ConnectOne Bancorp 10Q 2009 Q1 Quarterly report

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2009

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 2-81353

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

(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 ¨ 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-12 of the Exchange Act

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

Common Stock, No Par Value:	12,991,312
(Title of Class)	(Outstanding at April 30, 2009)

INDEX TO FORM 10-Q

		Page

PART I. – FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Statements of Condition at March 31, 2009 (unaudited) and December 31, 2008	2

	Consolidated Statements of Income for the three months ended March 31, 2009 and 2008 (unaudited)	3

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2009 and 2008 (unaudited)	4

	Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)	5

	Notes to Consolidated Financial Statements	6-21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-38

Item 3.	Qualitative and Quantitative Disclosures about Market Risks	39

Item 4.	Controls and Procedures	40

PART II. – OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6.	Exhibits	41

Signatures		42

Certifications

PART I – FINANCIAL INFORMATION

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009, or for any other interim period. The Center Bancorp, Inc. 2008 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

(Dollars in Thousands, Except Per Share Data)	March 31, 2009			December 31, 2008
	(unaudited)
ASSETS
Cash and due from banks	$	90,634		$	15,031
Investment securities available-for-sale		266,032			242,714
Loans, net of unearned income		678,017			676,203
Less: Allowance for loan losses		6,769			6,254
Net Loans		671,248			669,949
Restricted investment in bank stocks, at cost		10,228			10,230
Premises and equipment, net		18,313			18,488
Accrued interest receivable		4,273			4,154
Bank owned life insurance		23,156			22,938
Other real estate owned		4,426			3,949
Goodwill and other intangible assets		17,087			17,110
Other assets		15,616			18,730
Total assets	$	1,121,013		$	1,023,293
LIABILITIES
Deposits:
Non-interest bearing	$	114,607		$	113,319
Interest-bearing
Time deposits $100 and over		163,392			100,493
Interest-bearing transactions, savings and time deposits $100 and less		490,380			445,725
Total deposits		768,379			659,537
Short-term borrowings		26,951			45,143
Long-term borrowings		223,259			223,297
Subordinated debentures		5,155			5,155
Accounts payable and accrued liabilities		7,840			8,448
Total liabilities		1,031,584			941,580
STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 liquidation value per share:
Authorized 5,000,000 shares; issued 10,000 shares in 2009 and none in 2008		9,557			—
Common stock, no par value:
Authorized 20,000,000 shares; issued 15,190,984 shares in 2009 and 2008; outstanding 12,991,312 shares in 2009 and 2008		86,908			86,908
Additional paid in capital		5,630			5,204
Retained earnings		15,806			16,309
Treasury stock, at cost (2,199,672 shares in 2009 and 2008)		(17,796	)		(17,796	)
Accumulated other comprehensive loss		(10,676	)		(8,912	)
Total stockholders’ equity		89,429			81,713
Total liabilities and stockholders’ equity	$	1,121,013		$	1,023,293

See the accompanying notes to the consolidated financial statements

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended March 31,
(Dollars in Thousands, Except Per Share Data )	2009		2008
Interest income:
Interest and fees on loans	$	9,102	$	8,471
Interest and dividends on investment securities:
Taxable interest income		2,380		2,765
Non-taxable interest income		343		802
Dividends		117		243
Interest on Federal funds sold and securities purchased under agreement to resell		—		79
Total interest income		11,942		12,360
Interest expense:
Interest on certificates of deposit $100 or more		778		675
Interest on other deposits		2,277		3,369
Interest on borrowings		2,508		2,629
Total interest expense		5,563		6,673
Net interest income		6,379		5,687
Provision for loan losses		1,421		150
Net interest income after provision for loan losses		4,958		5,537
Other income:
Service charges, commissions and fees		449		529
Annuities and insurance		40		17
Bank owned life insurance		218		222
Net securities gains		600		—
Other		77		98
Total other income		1,384		866
Other expense:
Salaries and employee benefits		2,393		2,352
Occupancy, net		797		759
Premises and equipment		321		366
FDIC Insurance		365		20
Professional and consulting		212		172
Stationery and printing		70		95
Marketing and advertising		130		160
Computer expense		214		141
Other		817		888
Total other expense		5,319		4,953
Income before income tax expense		1,023		1,450
Income tax expense		224		233
Net income		799		1,217
Preferred stock dividends and accretion		129		—
Net income available to common stockholders	$	670	$	1,217
Earnings per common share:
Basic	$	0.05	$	0.09
Diluted	$	0.05	$	0.09
Weighted average common shares outstanding :
Basic		12,991,312		13,144,747
Diluted		12,993,185		13,163,586

See the accompanying notes to the consolidated financial statements

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

(Dollars in Thousands, Except Per Share Data)	Preferred Stock		Common Stock			Additional Paid In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance, December 31, 2007	$	-	$	86,908		$	5,133		$	15,161		$	(16,100	)	$	(5,824	)	$	85,278
Comprehensive income:
Net income										1,217									1,217
Other comprehensive income, net of taxes																544			544
Total comprehensive income					��														1,761
Cash dividends declared on common stock ($0.09 per share)										(1,168	)								(1,168	)
Issuance cost of common stock										(5	)								(5	)
Exercise of stock options (21,974 shares)							20						173						193
Stock based compensation expense							45												45
Treasury stock purchased (63,898 shares)													(703	)					(703	)
Balance, March 31, 2008	$	-	$	86,908		$	5,198		$	15,205		$	(16,630	)	$	(5,280	)	$	85,401

Balance, December 31 ,2008	$	-	$	86,908		$	5,204		$	16,309		$	(17,796	)	$	(8,912	)	$	81,713
Comprehensive loss:
Net income										799									799
Other comprehensive loss, net of taxes																(1,764	)		(1,764	)
Total comprehensive loss																			(965	)
Proceeds from issuance of preferred stock & warrants		9,539					461												10,000
Accretion of discount on preferred stock		18								(18	)								-
Dividends on preferred stock										(111	)								(111	)
Cash dividends declared on common stock ($0.09 per share)										(1,169	)								(1,169	)
Issuance cost of common stock										(4	)								(4	)
Taxes related to stock based compensation							(57	)											(57	)
Stock based compensation expense							22												22
Balance, March 31, 2009	$	9,557	$	86,908		$	5,630		$	15,806		$	(17,796	)	$	(10,676	)	$	89,429

See the accompanying notes to the consolidated financial statements

CENTER BANCORP, INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended March 31,
(Dollars In Thousands)	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	799		$	1,217
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation and amortization		399			409
Stock based compensation expense		22			45
Provision for loan losses		1,421			150
Provision for deferred taxes		57			—
Net gain on investment securities available for sale		(600	)		—
(Increase) decrease in accrued interest receivable		(119	)		40
Decrease (increase) in other assets		2,637			(1,317	)
Increase (decrease) in other liabilities		450			(2,091	)
Increase in cash surrender value of bank owned life insurance		(218	)		(222	)
Amortization of premium and accretion of discount on investment securities, net		10			—
Net cash provided by (used in) operating activities		4,858			(1,769	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale		6,475			29,378
Net redemptions (purchases) of restricted investment in bank stock		2			(1,569	)
Proceeds from sales of investment securities available-for-sale		56,458			8,626
Purchase of securities available-for-sale		(88,601	)		(10,794	)
Net increase in loans		(2,720	)		(13,424	)
Purchases of premises and equipment		(201	)		(369	)
Proceeds from the sale of branch facility		—			2,414
Net cash provided by (used in) investing activities		(28,587	)		14,262
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		108,842			(76,146	)
Net (decrease) increase in short-term borrowings		(18,192	)		20,797
Proceeds from long term borrowings		—			35,000
Payment on long term borrowings		(38	)		(37	)
Proceeds from issuance of preferred stock and warrants		10,000			—
Cash dividends on common stock		(1,169	)		(1,168	)
Cash dividends on preferred stock		(50	)		—
Issuance cost of common stock		(4	)		(5	)
Proceeds from exercise of stock options		—			193
Taxes related to stock based compensation		(57	)		—
Purchase of treasury stock		—			(703	)
Net cash provided by (used in) financing activities		99,332			(22,069	)
Net increase (decrease) in cash and cash equivalents		75,603			(9,576	)
Cash and cash equivalents at beginning of period		15,031			70,031
Cash and cash equivalents at end of period	$	90,634		$	60,455
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non cash investment activities:
Trade date accounting settlements for investments	$	—		$	6,117
Cash paid during year for:
Interest paid on deposits and borrowings	$	5,369		$	6,514
Income taxes	$	50		$	1,659

See the accompanying notes to the consolidated financial statements

CENTER BANCORP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation

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 inter-company accounts and transactions have been eliminated from the accompanying consolidated financial statements.

Business

The Parent Corporation is a financial services bank holding company whose principal activity is the ownership and management of Union Center National Bank as mentioned above. The Bank provides a full range of banking services to individual and corporate customers through branch locations in Union and Morris counties, New Jersey. Additionally, the Bank originates residential mortgage loans and services such loans for others. The Bank is subject to competition from other financial institutions and the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.

Use of Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the reported periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant 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.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks.

Investment Securities

The Corporation accounts for its investment securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investment in Debt and Equity Securities.” Investments are classified into the following categories: (1) held to maturity securities, for which the Corporation has both the positive intent and ability to hold until maturity, which are reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term and are reported at fair value with unrealized gains and losses included in earnings; and (3) available-for-sale securities, which do not meet the criteria of the other two categories and which management believes may be sold prior to maturity due to changes in interest rates, prepayment, risk, liquidity or other factors, and are reported at fair value, with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity and excluded from earnings.

Investment securities are adjusted for amortization of premiums and accretion of discounts, which are recognized on a level yield method, as adjustments to interest income. Investment securities gains or losses are determined using the specific identification method.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies – (continued)

During the fourth quarter of 2007, the Corporation reclassified all of its held-to-maturity investment securities to available-for-sale. The transfer of these securities to available-for-sale will allow the Corporation greater flexibility in managing its investment portfolio. Investment securities with a total of $113.4 million and a fair value of $112.9 million were transferred to available-for-sale during the fourth quarter of 2007. The unrealized loss on these securities was recorded, net of tax, as accumulated other comprehensive income, an adjustment to stockholders’ equity. As a result, the Corporation will not classify any future purchases of investment securities as held-to-maturity for at least two years from the date of transfer.

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. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and the intent and ability of the Corporation to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced to fair value and a corresponding charge to earnings is recognized. An impairment charge on certain investment securities of approximately $140,000 was recognized during the three months ended March 31, 2009. No impairment charge was recognized during the three months ended March 31, 2008.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregated costs or estimated fair value. Gains and losses on sales of loans are also accounted for in accordance with SFAS No. 134 “Accounting for Mortgage Securities retained after Securitizations or Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.” At March 31, 2009 and 2008, the Corporation held no loans for sale.

Loans

Loans are stated at their principal amounts less 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. 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 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. 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.

Allowance for Loan Losses

The allowance for loan losses (“allowance”) 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.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies – (continued)

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

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize loan losses, 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.

The Corporation accounts for impaired loans in accordance with 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, at a minimum, non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment.

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.

Premises and Equipment

Land is carried at cost and bank premises and equipment at cost less accumulated depreciation based on the estimated useful lives of assets, computed principally on a straight-line basis. Expenditures for maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Gains and losses on sales or other dispositions are recorded as a component of other income or other expenses.

Other Real Estate Owned

Other real estate owned (“OREO”), representing property acquired through foreclosure and held for sale, are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosures, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses. During the second quarter of 2008, the Corporation recorded a $26,000 loss on the sale of two OREO properties which had a carrying value of $478,000. At December 31, 2008, the Corporation’s OREO totaled $3.9 million and consisted of a residential condominium project in Union County, New Jersey. At March 31, 2009, the Corporation’s OREO totaled $4.4 million; the increase from December 31, 2008 represented construction costs incurred in completing the residential condominium project.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies – (continued)

Mortgage Servicing

The Corporation performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received for those services. At March 31, 2009 and December 31, 2008, the Corporation was servicing approximately $9.8 million and $10.0 million, respectively, of loans for others.

Employee Benefit Plans

The Corporation has a non-contributory pension plan covering all eligible employees up until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. The Corporation’s policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in other expense.

On August 9, 2007, the Corporation froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved.

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 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 March 31,
(In thousands, except per share amounts)	2009		2008

Net income	$	799	$	1,217
Preferred stock dividends and accretion		129		—
Net income available to common stockholders	$	670	$	1,217
Average number of common shares outstanding		12,991		13,145
Effect of dilutive options		2		19
Average number of common shares outstanding used to calculate diluted earnings per common share		12,993		13,164
Earnings per common share:
Basic	$	0.05	$	0.09
Diluted	$	0.05	$	0.09

Treasury Stock

The Corporation announced on March 27, 2006 that its Board of Directors approved an increase in its then current share buyback program to 5 percent of outstanding shares, enhancing its then current authorization by 425,825 shares to 684,965 shares. The Corporation announced on October 1, 2007 that its Board of Directors approved an additional increase in its current share buyback program to 5 percent of outstanding shares, enhancing its current authorization by 684,627 shares. On June 26, 2008, the Corporation announced that its Board of Directors approved an additional buyback of 649,712 shares. The total buyback authorization has been increased to 2,039,731 shares. Subject to limitations applicable to the Corporation, purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased will be added to the corporate treasury and will be used for future stock dividends and other issuances. As of March 31, 2009, Center Bancorp had 13.0 million shares of common stock outstanding. As of March 31, 2009, the Corporation had purchased 1,386,863 common shares at an average cost per share of $11.44 under the stock buyback program as amended on October 1, 2007 and June 26, 2008. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. For the three months ended March 31, 2009, the Corporation did not purchase any of its common shares.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies – (continued)

Goodwill

The Corporation adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment annually, or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the three months ended March 31, 2009 and 2008.

Comprehensive Income

Total comprehensive income includes all changes in equity during a period 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 securities available-for-sale and unrecognized actuarial gains and losses of the Corporation’s defined benefit pension plan, net of taxes.

Disclosure of comprehensive income (loss) for the three months ended March 31, 2009 and 2008 is presented in the Consolidated Statements of Changes in Stockholders’ Equity and presented in detail in Note 4 of the Notes to Consolidated Financial Statements.

Bank Owned Life Insurance

During 2001, the Corporation invested $12.5 million in Bank Owned Life Insurance (“BOLI”) to help offset the rising cost of employee benefits, and made subsequent investments in 2004 of $2.5 million and in 2006 of $2.0 million. The change in the cash surrender value of the BOLI was recorded as a component of other income and amounted to $218,000 and $222,000 in the three months ended March 31, 2009 and 2008, respectively.

Income Taxes

The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of assets and liabilities, using enacted tax rates expected to be applied to taxable income in the years in which the differences are expected to be settled. Income tax-related interest and penalties are classified as a component of income tax expense.

Advertising Costs

The Corporation recognizes its marketing and advertising cost as incurred. Advertising costs were $130,000 and $160,000 for the three months ended March 31, 2009 and 2008, respectively.

Note 2 — 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 1999 Employee Stock Incentive Plan, an aggregate of 225,345 shares remain available for grant under the plan as of March 31, 2009 and are authorized for issuance. Since the 1999 Employee Stock Incentive Plan expired on April 13, 2009, a proposal with respect to a new plan will be considered at the Corporation’s 2009 annual meeting of shareholders. Under the 2003 Non-Employee Director Stock Option Plan, an aggregate total of 470,404 shares remain available for grant under the plan as of March 31, 2009 and are authorized for issuance. Such shares may be treasury shares, newly issued shares or a combination thereof.

CENTER BANCORP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Stock Based Compensation – (continued)

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

Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Corporation recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of 3 years. The Corporation estimated the forfeiture rate based on its historical experience during the preceding seven fiscal years.

For the three months ended March 31, 2009, the Corporation’s income before income taxes and net income was reduced by $22,000 and $13,000, respectively, as a result of the compensation expense related to stock options. For the three months ended March 31, 2008, the Corporation’s income before income taxes and net income was reduced by $45,000 and $27,000, respectively, as a result of such expense.

Under the principal option plans, the Corporation may 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 the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. There were no restricted stock awards outstanding at March 31, 2009 and 2008.

There were 38,203 shares of common stock underlying options that were granted on both March 1, 2009 and 2008. 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:

	Three Months Ended March 31,
	2009			2008

Weighted average fair value of grants	$	1.48		$	3.10
Risk-free interest rate		1.90	%		3.03	%
Dividend yield		4.69	%		2.43	%
Expected volatility		32.9	%		30.2	%
Expected life in months		69			88

CENTER BANCORP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Stock Based Compensation – (continued)

Option activity under the principal option plans as of March 31, 2009 and changes during the three months ended March 31, 2009 were as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
					(In Years)

Outstanding at December 31, 2008	185,164		$	10.45
Granted	38,203			7.67
Exercised	—			—
Forfeited/cancelled/expired	(711	)		6.07
Outstanding at March 31, 2009	222,656		$	9.99	6.38	$	11,478
Exercisable at March 31, 2009	132,348		$	9.58	4.65	$	11,478

The aggregate intrinsic value of options above represents the total pretax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the first quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2009. This amount changes based on the fair market value of the Corporation’s stock.

As of March 31, 2009, there was approximately $229,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 2.1 years.

Note 3 — Recent Accounting Pronouncements

FSP FAS 157-4

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FASB Statement 157, “Fair Value Measurements”, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

CENTER BANCORP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Recent Accounting Pronouncements – (continued)

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The Corporation elected not to early adopt the position and is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

FSP FAS 115-2 and FAS 124-2

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarify the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess 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 an 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, FSP FAS 115-2 and FAS 124-2 change 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.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. The Corporation elected not to early adopt this position and is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. The Corporation elected not to early adopt this position and is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Recent Accounting Pronouncements – (continued)

FSP EITF 99-20-1

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets”, to achieve a more consistent determination of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of FSP EITF 99-20-1 did not have a material impact on the Corporation’s consolidated financial statements.

International Financial Reporting Standards

In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.

FSP FAS 132(R)-1

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending

after December 15, 2009. The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

Note 4 — Comprehensive Income

Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Corporation’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale and the effects of the pension liability.

The table below provides a reconciliation of the components of other comprehensive income (loss) to the disclosure provided in the statement of changes in stockholders’ equity.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Comprehensive Income – (continued)

The changes in the components of other comprehensive income (loss), net of taxes, were as follows for the following fiscal periods:

(Dollars in Thousands)	Before Tax Amount			Tax Benefit (Expense)			Net of Tax Amount
For the three month period ended March 31, 2009:
Net unrealized losses on available for sale securities
Net unrealized holding losses arising during period	$	(2,340	)	$	936		$	(1,404	)
Less reclassification adjustment for net gains arising during the period		600			(240	)		360
Net unrealized losses	$	(2,940	)	$	1,176		$	(1,764	)
Other comprehensive loss, net	$	(2,940	)	$	1,176		$	(1,764	)

For the three month period ended March 31, 2008:
Net unrealized gains on available for sale securities
Net unrealized holding gains arising during the period	$	879		$	(335	)	$	544
Less reclassification adjustment for net gains arising during the period		—			—			—
Net unrealized gains		879			(335	)		544
Other comprehensive income, net	$	879		$	(335	)	$	544

Note 5 — Fair Value Measurements and Fair Value of Financial Instruments

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 sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends 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.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157, “Fair Value Measurements,” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for

fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

In December 2007, the FASB issued FASB Statement Position 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such, the Corporation adopted the provisions of SFAS No. 157 relating to non-financial assets and liabilities in 2009. In October 2008, the FASB issued FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active” (“FSP 157-3”), to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was applied to the Corporation’s December 31, 2008 consolidated financial statements.

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation methods 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 under SFAS No. 157 are as follows:

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Level 1: Unadjusted 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 are as follows:

				Fair Value Measurements at Reporting Date Using
	March 31, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
				(Dollars in Thousands)
Assets Measured at Fair Value on a Recurring Basis:
Securities available-for-sale		$	266,032		$	55,179		$	182,878		$	27,975

The following table presents the changes in securities available-for-sale with significant unobservable inputs (Level 3) for the quarter ended March 31:

	2009
	(Dollars in Thousands)
Beginning balance, January 1,	$	23,554
Transfers in (out) of Level 3		4,251
Principal paydowns		5
Total net losses included in net income		(140	)
Total net unrealized gains		305
Ending balance, March 31,	$	27,975

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 March 31, 2009 and December 31, 2008:

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Securities Available-For-Sale

Where quoted prices are available in an active market, securities are classified with Level 1 of the valuation hierarchy. Level 1 inputs include 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 securities as Level 3 securities 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.

The table above includes pooled trust preferred securities and single name corporate trust preferred securities, which were transferred to Level 3 at September 30, 2008 due to the aforementioned market conditions. As the financial markets remained in turmoil over year-end, market pricing for these securities varied widely from one pricing service to another based on the lack of trading. As such, these securities were considered to no longer have readily observable market data that was accurate to support a fair value as prescribed by SFAS No. 157. The fair value measurement objective remained the same in that the price received by the Corporation would result from an orderly transaction (an exit price notion) and that the observable transactions considered in fair value were not forced liquidations or distressed sales at the measurement date.

In regards to the pooled trust preferred securities (“pooled TRUPS”), prior to June 30, 2008, the Corporation was able to determine fair value of these using a market approach validation technique based on Level 2 inputs that did not require significant adjustments. The Level 2 inputs included:

Quoted prices in active markets for similar pooled TRUPS with insignificant adjustments for differences between the pooled TRUPS that the Corporation holds and similar pooled TRUPS.

Quoted prices in markets that are not active that represent current transactions for the same or similar pooled TRUPS that do not require significant adjustment based on unobservable inputs.

Since June 30, 2008, the market for these pooled TRUPS has become increasingly inactive. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these pooled TRUPS trade and then by a significant decrease in the volume of trades relative to historical levels as well as other relevant factors. At September 30, 2008, the Corporation determined that the market for similar pooled TRUPS is not active. That determination was made considering that there are few observable transactions for similar pooled TRUPS, the prices for those transactions that have occurred are not current or represent fair value, and the observable prices for those transactions vary substantially over time, thus reducing the potential relevance of those observations. Consequently, the Corporation’s pooled TRUPS at September 30, 2008 have been classified within Level 3 because the Corporation has 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 such, the Corporation used the discount rate adjustment technique to determine fair value.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair value as of March 31, 2009 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. The securities continue to make scheduled cash flows and no cash flow payment defaults have occurred to date.

In regards to the single name corporate trust preferred securities (“single name TRUPS”), prior to June 30, 2008, the Corporation was able to determine fair value of these using a market approach validation technique based on Level 2 inputs that did not require significant adjustments. The Level 2 inputs included:

Quoted prices in active markets for similar single name TRUPS with insignificant adjustments for differences between the Pooled TRUPS that the Corporation holds and similar pooled TRUPS.

Quoted prices in markets that are not active that represent current transactions for the same or similar single name TRUPS that do not require significant adjustment based on unobservable inputs.

Since June 30, 2008, the market for these single name TRUPS has become increasingly inactive. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these single name TRUPS trade and then by a significant decrease in the volume of trades relative to historical levels as well as other relevant factors. At September 30, 2008, the Corporation determined that the market for similar single name TRUPS is not active. That determination was made considering that there are few observable transactions for similar single name TRUPS, the prices for those transactions that have occurred are not current or represent fair value, and the observable prices for those transactions vary substantially over time, thus reducing the potential relevance of those observations. Consequently, the Corporation’s single name TRUPS at September 30, 2008 have been classified within Level 3 because the Corporation has determined that significant adjustments using unobservable inputs are required to determine fair value at the measurement date.

Loans Held for Sale

Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, 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.

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

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 March 31, 2009 are as follows:

			Fair Value Measurements at Reporting Date Using
(Dollars in Thousands)	March 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)

Assets Measured at Fair Value on a Non-Recurring Basis:
Impaired loans	$	3,951			$	3,951
Other real estate owned		4,426				4,426

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 March 31, 2009 and December 31, 2008:

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.

Other Real Estate Owned

Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. The Corporation believes that the fair value component in its valuation follows the provisions of SFAS No. 157. 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 appraisal. Accordingly, at March 31, 2009 and December 31, 2008, the Corporation had $4.4 million and $3.9 million, respectively, in other real estate owned.

Note 6 — Components of Net Periodic Pension Cost

The following table sets forth the net periodic pension cost for the pension plan for the three months ended March 31, 2009 and 2008.

	Three Months Ended March 31,
(Dollars in Thousands)	2009				2008

Interest cost		$	152			$	175
Expected return on plan assets			—				(164	)
Net amortization and deferral			(37	)			—
Net periodic pension cost		$	115			$	11

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Components of Net Periodic Pension Cost – (continued)

Contributions

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2008, that it expects to contribute $596,000 to its Pension Trust in 2009. For the three months ended March 31, 2009, the Corporation did not contribute to its Pension Trust.

Note 7 — Income Taxes

In June 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in tax positions.

The Corporation adopted the provisions of FIN 48 as of January 1, 2007. The adoption of FIN 48 did not impact the Corporation’s consolidated financial condition, results of operations or cash flows. At March 31, 2009 and December 31, 2008, the Corporation had unrecognized tax benefits of $2.5 million and $2.5 million, respectively,

which primarily related to uncertainty regarding the sustainability of certain deductions to be taken in 2008 and future U.S. Federal income tax returns related to the liquidation of the Corporation’s New Jersey REIT subsidiary. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. For the three months ended March 31, 2009, the Corporation recorded approximately $41,000 in interest expense as a component of tax expense related to the unrecognized tax benefit.

Note 8 — 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. he details of these borrowings are presented in the following table.

(Dollars in Thousands)	March 31, 2009
Short-term borrowings:
Average interest rate:
At quarter end		1.51	%
For the quarter		1.67	%
Average amount outstanding during the quarter:	$	26,842
Maximum amount outstanding at any month end:	$	26,951
Amount outstanding at quarter end:	$	26,951

Long-Term Borrowings:

Long-term borrowings, which consist primarily of FHLB advances and securities sold under agreements to repurchase, totaled $223.3 million and mature within one to ten years. The FHLB advances are secured by pledges of FHLB stock, 1-4 family mortgage and U.S. government and Federal agency obligations. At March 31, 2009, the FHLB advances and securities sold under agreements to repurchase had a weighted average interest rate of 4.09 percent and 4.54 percent, respectively, and are contractually scheduled for repayment as follows:

(Dollars in Thousands)	March 31, 2009
2010	$	40,259
2011		22,000
2013		5,000
Thereafter		156,000
Total	$	223,259

CENTER BANCORP, INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Stockholders’ Equity and Subsequent Event

On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under the 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 believes that its participation in this program will strengthen its current well-capitalized position. The funding will be used to support future loan growth.

The Corporation’s senior preferred stock and the warrant issued under the Capital Purchase Program qualify and are accounted for as equity on the 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 warrant, 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 is 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 April 24, 2009, the Board of Directors of Center Bancorp, Inc. unanimously voted to reduce its current quarterly common stock dividend from $0.09 per share to $0.03 per share, beginning with the second quarter dividend declaration.

Note 10 — Subordinated Debentures

During 2001 and 2003, the Corporation issued $10.3 million and $5.2 million, respectively, of subordinated debentures and formed statutory business trusts, which exist for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of the trusts; (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 trusts are not consolidated in accordance with FASB interpretation No. 46 “Consolidation of Variable interest Entities.” Distributions on the subordinated debentures owned by the subsidiary trust are classified as interest expense in the Corporation’s consolidated statement of income. On December 18, 2006, the Corporation dissolved its Statutory Trust I, in connection with the redemption of $10.3 million of subordinated debentures.

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, but 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 March 31, 2009 was 4.02 percent.

Item 2. Management’s Discussion and Analysis (“MD&A”) 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 March 31, 2009 and December 31, 2008. In order to fully appreciate 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, 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; (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 are included in Item 1A of Center Bancorp’s Annual Report on Form 10-K and in Center Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from Center Bancorp.

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 most significant accounting policies followed by the Corporation are presented in Note 1 of the Notes to Consolidated Financial Statements. 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 can be found below and in Note 1 of the Notes to Consolidated Financial Statements.

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 Securities

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. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and the intent and ability of the Corporation to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced to fair value and a corresponding charge to earnings is recognized. An impairment charge of $140,000 was recognized during the three months ended March 31, 2009 on its Lehman Brothers bond. No impairment charges were recognized during the three months ended March 31, 2008.

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 7 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.

Goodwill

The Corporation adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” 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 March 31, 2009 and 2008.

Fair Value of Investment Securities

In October 2008, the FASB issued FSP SFAS No. 157-3, “ Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (“FSP 157-3”), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Corporation’s December 31, 2008 and March 31, 2009 financial statements. The Corporation applied the guidance in FSP 157-3 when determining fair value for the Corporation’s pooled trust preferred securities and single name corporate trust preferred securities. See Note 5, Fair Value Measurements, for further discussion.

Earnings Analysis

Net income for the three months ended March 31, 2009 amounted to $ 799,000 compared to net income of $1.2 million for the comparable three-month period ended March 31, 2008. The Corporation recorded earnings per diluted common share of $0.05 for the three months ended March 31, 2009 as compared with earnings of $0.09 per diluted common share for the three months ended March 31, 2008. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury reduced earnings by approximately $0.01 per fully diluted common share. The annualized return on average assets decreased to 0.30 percent for the three months ended March 31, 2009 as compared to 0.50 percent for the comparable three-month period in 2008. The annualized return on average stockholders’ equity was 3.52 percent for the three-month period ended March 31, 2009 as compared to 5.60 percent for the three months ended March 31, 2008.

Net Interest Income/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 wholesale borrowings, which support these assets. Net interest income is presented in this Quarterly Report on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on various 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, and then in accordance with the Corporation’s consolidated financial statements.

Financial institutions typically analyze earnings performance on a tax-equivalent basis as a result of certain disclosure obligations, which require the presentation of tax-equivalent data, and in order to assist financial statement readers in comparing data from period to period.

Net Interest Income

(tax-equivalent basis)

	Three Months Ended March 31,
							Increase			Percent
(Dollars in Thousands)	2009			2008			(Decrease)			Change
Interest income:
Investments	$	2,930		$	4,085		$	(1,155	)		(28.27	)
Loans, including fees		9,102			8,471			631			7.45
Federal funds sold and securities purchased under agreement to resell		—			79			(79	)		(100.00	)
Restricted investment in bank stocks, at cost		87			155			(68	)		(43.87	)
Total interest income		12,119			12,790			(671	)		(5.25	)
Interest expense:
Time deposits of $100 or more		778			675			103			15.26
All other deposits		2,277			3,369			(1,092	)		(32.41	)
Borrowings		2,508			2,629			(121	)		(4.60	)
Total interest expense		5,563			6,673			(1,110	)		(16.63	)
Net interest income on a fully tax-equivalent basis		6,556			6,117			439			7.18
Tax-equivalent adjustment		(177	)		(430	)		253			(58.84	)
Net interest income	$	6,379		$	5,687		$	692			12.17

Note: The tax-equivalent adjustment was computed on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest earned on tax-advantaged instruments.

Net interest income on a fully tax-equivalent basis increased $439,000 or 7.2 percent to $6.6 million for the three months ended March 31, 2009 as compared to the same period in 2008. For the three months ended March 31, 2009, the net interest margin increased 7 basis points to 2.81 percent from 2.74 percent during the three months ended March 31, 2008, due primarily to lower rates paid on interest-bearing liabilities. For the three months ended March 31, 2009, a decrease in the average yield on interest-earning assets of 55 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 82 basis points, which increased the Corporation’s net interest spread by 27 basis points for the period. On a quarterly linked sequential basis, net interest spread and margin declined by 13 basis points and 20 basis points, respectively.

For the three-month period ended March 31, 2009, interest income on a tax-equivalent basis decreased by $671,000 or 5.2 percent from the comparable three-month period in 2008. This decrease was due primarily to a decline in balances of the Corporation’s investment securities portfolio coupled with a decline in rates due to the actions taken by the Federal Reserve to lower market interest rates over the past year. The Corporation’s loan portfolio increased on average $114.3 million to $680.0 million from $565.7 million in the same quarter in 2008, primarily driven by growth in commercial real estate business related sectors of the loan portfolio. The loan portfolio represented approximately 72.8 percent of the Corporation’s interest-earning assets on average during the first quarter of 2009 as compared to 63.4 percent in the same quarter in 2008. The increase in loan volume was partially offset by the above-mentioned decline in the volume of the Corporation’s investment portfolio. Average investment volume decreased during the current three month period by $62.6 million compared to the first quarter of 2008.

The Federal Open Market Committee (FOMC) reduced rates seven times during 2008 for a total of 400 basis points. This action by the FOMC allowed the Corporation to further reduce liability costs throughout 2008 and into 2009.

For the three months ended March 31, 2009, interest expense declined by $1.1 million or 16.6 percent from the same period in 2008. The average rate of interest-bearing liabilities decreased 82 basis points to 2.64 percent for the three months ended March 31, 2009 from 3.46 percent for the three months ended March 31, 2008. At the same time, the average volume of interest-bearing liabilities increased by $73.3 million. The increase in the average balance of interest-bearing liabilities during the three months ended March 31, 2009 was primarily in time deposits (CDARS Reciprocal deposits) of $113.4 million and in savings deposits of $23.6 million, partially offset by decreases of $59.5 million in money market deposits and $8.3 million in other interest bearing deposits. Steps were taken throughout 2008 to improve the Corporation’s net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further cash outflows during the year. The result was a steady improvement in the Corporation’s cost of funds and net interest margin during 2008. As a result of these factors, for the three months ended March 31, 2009, the Corporation’s net interest spread on a tax-equivalent basis increased to 2.55 percent from 2.28 percent for the three months ended March 31, 2008.

The following table, “Analysis of Variance in Net Interest Income Due to Volume and Rates”, analyzes net interest income on a fully tax-equivalent basis by segregating the volume and rate components of various interest-earning assets and liabilities and the changes in the rates earned and paid by the Corporation.

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

	Three Months Ended March 31, 2009/2008 Increase (Decrease) Due to Change In:
	Average			Average			Net
(Dollars in Thousands)	Volume			Rate			Change
Interest-earning assets:
Investment securities:
Taxable	$	(136	)	$	(251	)	$	(387	)
Non-Taxable		(757	)		(11	)		(768	)
Loans, net of unearned income		1,592			(961	)		631
Federal funds sold and securities purchased under agreement to resell		(79	)		—			(79	)
Restricted investment in bank stock		6			(74	)		(68	)
Total interest-earning assets		626			(1,297	)		(671	)
Interest-bearing liabilities:
Money market deposits		(370	)		(522	)		(892	)
Savings deposits		65			110			175
Time deposits		924			(763	)		161
Other interest-bearing deposits		(54	)		(379	)		(433	)
Borrowings and subordinated debentures		41			(162	)		(121	)
Total interest-bearing liabilities		606			(1,716	)		(1,110	)
Change in net interest income	$	20		$	419		$	439

The following table, “Average Statement of condition with Interest and Average Rates”, presents for the three months ended March 31, 2009 and 2008 the Corporation’s average assets, liabilities and stockholders’ equity. The Corporation’s net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also reflected.

Average Statements of Condition with Interest and Average Rates

	Three Months Ended March 31,
	2009									2008
(Tax-Equivalent Basis, Dollars in Thousands)	Average Balance			Interest Income/ Expense			Average Yield/ Rate			Average Balance			Interest Income/ Expense			Average Yield/ Rate

Assets:
Interest-earning assets:
Investment securities:(1)
Taxable	$	207,814		$	2,410			4.64	%	$	218,836		$	2,797			5.11	%
Tax-exempt		35,402			520			5.88			87,018			1,288			5.92
Loans, net of unearned income(2)		679,953			9,102			5.35			565,654			8,471			5.99
Federal funds sold and securities purchased under agreement to resell		-			-			-			10,745			79			2.94
Restricted investment in bank stocks		10,229			87			3.40			9,798			155			6.33
Total interest-earning assets		933,398			12,119			5.19			892,051			12,790			5.74
Non-interest-earning assets:
Cash and due from banks		47,130									15,623
Bank owned life insurance		23,035									22,349
Intangible assets		17,101									17,194
Other assets		44,595									37,922
Allowance for loan losses		(6,384	)								(5,237	)
Total non-interest earning assets		125,477									87,851
Total assets	$	1,058,875								$	979,902
Liabilities and stockholders’ equity
Interest-bearing liabilities:
Money market deposits	$	112,392		$	449			1.60	%	$	171,843		$	1,341			3.12	%
Savings deposits		86,559			315			1.46			62,965			140			0.89
Time deposits		261,771			1,780			2.72			148,411			1,619			4.36
Other interest-bearing deposits		127,823			511			1.60			136,076			944			2.77
Short-term and long-term borrowings		250,114			2,450			3.92			246,067			2,547			4.14
Subordinated debentures		5,155			58			4.50			5,155			82			6.36
Total interest-bearing liabilities		843,814			5,563			2.64			770,517			6,673			3.46
Non-interest-bearing liabilities:
Demand deposits		115,274									112,276
Other non-interest-bearing deposits		320									419
Other liabilities		8,568									9,769
Total non-interest-bearing liabilities		124,162									122,464
Stockholders’ equity		90,899									86,921
Total liabilities and stockholders’ equity	$	1,058,875								$	979,902
Net interest income (tax-equivalent basis)				$	6,556								$	6,117
Net interest spread								2.55	%								2.28	%
Net interest income as percent of earning-assets (net interest margin)								2.81	%								2.74	%
Tax-equivalent adjustment(3)					(177	)								(430	)
Net interest income				$	6,379								$	5,687

——————

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

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

(3)	The tax-equivalent adjustment was computed based on a statutory Federal income tax rate of 34 percent.

Investment Portfolio

For the three months ended March 31, 2009, the average volume of investment securities decreased by $62.6 million to approximately $243.2 million, or 26.1 percent of average earning assets, from $305.9 million on average, or 34.3 percent of average earning assets, in the comparable period in 2008. The decline is consistent with maintaining the balance sheet strategies the Corporation has previously outlined in seeking to reduce the size of its investment securities portfolio while increasing loans as a percentage of the earning-asset mix. The reduction was made in anticipation of providing cash flow for loan funding and forecasted liability outflows.

At March 31, 2009, the principal components of the investment portfolio are U.S. Treasury and U.S. Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. states and political subdivision, corporate bonds and notes, and other debt and equity securities. The Corporation’s investment portfolio also consists of overnight investments that were made into the Reserve Primary Fund (the “Fund”), a money market fund registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation could be effected for the protection of the Fund’s investors. To date, the Corporation has received four distributions from the Fund, totaling approximately 90 percent of its outstanding balance. The Fund announced that it has applied to participate in the United States Department of Treasury’s Temporary Money Market Fund Guarantee Program, participation in which is subject to approval of the Treasury Department. While the Corporation expects to recover substantially all of its current holdings in the Fund, the Corporation cannot predict when this will occur and cannot be certain as to the extent of the recovery.

During the three-month period ended March 31, 2009, the volume related factors applicable to the investment portfolio decreased revenue by $893,000, while rate related changes resulted in a decrease in revenue of $262,000 from the same period in 2008. The tax-equivalent yield on investments decreased by 52 basis points to 4.82 percent from a yield of 5.34 percent during the comparable period in 2008.

Securities available-for-sale is a part of the Corporation’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. On November 16, 2007, the Corporation transferred $113.4 million in securities classified as held-to-maturity to its available for sale portfolio. As a result of this action in the fourth quarter of 2007, the entire securities portfolio has been classified as available for sale.

During the first quarter of 2009, the Corporation recorded a $140,000 other than temporary impairment charge on its Lehman Brothers bond holding. As management continues to monitor the liquidation process and re-evaluates the carrying value based on changes in current information, the Corporation deemed it prudent to further writedown this bond holding. To date, other than temporary impairment charges taken on this bond amounted to $1,440,000.

During the three months ended March 31, 2009, approximately $56.5 million in debt securities were sold from the Corporation’s available-for-sale portfolio. The cash flow from the sale of investment securities was in part used to reduce borrowings. The Corporation’s sales from its available-for-sale portfolio were made in the ordinary course of business.

At March 31, 2009, the net unrealized loss on securities available-for-sale, which is carried as a component of other comprehensive loss and included in stockholders’ equity, net of tax, amounted to a net unrealized loss of $8.2 million as compared with a net unrealized loss of $6.5 million at December 31, 2008. The gross unrealized losses associated with U.S. Treasury and Agency securities and Federal agency obligations, mortgage-backed securities, other taxable securities 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. The Corporation has the intent and ability to hold the investment securities for a period of time necessary to recover the amortized cost.

Loan Portfolio

Lending is one of the Corporation’s primary business activities. The Corporation’s loan portfolio consists of both retail and commercial loans, serving the diverse customer base in its market area. The composition of the Corporation’s loan 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. Loan growth has been generated through business development efforts and entry into new markets.

At March 31, 2009, total loans amounted to $ 678.0 million, an increase of $1.8 million or 0.3 percent as compared to December 31, 2008. Loan growth during the quarter ended March 31, 2009 occurred primarily in the commercial and commercial real estate sectors of the loan portfolio. Total gross loans originated during the quarter included $32.0 million of new loans and $15.2 million in advances, principally offset, exclusive of scheduled payments, by payoffs and extraordinary unscheduled principal payments of $37.9 million.

Total average loan volume increased $114.3 million or 20.2 percent for the three months ended March 31, 2009 as compared to the same period in 2008, while the portfolio yield decreased by 64 basis points as compared with 2008. The increased total average loan volume was due primarily to increased customer activity, new lending relationships and new markets. The volume related factors during the period contributed increased revenue of $1.6 million, while the rate related changes decreased revenue by $961,000. The decrease in yield on loans for the three month period of 2009 compared to 2008 was the result of a decrease in market interest rates as compared with 2008, coupled with a competitive rate pricing structure and tighter spreads in the market on loans which has been driven by the heightened competition for lending relationships that exists within the Corporation’s market. At March 31, 2009, the Corporation had $31.2 million in overall undisbursed loan commitments which are expected to fund over the next 90 days.

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 are offered 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.

Allowance for Loan Losses and Related Provision

The purpose of the allowance for loan losses (“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 potential credit losses based upon a periodic evaluation of the risk characteristics of the loan portfolio. 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 borrowing base. At March 31, 2009, the level of the allowance was $6,769,000 as compared to $6,254,000 at December 31, 2008 and $5,245,000 at March 31, 2008. The Corporation had total provisions to the allowance for the three-month period ended March 31, 2009 in the amount of $1,421,000 as compared to $150,000 for the comparable period in 2008. The higher loan loss provision covered a $900,000 charge-off in connection with a $4.9 million commercial real estate construction project of industrial warehouses, which was downgraded to non-accrual status, in addition to an increase in the level of the allowance for loan losses, which was due primarily to changes in the risk ratings related to eight loans that were downgraded during the quarter. The level of the allowance during the respective periods of 2009 and 2008 reflects the credit quality within the loan portfolio, the loan volume recorded during the periods, the Corporation’s focus on the changing composition of the commercial and residential real estate loan portfolios and other related factors.

At March 31, 2009, the allowance for loan losses amounted to 1.00 percent of total loans. In management’s view, the level of the allowance at March 31, 2009 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.

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. The allowance for loan losses as a percentage of total loans amounted to 1.00 percent, 0.92 percent and 0.93 percent at March 31, 2009, December 31, 2008 and March 31, 2008, respectively.

Net charge-offs were $906,000 and $68,000 during the three months ended March 31, 2009 and 2008. The higher charge-offs for the 2009 period resulted from the previously mentioned loan placed into non-accrual status during the quarter.

Changes in the allowance for loan losses are set forth below.

	Three Months Ended March 31,
(Dollars in Thousands)	2009			2008
Average loans outstanding	$	679,953		$	565,654
Total loans at end of period	$	678,017		$	565,025
Analysis of the Allowance for Loan Losses
Balance at the beginning of year	$	6,254		$	5,163
Charge-offs:
Commercial loans		900			60
Residential		—			—
Installment loans		7			10
Total charge-offs		907			70
Recoveries:
Commercial		—			1
Installment loans		1			1
Total recoveries		1			2
Net charge-offs		906			68
Provision for loan losses		1,421			150
Balance at end of period	$	6,769		$	5,245
Ratio of net charge-offs during the period to average loans outstanding during the period (1)		0.53	%		0.05	%
Allowance for loan losses as a percentage of total loans at end of period		1.00	%		0.93	%

——————

(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 and delinquencies, 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 to maintain an adequate allowance for loan losses at all times. These practices have protected the Corporation during economic downturns and periods of uncertainty.

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 and Past Due Loans and OREO

Non-performing loans include non-accrual loans, troubled debt restructuring and accruing loans past due 90 days or more. Non-accrual loans represent loans on which interest accruals have been suspended. It is the Corporation’s general policy to consider the charge-off of loans when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Troubled debt restructurings 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.

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

(Dollars in Thousands)	March 31, 2009		December 31, 2008		March 31, 2008

Non-accrual loans	$	4,566	$	541	$	1,215
Troubled debt restructuring		91		93		—
Accruing loans past due 90 days or more		—		139		—
Total non-performing loans		4,657		773		1,215
Other real estate owned		4,426		3,949		478
Total non-performing assets	$	9,083	$	4,722	$	1,693

The increase in non-accrual loans of $4.0 million at March 31, 2009 from December 31, 2008 was primarily attributable to one commercial real estate construction project of industrial warehouses, which was downgraded to non-accrual status during the quarter. The Corporation is currently working with the borrowers and the participating bank that is involved with the project, in an effort to sell or lease the remaining industrial warehouse units. Proceeds from the current units under contract, as well as remaining units, will be used to make further principal reductions to the Corporation's loan. The $91,000 carried as troubled debt restructuring represents the total modified amount required to be paid by two different one-to-four family residential developers. Each of these borrowers is expected to make monthly payments of principal without interest. These loans are secured by real estate.

Overall credit quality in the Bank’s portfolio remains high, even though the economic weakness has impacted several potential problem loans. Other known “potential problem loans” (as defined by SEC regulations) as of March 31, 2009 have been identified and internally risk rated as other assets especially mentioned or substandard. Such loans amounted to $40.3 million, $9.4 million and $5.5 million at March 31, 2009, December 31, 2008, and March 31, 2008 respectively. The change in internally risk rated assets at March 31, 2009 was attributable to eight loans that were downgraded due mainly to a variety of changing conditions, including general economic conditions and/or conditions applicable to the specific borrowers. All such loans are currently performing and management believes that a large number of issues surrounding these loans can be cured within the near term, possibly warranting a risk rating upgrade. The Corporation has no foreign loans.

At March 31, 2009, 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.

At March 31, 2009, the Corporation had $4.4 million in other real estate owned (OREO) as compared to $3.9 million at December 31, 2008 and $478,000 at March 31, 2008. The increase in OREO balance in the first quarter was related to the construction costs incurred in completing the above-mentioned condominium project to date.

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.

Other Income

The following table presents the principal categories of other income.

	Three Months Ended March 31,
					Increase			Percent
(Dollars in Thousands)	2009		2008		(Decrease)			Change

Service charges, commissions and fees	$	449	$	529	$	(80	)		(15.1	)
Annuities and insurance		40		17		23			135.3
Bank owned life insurance		218		222		(4	)		(1.8	)
Net securities gains		600		—		600			N/M
Other		77		98		(21	)		(21.4	)
Total other income	$	1,384	$	866	$	518			59.8

N/M = not meaningful

For the three-month period ended March 31, 2009, total other income increased $518,000 as compared with the comparable quarter of 2008, primarily as a result of net securities gains during the first quarter of 2009. During the first quarter of 2009, the Corporation recorded net securities gains of $600,000, which is net of a $140,000 impairment charge recognized on its Lehman Brothers bond holding. Sales in the first quarter of 2009 were made in the ordinary course of business. Excluding net securities gains, the Corporation recorded other income of $784,000 in the three months ended March 31, 2009, compared to $866,000 in the three months ended March 31, 2008, a decrease of $82,000 or 9.5 percent. This decrease was due primarily to lower levels of service charges, commissions and fees offset in part by higher commissions from sales of mutual funds and annuities.

Other Expense

The following table presents the principal categories of other expense.

	Three Months Ended March 31,
					Increase			Percent
(Dollars in Thousands)	2009		2008		(Decrease)			Change

Salaries and employee benefits	$	2,393	$	2,352	$	41			1.7
Occupancy, net		797		759		38			5.0
Premises and equipment		321		366		(45	)		(12.3	)
FDIC Insurance		365		20		345			1,725.0
Professional and consulting		212		172		40			23.3
Stationery and printing		70		95		(25	)		(26.3	)
Marketing and advertising		130		160		(30	)		(18.8	)
Computer expense		214		141		73			51.8
Other		817		888		(71	)		(8.0	)
Total other expense	$	5,319	$	4,953	$	366			7.4

For the three months ended March 31, 2009, total other expense increased $366,000, or 7.4 percent, from the comparable three months ended March 31, 2008, principally as a result of an increase in FDIC insurance fees.

Salary and employee benefit expense for the quarter ended March 31, 2009 increased by $41,000, or 1.7 percent, to $2.4 million as compared to the same period last year. This increase was due primarily to increased expense resulting from changes in the asset valuation and expected rate of return on the Corporation’s defined pension plan, which was frozen in 2007. This increase was partially offset by reductions in staff and elimination of certain other benefit plans during the middle to later part of 2008. Full-time equivalent staffing levels were 160 at March 31, 2009 compared to 161 as of December 31, 2008 and 167 at March 31, 2008.

Occupancy and premises and equipment expenses for the quarter ended March 31, 2009 decreased $7,000, or 0.6 percent, from the comparable three-month period in 2008.

Professional and consulting expense for the three month period ended March 31, 2009 increased by $40,000, or 23.3 percent, compared to the comparable quarter of 2008 due to an increase in legal and consulting fees. The increase in the three-month period is primarily attributable to higher legal expenses in 2009.

On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an annual basis, for the first quarter of 2009. As a result of these changes coupled with one-time assessment credits recognized in 2008, FDIC insurance assessments amounted to $365,000 in the first quarter of 2009, an increase of $345,000 or 1,725 percent, over the comparable period in 2008. The FDIC also adopted an interim rule imposing an emergency special assessment of 20 basis points (20 cents for every $100 of deposits) on the entire banking industry, which will be assessed on June 30, 2009 and oayable on September 30, 2009. Subsequently, on March 5, 2009, the Chairman of the FDIC announced that it may cut the 20 basis point emergency special assessment to 10 basis points if legislation passes to expand the FDIC’s existing line of credit with the U.S. Treasury.

Marketing and advertising expense for the three months ended March 31, 2009 decreased $30,000, or 18.8 percent, from the comparable period in 2008. Computer expense for the three-month period ended March 31, 2009 increased $ 73,000, or 51.8 percent, compared to the same quarter of 2008 due primarily to fees paid to the Corporation’s outsourced information technology service provider. This previously announced strategic outsourcing agreement has significantly improved operating efficiencies and reduced overhead, primarily in salaries and benefits.

Other expense for the first quarter of 2009 totaled $817,000, a decrease of $71,000, or 8.0 percent, from the comparable period in 2008. The decrease in such expense was primarily attributable to reduced levels of postage and freight, other professional fees, loan appraisal fees and other general expenses.

During 2008, the Corporation announced a number of strategic outsourcing agreements to aid in reducing operating overhead and shrinking the infrastructure of the Corporation. The cost reduction plans resulted in the reduction of workforce by 12 staff positions during the second quarter of 2008. Additionally, the Corporation completed its outsourcing with Atlantic Central Bankers Bank Banking and Infrastructure and Technology Services, Inc. and the migration of its telecommunications lines to their service platform. The result of all of the announced strategic outsourcing initiatives is expected to result in annual cost savings of approximately $600,000. This projection represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially as a result of unanticipated needs for additional personnel or other unanticipated factors.

Provision for Income Taxes

For the quarter ended March 31, 2009, the Corporation recorded an income tax expense of $224,000, as compared with a tax expense of $233,000 for the quarter ended March 31, 2008. The effective tax rates for the Corporation for the respective quarterly periods ended March 31, 2009 and 2008 were 21.9 percent and 16.1 percent, respectively. The increase in the effective tax rate was primarily due to a business entity restructuring which was fully completed in 2008.

Recent Accounting Pronouncements

Note 3 of the Consolidated Financial Statements discusses recent accounting pronouncements adopted by the Corporation during 2009 and the expected impact of accounting standards 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 these components of the statement of condition.

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 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 to 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 March 31, 2009, the Corporation reflects a positive interest sensitivity gap (or an interest sensitivity ratio of 1.22:1.00) at the cumulative one-year position. Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-asset portfolio and the current level of interest rates, emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2009. 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 the 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 on successful management of its 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 in-flows, 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. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is reduced. Management also maintains a detailed liquidity contingency plan designed to respond adequately to situations which could lead to liquidity concerns.

Management believes that the Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable securities, the Corporation also maintains borrowing capacity through the Federal Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities.

Liquidity is measured and monitored for the Corporation’s bank subsidiary, Union Center National Bank (the “Bank”). The Corporation reviews its net short-term mismatch. This measures the ability of the Corporation to meet obligations should access to Bank dividends be constrained. At March 31, 2009, the Parent Corporation had $3.3 million in cash and short-term investments compared to $2.2 million at December 31, 2008. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation 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 March 31, 2009, the Corporation was in compliance with all covenants and provisions of these agreements.

Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is somewhat reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns.

Anticipated cash-flows at March 31, 2009, projected to October 1, 2009, indicates that the Bank’s liquidity should remain strong, with an approximate projection of $395.7 million in anticipated cash flows over the next twelve months. This projection represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this projection depending upon a number of factors, including the liquidity needs of the Bank’s customers, the availability of alternative sources of liquidity and general economic conditions.

Deposits

Total deposits increased $108.8 million, or 16.5 percent, to $768.4 million on March 31, 2009 from $659.5 million at December 31, 2008. Total non-interest-bearing deposits increased from $113.3 million at December 31, 2008 to $114.6 million at March 31, 2009, an increase of $1.3 million or 1.1 percent. Interest bearing demand, savings and time deposits increased $107.5 million at March 31, 2009 as compared to December 31, 2008. The increase in total deposits was primarily the result of an inflow in core savings deposits and CDARS Reciprocal deposits, as customers sought safety and more liquidity in light of the financial crisis. Time certificates of deposit of $100,000 or more increased $62.9 million as compared to year-end 2008 due to an increase in CDARS Reciprocal deposits.

The Corporation derives a significant proportion of its liquidity from its core deposit base. Total demand deposits, savings and money market accounts of $493.7 million at March 31, 2009 increased by $63.4 million, or 14.7 percent, from December 31, 2008. At March 31, 2009, total demand deposits, savings and money market accounts were 64.3 percent of total deposits compared to 66.6 percent at year-end 2008. 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 declined by $2.0 million, or 0.6 percent, from $349.5 million at December 31, 2008 to $347.5 million at March 31, 2009 and represented 45.2 percent of total deposits at March 31, 2009 as compared with 53.0 percent at December 31, 2008.

More volatile rate sensitive deposits, concentrated in certificates of deposit $100,000 and greater, increased to 21.3 percent of total deposits at March 31, 2009 from 15.2 percent at December 31, 2008.

Core Deposit Mix

The following table depicts the Corporation’s core deposit mix at March 31, 2009 and December 31, 2008.

											Net Change
	March 31, 2009					December 31, 2008					Volume
(Dollars in Thousands)	Amount			Percentage		Amount			Percentage		2009 vs. 2008

Non-interest bearing deposits	$	114,607			33.0	$	113,319			32.4	$	1,288
Interest-bearing demand		132,682			38.2		139,349			39.9		(6,667	)
Regular savings		60,657			17.5		56,431			16.2		4,226
Money market deposits under $100		39,525			11.3		40,419			11.5		(894	)
Total core deposits	$	347,471			100.0	$	349,518			100.0	$	(2,047	)
Total deposits	$	768,379				$	659,537					108,842
Core deposits to total deposits		45.2	%				53.0	%

Borrowings

Total borrowings amounted to $255.4 million at March 31, 2009, reflecting a decrease of $18.2 million from December 31, 2008. Overnight customer repurchase transactions covering commercial customer sweep accounts totaled $27.0 million at March 31, 2009 as compared with $30.1 million at December 31, 2008. This shift in the volume of repurchase agreements also accounted for a portion of the change in non-interest bearing commercial checking accounts during the period.

Cash Flows

The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During the three months ended March 31, 2009, cash and cash equivalents (which increased overall by $75.6 million) were used on a net basis by investing activities in the amount of approximately $28.6 million, primarily from an increase in the investment and loan portfolios, offset in part by maturities and sales of investment securities. Net cash of $99.3 million was provided by financing activities, primarily due to an increase in borrowings, partially offset by a decrease in deposits. Net cash of $4.9 million was provided by operating activities, principally as a result of net income of $799,000, a $1.4 million provision for loan losses and a $2.6 million decrease in certain assets.

In comparison, as set forth in the consolidated statements of cash flows for the three months ended March 31, 2008, cash and cash equivalents (which decreased overall by $9.6 million) were used on a net basis by $22.1 million in financing activities. Cash used for the period was partially offset by $14.3 million of net cash provided in investing activities, primarily from maturities and sales of investment securities.

Stockholders’ Equity

Total stockholders’ equity amounted to $89.4 million, or 7.98 percent of total assets, at March 31, 2009, compared to $81.7 million or 7.99 percent of total assets at December 31, 2008. Book value per common share was $6.15 at March 31, 2009, compared to $6.29 at December 31, 2008. Tangible book value (i.e., total stockholders’ equity less preferred stock, goodwill and other intangible assets) per common share was $4.83 at March 31, 2009 compared to $4.97 at December 31, 2008.

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 March 31, 2009 and December 31, 2008.

	March 31,		December 31,
(Dollars in Thousands, Except per Share Data	2009		2008
Common shares outstanding		12,991,312		12,991,312
Stockholders’ equity	$	89,429	$	81,713
Less: Preferred Stock		9,557		—
Less: Goodwill and other intangible assets		17,087		17,110
Tangible common stockholders’ equity	$	62,785	$	64,603
Book value per common share	$	6.15	$	6.29
Less: Goodwill and other intangible assets		1.32		1.32
Tangible book value per common share	$	4.83	$	4.97

During the three months ended March 31, 2009, the Corporation had no purchases of common stock associated with its buy back program. For the three months ended March 31, 2008, the Corporation had purchased 63,898 shares of common stock at an average cost per share of $11.01 per share. At March 31, 2009, there were 652,868 shares available for repurchase under the Corporation’s stock buyback program. As described in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008, the Corporation is restricted from repurchasing its Common Stock while its newly issued preferred stock is held by the Treasury.

Capital

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

In early October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law. The Act has numerous provisions designed to aid the availability of credit, the domestic economy and the financial institution industry. One recently announced facet of EESA’s implementation is the capital injection program for banks and bank holding companies offered by the U.S. Department of Treasury.

Risk-Based Capital/Leverage

The Tier I leverage capital at March 31, 2009 (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) amounted to $87.7 million, or 8.42 percent of average total assets. At December 31, 2008, the Corporation’s Tier I leverage risk-based capital amounted to $78.2 million or 7.71 percent of average total assets. The increase reflects the Corporation's participation in the United States Government's Capital Purchase Program.

Tier I capital excludes the effect of SFAS No. 115, which amounted to $ 8.2 million of net unrealized losses, after tax, on securities available-for-sale (reported as a component of accumulated other comprehensive income which is included in stockholders’ equity) and goodwill and intangible assets of $17.1 million as of March 31, 2009.

United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets.

At March 31, 2009, the Corporation’s Tier 1 and total risk-based capital ratios were 10.98 percent and 11.83 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of March 31, 2009.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-statement of condition items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings and other factors. As of March 31, 2009, management believes that each of Union Center National Bank and Center Bancorp, Inc. meet all capital adequacy requirements to which it is subject.

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 capital securities presently qualify as Tier I capital. 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% and reprices quarterly. The rate at March 31, 2009 was 4.02%.

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 market place is rapidly changing and currently is in flux. The U.S. Treasury and banking regulators are implementing a number of programs under relatively new legislation to address capital and liquidity issues in the banking system. It is difficult to assess whether Congress’ intervention 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 is mitigated by ALCO 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, 2008.

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, including the use of derivative financial instruments. The management of the Corporation believes that hedging instruments currently available are not cost-effective, and, therefore, has focused 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-statement of condition 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 one and two-year time horizons has enabled 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 12 month time horizon an 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 maturity or payment schedules.

Based on the results of the interest simulation model as of March 31, 2009, and assuming that management does not take action to alter the outcome, the Corporation would expect a decrease of 0.04 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. As market rates declined to historic lows at March 31, 2009, the Corporation did not feel that modeling a down rate scenario was realistic in the current environment.

Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-asset portfolio and the current level of interest rates, emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2009. However, no assurance can be given that this objective will be met.

Equity Price Risk

We are also exposed to equity price risk inherent in our portfolio of publicly traded equity securities, which had an estimated fair value of $0.6 million at March 31, 2009 and $0.7 million at December 31, 2008. We monitor our equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and we determine the decline in value to be other than temporary, we reduce the carrying value to its current fair value. During 2009, 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.

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

The Corporation is subject to claims and lawsuits, which arise primarily in the ordinary course of business. Based upon the information currently available, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position, results of operations, or liquidity of the Corporation. This statement represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement, primarily due to the uncertainties involved in proving facts within the context of the legal processes.

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

As of March 31, 2009, the Corporation had purchased 1,386,863 common shares at an average cost per share of $ 11.44 under stock buyback programs announced in 2006 and 2007. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholders’ equity. During the three months ended March 31, 2009, there were no shares repurchased.

Information concerning the first quarter 2009 stock repurchases is set forth below.

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1)

Jan 1 through Jan 31, 2009		—	$	—		1,386,863		652,868
Feb 1 through Feb 28, 2009		—		—		1,386,863		652,868
Mar 1through Mar 31, 2009		—		—		1,386,863		652,868
Total		—	$	—		1,386,863		652,868

——————

(1)

On June 26, 2008, the Board approved an increase in its current share buyback program to an additional 5% of outstanding shares, enhancing its current authorization by 649,712 shares. Any purchases by the Corporation may be made, from time to time, in the open market, in privately negotiated transactions or otherwise, subject to restrictions under the Capital Purchase Program.

On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under the 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. These securities were not registered under the Securities Act of 1933, but rather wee issued pursuant to an exemption from such requirements (pursuant Section 4(2) of the Securities Act of 1933) afforded to the private placement of securities. There was a single investor in this issuance - the United States Treasury.

Item 6. Exhibits

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

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.

By:	/s/ Anthony C. Weagley	By:	/s/ A. Richard Abrahamian
	Anthony C. Weagley, President and Chief Executive Officer		A. Richard Abrahamian, Treasurer and Chief Financial Officer

	Date: May 8, 2009		Date: May 8, 2009

EXHIBIT INDEX

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman V bad

ConnectOne Bancorp (CNOB) 10-Q2009 Q1 Quarterly report

Content analysis