ConnectOne Bancorp, Inc. - FORM 10-K/A

Attached files

file	filename
EX-31.2 - ConnectOne Bancorp, Inc.	c77254_ex31-2.htm
EX-32.1 - ConnectOne Bancorp, Inc.	c77254_ex32-1.htm
EX-23.2 - ConnectOne Bancorp, Inc.	c77254_ex23-2.htm
EX-23.1 - ConnectOne Bancorp, Inc.	c77254_ex23-1.htm
EX-32.2 - ConnectOne Bancorp, Inc.	c77254_ex32-2.htm
EX-31.1 - ConnectOne Bancorp, Inc.	c77254_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

S	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Fiscal Year Ended December 31, 2013

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

For the Transition Period from __________ to ___________

Commission File Number: 000-11486

CENTER BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

New Jersey

52-1273725

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification Number)

2455 Morris Avenue, Union, NJ 07083-0007

(Address of Principal Executive Offices, Including Zip Code)

(908) 688-9500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class		Name of each exchange on which registered
Common Stock, no par value		NASDAQ

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes £ No S

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 S 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 Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.) Yes S No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer £

Accelerated Filer S

Non-Accelerated £

Small Reporting Company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes £ or No S

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $149.9 million.

Shares Outstanding on February 28, 2014
Common Stock, no par value: 16,369,012 shares

DOCUMENTS INCORPORATED BY REFERENCE

Definitive proxy statement in connection with the 2014 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A is incorporated by reference in Part III.

-2-

EXPLANATORY NOTE

Center Bancorp, Inc. (the “Company”) is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form 10-K for the fiscal year end December 31, 2013, as filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2014 (the “Original Filing”), for the sole purpose of re-filing the Report of Independent Registered Public Accounting Firm of ParenteBeard LLC (the “Report”) with the correct date on such Report. The Report was inadvertently dated March 5, 2014 in the Original Filing, and it should have been dated March 13, 2013.

No amendments are being made to the Original Filing except as set forth above. This Amendment does not reflect events occurring after the filing of the Original Filing or modify or update the disclosures contained in the Original Filing in any way other than as described above.

In accordance with SEC rules, all of Item 8. Financial Statements and Supplementary Data is set forth herein.

-3-

8. Financial Statements and Supplementary Data

All Financial Statements:

The following financial statements are filed as part of this report under Item 8 — “Financial Statements and Supplementary Data.”

		Page
Reports of Independent Registered Public Accounting Firms		F-2
Consolidated Statements of Condition		F-4
Consolidated Statements of Income		F-5
Consolidated Statements of Comprehensive Income		F-6
Consolidated Statements of Changes in Stockholders’ Equity		F-7
Consolidated Statements of Cash Flows		F-8
Notes to Consolidated Financial Statements		F-9

	F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Center Bancorp, Inc.

We have audited the accompanying consolidated statement of condition of Center Bancorp, Inc. and subsidiaries (the “Corporation”) as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2013. Center Bancorp, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Center Bancorp, Inc. and subsidiaries as of December 31, 2013, and the consolidated results of its operations and its cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Center Bancorp, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 5, 2014 expressed an unqualified opinion.

/s/ BDO USA, LLP

BDO USA, LLP
Philadelphia, Pennsylvania
March 5, 2014

	F-2

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Center Bancorp, Inc.

We have audited the accompanying consolidated statements of condition of Center Bancorp, Inc. and subsidiaries (the “Corporation”) as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States), Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Center Bancorp, Inc. and subsidiaries as of December 31, 2012, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

/s/ ParenteBeard LLC

ParenteBeard LLC

Clark, New Jersey

March 13, 2013

	F-3

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

	December 31,
	2013		2012
	(In Thousands, Except Share and Per Share Data)
ASSETS
Cash and due from banks	$	82,692	$	104,134
Interest bearing deposits with banks		—		2,004
Total cash and cash equivalents		82,692		106,138
Securities available-for-sale		323,070		496,815
Securities held-to-maturity (fair value of $210,958 and $62,431)		215,286		58,064
Loans held for sale		—		1,491
Loans		960,943		889,672
Less: Allowance for loan losses		10,333		10,237
Net loans		950,610		879,435
Restricted investment in bank stocks, at cost		8,986		8,964
Premises and equipment, net		13,681		13,563
Accrued interest receivable		6,802		6,849
Bank owned life insurance		35,734		34,961
Goodwill and other intangible assets		16,828		16,858
Prepaid FDIC assessment		—		811
Other real estate owned		220		1,300
Due from brokers for investment securities		8,759		—
Other assets		10,414		4,516
Total assets	$	1,673,082	$	1,629,765
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing	$	227,370	$	215,071
Interest-bearing:
Time deposits $100 and over		99,444		110,835
Interest-bearing transaction, savings and time deposits less than $100		1,015,191		981,016
Total deposits		1,342,005		1,306,922
Long-term borrowings		146,000		146,000
Subordinated debentures		5,155		5,155
Accounts payable and accrued liabilities		11,338		10,997
Total liabilities		1,504,498		1,469,074
Stockholders’ Equity
Preferred Stock, $1,000 liquidation value per share:
Authorized 5,000,000 shares; issued and outstanding 11,250 shares of Series B preferred stock at December 31, 2013 and 2012 total liquidation value of $11,250,000		11,250		11,250
Common stock, no par value:
Authorized 25,000,000 shares; issued 18,477,412 shares at December 31, 2013 and 2012; outstanding 16,369,012 shares at December 31, 2013 and 16,347,915 at December 31, 2012		110,056		110,056
Additional paid-in capital		4,986		4,801
Retained earnings		61,914		46,753
Treasury stock, at cost (2,108,400 shares at December 31, 2013 and 2,129,497 at December 31, 2012)		(17,078)		(17,232)
Accumulated other comprehensive income (loss)		(2,544)		5,063
Total stockholders’ equity		168,584		160,691
Total liabilities and stockholders’ equity	$	1,673,082	$	1,629,765

See the accompanying notes to the consolidated financial statements.

	F-4

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2013		2012		2011

	(Dollars in Thousands, Except per Share Data)
Interest income:
Interest and fees on loans	$	40,132	$	38,921	$	36,320
Interest and dividends on investment securities:
Taxable interest income		12,189		12,269		13,278
Non-taxable interest income		4,422		3,507		1,700
Dividends		523		567		629
Interest on federal funds sold and other short-term investment		2		8		—
Total interest income		57,268		55,272		51,927
Interest expense:
Interest on certificates of deposit $100 & over		866		839		1,215
Interest on other deposits		4,353		4,569		4,305
Interest on short-term borrowings		—		—		79
Interest on long-term borrowings		5,863		6,368		6,578
Total interest expense		11,082		11,776		12,177
Net interest income		46,186		43,496		39,750
Provision for loan losses		350		325		2,448
Net interest income, after provision for loan losses		45,836		43,171		37,302
Other income:
Service charges, commissions and fees		1,873		1,775		1,896
Annuity and insurance		489		204		110
Bank-owned life insurance		1,364		1,018		1,038
Loan related fees		839		510		432
Net gains on sale of loans held for sale		294		484		251
Bargain gain on acquisition		—		899		—
Other		281		308		117
Total other-than-temporary impairment losses		(652)		(870)		(342)
Net gains on sale on investment securities		2,363		2,882		3,976
Net investment securities gains		1,711		2,012		3,634
Total other income		6,851		7,210		7,478
Other expense:
Salaries and employee benefits		13,465		12,571		11,527
Occupancy and equipment		3,518		2,987		2,947
FDIC Insurance		1,098		1,154		1,712
Professional and consulting		1,111		1,077		1,156
Stationery and printing		333		349		368
Marketing and advertising		304		186		131
Computer expense		1,422		1,419		1,312
Other real estate owned expense, net		137		150		398
Repurchase agreement prepayment and termination fee		—		1,012		—
Acquisition cost		—		482		—
Other		3,890		3,810		3,892
Total other expense		25,278		25,197		23,443
Income before income tax expense		27,409		25,184		21,337
Income tax expense		7,484		7,677		7,411
Net income		19,925		17,507		13,926
Preferred stock dividends and accretion		141		281		820
Net income available to common stockholders	$	19,784	$	17,226	$	13,106
Earnings per common share:
Basic	$	1.21	$	1.05	$	0.80
Diluted	$	1.21	$	1.05	$	0.80
Weighted average common shares outstanding:
Basic		16,349,204		16,340,197		16,295,761
Diluted		16,385,692		16,351,046		16,314,899

See the accompanying notes to the consolidated financial statements.

F-5

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Net income	$	19,925	$	17,507	$	13,926
Other comprehensive income, net of tax:
Unrealized gains and losses on securities available-for-sale:
Reclassification adjustments for OTTI losses included in income		652		870		342
Tax effect		(178)		(265)		(119)
Net of tax amount		474		605		223
Unrealized (losses) gains on available for sale securities		(8,741)		19,819		8,990
Tax effect		3,578		(7,444)		(3,486)
Net of tax amount		(5,163)		12,375		5,504
Reclassification adjustment for realized gains arising during this period		(2,363)		(2,882)		(3,976)
Tax effect		645		879		1,380
Net of tax amount		(1,718)		(2,003)		(2,596)
Unrealized holding (losses) gains on securities transferred from available-for-sale to held-to-maturity securities		(2,612)		—		291
Tax effect		1,064		—		(110)
Net of tax amount		(1,548)		—		181
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity securities		(58)		(2)		(46)
Tax effect		19		1		28
Net of tax amount		(39)		(1)		(18)
Pension plan:
Actuarial gains (losses)		654		(790)		(1,649)
Tax effect		(267)		323		584
Net of tax amount		387		(467)		(1,065)
Total other comprehensive (loss) income		(7,607)		10,509		2,229
Total comprehensive income	$	12,318	$	28,016	$	16,155

See the accompanying notes to the consolidated financial statements.

	F-6

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Years Ended December 31, 2013, 2012 and 2011
	Preferred Stock		Common Stock		Additional Paid In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	(In Thousands, Except Share and per Share Data)
Balance, January 1, 2011	$	9,700	$	110,056	$	4,941	$	21,633	$	(17,698)	$	(7,675)	$	120,957
Net income								13,926						13,926
Other comprehensive income												2,229		2,229
Accretion of discount on preferred stock		300						(300)						—
Dividends on preferred stock								(520)						(520)
Redemption of series A preferred stock		(10,000)												(10,000)
Proceeds from issuance of series B preferred stock		11,250												11,250
Warrant repurchased						(245)								(245)
Cash dividends declared on common stock ($0.12 per share)								(1,955)						(1,955)
Issuance cost of common stock								(5)						(5)
Issuance cost of series B preferred stock								(84)						(84)
Exercise of stock options (42,495 shares)						(16)				344				328
Stock-based compensation expense						35								35
Balance, December 31, 2011		11,250		110,056		4,715		32,695		(17,354)		(5,446)		135,916
Net income								17,507						17,507
Other comprehensive income												10,509		10,509
Dividends on series B preferred stock								(253)						(253)
Cash dividends declared on common stock ($0.195 per share)								(3,188)						(3,188)
Issuance cost of common stock								(8)						(8)
Exercise of stock options (15,588 shares)						19				122				141
Stock-based compensation expense						39								39
Option related tax trueup						28								28
Balance, December 31, 2012		11,250		110,056		4,801		46,753		(17,232)		5,063		160,691
Net income								19,925						19,925
Other comprehensive loss												(7,607)		(7,607)
Dividends on series B preferred stock								(169)						(169)
Cash dividends declared on common stock ($0.260 per share)								(4,581)						(4,581)
Dividend on restricted stock declared								(1)						(1)
Issuance cost of common stock								(13)						(13)
Issuance of restricted stock award (18,829 shares)						91				152				243
Exercise of stock options (2,268 shares)						19				2				21
Stock-based compensation expense						59								59
Option related tax trueup						16								16
Balance, December 31, 2013	$	11,250	$	110,056	$	4,986	$	61,914	$	(17,078)	$	(2,544)	$	168,584

See the accompanying notes to the consolidated financial statements.

	F-7

CENTER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Cash flows from operating activities:
Net income	$	19,925	$	17,507	$	13,926
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and amortization		886		914		983
Provision for loan losses		350		325		2,448
Provision for deferred taxes		1,739		1,912		3,406
Stock-based compensation expense		59		39		35
Net other-than-temporary impairment losses		652		870		342
Net gains on sales of available-for-sale securities		(2,363)		(2,882)		(3,976)
Net gains on sales of loans held for sale		(294)		(484)		(251)
Net loans originated for sale		(14,816)		(22,013)		(14,357)
Proceeds from sales of loans held for sale		16,601		22,024		13,923
Net gains on disposition of premises and equipment		(2)		—		—
Net loss on sales of other real estate owned		75		9		5
Life insurance death benefit		(291)		—		—
Increase in cash surrender value of bank owned life insurance		(1,073)		(1,018)		(1,038)
Net amortization of securities		3,316		4,589		4,012
Increase in accrued interest receivable		(233)		(241)		(2,085)
Decrease in prepaid FDIC insurance assessment		811		1,073		1,698
Increase in other assets		(397)		(2,538)		(402)
(Decrease) increase in other liabilities		(1,792)		980		(585)
Net cash provided by operating activities		23,153		21,066		18,084
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(155,464)		(207,880)		(400,644)
Sales		122,165		130,059		254,821
Maturities, calls and principal repayment		46,378		48,406		48,029
Investment securities held-to-maturity:
Purchases		(23,531)		(16,606)		(13,118)
Maturities and principal repayment		3,830		30,258		7,475
Net (purchase) redemption of restricted investment in bank stock		(22)		319		363
Net increase in loans		(71,761)		(83,478)		(49,223)
Purchases of premises and equipment		(973)		(842)		(316)
Purchase of bank-owned life insurance		—		(5,000)		—
Proceeds from life insurance death benefits		592		—		—
Proceeds from sale of premises and equipment		2		—		—
Proceeds from sale of other real estate owned		1,230		500		33
Cash and cash equivalent acquired in acquisition		—		6,195		—
Cash consideration paid in acquisition		—		(10,251)		—
Net cash used in investing activities		(77,554)		(108,320)		(152,580)
Cash flows from financing activities:
Net increase in deposits		35,083		100,271		261,083
Net decrease in short-term borrowings		—		—		(41,855)
Payments on long-term borrowings		—		(15,000)		(10,000)
Cash dividends on common stock		(4,254)		(2,778)		(1,955)
Cash dividends on preferred stock		(141)		(363)		(417)
Proceeds from issuance of Series B preferred stock		—		—		11,250
Redemption of Series A preferred stock		—		—		(10,000)
Warrant repurchased		—		—		(245)
Issuance cost of common stock		(13)		(8)		(5)
Issuance cost of Series B preferred stock		—		—		(84)
Tax expense from stock based compensation		16		28		—
Issuance of restricted stock award		243		—		—
Proceeds from exercise of stock options		21		141		328
Net cash provided by financing activities		30,955		82,291		208,100
Net (decrease) increase in cash and cash equivalents		(23,446)		(4,963)		73,604
Cash and cash equivalents at beginning of year		106,138		111,101		37,497
Cash and cash equivalents at end of year	$	82,692	$	106,138	$	111,101
Supplemental disclosures of cash flow information:
Noncash activities:
Trade date accounting settlement for investments	$	8,759	$	—	$	—
Transfer of loans to other real estate owned		236		1,300		629
Transfer from investment securities available-for-sale to investment securities held-to-maturity		138,300		—		66,833
Cash paid during year for:
Interest paid on deposits and borrowings	$	10,993	$	11,894	$	12,226
Income taxes		4,727		6,280		4,484
Business combinations:
Non-cash assets acquired:
Investment securities available-for-sale	$	—	$	37,143	$	—
Loans		—		52,192		—
Premises and equipment, net		—		1,262		—
Accrued interest receivable		—		389		—
Total non-cash assets acquired	$	—	$	90,986	$	—
Liabilities assumed:
Deposits	$	—	$	85,236	$	—
Other liabilities		—		795		—
Total liabilities assumed	$	—	$	86,031	$	—
Net non-cash assets acquired	$	—	$	4,056	$	—
Bargain gain on acquisition	$	—	$	899	$	—
Net cash and cash equivalents acquired	$	—	$	6,195	$	—
Cash consideration paid in acquisition	$	—	$	10,251	$	—

See the accompanying notes to the consolidated financial statements.

	F-8

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 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, Morris, Bergen and, commencing in May 2013, Mercer 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.

Segments

Center Bancorp, Inc. has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others. For example, lending is dependent upon the ability of the Corporation to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Bank as one segment or unit.

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, the income tax provision and the valuation of deferred tax assets.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand and balances due from correspondent banks and interest bearing deposits with banks.

Investment Securities

The Corporation accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-05. 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.

	F-9

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management 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. In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changed the presentation and amount of the other-than-temporary impairment recognized in the statement of income. 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 through earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized through other comprehensive income. Impairment charges on certain investment securities of approximately $0.7 million, $0.9 million and $0.3 million were recognized in earnings during the years ended December 31, 2013, 2012 and 2011, respectively.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value. For loans carried at the lower of cost or estimated fair value, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan.

Loans

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

	F-10

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

Impaired Loans

The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of an impaired loan is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

The Corporation has defined its population of impaired loans to include all non-accrual and troubled debt restructuring loans. As part of the evaluation, the Corporation reviews all non-homogeneous loans for impairment internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. Smaller impaired non-homogeneous loans and impaired homogeneous loans are not measured for specific reserves and are covered under the Corporation’s general reserve.

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

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

	F-11

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Loans Modified in a Troubled Debt Restructuring

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Reserve for Credit Losses

A consequence of lending activities is that the Corporation may incur losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions such as rising interest rates and the financial performance of borrowers. The Corporation’s reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the “Unfunded Commitments”). The reserve for credit losses provides for credit losses inherent in lending or commitments to lend and is based on loss estimates derived from a comprehensive quarterly evaluation, reflecting analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment to address observed changes in trends, conditions, and other relevant environmental and economic factors.

Allowance for Loan Losses

The 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. In connection with the determination of the Allowance, management obtains independent appraisals for significant properties.

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

Management believes that the allowance for loan losses is adequate. Management uses available information to recognize loan losses; however, future additions to the Allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s Allowance. 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.

	F-12

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense. The balance of the reserve for unfunded commitments was $210,000 as of December 31, 2013 and 2012.

Premises and Equipment

Land is carried at cost and bank premises and equipment at cost less accumulated depreciation based on 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. Subsequently, 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.

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 December 31, 2013 and 2012, the Corporation was servicing approximately $8.4 million and $10.2 million, respectively, of loans for others.

The Corporation accounts for its servicing of financial assets in accordance with FASB ASC 860-50. The Corporation originates certain mortgages under plans to sell those loans and service the loans owned by the investor. The Corporation records mortgage servicing rights and the loans based on relative fair values at the date of sale. The balance of mortgage servicing rights at December 31, 2013 and 2012 are immaterial to the Corporation’s consolidated financial statements.

Risk Related to Representation and Warranty Provisions

The Corporation sells residential mortgage loans in the secondary market primarily to Fannie Mae. The Corporation sells residential mortgage loans to Fannie Mae that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters.

As of December 31, 2013 and 2012, the unpaid principal balance of the Corporation’s portfolio of residential mortgage loans sold to Fannie Mae was $8.4 million and $10.2 million, respectively. These loans are generally sold on a non-recourse basis. The agreements under which the Corporation sells residential mortgage loans require the Corporation to deliver various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, the Corporation may be obligated to repurchase residential mortgage loans where required documents are not delivered or are defective. Investors may require the immediate repurchase of a mortgage loan when an early payment default discovered in an underwriting review reveals significant underwriting deficiencies, even if the mortgage loan has subsequently been brought current. As of December 31, 2013, there were no pending repurchase requests related to representation and warranty provisions.

	F-13

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Employee Benefit Plans

The Corporation has a non-contributory pension plan that covered all eligible employees up until September 30, 2007, at which time 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. 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.

The Corporation accounts for its defined benefit pension plan in accordance with FASB ASC 715-30. FASB ASC 715-30 requires that the funded status of defined benefit postretirement plans be recognized on the Corporation’s statement of condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715-30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end.

Stock-Based Compensation

Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.

Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. See Note 17 of the Notes to Consolidated Financial Statements for a further discussion.

Earnings per Share

Basic Earnings per 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.

	F-14

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

	Years Ended December 31,
	2013		2012		2011
	(In Thousands, Except per Share Amounts)
Net income	$	19,925	$	17,507	$	13,926
Preferred stock dividends and accretion		141		281		820
Net income available to common stockholders	$	19,784	$	17,226	$	13,106
Average number of common shares outstanding		16,349		16,340		16,296
Effect of dilutive options		37		11		19
Average number of common shares outstanding used to calculate diluted earnings per common share		16,386		16,351		16,315
Anti-dilutive common shares outstanding		14		42		79
Earnings per common share:
Basic	$	1.21	$	1.05	$	0.80
Diluted	$	1.21	$	1.05	$	0.80

Treasury Stock

The Parent Corporation, under a stock buyback program last amended in 2008, is authorized to buy back up to 2,039,731 shares of the Parent Corporation’s common stock. 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 December 31, 2013, Center Bancorp had 16.4 million shares of common stock outstanding. As of December 31, 2013, the Parent 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. During the years ended December 31, 2013, 2012 and 2011, the Parent Corporation did not purchase any of its shares.

Goodwill

The Corporation adopted the provisions of FASB ASC 350-10 (previously SFAS No. 142, “Goodwill and Other Intangible Assets”), which requires that goodwill be tested for impairment annually, or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2013, 2012 and 2011.

As provided by ASU 2011-08 management has evaluated and assessed the following events and circumstances relevant to determining whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value:

⋅

Macroeconomic conditions.

⋅

Industry and market conditions.

⋅

Overall financial performance.

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 for the years ended December 31, 2013, 2012 and 2011 is presented in the Consolidated Statements of Comprehensive Income and presented in detail in Note 15 of the Notes to Consolidated Financial Statements.

	F-15

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Bank-Owned Life Insurance

The Corporation invests in Bank-Owned Life Insurance (“BOLI”) to help offset the rising cost of employee benefits. The change in the cash surrender value of the BOLI is recorded as a component of other income.

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.

ASC Topic 740, Taxes, provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Corporation has not identified any income tax uncertainties.

Advertising Costs

The Corporation recognizes its marketing and advertising cost as incurred. Advertising costs were $304,000, $186,000 and $131,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Reclassifications

Certain reclassifications have been made in the consolidated financial footnotes for 2012 and 2011 to conform to the classifications presented in 2013.

Note 2 — Recent Accounting Pronouncements

In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” which amended disclosures by requiring improved information about financial instruments and derivative instruments that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. Reporting entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of international financial reporting standards ("IFRS"). Companies were required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those years. The adoption of this accounting standard did not have a material impact on the Corporation's results of operations, financial position, or liquidity.

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line item affected by the reclassification. The Corporation adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Corporation provided these required disclosures in the notes to the Consolidated Financial Statements, the adoption of ASU No. 2013-02 had no impact on the Corporation's consolidated statements of income and condition.

FASB ASU 2014-04: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. EITF Issue 13-E sought to define “in substance repossession or foreclosure” because of the diversity in practice regarding when entities were reclassifying loans receivable to other real estate owned instead of as a loan receivable. The timing of loan reclassifications to OREO may be qualitatively significant to regulators and other financial statement users. “In substance repossession or foreclosure” is clarified by the ASU. A creditor is considered to have received physical possession (resulting from an in substance repossession) of residential real estate property collateralizing a consumer mortgage loan only upon the occurrence of either of the following: a) The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law. b) The borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor. The ASU is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The Corporation will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

	F-16

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Cash and Due from Banks

The Bank maintained cash balances reserved to meet regulatory requirements of the Federal Reserve Board of approximately $2,545,000 and $1,337,000 at December 31, 2013 and 2012, respectively.

Note 4. Business Combinations

On August 1, 2012, the Bank assumed all of the deposits and certain other liabilities and acquired certain assets of Saddle River Valley Bank (“Saddle River”), a New Jersey State-chartered bank, pursuant to the terms of a Purchase and Assumption Agreement, dated as of February 1, 2012, among the Bank, Saddle River Valley Bank and Saddle River Valley Bancorp. This purchase and assumption was in keeping with the Bank’s strategy to expand its base of operations into Northern New Jersey.

The Bank assumed approximately $85.2 million in deposits and acquired approximately $89.3 million in loans and securities from Saddle River. The Bank paid total consideration of $10.3 million in cash. Acquisition costs, totaling $482,000 are reported on the consolidated statements of income.

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

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

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing date fair values becomes available.

Fair Value of Measurement of Assets Acquired and Liabilities Assumed

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

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

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

	F-17

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Business Combinations – (continued)

Loans. A discounted cash flow of each individual loan was calculated. The discounted cash flows, at an account level, were then aggregated together by category type to determine the mark-to-market value of each loan type. The market values of all loan categories were added together to determine the total market value of the loan portfolio. The price of the portfolio is then determined by dividing the market value of the portfolio by the purchased face value of the portfolio. The discount rate utilized for the discounted cash flow of each loan category was based upon Bankrate and a survey of three local market competitors and the Bank’s offerings. There was no carryover of the allowance for loan losses that had been previously recorded by Saddle River.

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

Accrued interest receivable. The carrying amounts of accrued interest approximate fair value.

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

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

The following table presents actual operating results attributable to Saddle River since the August 1, 2012 assumption date through December 31, 2012. This information does not include purchase accounting adjustments or acquisition integration costs.

(Dollars in thousands)
Net interest income	$	1,352
Non-interest income		15
Non-interest expense and income taxes		(763)
Net income	$	604

The Corporation has not provided pro forma information for the twelve month periods ended December 31, 2012 as if the asset/liability purchase and assumption of Saddle River had occurred as of January 1, 2012. There is no consistent level base for objective comparison as product balances declined on a steady basis from the agreement date to assumption date and the closing date and accordingly such disclosures are considered impractical. The application of those disclosures would require a significant estimate of amounts, and it is impossible to distinguish objective information about those estimates that both provide evidence of circumstances that existed at the reporting dates, and would have been available when the financial statements for the prior periods were issued.

Certain loans, for which specific credit-related deterioration was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation of the timing and amount of cash flows to be collected. The timing of the sale of loan collateral was estimated for acquired loans deemed impaired and considered collateral dependent. For these collateral dependent impaired loans, the excess of the future expected cash flow over the present value of the future expected cash flow represents the accretable yield, which will be accreted into interest income over the estimated liquidation period using the effective interest method. The aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount or difference. The nonaccretable balance at December 31, 2013 and 2012 was approximately $0 and $71,000, respectively. The following table details the loans that are accounted for in accordance with FASB ASC 310-30 as of August 1, 2012:

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

The following table presents the changes in accretable discount related to purchased-credit-impaired loans:

	December 31,
	2013		2012
	(in thousands)
Accretable discount balance, beginning of period	$	130	$	—
Additions resulting from acquisition		—		161
Accretion to interest income		(130)		(31)
Accretable discount, end of period	$	—	$	130

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

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

	F-18

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities

The following tables present information related to the Corporation’s portfolio of securities available-for-sale and held-to-maturity at December 31, 2013 and 2012.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	December 31, 2013
	(Dollars in Thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	14,344	$	—	$	(825)	$	13,519
Federal agency obligations		20,567		29		(655)		19,941
Residential mortgage pass-through securities		48,312		791		(229)		48,874
Commercial mortgage pass-through securities		7,145		3		(157)		6,991
Obligations of U.S. states and political subdivisions		30,804		711		(55)		31,460
Trust preferred securities		19,763		150		(510)		19,403
Corporate bonds and notes		154,182		4,930		(482)		158,630
Asset-backed securities		15,733		246		—		15,979
Certificates of deposit		2,250		32		(20)		2,262
Equity securities		376		—		(89)		287
Other securities		5,671		68		(15)		5,724
Total	$	319,147	$	6,960	$	(3,037)	$	323,070
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities	$	28,056	$	—	$	(1,019)	$	27,037
Federal agency obligations		15,249		23		(389)		14,883
Residential mortgage-backed securities		2,246		—		(64)		2,182
Commercial mortgage-backed securities		4,417		41		(62)		4,396
Obligations of U.S. states and political subdivisions		127,418		1,303		(3,688)		125,033
Corporate bonds and notes		37,900		149		(622)		37,427
Total	$	215,286	$	1,516	$	(5,844)	$	210,958
Total investment securities	$	534,433	$	8,476	$	(8,881)	$	534,028

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	December 31, 2012
	(Dollars in Thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	11,870	$	62	$	(23)	$	11,909
Federal agency obligations		20,207		333		(5)		20,535
Residential mortgage pass-through securities		52,400		1,385		(1)		53,784
Commercial mortgage pass-through securities		9,725		244		—		9,969
Obligations of U.S. states and political subdivisions		103,193		4,653		(132)		107,714
Trust preferred securities		22,279		144		(1,174)		21,249
Corporate bonds and notes		228,681		9,095		(371)		237,405
Collateralized mortgage obligations		2,120		—		—		2,120
Asset-backed securities		19,431		311		—		19,742
Certificates of deposit		2,854		21		(10)		2,865
Equity securities		535		—		(210)		325
Other securities		9,145		68		(15)		9,198
Total	$	482,440	$	16,316	$	(1,941)	$	496,815
Investment Securities Held-to-Maturity:
Federal agency obligations	$	4,178	$	79	$	—	$	4,257
Commercial mortgage-backed securities		5,501		154		(5)		5,650
Obligations of U.S. states and political subdivisions		48,385		4,139		—		52,524
Total	$	58,064	$	4,372	$	(5)	$	62,431
Total investment securities	$	540,504	$	20,688	$	(1,946)	$	559,246

The available-for-sale securities are reported at fair value with unrealized gains or losses included in equity, net of taxes. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 19 of the Notes to Consolidated Financial Statements for a further discussion.

During 2013, the Corporation transferred from its available-for-sale category to its held-to-maturity category $138.3 million of securities. Transfers of securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

	F-19

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

The following table presents information for investments in securities available-for-sale and held-to-maturity at December 31, 2013, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

	December 31, 2013
	Amortized Cost		Fair Value
	(Dollars in Thousands)
Investment Securities Available-for-Sale:
Due in one year or less	$	9,738	$	9,780
Due after one year through five years		63,206		64,802
Due after five years through ten years		123,765		126,024
Due after ten years		60,934		60,588
Residential mortgage pass-through securities		48,312		48,874
Commercial mortgage pass-through securities		7,145		6,991
Equity securities		376		287
Other securities		5,671		5,724
Total	$	319,147	$	323,070
Investment Securities Held-to-Maturity:
Due in one year or less	$	2,061	$	2,065
Due after one year through five years		12,547		12,699
Due after five years through ten years		65,692		64,027
Due after ten years		128,323		125,589
Residential mortgage-backed securities		2,246		2,182
Commercial mortgage-backed securities		4,417		4,396
Total	$	215,286	$	210,958
Total investment securities	$	534,433	$	534,028

Gross gains and losses from the sales of investment securities for the years ended December 31, 2013, 2012 and 2011 were as follows:

	Years Ended December 31,
(Dollars in Thousands)	2013		2012		2011
Gross gains on sales of investment securities	$	2,451	$	2,905	$	4,045
Gross losses on sales of investment securities		88		23		69
Net gains on sales of investment securities	$	2,363	$	2,882	$	3,976

	F-20

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

Other-than-Temporarily Impaired Investments

Summary of Other-than-Temporary Impairment Charges

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
One variable rate private label CMO	$	—	$	484	$	18
Pooled trust preferred securities		628		68		—
Principal losses on a variable rate CMO		24		318		324
Total other-than-temporary impairment charges	$	652	$	870	$	342

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

The Corporation reviews all securities for potential recognition of other-than-temporary impairment. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could include credit rating downgrades.

The Corporation’s assessment of whether an investment in the portfolio of assets is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.

	F-21

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

The following table presents detailed information for each trust preferred security held by the Corporation at December 31, 2013, of which all but one has at least one rating below investment grade.

Deal Name	Single Issuer or Pooled	Class/ Tranche		Amortized Cost		Fair Value		Gross Unrealized Gain (Loss)		Lowest Credit Rating Assigned	Number of Banks Currently Performing	Deferrals and Defaults as % of Original Collateral	Expected Deferral/Defaults as % of Remaining Performing Collateral
	(Dollars in Thousands)
Countrywide Capital IV	Single		—	$	1,771	$	1,772	$	1	BB+	1	None	None
Countrywide Capital V	Single		—		2,747		2,784		37	BB+	1	None	None
Countrywide Capital V	Single		—		250		253		3	BB+	1	None	None
Citigroup Cap IX	Single		—		992		999		7	BB+	1	None	None
Citigroup Cap IX	Single		—		1,906		1,927		21	BB+	1	None	None
Citigroup Cap XI	Single		—		246		248		2	BB+	1	None	None
Nationsbank Cap Trust III	Single		—		1,574		1,275		(299)	BB+	1	None	None
Morgan Stanley Cap Trust IV	Single		—		2,500		2,372		(128)	BB+	1	None	None
Morgan Stanley Cap Trust IV	Single		—		1,742		1,659		(83)	BB+	1	None	None
Saturns — GS 2004-04	Single		—		536		536		—	BB+	1	None	None
Goldman Sachs	Single		—		999		1,011		12	BB+	1	None	None
Stifel Financial	Single		—		4,500		4,567		67	BBB-	1	None	None
Total				$	19,763	$	19,403	$	(360)

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

	F-22

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

During 2013, the Pooled TRUP, ALESCO VII, incurred its eighteenth interruption of cash flow payments to date. Management determined that an other-than-temporary impairment charge of $628,000 existed on this security for the twelve months ended December 31, 2013, and subsequently sold at its book value in January 2014.

Credit Loss Portion of OTTI Recognized in Earning on Debt Securities

	Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Balance of credit-related OTTI at January 1,	$	4,450	$	6,539	$	6,197
Addition:
Credit losses for which other-than-temporary impairment was not previously recognized		652		870		342
Reduction:
Credit losses for securities sold during the period		(5,102)		(2,959)		—
Balance of credit-related OTTI at December 31,	$	—	$	4,450	$	6,539

The Corporation held one variable rate private label collateralized mortgage obligation (CMO), which was also evaluated for impairment. The Variable Rate Collateralized Mortgage Obligation was originally issued in 2006 and is 30 year Adjustable Rate Mortgage loan secured by a first lien, fully amortizing one-to-four residential mortgage loans. The tranche purchased was a Super Senior with an original credit rating of AAA/AAA. The top five states geographic concentration comprised in the deal were California 18.2 percent, Arizona 10.5 percent, Virginia 6.1 percent, Florida 6.5 percent and Nevada 6.3 percent. No one state exceeded a 25 percent concentration. These states have been heavily impacted by the financial crises and as such have sustained heavy delinquencies affecting the credit rating of the security. Management had applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. The Corporation recorded $24,000 in principal losses on the bond in 2013, and this security was sold at this book value in January 2013.

	F-23

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

Temporarily Impaired Investments

For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of 170 and 49 investment securities as of December 31, 2013 and December 31, 2012, respectively, represent an other-than-temporary impairment. The gross unrealized losses associated with mortgage-backed securities, corporate bonds, asset-backed 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.

Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified.

The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.

The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the mortgage-backed securities category consist primarily of U.S. agency and private issue collateralized mortgage obligations. Unrealized losses in the corporate debt securities category consist of single name corporate trust preferred securities, a pooled trust preferred security and corporate debt securities issued by large financial institutions. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. For collateralized mortgage obligations, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid. None of the corporate issuers have defaulted on interest payments. Management concluded that these securities were not other-than-temporarily impaired at December 31, 2013. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of corporate debt securities could result in impairment charges in the future. Obligations of U.S. states and political subdivisions are comprised of intermediate to long-term municipal bonds. A review of the coupon rates and maturity dates validates the unrealized losses due to the changes in interest rates. These bonds were purchased at lower ends of the interest rate cycle and were a part of the Corporation’s overall strategy to use tax-free instruments and to barbell the maturity distribution of bonds. The bonds are conservative in nature and the value decline is related to the changes in interest rates that occurred since the time of purchase and subsequent changes in spreads affecting the market prices. All of the issues carry an A or better underlying credit support and were evaluated on the basis on their underlying fundamentals; included but not limited to annual financial reports, geographic location, population and debt ratios. In certain cases options for calls reduce the effective duration and in turn the future market value fluctuations. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. There have not been disruptions of any payments, associated with any of these municipal securities.

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

	F-24

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012:

	December 31, 2013
	Total				Less than 12 Months				12 Months or Longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	13,519	$	(825)	$	13,519	$	(825)	$	—	$	—
Federal agency obligation		17,200		(655)		17,200		(655)		—		—
Residential mortgage pass-through securities		18,293		(229)		18,293		(229)		—		—
Commercial mortgage pass-through securities		2,924		(157)		2,924		(157)		—		—
Obligations of U.S. states and political subdivisions		4,199		(55)		4,199		(55)		—		—
Trust preferred securities		5,306		(510)		4,031		(211)		1,275		(299)
Corporate bonds and notes		32,498		(482)		30,533		(448)		1,965		(34)
Certificates of deposit		552		(20)		552		(20)		—		—
Equity securities		287		(89)		—		—		287		(89)
Other securities		985		(15)		—		—		985		(15)
Total		95,763		(3,037)		91,251		(2,600)		4,512		(437)
Investment Securities Held-to-Maturity:
U.S. Treasury and agency securities		27,037		(1,019)		27,037		(1,019)		—		—
Federal agency obligation		13,492		(389)		13,197		(388)		295		(1)
Residential mortgage pass-through securities		2,182		(64)		2,182		(64)		—		—
Commercial mortgage-backed securities		1,395		(62)		1,395		(62)		—		—
Obligations of U.S. states and political subdivisions		66,034		(3,688)		57,072		(2,957)		8,962		(731)
Corporate bonds and notes		27,210		(622)		27,210		(622)		—		—
Total		137,350		(5,844)		128,093		(5,112)		9,257		(732)
Total Temporarily Impaired Securities	$	233,113	$	(8,881)	$	219,344	$	(7,712)	$	13,769	$	(1,169)

	F-25

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Investment Securities – (continued)

	December 31, 2012
	Total				Less than 12 Months				12 Months or Longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in Thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	4,460	$	(23)	$	4,460	$	(23)	$	—	$	—
Federal agency obligation		877		(5)		877		(5)		—		—
Residential mortgage pass-through securities		1,669		(1)		1,669		(1)		—		—
Obligations of U.S. states and political subdivisions		18,360		(132)		18,360		(132)		—		—
Trust preferred securities		11,740		(1,174)		10,494		(18)		1,246		(1,156)
Corporate bonds and notes		26,440		(371)		18,244		(134)		8,196		(237)
Certificates of deposit		388		(10)		388		(10)		—		—
Equity securities		325		(210)		—		—		325		(210)
Other securities		985		(15)		—		—		985		(15)
Total		65,244		(1,941)		54,492		(323)		10,752		(1,618)
Investment Securities Held-to-Maturity:
Commercial mortgage-backed securities		932		(5)		932		(5)		—		—
Total		932		(5)		932		(5)		—		—
Total Temporarily Impaired Securities	$	66,176	$	(1,946)	$	55,424	$	(328)	$	10,752	$	(1,618)

Investment securities having a carrying value of approximately $109.3 million and $96.1 million at December 31, 2013 and 2012, respectively, were pledged to secure public deposits, short-term borrowings, and FHLB advances and for other purposes required or permitted by law.

Note 6 — Loans and the Allowance for Loan Losses

The following table sets forth the composition of the Corporation’s loan portfolio including net deferred fees and costs, at December 31, 2013 and 2012, respectively:

	2013		2012
	(Dollars in Thousands)
Commercial and industrial	$	229,688	$	181,682
Commercial real estate		536,539		497,392
Construction		42,722		40,277
Residential mortgage		150,571		169,094
Installment		1,084		1,104
Subtotal		960,604		889,549
Net deferred loan costs		339		123
Total loans	$	960,943	$	889,672

	F-26

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

At December 31, 2013 and 2012, loans to officers and directors aggregated approximately $20,365,000 and $18,977,000, respectively. During the year ended December 31, 2013, the Corporation made new loans to officers and directors in the amount of $11,613,000; payments by such persons during 2013 aggregated $10,225,000. During the year ended December 31, 2012, the Corporation made new loans to officers and directors in the amount of $13,952,000; payments by such persons during 2012 aggregated $5,254,000. On March 30, 2012, the Corporation appointed Frederick S. Fish to the Board of Directors. Mr. Fish had a prior lending relationship with the Bank, the total loan to Mr. Fish of approximately $9,910,000 is included in the amount of new loan to officers and directors.

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

At December 31, 2013 and 2012, loan balances of approximately $564.7 million and $532.8 million were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances.

At December 31, 2013 and 2012, the net investment in direct financing lease consists of a minimum lease receivable of $4,483,000 and $4,699,000, respectively, and unearned interest income of $733,000 and $928,000, respectively, for a net investment in direct financing lease of $3,750,000 and $3,771,000, respectively. The net investment in direct financing lease is carried as a component of loans in the Corporation’s consolidated statements of condition.

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

For years ending December 31,	(Dollars in Thousands)
2014	$	216
2015		228
2016		265
2017		265
2018		265
Thereafter		2,511
Total minimum future lease receipts	$	3,750

The following table presents information about loan receivables on non-accrual status at December 31, 2013 and 2012:

	2013		2012
	(Dollars in Thousands)
Commercial and industrial	$	753	$	214
Commercial real estate		744		354
Construction		—		319
Residential mortgage		1,640		2,729
Total loans receivable on non-accrual status	$	3,137	$	3,616

	F-27

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

The Corporation continuously monitors the credit quality of its loans receivable. In addition to the internal staff, the Corporation utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporation’s credit position at some future date. Assets are classified “Substandard” if the asset has a well defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or more and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality at December 31, 2013 and 2012:

Credit Quality Indicators

	December 31, 2013
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	226,013	$	1,719	$	1,284	$	672	$	229,688
Commercial real estate		509,679		14,544		12,316		—		536,539
Construction		41,492		—		1,230		—		42,722
Residential mortgage		147,379		978		2,214		—		150,571
Installment		964		—		120		—		1,084
Total loans	$	925,527	$	17,241	$	17,164	$	672	$	960,604

Credit Quality Indicators

	December 31, 2012
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	176,818	$	3,281	$	1,583	$	—	$	181,682
Commercial real estate		462,266		18,945		16,181		—		497,392
Construction		38,303		810		1,164		—		40,277
Residential mortgage		163,769		993		4,332		—		169,094
Installment		967		—		137		—		1,104
Total loans	$	842,123	$	24,029	$	23,397	$	—	$	889,549

	F-28

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis of the impaired loans at December 31, 2013 and 2012:

	December 31, 2013
	(Dollars in Thousands)
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	449	$	449	$	—	$	494	$	25
Commercial real estate		10,482		10,783		—		10,658		496
Residential mortgage		1,858		2,000		—		1,892		94
Installment		120		120		—		128		6
Total	$	12,909	$	13,352	$	—	$	13,172	$	621

With An Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	672	$	672	$	300	$	687	$	43
Commercial real estate		4,344		4,344		115		4,359		200
Total	$	5,016	$	5,016	$	415	$	5,046	$	243
Total
Commercial and industrial	$	1,121	$	1,121	$	300	$	1,181	$	68
Commercial real estate		14,826		15,127		115		15,017		696
Residential mortgage		1,858		2,000		—		1,892		94
Installment		120		120		—		128		6
Total (including related allowance)	$	17,925	$	18,368	$	415	$	18,218	$	864

	December 31, 2012
	(Dollars in Thousands)
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	731	$	731	$	—	$	834	$	46
Commercial real estate		5,886		6,187		—		6,182		349
Construction		3,600		3,600		—		3,600		92
Residential mortgage		422		422		—		439		22
Total	$	10,639	$	10,940	$	—	$	11,055	$	509

With An Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	4,180	$	4,180	$	493	$	4,179	$	138
Residential mortgage		1,255		1,255		152		1,289		40
Total	$	5,435	$	5,435	$	645	$	5,468	$	178
Total
Commercial and industrial	$	731	$	731	$	—	$	834	$	46
Commercial real estate		10,066		10,367		493		10,361		487
Construction		3,600		3,600		—		3,600		92
Residential mortgage		1,677		1,677		152		1,728		62
Total (including related allowance)	$	16,074	$	16,375	$	645	$	16,523	$	687

	F-29

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

Loans are considered to have been modified in a troubled debt restructuring when due to a borrower’s financial difficulties, the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status. Included in impaired loans at December 31, 2013 are loans that are deemed troubled debt restructurings. Of these loans, $5.7 million or 87.4% at December 31,2013 and $6.2 million or 91.0% at December 31,2012, of which are included in the tables above, are performing under the restructured terms and are accruing interest.

	F-30

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

The following table provides an analysis of the aging of loans, excluding deferred fees and costs, that are past due at December 31, 2013 and 2012:

Aging Analysis

	December 31, 2013
	(Dollars in Thousands)
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
Commercial and Industrial	$	18	$	—	$	753	$	771	$	228,917	$	229,688	$	—
Commercial Real Estate		221		—		744		965		535,574		536,539		—
Construction		—		—		—		—		42,722		42,722		—
Residential Mortgage		990		258		1,640		2,888		147,683		150,571		—
Installment		5		—		—		5		1,079		1,084		—
Total	$	1,234	$	258	$	3,137	$	4,629	$	955,975	$	960,604	$	—

Aging Analysis

	December 31, 2012
	(Dollars in Thousands)
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
Commercial and Industrial	$	590	$	—		216		806	$	180,876	$	181,682	$	—
Commercial Real Estate		1,012		703		354		2,069		495,323		497,392		—
Construction		—		—		319		319		39,958		40,277		—
Residential Mortgage		2,017		628		2,784		5,429		163,665		169,094		55
Installment		23		—		—		23		1,081		1,104		—
Total	$	3,642	$	1,331	$	3,673	$	8,646	$	880,903	$	889,549	$	55

	F-31

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

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

Allowance for loan and lease losses

	December 31, 2013 (Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	300	$	115	$	—	$	—	$	—	$	—	$	415
Collectively evaluated for impairment		1,398		5,631		362		990		146		1,391		9,918
Total	$	1,698	$	5,746	$	362	$	990	$	146	$	1,391	$	10,333
Loans Receivable
Individually evaluated for impairment	$	1,121	$	14,826	$	—	$	1,858	$	120	$	—	$	17,925
Collectively evaluated for impairment		226,450		505,361		41,493		135,031		839		—		909,174
Loans acquired with discounts related to credit quality		2,117		16,352		1,229		13,682		125		—		33,505
Total	$	229,688	$	536,539	$	42,722	$	150,571	$	1,084	$	—	$	960,604

Allowance for loan and lease losses

	December 31, 2012 (Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	493	$	—	$	152	$	—	$	—	$	645
Collectively evaluated for impairment		2,419		4,719		313		1,376		114		651		9,592
Total	$	2,419	$	5,212	$	313	$	1,528	$	114	$	651	$	10,237
Loans Receivable
Individually evaluated for impairment	$	731	$	10,066	$	3,600	$	1,677	$	—	$	—	$	16,074
Collectively evaluated for impairment		176,913		466,411		34,572		146,508		973		—		825,377
Loans acquired with discounts related to credit quality		4,038		20,915		2,105		20,909		131		—		48,098
Total	$	181,682	$	497,392	$	40,277	$	169,094	$	1,104	$	—	$	889,549

The Corporation’s allowance for loan losses is analyzed quarterly and many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporation’s previous Annual Reports.

	F-32

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

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

	Year Ended December 31, 2013
	(Dollars in thousands)
	C & I		Comm R/E		Construction		Res Mtg		Installment		Unallocated		Total
Balance at January 1,	$	2,424	$	5,323	$	313	$	1,532	$	113	$	532	$	10,237
Loans charged-off		(6)		(126)		—		(175)		(22)		—		(329)
Recoveries		41		28		—		—		6		—		75
Provision for loan losses		(761)		521		49		(367)		49		859		350
Balance at December 31,	$	1,698	$	5,746	$	362	$	990	$	146	$	1,391	$	10,333

	Year Ended December 31, 2012
	(Dollars in thousands)
	C & I		Comm R/E		Construction		Res Mtg		Installment		Unallocated		Total
Balance at January 1,	$	1,527	$	5,972	$	707	$	1,263	$	51	$	82	$	9,602
Loans charged-off		—		(57)		—		(454)		(16)		—		(527)
Recoveries		—		80		540		210		7		—		837
Provision for loan losses		892		(783)		(934)		509		72		569		325
Balance at December 31,	$	2,419	$	5,212	$	313	$	1,528	$	114	$	651	$	10,237

	For the Year Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Balance at the beginning of year	$	10,237	$	9,602	$	8,867
Provision for loan losses		350		325		2,448
Loans charged-off		(329)		(527)		(2,028)
Recoveries on loans previously charged-off		75		837		315
Balance at the end of year	$	10,333	$	10,237	$	9,602

The amount of interest income that would have been recorded on non-accrual loans in 2013, 2012 and 2011 had payments remained in accordance with the original contractual terms was $104,000, $187,000 and $378,000, respectively.

At December 31, 2013, there were no commitments to lend additional funds to borrowers whose loans were non-accrual or contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.

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

	F-33

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Loans and the Allowance for Loan Losses – (continued)

The following tables present information about the troubled debt restructurings (TDRs) by class transacted during the period indicated:

	Year Ended December 31, 2013
	Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment
	(Dollars in Thousands)
Troubled debt restructurings:
Commercial Real Estate		—	$	—	$	—
Residential Mortgage		—		—		—
Installment		—		—		—
Total		—	$	—	$	—

	Year Ended December 31, 2012
	Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment
	(Dollars in Thousands)
Troubled debt restructurings:
Commercial Real Estate		1	$	225	$	225
Residential Mortgage		1		714		675
Installment		1		1,354		1,354
Total		3	$	2,293	$	2,254

The Corporation had no loans charged off in connection with loan modifications at the time of the modification during the twelve months ended December 31, 2013 and 2012.

The Corporation had no loan modified as a TDR within the previous twelve months that subsequently defaulted during the twelve months ended December 31, 2013. The Corporation had one loan that defaulted during the twelve months ended December 31, 2012 that had previously been modified as a TDR within the previous twelve months.

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

Loans modified in a troubled debt restructuring totaled $6.6 million at December 31, 2013 of which $826,000 were on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement.

In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of December 31, 2013, loans on which concessions were made with respect to adjusted repayment terms amounted to $1.5 million. Loans on which combinations of two or more concessions were made amounted to $5.1 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.

	F-34

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — Premises and Equipment

Premises and equipment are summarized as follows:

	Estimated
	Useful Life
	(Years)	2013		2012
	(Dollars in Thousands)
Land	—	$	2,403	$	2,403
Buildings	5 – 40		13,675		13,434
Furniture, fixtures and equipment	2 – 20		17,604		17,226
Leasehold improvements	5 – 30		3,184		2,900
Subtotal			36,866		35,963
Less: accumulated depreciation and amortization			23,185		22,400
Total premises and equipment, net		$	13,681	$	13,563

Depreciation and amortization expense of premises and equipment for the three years ended December 31, amounted to $855,000 in 2013, $868,000 in 2012 and $926,000 in 2011.

Note 8 — Goodwill and Other Intangible Assets

A goodwill impairment test is required under ASC 350, Intangibles – Goodwill and Other, and the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” allowing an initial qualitative assessment of goodwill commonly known as step zero impairment testing. In general, the step zero test allows an entity to first assess qualitative factors to determine whether it is more likely than not (i.e., more than 50%) that the fair value of a reporting unit is less than its carrying value. If a step zero impairment test results in the conclusion that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then no further testing is required.

While step zero impairment testing is an assessment of qualitative factors that affect the likelihood of impairment. Based upon management’s review, the Corporation’s intangible assets were not impaired and there has been no impairment through December 31, 2013. Management concludes that the ASC 350 goodwill step zero test has been passed, and no further testing is required.

Goodwill

Goodwill allocated to the Corporation as of December 31, 2013 and 2012 was $16,804,000. There were no changes in the carrying amount of goodwill during the fiscal years ended December 31, 2013 and 2012.

The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(Dollars in Thousands)
As of December 31, 2013:
Core deposits	$	703	$	(679)	$	24
Total intangible assets		703		(679)		24
As of December 31, 2012:
Core deposits	$	703	$	(649)	$	54
Total intangible assets		703		(649)		54

The current year and estimated future amortization expense for amortized intangible assets was $30,000 for 2013 and $19,000, and $5,000, respectively, for 2014 and 2015.

	F-35

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Deposits

Time Deposits

As of December 31, 2013 and 2012, the Corporation's total time deposits were $152.0 million and $170.9 million, respectively. As of December 31, 2013, the contractual maturities of these time deposits were as follows:

(dollars in thousands)	Amount
2014	$	102,106
2015		25,672
2016		19,765
2017		4,376
2018		34
Thereafter		—
Total	$	151,953

The amount of time deposits with balances of $100,000 or more was $99.4 million and $110.8 million as of December 31, 2013 and 2012, respectively. As of December 31, 2013, the contractual maturities of these time deposits were as follows:

(dollars in thousands)	Amount
Three Months or Less	$	15,301
Over Three Months through Six Months		28,401
Over Six Months through Twelve Months		18,771
Over Twelve Months		36,971
Total	$	99,444

Note 10 — Borrowed Funds:

Long-term borrowings at December 31, 2013 and 2012 consisted of the following:

	2013		2012
	(Dollars in Thousands)
FHLB long-term advances	$	115,000	$	115,000
Securities sold under agreements to repurchase		31,000		31,000
Total long-term borrowings	$	146,000	$	146,000

Securities sold under agreements to repurchase had average balances of $31.0 million and $38.2 million for the years ended December 31, 2013 and 2012, respectively. The maximum amount outstanding at any month end during 2013 and 2012 was $31.0 million and $41.0 million, respectively. The average interest rate paid on securities sold under agreements to repurchase were 5.99 percent, 5.54 percent and 3.39 percent for the years ended December 31, 2013, 2012 and 2011, respectively.

	F-36

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Borrowed Funds: – (continued)

The weighted average interest rates on long term borrowings at December 31, 2013 and 2012 were 3.82 percent and 3.97 percent, respectively. The maximum amount outstanding at any month-end during 2013 and 2012 was $161.0 million. The average interest rates paid on Federal Home Loan Bank advances were 3.46 percent and 3.51 percent for the years ended December 31, 2013 and 2012, respectively. The maximum borrowing capacity with the Federal Home Loan Bank is limited to 25 percent of the Corporation’s total assets.

At December 31, 2013 and 2012, advances from the Federal Home Loan Bank of New York (“FHLB”) amounted to $115.0 million. The FHLB advances had a weighted average interest rate of 3.26 percent and 3.44 percent at December 31, 2013 and 2012, respectively. These advances are secured by pledges of FHLB stock, 1 – 4 family residential mortgages, commercial real estate mortgages and U.S. Government and Federal Agency obligations. The advances are subject to quarterly call provisions at the discretion of the FHLB and at December 31, 2013 and 2012, are contractually scheduled for repayment as follows:

	2013		2012

	(Dollars in Thousands)
2016	$	—	$	20,000
2017		35,000		55,000
2018		40,000		40,000
2020		40,000		—
Total	$	115,000	$	115,000

The securities sold under repurchase agreements to other counterparties included in long-term debt totaled $31.0 million at December 31, 2013 and 2012. The weighted average rates were 5.90 percent at December 31, 2013 and 2012. The schedule for contractual repayment is as follows:

	2013		2012
	(Dollars in Thousands)
2017	$	15,000	$	15,000
2018		16,000		16,000
Total	$	31,000	$	31,000

Note 11 — Subordinated Debentures:

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

	F-37

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Subordinated Debentures: – (continued)

The following table summarizes the mandatory redeemable trust preferred securities of the Corporation’s Statutory Trust II at December 31, 2013 and 2012.

Issuance Date

Securities
Issued

Liquidation Value

Coupon Rate

Maturity

Redeemable by
Issuer Beginning

12/19/2003

5,000,000

$1,000 per Capital Security

Floating 3-month LIBOR + 285 Basis Points

01/23/2034

01/23/2009

Note 12 — Income Taxes

The current and deferred amounts of income tax expense for the years ended December 31, 2013, 2012 and 2011, respectively, are as follows:

	2013		2012		2011
	(Dollars in Thousands)
Current:
Federal	$	5,658	$	5,506	$	3,818
State		87		259		187
Subtotal		5,745		5,765		4,005
Deferred:
Federal		1,906		1,085		2,157
State		(167)		827		1,249
Subtotal		1,739		1,912		3,406
Income tax expense	$	7,484	$	7,677	$	7,411

Reconciliation between the amount of reported income tax expense and the amount computed by applying the statutory Federal income tax rate is as follows:

	2013			2012			2011
	(Dollars in Thousands)
Income before income tax expense	$	27,409		$	25,184		$	21,337
Federal statutory rate		35	%		35	%		35	%
Computed “expected” Federal income tax expense		9,593			8,814			7,468
State tax, net of Federal tax benefit		(53)			706			933
Bank owned life insurance		(477)			(356)			(363)
Tax-exempt interest and dividends		(1,645)			(1,228)			(595)
Bargain gain on Saddle River Valley Bank acquisition		—			(314)			—
Other, net		66			55			(32)
Income tax	$	7,484		$	7,677		$	7,411

	F-38

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Income Taxes – (continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 2013 and 2012 are presented in the following table:

	2013		2012
	(Dollars in Thousands)
Deferred tax assets:
Impaired assets	$	1,221	$	1,967
Allowance for loan losses		4,118		4,040
Employee benefit plans		—		64
Pension actuarial losses		2,206		2,473
Other		466		454
NJ NOL		399		—
NJ AMA credits		137		131
Total deferred tax assets	$	8,547	$	9,129
Deferred tax liabilities:
Employee benefit plans	$	1,281	$	—
Depreciation		416		294
Market discount accretion		200		148
Deferred loan costs, net of fees		385		330
Purchase accounting		522		608
Unrealized gains on securities available-for-sale		547		5,675
Total deferred tax liabilities		3,351		7,055
Net deferred tax asset	$	5,196	$	2,074

Based on the Corporation’s historical and current taxable income and the projected future taxable income, management believes it is more likely than not that the Corporation will realize the benefit of the net deductible temporary differences existing at December 31, 2013 and 2012, respectively.

At December 31, 2013, the Corporation has approximately $6.8 million state income tax loss carry forwards which expire in 2033.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2013 and 2012, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Corporation believes the net deferred tax assets are more likely than not to be realized.

The Corporation’s federal income tax returns are open and subject to examination from the 2010 tax return year and forward. The Corporation’s state income tax returns are generally open from the 2009 and later tax return years based on individual state statutes of limitations.

	F-39

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 — Commitments, Contingencies and Concentrations of Credit Risk

In the normal course of business, the Corporation has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. Commitments to extend credit and standby letters of credit generally do not exceed one year.

These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Corporation’s level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument.

The Corporation controls the credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk, the Corporation generally requires collateral and other credit-related terms and conditions from the customer. In the opinion of management, the financial condition of the Corporation will not be materially affected by the final outcome of these commitments and contingent liabilities.

A substantial portion of the Bank’s loans are secured by real estate located in New Jersey. Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the New Jersey real estate market.

The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2013 and 2012:

	2013		2012
	(Dollars in Thousands)
Commitments under commercial loans and lines of credit	$	109,661	$	129,797
Home equity and other revolving lines of credit		41,836		46,795
Outstanding commercial mortgage loan commitments		48,129		30,955
Standby letters of credit		9,655		1,700
Performance letters of credit		21,844		27,743
Outstanding residential mortgage loan commitments		1,858		2,207
Overdraft protection lines		5,273		5,666
Total	$	238,256	$	244,863

Occupancy and equipment expense includes rentals for premises and equipment of $1,094,000 in 2013, $805,000 in 2012 and $710,000 in 2011. At December 31, 2013, the Corporation was obligated under a number of non-cancelable leases for premises and equipment, many of which provide for increased rentals based upon increases in real estate taxes and the cost of living index. These leases, most of which have renewal provisions, are principally operating leases. Minimum rentals under the terms of these leases for the years 2014 through 2018 are $920,000, $932,000, $803,000, $796,000 and $803,000, respectively. Minimum rentals due 2019 and after are $7,289,000.

The Corporation is subject to claims and lawsuits that arise in the ordinary course of business. Based upon the information currently available in connection with such claims, 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.

Note 14 — Stockholders’ Equity and Regulatory Requirements

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 U.S. Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As a result of the successful completion of a rights offering in October 2009, the number of shares underlying the warrants held by the U.S. Treasury was reduced to 86,705 shares, or 50 percent of the original 173,410 shares as outlined by the provisions of the Capital Purchase Program.

	F-40

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Stockholders’ Equity and Regulatory Requirements – (continued)

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

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

Federal Deposit Insurance Corporation (“FDIC”) and the Board of Governors of the Federal Reserve System (“FRB”) regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2013 (but subject to the enhanced requirement described below), the Bank was required to maintain (i) a minimum leverage ratio of Tier I capital to total adjusted assets of 4.00 percent, and (ii) minimum ratios of Tier I and total capital to risk-weighted assets of 4.00 percent and 8.00 percent, respectively.

Under its prompt corrective action regulations, the regulators are required to take certain supervisory actions with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations establish a framework for the classification of financial institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier I) capital ratio of at least 5.00 percent; a Tier I risk-based capital ratio of at least 6.00 percent; and a total risk-based capital ratio of at least 10.00 percent.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about capital components, risk weightings and other factors.

At December 31, 2013, management believes that the Bank and the Parent Corporation met all capital adequacy requirements to which they are subject.

The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31, 2013 and 2012, compared to the FRB and FDIC minimum capital adequacy requirements and the FRB and FDIC requirements for classification as a well-capitalized institution.

	F-41

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 — Stockholders’ Equity and Regulatory Requirements – (continued)

	Union Center National Bank				Minimum Capital Adequacy				For Classification Under Corrective Action Plan as Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
December 31, 2013 Leverage (Tier 1) capital	$	159,431	9.69	%	$	65,813	4.00	%	$	82,266	5.00	%
Risk-Based Capital:
Tier 1	$	159,431	12.10	%	$	52,704	4.00	%	$	79,057	6.00	%
Total		169,974	12.91	%		105,329	8.00	%		131,661	10.00	%
December 31, 2012 Leverage (Tier 1) capital	$	143,294	8.99	%	$	63,757	4.00	%	$	79,696	5.00	%
Risk-Based Capital:
Tier 1	$	143,294	11.35	%	$	50,500	4.00	%	$	75,750	6.00	%
Total		153,776	12.18	%		101,002	8.00	%		126,253	10.00	%

	Parent Corporation				Minimum Capital Adequacy				For Classification as Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
December 31, 2013 Leverage (Tier 1) capital	$	159,316	9.69	%	$	65,765	4.00	%	$	N/A	N/A	%
Risk-Based Capital:
Tier 1	$	159,316	12.10	%	$	52,666	4.00	%	$	N/A	N/A	%
Total		169,894	12.90	%		105,361	8.00	%		N/A	N/A
December 31, 2012 Leverage (Tier 1) capital	$	143,824	9.02	%	$	63,780	4.00	%	$	N/A	N/A	%
Risk-Based Capital:
Tier 1	$	143,824	11.39	%	$	50,509	4.00	%	$	N/A	N/A	%
Total		154,271	12.22	%		100,996	8.00	%		N/A	N/A

The Corporation issued $5.2 million of subordinated debentures in 2003. These securities are included as a component of Tier 1 Capital for regulatory purposes.

	F-42

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 — 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, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Corporation’s defined benefit pension plan, net of taxes.

							Affected Line Item in the
Details about Accumulated Other	Amounts Reclassified from Accumulated						Statement Where Net Income is
Comprehensive Income Components	Other Comprehensive Income						Presented
	Twelve Months Ended
	December 31,
(Dollars in thousands)	2013		2012		2011
OTTI losses	$	(652)	$	(870)	$	(342)	Net investment securities gains
		178		265		119	Tax benefit
		(474)		(605)		(223)	Net of tax
Sale of investment securities available-for-sale		2,363		2,882		3,976	Net investment securities gains
		(645)		(879)		(1,380)	Tax expense
		1,718		2,003		2,596	Net of tax
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity		58		2		46	Interest income
		(19)		(1)		(28)	Tax expense
		39		1		18	Net of tax
Pension plan actuarial (gains) losses		(654)		790		1,649	Before tax
		267		(323)		(584)	Tax benefit (expense)
		(387)		467		1,065	Net of tax
Total reclassification	$	896	$	1,866	$	3,456	Net of tax

Accumulated other comprehensive income (loss) at December 31, 2013 and 2012 consisted of the following:

	2013		2012
	(Dollars in Thousands)
Investment securities available for sale, net of tax	$	2,374	$	8,781
Unamortized component of securities transferred from available-for-sale to held-to-maturity, net of tax		(1,425)		162
Defined benefit pension and post-retirement plans, net of tax		(3,493)		(3,880)
Total	$	(2,544)	$	5,063

	F-43

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Pension and Other Benefits

Defined Benefit Plans

The Corporation maintained a non-contributory pension plan for substantially all of its employees until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. The benefits are based on years of service and the employee’s compensation over the prior five-year period. The plan’s benefits are payable in the form of a ten year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401(a) of the Internal Revenue Code. The pension plan generally covers employees of Union Center National Bank and the Parent Corporation who had attained age 21 and completed one year of service prior to September 30, 2007. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and are generally equal to 44 percent of a participant’s highest average compensation over a 5-year period.

The following table sets forth changes in projected benefit obligation, changes in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Corporation’s pension plans at December 31, 2013 and 2012.

	2013		2012
	(Dollars in Thousands)
Change in Benefit Obligation:
Projected benefit obligation at beginning of year	$	13,533	$	12,345
Interest cost		529		555
Actuarial loss		255		1,389
Benefits paid		(748)		(756)
Projected benefit obligation at end of year	$	13,569	$	13,533
Change in Plan Assets:
Fair value of plan assets at beginning year	$	7,034	$	6,762
Actual return on plan assets		1,040		681
Employer contributions		3,700		347
Benefits paid		(748)		(756)
Fair value of plan assets at end of year	$	11,026	$	7,034
Funded status	$	(2,543)	$	(6,499)

Amounts related to unrecognized actuarial losses for the plan, on a pre-tax basis, that have been recognized in accumulated other comprehensive loss amounted to $5,699,000 and $6,354,000 at December 31, 2013 and 2012, respectively.

	F-44

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Pension and Other Benefits – (continued)

The net periodic pension cost for 2013, 2012 and 2011 includes the following components:

	2013		2012		2011
	(Dollars in Thousands)
Interest cost	$	529	$	555	$	589
Expected return on plan assets		(488)		(377)		(381)
Net amortization		375		294		179
Net periodic pension expense	$	416	$	472	$	387

The following table presents the assumptions used to calculate the projected benefit obligation in each of the last three years.

	2013			2012			2011
Discount rate		4.84	%		4.03	%		4.64	%
Rate of compensation increase		N/A			N/A			N/A
Expected long-term rate of return on plan assets		5.50	%		5.50	%		5.50	%

The following information is provided for the year ended December 31:

	2013			2012			2011
	(Dollars in Thousands)
Weighted average assumptions used to determine net periodic benefit cost for years ended December 31
Discount rate		4.03	%		4.64	%		5.25	%
Expected long-term return on plan assets		5.50	%		5.50	%		5.50	%
Rate of compensation increase		N/A			N/A			N/A

The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment return for each asset class. An average, weighted real-return range is computed reflecting the plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. Specific factors such as the plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range.

Plan Assets

The Union Center National Bank Pension Trust’s weighted-average asset allocation at December 31, 2013, 2012 and 2011, by asset category, is as follows:

Asset Category	2013			2012			2011
Equity securities (domestic and international)		53	%		60	%		47	%
Debt and/or fixed income securities		39	%		39	%		41	%
Alternative investments, including commodities, foreign currency and real estate		—	%		1	%		4	%
Cash and other alternative investments, including hedge funds, equity structured notes		8	%		—	%		8	%
Total		100	%		100	%		100	%

	F-45

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Pension and Other Benefits – (continued)

The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. Appropriate diversification on a total fund basis is achieved by following an allowable range of commitment within asset category, as follows:

	Range			Target
Equity securities		42 – 48	%		45	%
Debt and/or fixed income securities		37 – 43	%		40	%
International equity		12 – 18	%		15	%
Short term		N/A			N/A
Other		N/A			N/A

The fair values of the Corporation’s pension plan assets at December 31, 2013 and 2012, by asset category, are as follows:

	December 31, 2013		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Cash	$	865	$	865	$	—	$	—
Equity securities:
U.S. companies		4,310		4,310		—		—
International companies		1,495		1,495		—		—
Debt and/or fixed income securities		4,356		4,356		—		—
Total	$	11,026	$	11,026	$	—	$	—

	December 31, 2012		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in Thousands)
Cash	$	42	$	42	$	—	$	—
Equity securities:
U.S. companies		3,154		3,154		—		—
International companies		1,051		1,051		—		—
Debt and/or fixed income securities		2,787		2,787		—		—
Total	$	7,034	$	7,034	$	—	$	—

	F-46

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 — Pension and Other Benefits – (continued)

The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan.

Cash Flows

Contributions

The Bank expects to contribute $400,000 to its Pension Trust in 2014.

The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, signed into law on June 25, 2010, permits single employer and multiple employer defined benefit plan sponsors to elect to extend the plan’s amortization period of a Shortfall Amortization Base over either a nine year period or a fifteen year period, rather than the seven year period required under the Pension Protection Act of 2006. The relief was available for any two Plan Years 2008 through 2011.

The Bank has elected to apply the Pension Relief Act fifteen year amortization of the Shortfall Amortization Bases established for the 2009 and 2011 Plan Years.

The Moving Ahead for Progress in the 21^st Century Act which was enacted on July 6, 2012 contained special rules related to funding stabilization for single employer defined benefit plans. Under these provisions, the interest rates used to calculate the plan’s funding percentages and minimum required contribution are adjusted as necessary to fall within a specified range that is determined based on an average of rates for the 25 year period ending on September 30 of the calendar year preceding the first day of the Plan year. For Plan years beginning in 2013, the range is 85% - 115% of the 25 year average. The application of the adjusted rates produced a 2013 required minimum contribution to the Plan to approximately $400,000. However, a decision was made to contribute a total of $3,700,000 for the 2013 plan year in order to make significant progress toward fully funding Plan liabilities and that amount has been contributed for the 2013 Plan Year.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in each year 2014, 2015, 2016, 2017, 2018 and years 2019-2023, respectively: $761,489, $762,957, $765,263, $747,835, $743,646 and $3,882,812.

401(k) Benefit Plan

The Corporation maintains a 401(k) employee savings plan to provide for defined contributions which covers substantially all employees of the Corporation. Prior to 2013, the Corporation’s contribution to its 401(k) plan provided a dollar-for-dollar matching contribution up to six percent of salary deferrals for the periods presented. Beginning with the 2013 Plan Year, the Plan was amended to provide for a 3% non-elective safe harbor contribution for all participants. For 2013, 2012 and 2011, employer contributions amounted to $265,000, $405,000 and $358,000, respectively.

	F-47

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Stock Based Compensation

Stock Option Plans

At December 31, 2013, the Corporation maintained two stock-based compensation plans from which new grants could be issued. The 2009 Equity Incentive Plan permits the grant of “incentive stock options” as defined under the Internal Revenue Code, non-qualified stock options, restricted stock awards and restricted stock unit awards to employees, including officers, and consultants of the Corporation and its subsidiaries. The 2003 Non-Employee Director Stock Option Plan permits the grant of non-qualified stock options to the Corporation’s non-employee directors. An aggregate of 363,081 shares remain available for grant under the 2009 Equity Incentive Plan and an aggregate of 406,527 shares remain available for grant under the 2003 Non-Employee Director Stock Option Plan. Such shares may be treasury shares, newly issued shares or a combination thereof.

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

The total compensation expense related to these plans was $59,000, $39,000 and $35,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

As a result of the compensation expense related to stock options: (i) for the year ended December 31, 2013, the Corporation’s income before income taxes and net income was reduced by $59,000 and $35,000, respectively; (ii) for the year ended December 31, 2012, the Corporation’s income before income taxes and net income was reduced by $39,000 and $23,000, respectively; and (iii) for the year ended December 31, 2011, the Corporation’s income before income taxes and net income was reduced by $35,000 and $21,000, respectively.

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 during a period specified at 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. During 2013, 18,829 shares were awarded while in 2012, 2,125 shares were awarded. During 2011, 2,780 shares were awarded. 2013 shares were issued from treasury stock, while 2012 and 2011 shares were purchased in the open market. The amount of compensation cost related to restricted stock awards included in salary expense was $24,000, $25,000 and $25,000 in 2013, 2012 and 2011, respectively. As of December 31, 2013, all shares relating to 2012 and 2011 restricted stock awards were vested.

Options covering 41,639 shares were granted on August 27 and March 1, 2013, while 27,784 and 27,784 shares were granted on March 1, 2012 and March 1, 2011, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values:

	2013			2012			2011
Weighted average fair value of grants	$	2.50 – 5.87		$	2.03		$	1.89
Risk-free interest rate		1.86 – 2.29	%		2.03	%		2.19	%
Dividend yield		1.76 – 2.11	%		1.24	%		1.32	%
Expected volatility		23.21 – 33.74	%		22.04	%		22.25	%
Expected life in months		69 – 90			68			65

	F-48

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 — Stock Based Compensation – (continued)

Option activity under the principal option plans as of December 31, 2013 and changes during the twelve months ended December 31, 2013 were as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (In Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2012		183,574	$	10.04
Granted		41,639		12.95
Exercised		(2,268)		9.14
Forfeited/cancelled/expired		(34,565)		10.81
Outstanding at December 31, 2013		188,380	$	10.55		5.99	$	1,546,129
Exercisable at December 31, 2013		113,751	$	10.14		4.40	$	980,102

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of 2013 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 December 31, 2013. This amount changes based on the fair market value of the Parent Corporation’s stock.

As of December 31, 2013, $266,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 3.9 years. Changes in options outstanding during the past three years were as follows:

Stock Option Plan	Shares		Exercise Price Range per Share
Outstanding, December 31, 2010 (138,898 shares exercisable)		198,946		$7.67 to $15.73
Granted during 2011		27,784	$	9.11
Exercised during 2011		(42,495)	$	7.71
Expired or canceled during 2011		(12,857)	$	10.50 to $15.73
Outstanding, December 31, 2011 (105,388 shares exercisable)		171,378		$7.67 to $15.73
Granted during 2012		27,784	$	9.64
Exercised during 2012		(15,588)		$7.67 to $10.50
Expired or canceled during 2012		—	$	0.00
Outstanding, December 31, 2012 (117,111 shares exercisable)		183,574		$7.67 to $15.73
Granted during 2013		41,639	$	12.52 to $14.24
Exercised during 2013		(2,268)		$7.67 to $10.66
Expired or canceled or forfeited during 2013		(34,565)	$	7.67 to $15.73
Outstanding, December 31, 2013 (113,751 shares exercisable)		188,380		$7.67 to $15.73

Under the Director Stock Option Plan, there were stock options granted with a weighted average fair value of 31,257 and $2.50, 27,784 and $2.03 and 27,784 and $1.89 during the years ended December 31, 2013, 2012 and 2011, respectively. There were 18,829, 2,125 and 2,780 restricted stock awards granted under the Employee Stock Incentive Plan during the years ended December 31, 2013, 2012 and 2011, respectively. In addition, during 2013 10,382 stock options with a weighted average fair value of $5.87 were granted under the Employee Stock Incentive Plan.

	F-49

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18 — Dividends and Other Restrictions

Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. Furthermore, prior approval by the OCC is required if the total of dividends declared in a calendar year exceeds the total of the Bank’s net profits for that year combined with the retained profits for the two preceding years. At December 31, 2013, approximately $45.1 million was available for payment of dividends based on the preceding guidelines.

Note 19 — 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 sale 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.

FASB ASC 820-10-05 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.

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

FASB ASC 820-10-05 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 FASB ASC 820-10-05 are as follows:

⋅

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.

	F-50

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

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 December 31, 2013 and December 31, 2012:

Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate those assets’ fair value.

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.

At December 31, 2012, the Corporation’s pooled trust preferred security, ALESCO VII, was classified as Level 3. Market pricing for the Level 3 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 FASB ASC 820-10-05. 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 security (“pooled TRUPS”), the Corporation was able to determine fair value of the TRUPS using a market approach validation technique based on Level 2 inputs that did not require significant adjustments. The Level 2 inputs included:

(a)

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

(b)

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

Since June 30, 2008, the market for these 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 TRUPS trade and then by a significant decrease in the volume of trades relative to historical levels as well as other relevant factors. At December 31, 2013, the Corporation determined that the market for similar TRUPS had stabilized. That determination was made considering that there are more observable transactions for similar TRUPS, the prices for those transactions that have occurred are current and or represent fair value, and the observable prices for those transactions have stabilized over time, thus increasing the potential relevance of those observations. However, the Corporation’s one TRUPS at December 31, 2012 has been classified within Level 3 because the Corporation determined that significant adjustments using unobservable inputs are required to determine a true fair value at the measurement date.

	F-51

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The Corporation held one variable rate private label collateralized mortgage obligation (CMO), which was also evaluated for impairment. The Variable Rate Collateralized Mortgage Obligation was originally issued in 2006 and is 30 year Adjustable Rate Mortgage loan secured by a first lien, fully amortizing one-to-four residential mortgage loans. The tranche purchased was a Super Senior with an original credit rating of AAA/AA. The top five states geographic concentration comprised in the deal were California 18.2 percent, Arizona 10.5 percent, Virginia 6.1 percent, Florida 6.5 percent and Nevada 6.3 percent. No one state exceeded a 25 percent concentration. These states have been heavily impacted by the financial crises and as such have sustained heavy delinquencies affecting the credit rating of the security. Management applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. The Corporation recorded $24,000 in principal losses on the bond in 2013, and this security was sold at this book value in January 2013.

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

The fair value as of December 31, 2013 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 material cash flow payment defaults have occurred to date.

Securities Held-to-Maturity

The fair value of the Corporation’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury as quoted prices were available, unadjusted, for identical securities in active markets. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Corporation’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

Loans Held for Sale

Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.

Loans Receivable

The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

	F-52

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Restricted Stocks

The carrying amount of restricted investments in bank stocks, which includes stock of the Federal Home Loan Bank of New York, Federal Reserve Bank of New York and Atlantic Central Bankers Bank, approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable

The carrying value of accrued interest receivable and accrued interest payable approximates its fair value.

Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings and interest-bearing checking accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 2013 and 2012. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-Term Borrowings

Short-term borrowings that mature within six months and securities sold under agreements to repurchase have fair values which approximate carrying value.

Long-Term Borrowings

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Subordinated Debt

The fair value of subordinated debentures is estimated by discounting the estimated future cash flows, using market discount rates of financial instruments with similar characteristics, terms and remaining maturity.

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rate and the committed rates.

The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2013 and December 31, 2012 are as follows:

	F-53

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

	December 31, 2013		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

	(Dollars in Thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis:
U.S. treasury and agency securities	$	13,519	$	13,519	$	—	$	—
Federal agency obligations		19,941		—		19,941		—
Residential mortgage pass-through securities		48,874		—		48,874		—
Commercial mortgage pass- through securities		6,991		—		6,991		—
Obligations of U.S. states and political subdivision		31,460		—		31,460		—
Trust preferred securities		19,403		—		19,403		—
Corporate bonds and notes		158,630		—		158,630		—
Asset-backed securities		15,979		—		15,979		—
Certificates of deposit		2,262		—		2,262		—
Equity securities		287		287		—		—
Other securities		5,724		5,724		—		—
Securities available-for-sale	$	323,070	$	19,530	$	303,540	$	—

	December 31, 2012		Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

	(Dollars in Thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis:
U.S. treasury and agency securities	$	11,909	$	11,909	$	—	$	—
Federal agency obligations		20,535		—		20,535		—
Residential mortgage pass- through securities		53,784		—		53,784		—
Commercial mortgage pass- through securities		9,969		—		9,969		—
Obligations of U.S. states and political subdivision		107,714		469		107,245		—
Trust preferred securities		21,249		—		21,213		36
Corporate bonds and notes		237,405		—		237,405		—
Collateralized mortgage obligations		2,120		—		2,120		—
Asset-backed securities		19,742		—		19,742		—
Certificates of deposit		2,865		—		2,865		—
Equity securities		325		325		—		—
Other securities		9,198		9,198		—		—
Securities available-for-sale	$	496,815	$	21,901	$	474,878	$	36

	F-54

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair values used by the Corporation are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2). The fair values of the federal agency obligations, obligations of states and political subdivision and corporate bonds and notes measured at fair value using Level 1 inputs at December 31, 2013 and 2012 represented the purchase price of the securities since they were acquired near year-end 2013 and 2012.

The following table presents the changes in securities available-for-sale with significant unobservable inputs (Level 3) for the year ended December 31, 2013 and December 31, 2012:

	2013		2012
	(Dollars in Thousands)
Beginning balance, January 1,	$	36	$	2,115
Transfers out of Level 3		(260)		(2,120)
Principal interest deferrals		58		116
Principal paydown		—		(272)
Total net losses included in net income		(628)		(68)
Total net unrealized gains		794		265
Ending balance, December 31,	$	—	$	36

Assets Measured at Fair Value on a Non-Recurring Basis

The Corporation may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The Corporation primarily utilized appraisal value less cost to sell and other unobservable market inputs to determine fair value of assets, and therefore, is classified as a Level 3 measurement. For assets measured at fair value on a non-recurring basis, the fair value measurements at December 31, 2013 and 2012 are as follows:

Impaired Loans	Valuation Techniques	Range of Unobservable Inputs
Residential	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 0-25%
Commercial	Discounted cash flow model	Discount rate from 0% to 6%
Commercial real estate	Appraisals of collateral value	Market capitalization rates between 8% to 12%. Market rental rates for similar properties
Construction	Appraisals of collateral value	Adjustment for age comparable sales. Generally a decline of 5% to no change

Other Real Estate Owned
Residential	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 0-25% and estimated selling costs of 6-8%
Commercial	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 15% to no change and estimated selling costs of 6-8%

For assets measured at fair value on a non-recurring basis, the unobservable inputs used to derive fair value measurements at December 31, 2013 and December 31, 2012 were as follows:

	December 31, 2013		Fair Value Measurements at Reporting Date Using
			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 Non-Recurring Basis:
Impaired loans	$	4,601	$	—	$	—	$	4,601
Other real estate owned		220		—		—		220

	December 31, 2012		Fair Value Measurements at Reporting Date Using
			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 Non-Recurring Basis:
Impaired loans	$	4,790	$	—	$	—	$	4,790
Other real estate owned		1,300		—		—		1,300

	F-55

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a non-recurring basis at December 31, 2013 and 2012:

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. At December 31, 2013 and 2012, impaired loans with related valuation allowance totaled $5,016,000 and $5,435,000, respectively. The amount of related valuation allowances was $415,000 at December 31, 2013 and $645,000 at December 31, 2012.

Other Real Estate Owned. Certain assets such as 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 FASB ASC 820-10-05. 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 are based on estimation per the terms and conditions of the sales agreements or appraisal.

Fair Value of Financial Instruments

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

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

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

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

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

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

	F-56

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments as of December 31, 2013 and December 31, 2012.

					Fair Value Measurements
	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
December 31, 2013
Financial assets
Cash and due from banks	$	82,692	$	82,692	$	82,692	$	—	$	—
Investment securities available-for-sale		323,070		323,070		19,530		303,540		—
Investment securities held-to-maturity		215,286		210,958		27,037		164,940		18,981
Restricted investment in bank stocks		8,986		8,986		—		8,986		—
Net loans		950,610		948,606		—		—		948,606
Accrued interest receivable		6,802		6,802		—		4,136		2,666

Financial liabilities
Non interest-bearing deposits		227,370		227,370		—		227,370		—
Interest-bearing deposits		1,114,635		1,115,781		—		1,115,781		—
Long-term borrowings		146,000		157,440		—		157,440		—
Subordinated debentures		5,155		5,143		—		5,143		—
Accrued interest payable		963		963		—		963		—

December 31, 2012
Financial assets
Cash and due from banks	$	104,134	$	104,134	$	104,134	$	—	$	—
Interest bearing deposits with banks		2,004		2,004		2,004		—		—
Investment securities available-for-sale		496,815		496,815		21,901		474,878		36
Investment securities held-to-maturity		58,064		62,431		—		53,247		9,184
Restricted investment in bank stocks		8,964		8,964		—		8,964		—
Loans held for sale		1,491		1,491		1,491		—		—
Net loans		879,435		897,030		—		—		897,030
Accrued interest receivable		6,849		6,849		—		4,465		2,384

Financial liabilities
Non interest-bearing deposits		215,071		215,071		—		215,071		—
Interest-bearing deposits		1,091,851		1,092,822		—		1,092,822		—
Long-term borrowings		146,000		162,992		—		162,992		—
Subordinated debentures		5,155		5,046		—		5,046		—
Accrued interest payable		874		874		—		874		—

	F-57

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)

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

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

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

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

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

Note 20 — Parent Corporation Only Financial Statements

The Parent Corporation operates its wholly-owned subsidiary, Union Center National Bank. The earnings of this subsidiary are recognized by the Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Corporation’s investment in the subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Corporation are restricted under supervisory regulations (see Note 18 of the Notes to Consolidated Financial Statements).

	F-58

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20 — Parent Corporation Only Financial Statements – (continued)

Condensed financial statements of the Parent Corporation only are as follows:

Condensed Statements of Condition

	At December 31,
	2013		2012
	(Dollars in Thousands)
ASSETS
Cash and cash equivalents	$	285	$	629
Investment in subsidiaries		173,658		165,351
Securities available for sale		442		543
Other assets		271		41
Total assets	$	174,656	$	166,564
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	917	$	718
Subordinated debentures		5,155		5,155
Stockholders’ equity		168,584		160,691
Total liabilities and stockholders’ equity	$	174,656	$	166,564

Condensed Statements of Income

	For Years Ended December 31,
	2013		2012		2011
	(Dollars in Thousands)
Income:
Dividend income from subsidiaries	$	4,393	$	2,079	$	785
Other income		6		15		7
Net gains on available for sale securities		22		26		—
Management fees		353		409		294
Total Income		4,774		2,529		1,086
Expenses		(765)		(731)		(615)
Income before equity in undistributed earnings of subsidiaries		4,009		1,798		471
Equity in undistributed earnings of subsidiaries		15,916		15,709		13,455
Net Income	$	19,925	$	17,507	$	13,926

	F-59

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20 — Parent Corporation Only Financial Statements – (continued)

Condensed Statements of Comprehensive Income

	Consolidated Subsidiaries		Parent		Consolidated Total
	(Dollars in Thousands)
For the year ended 2013:
Net income	$	19,925	$	—	$	19,925
Other comprehensive (loss) income, net of tax:
Net unrealized loss on investment securities		(8,073)		79		(7,994)
Actuarial gain		387		—		387
Total other comprehensive (loss) income		(7,686)		79		(7,607)
Total comprehensive income	$	12,239	$	79	$	12,318

For the year ended 2012:
Net income	$	17,507	$	—	$	17,507
Other comprehensive income, net of tax:
Net unrealized gain on investment securities		10,935		41		10,976
Actuarial loss		(467)		—		(467)
Total other comprehensive income		10,468		41		10,509
Total comprehensive income	$	27,975	$	41	$	28,016

For the year ended 2011:
Net income	$	13,926	$	—	$	13,926
Other comprehensive income, net of tax:
Net unrealized gain (loss) on investment securities		3,301		(7)		3,294
Actuarial loss		(1,065)		—		(1,065)
Total other comprehensive income (loss)		2,236		(7)		2,229
Total comprehensive income	$	16,162	$	(7)	$	16,155

Condensed Statements of Cash Flows

	For Years Ended December 31
	2013		2012		2011
	(Dollars in Thousands)
Cash flows from operating activities:
Net income	$	19,925	$	17,507	$	13,926
Adjustments to reconcile net income to net cash provided by operating activities:
Net gains on available for sale securities		(22)		(26)		—
Equity in undistributed earnings of subsidiary		(15,916)		(15,709)		(13,455)
Change in deferred tax asset		—		—		3
(Increase) decrease in other assets		(167)		563		(298)
(Decrease) increase in other liabilities		(276)		(772)		220
Stock based compensation		59		39		35
Net cash provided by operating activities		3,603		1,602		431
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities		181		375		—
Purchase of available-for-sale securities		—		(410)		—
Investments in subsidiaries		—		—		(1,250)
Net cash provided by (used in) investing activities		181		(35)		(1,250)
Cash flows from financing activities:
Net decrease in borrowings		—		—		(310)
Cash dividends on common stock		(4,254)		(2,778)		(1,955)
Cash dividends on preferred stock		(141)		(363)		(417)
Proceeds from issuance of Series B preferred stock		—		—		11,250
Redemption of Series A preferred stock		—		—		(10,000)
Warrant repurchased		—		—		(245)
Issuance of restricted stock award		243		—		—
Issuance cost of common stock		(13)		(8)		(5)
Issuance cost of Series B preferred stock		—		—		(84)
Proceeds from exercise of stock options		21		141		328
Tax expense from stock based compensation		16		28		—
Net cash used in financing activities		(4,128)		(2,980)		(1,438)
Decrease in cash and cash equivalents		(344)		(1,413)		(2,257)
Cash and cash equivalents at beginning of year		629		2,042		4,299
Cash and cash equivalents at the end of year	$	285	$	629	$	2,042

	F-60

CENTER BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 21 — Quarterly Financial Information of Center Bancorp, Inc. (Unaudited)

	2013
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
	(Dollars in Thousands, Except per Share Data)
Total interest income	$	14,644	$	14,541	$	13,979	$	14,104
Total interest expense		2,778		2,819		2,751		2,734
Net interest income		11,866		11,722		11,228		11,370
Provision for loan losses		350		—		—		—
Total other income, net of securities gains		1,307		1,200		1,107		1,526
Net securities gains		449		343		600		319
Other expense		6,459		6,205		6,076		6,538
Income before income taxes		6,813		7,060		6,859		6,677
Provision from income taxes		1,829		1,966		1,936		1,753
Net income	$	4,984	$	5,094	$	4,923	$	4,924
Net income available to common stockholders	$	4,955	$	5,066	$	4,895	$	4,868
Earnings per share:
Basic	$	0.30	$	0.31	$	0.30	$	0.30
Diluted	$	0.30	$	0.31	$	0.30	$	0.30
Weighted average common shares outstanding:
Basic		16,350,183		16,349,480		16,348,915		16,348,215
Diluted		16,396,931		16,385,155		16,375,774		16,373,588

	2012
	4th Quarter		3rd Quarter		2nd Quarter		1st Quarter
	(Dollars in Thousands, Except per Share Data)
Total interest income	$	14,263	$	14,118	$	13,496	$	13,395
Total interest expense		2,841		2,935		2,950		3,050
Net interest income		11,422		11,183		10,546		10,345
Provision for loan losses		100		225		(107)		107
Total other income, net of securities gains		1,217		1,872		1,091		1,018
Net securities (losses) gains		(201)		763		513		937
Other expense		6,193		7,507		5,690		5,807
Income before income taxes		6,145		6,086		6,567		6,386
Provision from income taxes		1,676		1,632		2,214		2,155
Net income	$	4,469	$	4,454	$	4,353	$	4,231
Net income available to common stockholders	$	4,441	$	4,426	$	4,269	$	4,090
Earnings per share:
Basic	$	0.27	$	0.27	$	0.26	$	0.25
Diluted	$	0.27	$	0.27	$	0.26	$	0.25
Weighted average common shares outstanding:
Basic		16,347,564		16,347,088		16,333,653		16,332,327
Diluted		16,363,698		16,362,635		16,341,767		16,338,162

	F-61

Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share.

Note 22 — Subsequent Event

On January 20, 2014, the Parent Corporation entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“ConnectOne Bancorp”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, ConnectOne Bancorp will merge with and into the Parent Corporation, with the Parent Corporation continuing as the surviving corporation (the “Merger”), and the Parent Corporation will change its name to ConnectOne Bancorp. The Merger Agreement also provides that immediately following the consummation of the Merger, the Bank will merge with and into ConnectOne Bank (the “Bank Merger”), a New Jersey-chartered commercial bank (“ConnectOne Bank”) and a wholly-owned subsidiary of ConnectOne Bancorp, with ConnectOne Bank continuing as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger (the “Effective Time”), each share of common stock, no par value per share, of ConnectOne Bancorp (“ConnectOne Common Stock”), issued and outstanding immediately prior to the Effective Time will be converted into and become the right to receive 2.6 shares of the Parent’s Corporation’s common stock. The Merger and the Bank Merger are subject to the receipt of all necessary regulatory approvals, the approvals of the shareholders of the Parent Corporation and ConnectOne Bancorp and other conditions. The parties contemplate that the merger will be consummated during the second or third quarters of 2014, provided that all conditions are satisfied or, where permitted, waived.

	F-62

Item 15. Exhibits and Financial Statement Schedules

Exhibit No.		Description

23.1*		Consent of BDO USA, LLP

23.2*		Consent of ParenteBeard LLC

31.1*		Personal certification of the chief executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Personal certification of the chief financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Personal certification of the chief executive officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Personal certification of the chief financial officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

** Furnished herewith.

-5-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Center Bancorp, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

April 14, 2014	CENTER BANCORP, INC.

	By:	/s/ Anthony C. Weagley
		Anthony C. Weagley
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of Center Bancorp, Inc., in the capacities described below, have signed this report on April 14, 2014.

Signatures	Title	Date

/s/ Anthony C. Weagley	Director, President and Chief Executive	April 14, 2014
Anthony C. Weagley	Officer (Principal Executive Officer)

/s/ Francis R. Patryn*	(Principal Financial Officer and Principal	April 14, 2014
Francis R. Patryn	Accounting Officer)

/s/ Alexander Bol*	Director	April 14, 2014
Alexander Bol

/s/ Frederick Fish*	Director	April 14, 2014
Frederick Fish

/s/ Harold Kent*	Director	April 14, 2014
Harold Kent

/s/ Nicholas Minoia*	Director	April 14, 2014
Nicholas Minoia

Harold Schechter	Director

-6-

/s/ Lawrence B. Seidman*	Director	April 14, 2014
Lawrence B. Seidman

/s/ William Thompson*	Director	April 14, 2014
William Thompson

/s/ Raymond Vanaria*	Director	April 14, 2014
Raymond Vanaria

*By:
	/s/ Anthony C. Weagley
	(Anthony C. Weagley
	Attorney-in-fact)

-7-

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