4 million compared to the same period in 2010, primarily as a result of net investment securities gains and losses including other-than-temporary impairment charges. Excluding net investment securities gains and losses, the Corporation recorded other income of $2.8 million for the nine months ended September 30, 2011 compared to $2.8 million for the comparable period in 2010. Increases in other income of $197,000 for the nine months ended September 30, 2011 were recorded primarily in service charges on deposits accounts and loan fees and income. These increases were offset by a reduction in Bank Owned Life Insurance of $177,000 caused by a nonrecurring premium reduction in 2010.

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,
					Increase			Percent								Increase			Percent
(dollars in thousands)	2011		2010		(Decrease)			Change			2011			2010		(Decrease)			Change
Salaries and employee benefits	$	2,848	$	2,721	$	127			4.7	%	$	8,618		$	8,106	$	512			6.3	%
Occupancy and equipment		713		754		(41	)		(5.4	)		2,246			2,377		(131	)		(5.5	)
FDIC insurance		328		510		(182	)		(35.7	)		1,384			1,586		(202	)		(12.7	)
Professional and consulting		319		153		166			108.5			805			849		(44	)		(5.2	)
Stationery and printing		73		68		5			7.4			273			242		31			12.8
Marketing and advertising		30		36		(6	)		(16.7	)		116			234		(118	)		(50.4	)
Computer expense		300		320		(20	)		(6.3	)		989			1,001		(12	)		(1.2	)
Other real estate owned expense		—		20		(20	)		100.0			(1	)		63		(64	)		(101.6	)
All other		918		860		58			6.7			2,791			3,643		(852	)		(23.4	)
Total other expense	$	5,529	$	5,442	$	87			1.6	%	$	17,221		$	18,101	$	(880	)		(4.9	)%

For the three months ended September 30, 2011, total other expense increased $87,000, or 1.6 percent, from the comparable three months ended September 30, 2010. This was primarily attributable to increases in salaries and employee benefits expense and professional and consulting expense partially offset by decreases in occupancy and equipment expenses and FDIC insurance. For the nine months ended September 30, 2010, total other expense decreased $880,000, or 4.9 percent from the same period in 2010.

Salaries and employee benefits expense for the quarter ended September 30, 2011 increased $127,000 or 4.7 percent over the comparable period in the prior year. For the nine months ended September 30, 2011, salaries and employee benefits expense increased $512,000, or 6.3 percent. These increases were primarily due to additions to staff, merit increases and one time severance payments. Full-time equivalent staffing levels were 161 at September 30, 2011, 159 at December 31, 2010 and 165 at September 30, 2010.

Occupancy and equipment expense for the quarter ended September 30, 2011 decreased $41,000, or 5.4 percent, from the comparable three-month period in 2010. The decrease for the quarter was primarily attributable to expense reductions pertaining to the Corporation’s former operations facility that resulted from vacating and leasing the facility earlier in 2010. For the nine months ended September 30, 2011, occupancy and equipment expense decreased $131,000 or 5.5 percent from the same period last year. The decrease was primarily attributable to reductions of $115,000 in depreciation expense and $56,000 in real estate taxes, largely associated with the Corporation’s former operations facility, $20,000 in utilities and $40,000 in maintenance contract expenses. These decreases were offset by an increase of $107,000 in building and equipment maintenance expense and higher weather related maintenance cost in 2011.

FDIC insurance expense decreased $182,000, or 35.7%, for the three months ended September 30, 2011 compared to the same period in 2010. For the nine months ended September 30, 2011, FDIC insurance expense decreased $202,000, or 12.7% compared to the same period in 2010. The decreases were caused by a new assessment formula which resulted in a favorable rating category for the Company.

Professional and consulting expense for the three months ended September 30, 2011 increased $166,000 or 108.5 percent compared to the comparable quarter of 2010, reflecting higher loan work out and additional credit analyst expenses. For the nine months ended September 30, 2011, professional and consulting expense decreased $44,000, or 5.2 percent, from the comparable period in 2010. Expense decreases primarily occurred in legal fees related to the termination of a structured repurchase agreement in 2010.

Marketing and advertising expense for the three months ended September 30, 2011 decreased $6,000 or 16.7 percent, from the comparable period in 2010. For the nine months ended September 30, 2011, marketing and advertising expense decreased $118,000, or 50.4 percent compared to the same period in 2010 primarily due to a reduction in print media costs

All other expense for the three months ended September 30, 2011 increased $58,000, or 6.7 percent, compared to the same quarter of 2010. Other expense for the nine months ended September 30, 2011 decreased $852,000, or 23.4 percent compared to the same period in 2010. The nine month period decrease was primarily due to a one-time termination fee in the first quarter of 2010 of $594,000 on a structured securities repurchase agreement and a $437,000 loss on fixed assets which was recorded in the second quarter of 2010.

Provision for Income Taxes

For the quarter ended September 30, 2011, the Corporation recorded income tax expense of $1.9 million, compared with $1.6 million income tax expense for the quarter ended September 30, 2010. The effective tax rates for the quarterly periods ended September 30, 2011 and 2010 were 33.7 percent and 43.2 percent, respectively.

For the nine months ended September 30, 2011, income tax expense amounted to $5.5 million compared with a $1.2 million for the comparable period in 2010. The effective tax rates for the respective nine-month periods ended September 30, 2011 and 2010 were 34.9 percent and 20.6 percent, respectively. The atypical effective tax rate for the nine months ended September 30, 2010 was due to the pre-tax loss for the first quarter of 2010 and the recognition of a tax benefit of $853,000 pertaining to prior uncertain tax positions for 2006 and 2007.

Recent Accounting Pronouncements

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

Asset and Liability Management

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

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

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

A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.

At September 30, 2011, the Corporation reflected a positive interest sensitivity gap with an interest sensitivity ratio of 1.59:1.00 at the cumulative one-year position. Based on management’s perception of interest rates remaining low through 2011, emphasis has been, and is expected to continue to be placed, on controlling liability costs while extending the maturities of liabilities in order to insulate the net interest spread from rising interest rates in the future. However, no assurance can be given that this objective will be met.

Estimates of Fair Value

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

Impact of Inflation and Changing Prices

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

Liquidity

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

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

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

At September 30, 2011, the Parent Corporation had $2.2 million in cash and short-term investments compared to $4.3 million at December 31, 2010. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation presently has adequate liquidity to fund its obligations.

Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of September 30, 2011, the Corporation was in compliance with all covenants and provisions of these agreements.

Deposits

Total deposits increased to $1,060 million at September 30, 2011 from $860.3 million at December 31, 2010. Total non interest-bearing deposits increased from $144.2 million at December 31, 2010 to $161.3 million at September 30, 2011, an increase of $17.1 million or 11.9 percent. Interest-bearing demand, savings and time deposits under $100,000 increased to a total of $757.3 million at September 30, 2011 as compared to $596.5 million at December 31, 2010. Time deposits $100,000 and over also increased $21.8 million as compared to year-end 2010 primarily due to an increase in deposits received at the end of the third quarter of 2011. Time deposits $100,000 and over represented 13.3 percent of total deposits at September 30, 2011 compared to 13.9 percent at December 31, 2010. During the third quarter of 2011 certain sweep relationships, in the amount of approximately $37 million, that were previously classified as short term borrowings were discontinued and reclassified as interest bearing checking accounts.

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 $869.1 million at September 30, 2011 increased by $182.9 million, or 26.6 percent, from December 31, 2010. At September 30, 2011, total demand deposits, savings and money market accounts were 82.0 percent of total deposits compared to 79.8 percent at year-end 2010. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally, which calculation consists of total demand, savings accounts and money market accounts (excluding money market accounts greater than $100,000 and time deposits) as a percentage of total deposits. This number increased by $97.2 million, or 21.3 percent, from $475.1 million at December 31, 2010 to $572.4 million at September 30, 2011 and represented 54.0 percent of total deposits at September 30, 2011 as compared with 55.2 percent at December 31, 2010.

The Corporation continues to place the main focus of its deposit gathering efforts in the maintenance, development, and expansion of its core deposit base. 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 2011.

The following table depicts the Corporation’s core deposit mix at September 30, 2011 and December 31, 2010 based on the Corporation’s alternative calculation:

	September 30, 2011					December 31, 2010					Dollar Change
	Amount		Percentage			Amount		Percentage			2011 vs. 2010
	(dollars in thousands)
Non interest-bearing demand	$	161,340		28.2	%	$	144,210		30.4	%	$	17,130
Interest-bearing demand		261,225		45.6			186,509		39.2			74,716
Regular savings		108,287		18.9			112,305		23.6			(4,018	)
Money market deposits under $100		41,543		7.3			32,105		6.8			9,438
Total core deposits	$	572,395		100.0	%	$	475,129		100.0	%	$	97,266

Total deposits	$	1,060,022				$	860,332				$	199,690
Core deposits to total deposits				54.0	%				55.2	%

Borrowings

Total borrowings amounted to $166.2 million at September 30, 2011, reflecting a decrease of $51.9 million from December 31, 2010. The decrease in long term borrowing reduction of $10.0 million was primarily the result of the maturity of a Federal Home Loan Bank advance and the repayment of a Federal Funds Purchase. Short term borrowings which represented overnight customer repurchase transactions covering commercial customer sweep accounts of approximately $37.0 million compared with $28.9 million at December 31, 2010 were discontinued and balances were transferred during September 2011, to interest-bearing commercial checking accounts.

Short-Term Borrowings

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

Long-Term Borrowings

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $166.2 million at September 30, 2011, and mature within one to eight years. The FHLB advances are secured by pledges of FHLB stock, 1-4 family mortgages and U.S. government and Federal agency obligations. At September 30, 2011, FHLB advances and securities sold under agreements to repurchase had weighted average interest rates of 3.46 percent and 5.13 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, 2011 was 3.10 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, 2011, cash and cash equivalents increased by $75.6 million over the balance at December 31, 2010. Net cash of $15.1 million was provided by operating activities, namely, net income as adjusted to net cash. Net income of $10.3 million was adjusted principally by net gains on sales of investment securities of $3.1 million, provision for loan losses of $2.1 million, a decrease in prepaid FDIC insurance assessments of $1.5 million, an increase in other assets of $3.1 million and an increase in other liabilities of $5.5 million. Net cash used in investing activities amounted to approximately $86.7 million, primarily reflecting a net increase in investment securities of $72.1 million, along with a net increase in loans of $14.4 million. Net cash of $147.2 million was provided by financing activities, primarily from the increase in deposits of $199.7 million offset in part by the funding of decreases in short and long term borrowings during the period of $51.9 million and the issuance of $11,250,000 of Preferred Stock to the U.S. Treasury on September 15, 2011 offset in part by the redemption of Preferred Stock of $10,000,000 issued in connection with TARP.

Stockholders’ Equity

Total stockholders’ equity amounted to $133.8 million, or 9.72 percent of total assets, at September 30, 2011, compared to $121.0 million or 10.02 percent of total assets at December 31, 2010. Book value per common share was $7.54 at September 30, 2011, compared to $6.83 at December 31, 2010. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $6.50 at September 30, 2011, compared to $5.79 at December 31, 2010.

Tangible book value per share is a non-GAAP financial measure and represents tangible stockholders’ equity (or tangible book value) calculated on a per common share basis. The Corporation believes that a disclosure of tangible book value per share may be helpful for those investors who seek to evaluate the Corporation’s book value per share without giving effect to goodwill and other intangible assets. The following table presents a reconciliation of total book value per share to tangible book value per share as of September 30, 2011 and December 31, 2010.

	September 30,		December 31,
	2011		2010
	(in thousands, except for share data)
Stockholders’ equity	$	133,808	$	120,957
Less: Preferred stock		11,012		9,700
Less: Goodwill and other intangible assets		16,915		16,959
Tangible common stockholders’ equity	$	105,881	$	94,298

Book value per common share	$	7.54	$	6.83
Less: Goodwill and other intangible assets		1.04		1.04
Tangible book value per common share	$	6.50	$	5.79

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 provides the Corporation with approximately $1.25 million additional Tier 1 capital. The capital the Corporation received under the program will allow it to continue to serve small business clients through the commercial lending program.

In January 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under its Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the U.S. Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. The Corporation's voluntary participation in the Capital Purchase Program represented approximately 50 percent of the dollar amount that the Corporation qualified to receive under the U. S. Treasury program. The warrant is still outstanding at September 30, 2011.

During the three and nine months ended September 30, 2011, the Corporation had no purchases of common stock associated with its stock buyback programs. At September 30, 2011, 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 of the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.

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

The following is a summary of regulatory capital amounts and ratios as of September 30, 2011 for the Corporation and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution.

	Center Bancorp, Inc.					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions
At September 30, 2011	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)

Tier 1 leverage capital	$	126,433		9.54	%	$	53,012		4.00	%		N/A		N/A
Tier 1 risk-based capital		126,433		12.50	%		40,459		4.00	%		N/A		N/A
Total risk-based capital		135,969		13.45	%		80,874		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, 2011	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)

Tier 1 leverage capital	$	124,166		9.38	%	$	52,949		4.00	%	$	66,187		5.00	%
Tier 1 risk-based capital		124,166		12.28	%		40,445		4.00	%		60,667		6.00	%
Total risk-based capital		133,702		13.22	%		80,909		8.00	%		101,136		10.00	%

N/A - not applicable

The Office of the Comptroller of the Currency (“OCC”) has established higher minimum capital ratios for the Bank effective as of December 31, 2009: Tier 1 leverage capital of 8.0 percent, Tier 1 risk-based capital of 10.0 percent and Total risk-based capital of 12.0 percent. As of September 30, 2011, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which it is subject, including those established for the Bank by the OCC.

Basel III

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

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

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including Union Center National Bank.

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

Looking Forward

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

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

Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.

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

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

Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.

This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to in this quarterly report and in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 3. Qualitative and Quantitative Disclosures about Market Risks

Market Risk

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

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

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

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

Based on the results of the interest simulation model as of September 30, 2011, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 1.11 percent in net interest income if interest rates increased by 200 basis points from current rates in a gradual and parallel rate ramp over a twelve month period. These results and other analyses indicate to management that the Corporation’s net interest income is presently minimally sensitive to rising interest rates.

Based on management’s perception that financial markets will continue to be volatile, interest rates that are projected to continue at low levels will generate increased downward repricing of earning assets. Emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with an overall objective of improving the net interest spread and margin during 2011. However, no assurance can be given that this objective will be met.

Equity Price Risk

The Corporation is exposed to equity price risk inherent in its portfolio of publicly traded equity securities, which had an estimated fair value of approximately $5.4 million and $4.8 million at September 30, 2011 and December 31, 2010, respectively. We monitor equity investment holdings for impairment on a quarterly basis. In the event that the carrying value of the equity investment exceeds its fair value, and the decline in value is determined to be to be other than temporary, the carrying value is reduced to its current fair value by recording a charge to current operations. For the three and nine months ended September 30, 2011 and 2010, the Corporation recorded no other-than-temporary impairment charges on its equity security holdings.

Item 4. Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On September 15, 2011, the Corporation issued $11.25 million in nonvoting senior preferred stock to the Treasury under the 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 (the “Series B Preferred Stock”). Simultaneously, using the proceeds from the issuance of the Series B 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 provides the Corporation with approximately $1.25 million additional Tier 1 capital. The Corporation issued the shares of Series B Preferred Stock to a single purchaser, the U.S. Treasury. The shares were issued without registration under the Securities Act of 1933 in reliance on the exemption from registration provided by Section 4(2) of that Act.

Item 6. Exhibits

Exhibit No.		Description

31.1		Certification of the Chief Executive Officer of the Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer of the Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer of the Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Chief Financial Officer of the Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.

SIGNATURES

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

CENTER BANCORP, INC.

(Registrant)

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

	Date: November 9, 2011		Date: November 9, 2011

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Note 1. Basis Of Presentation Note 2. Earnings Per Common Share Note 3. Stock-based Compensation Note 3. Stock-based Compensation (continued)Note 4. Recent Accounting Pronouncements Note 5 Loans and The Allowance For Loan Losses Note 6. Comprehensive Income Note 7. Investment Securities Note 8. Fair Value Measurements and Fair Value Of Financial Instruments Note 9. Net Investment in Direct Financing Lease Note 10. Components Of Net Periodic Pension Cost Note 11. Income Taxes Note 12. Borrowed Funds Note 13. Subordinated Debentures Note 14. Stockholders Equity Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Qualitative and Quantitative Disclosures About Market Risks Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

CNOB 10-Q Quarter ended Sept. 30, 2011