The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Corporation's results of operations for the periods presented herein and financial condition as of September 30, 2008 and December 31, 2007. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as "believes," "expects," "anticipates," "plans," "trend," "objective," "continue," "remain," "pattern" or similar expressions or future or conditional verbs such as "will," "would," "should," "could," "might," "can," "may" or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected;
(5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which Center Bancorp is engaged; (7) changes and trends in the securities markets may adversely impact Center Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by Center Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of Center Bancorp are included in Item 1A of Center Bancorp's Annual Report on Form 10-K and in Center Bancorp's other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission's website at http://www.sec.gov and/or from Center Bancorp.

Critical Accounting Policies and Estimates

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

The Corporation's accounting policies are fundamental to understanding Management's Discussion and Analysis ("MD&A") of financial condition and results of operations. The most significant accounting policies followed by the Corporation are presented in Note 1 of the Notes to Consolidated Financial Statements. The Corporation has identified its policies on the allowance for loan losses, issues relating to other-than-temporary impairment losses in the securities portfolio, the valuation of deferred tax assets and the fair value of investment securities to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available. Additional information on these policies can be found in Note 1 of the Notes to Consolidated Financial Statements.

Allowance for Loan Losses and Related Provision

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

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

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

Other-Than-Temporary Impairment of Securities

Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and the duration of the decline and the intent and ability of the Corporation to retain its investment in the security for a period of time sufficient to allow for an anticipated recovery in the fair value. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced to fair value and a corresponding charge to earnings is recognized. Impairment charges on certain investment securities of approximately $1.2 million and $1.4 million were recognized during the three and nine months ended September 30, 2008, respectively. As a result of the bankruptcy of Lehman Brothers in September 2008, the Corporation incurred an impairment charge of $1.2 million in its investment securities portfolio during the third quarter of 2008. This charge for the quarter was based on the Corporation's expectation at September 30, 2008 of what the Corporation feels it would receive from the bankruptcy proceedings as opposed to an attempted sale into an illiquid market. No impairment charge was recognized during the three or nine months ended September 30, 2007.

Income Taxes

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

Fluctuations in the actual outcome of these future tax consequences could impact the Corporation's consolidated financial condition or results of operations. Note 7 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.

Fair Value of Investment Securities

In October 2008, the FASB issued FSP SFAS No. 157-3,"Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active" ("FSP 157-3"), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Corporation's September 30, 2008 financial statements. The Corporation applied the guidance in FSP 157-3 when determining fair value for the Corporation's private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 5, Fair Value Measurements, for further discussion.

Earnings Analysis

Net income for the three months ended September 30, 2008 amounted to $1,518,000 compared to net income of $998,000 for the comparable three-month period ended September 30, 2007. The Corporation recorded earnings per diluted common share of $0.12 for the three months ended September 30, 2008 as compared with earnings of $0.07 per diluted common share for the three months ended September 30, 2007. The annualized return on average assets increased to 0.60 percent for the three months ended September 30, 2008 as compared to 0.40 percent for the comparable three-month period in 2007. The annualized return on average stockholders' equity was 7.55 percent for the three-month period ended September 30, 2008 as compared to 4.21 percent for the three months ended September 30, 2007.

During the third quarter of 2008, the Corporation recorded certain non-recurring items, including gains related to employee benefit plans and the Corporation's bank owned life insurance offset by an impairment charge taken on a Lehman Brothers corporate bond as a result of Lehman Brothers' September bankruptcy filing. These items amounted to an after-tax net charge of $213,000 or $0.02 per diluted share. Nonetheless, the results for the period continue to reflect the core strengths of the Corporation - asset growth, margin expansion and a reduction in operating overhead. Earnings for both the third quarter and nine months of 2008 reflect the progress that the Corporation is making in building a strong balance sheet, maintaining a strong credit culture and improving the stability of revenue streams.

For the nine months ended September 30, 2008, the Corporation recorded net income of $4,143,000 compared to net income of $3,324,000 for the comparable nine month period ended September 30, 2007. The Corporation recorded earnings per diluted common share of $0.32 for the nine months ended September 30, 2008 as compared with earnings of $0.24 per diluted common share for the nine months ended September 30, 2007. The annualized return on average assets increased to 0.56 percent for the nine months ended September 30, 2008 as compared to 0.43 percent for the comparable nine month period in 2007. The annualized return on average stockholders' equity was 6.59 percent for the nine month period ended September 30, 2008 as compared to 4.58 percent for the nine months ended September 30, 2007.

Net Interest Income/Margin

Net interest income is the difference between the interest earned on the portfolio of earning-assets (principally loans and investments) and the interest paid for deposits and wholesale borrowings, which support these assets. Net interest income is presented in this Quarterly Report on a fully tax-equivalent basis by adjusting tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues, and then in accordance with the Corporation's consolidated financial statements.

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

Net Interest Income
(tax-equivalent basis)

                                 Three Months Ended September 30,                 Nine Months Ended September 30,
                                                  Increase      Percent                            Increase     Percent
(Dollars in Thousands)      2008       2007      (Decrease)     Change       2008       2007      (Decrease)     Change
Interest income:
Investments               $  3,389   $  4,732        ($1,343 )    (28.38 ) $ 11,164   $ 14,706   $     (3,542 )   (24.09 )
Loans, including fees        9,427      8,460            967       11.43     26,575     25,087          1,488       5.93
Federal funds sold and
securities purchased
under agreement to
resell                           -         40            (40 )   (100.00 )      109        521           (412 )   (79.08 )
Restricted investment
in bank stocks, at cost        161        138             23       16.67        497        402             95      23.63
Total interest income       12,977     13,370           (393 )     (2.94 )   38,345     40,716          2,371      (5.82 )
Interest expense:
Time deposits of $100
or more                        618      1,132           (514 )    (45.41 )    1,830      3,022         (1,192 )   (39.44 )
All other deposits           2,434      3,954         (1,520 )    (38.44 )    8,302     12,704         (4,402 )   (34.65 )
Borrowings                   2,777      2,369            408       17.22      8,171      7,279            892      12.25
Total interest expense       5,829      7,455         (1,626 )    (21.81 )   18,303     23,005         (4,702 )   (20.44 )
Net interest income on
a fully tax-equivalent
basis                        7,148      5,915          1,233       20.85     20,042     17,711          2,331      13.16
Tax-equivalent
adjustment                    (288 )     (434 )          146       33.64     (1,066 )   (1,384 )          318      22.98
Net interest income       $  6,860   $  5,481   $      1,379       25.16   $ 18,976   $ 16,327   $      2,649      16.22

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

Net interest income on a fully tax-equivalent basis increased $1.2 million or 20.8 percent to $7.1 million for the three months ended September 30, 2008 as compared to the same period in 2007. For the three months ended September 30, 2008, the net interest margin increased 46 basis points to 3.09 percent from 2.63 percent during the three months ended September 30, 2007 due primarily to lower rates paid on interest-bearing liabilities. For the three months ended September 30, 2008, a decrease in the average yield on interest-earning assets of 33 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 106 basis points, which increased the Corporation's net interest spread by 73 basis points for the period. On a linked sequential basis, net interest spread and margin improved by 12 basis points and 9 basis points, respectively, from the three months ended June 30, 2008 to the three months ended September 30, 2008.

Net interest income on a fully tax-equivalent basis increased $2.3 million or 13.2 percent to $20.0 million for the nine months ended September 30, 2008 as compared to the same period in 2007. For the nine months ended September 30, 2008, the net interest margin increased 42 basis points to 2.95 percent from 2.53 percent during the nine months ended September 30, 2007 due primarily to lower rates paid on interest-bearing liabilities. For the nine months ended September 30, 2008, a decrease in the average yield on interest-earning assets of 19 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 81 basis points, which increased the Corporation's net interest spread by 62 basis points for the period.

For the three-month period ended September 30, 2008, interest income on a tax-equivalent basis decreased by $0.4 million or 2.9 percent from the comparable three-month period in 2007. This decrease was due primarily to a decline in balances of the Corporation's investment securities portfolio coupled with a decline in rates due to the actions taken by the Federal Reserve to lower market interest rates over the past year. The Corporation's loan portfolio increased on average $113.0 million to $651.8 million from $538.8 million in the same quarter in 2007, primarily driven by growth in commercial real estate business related sectors of the loan portfolio. The loan portfolio represented approximately 70.5 percent of the Corporation's interest-earning assets on average during the third quarter of 2008 as compared to 59.8 percent in the same quarter in 2007. The increase in loan volume was partially offset by the above-mentioned decline in the volume of the Corporation's investment portfolio. Average investment volume decreased during the current three month period by $87.9 million compared to the third quarter of 2007.

For the nine-month period ended September 30, 2008, interest income on a tax-equivalent basis decreased by $2.4 million or 5.8 percent from the comparable nine-month period in 2007. This decrease was due primarily to a decline in balances of the Corporation's investment securities portfolio coupled with a decline in rates due to the actions taken by the Federal Reserve to lower market interest rates over the past year. The Corporation's loan portfolio increased on average $69.0 million to $606.5 million from $537.5 million in the same period in 2007, primarily driven by growth in commercial real estate business related sectors of the loan portfolio. The loan portfolio represented approximately 66.9 percent of the Corporation's interest-earning assets on average during the first nine months of 2008 as compared to 57.7 percent in the same period in 2007. The increase in loan volume was more than offset by the above-mentioned decline in the volume of the Corporation's investment portfolio. Average investment volume decreased during the current nine month period by $88.3 million compared to the same period of 2007.

The Federal Open Market Committee (FOMC) reduced rates four times during the first nine months of 2008 in addition to the two rate reductions during the fourth quarter of 2007, for a total of 275 basis points. This action by the FOMC allowed the Corporation to further reduce liability costs throughout 2008.

For the three months ended September 30, 2008, interest expense declined by $1.6 million or 21.8 percent from the same period in 2007. The average rate of interest-bearing liabilities decreased 106 basis points to 2.88 percent for the three months ended September 30, 2008 from 3.94 percent for the three months ended September 30, 2007. At the same time, the average volume of interest-bearing liabilities increased by $51.7 million. The increase in the average balance of interest-bearing liabilities during the three months ended September 30, 2008 was primarily in borrowings of $87.7 million and in money market and time deposits of $13.9 million, partially offset by decreases of $44.9 million in other interest bearing deposits and $5.0 million in savings deposits. Steps were taken during the fourth quarter of 2007 to improve the Corporation's net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation's cash position for further outflows in the first, second and third quarters of 2008. The result was an improvement in the Corporation's cost of funds and net interest margin. During the first nine months of 2008, the Corporation secured approximately $55 million of longer term funding with a weighted average rate of 2.90 percent in an effort to support continued loan growth. In part as a result of these factors, for the three months ended September 30, 2008, the Corporation's net interest spread on a tax-equivalent basis increased to 2.73 percent from 2.00 percent for the three months ended September 30, 2007.

For the nine months ended September 30, 2008, interest expense declined by $4.7 million or 20.4 percent from the same period in 2007. The average rate of interest-bearing liabilities decreased 81 basis points to 3.10 percent for the nine months ended September 30, 2008 from 3.91 percent for the nine months ended September 30, 2007. At the same time, the average volume of interest-bearing liabilities increased by $3.0 million. The increase in the average balance of interest-bearing liabilities during the three months ended September 30, 2008 was primarily in borrowings of $65.7 million and in money market deposits of $18.3 million, partially offset by decreases of $40.9 million in other interest bearing deposits and $40.1 million in savings and time deposits. For the nine months ended September 30, 2008, the Corporation's net interest spread on a tax-equivalent basis increased to 2.54 percent from 1.92 percent for the nine months ended September 30, 2007.

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

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

                                Three Months Ended September 30,           Nine Months Ended September 30,
                                 2008/2007 Increase (Decrease)              2008/2007 Increase (Decrease)
                                       Due to Change In:                          Due to Change In:
                              Average        Average          Net        Average         Average         Net
(Dollars in Thousands)        Volume           Rate         Change        Volume           Rate        Change
Interest-earning assets:
Investment securities:
Taxable                     $      (721 )  $       (160 )  $    (881 ) $     (2,392 )  $          5   $  (2,387 )
Non-Taxable                        (438 )           (24 )       (462 )       (1,084 )           (71 )    (1,155 )
Loans, net of unearned
income                            1,672            (705 )        967          3,087          (1,599 )     1,488
Federal funds sold and
securities
purchased under agreement
to resell                           (20 )           (20 )        (40 )         (226 )          (186 )      (412 )
Restricted investment in
bank stock                           39             (16 )         23            112             (17 )        95
Total interest-earning
assets                              532            (925 )       (393 )         (503 )        (1,868 )    (2,371 )
Interest-bearing
liabilities:
Money market deposits                49            (936 )       (887 )          564          (2,489 )    (1,925 )
Savings deposits                    (26 )          (217 )       (243 )         (111 )          (610 )      (721 )
Time deposits                      (102 )          (492 )       (594 )       (1,039 )        (1,272 )    (2,311 )
Other interest-bearing
deposits                           (239 )           (71 )       (310 )         (725 )            88        (637 )
Borrowings and
subordinated debentures             889            (481 )        408          2,031          (1,139 )       892
Total interest-bearing
liabilities                         571          (2,197 )     (1,626 )          720          (5,422 )    (4,702 )
Change in net interest
income                      $       (39 )  $      1,272    $   1,233   $     (1,223 )  $      3,554   $   2,331

The following table, "Average Statement of condition with Interest and Average Rates", presents for the three and nine months ended September 30, 2008 and 2007 the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also reflected.

        Average Statements of Condition with Interest and Average Rates

                                                 Three Months Ended September 30,
                                            2008                                   2007
                                           Interest     Average                  Interest     Average
(Tax-Equivalent Basis,        Average      Income/       Yield/      Average     Income/       Yield/
Dollars in Thousands)         Balance      Expense        Rate       Balance     Expense        Rate

Assets:
Interest-earning assets:
Investment securities:(1)
Taxable                     $   203,775   $    2,542         4.99 % $ 261,005   $    3,423         5.25 %
Tax-exempt                       59,426          847         5.70      90,124        1,309         5.81
Loans, net of unearned
income(2)                       651,766        9,427         5.79     538,798        8,460         6.28
Federal funds sold and
securities purchased
under agreement to resell             -            -         0.00       3,238           40         4.94
Restricted investment in
bank stocks                      10,136          161         6.35       7,752          138         7.12
Total interest-earning
assets                          925,101       12,977         5.61     900,917       13,370         5.94
Non-interest-earning
assets:
Cash and due from banks          16,533                                16,691
Bank owned life insurance        22,789                                21,910
Intangible assets                17,145                                17,245
Other assets                     37,069                                34,687
Allowance for loan losses        (5,840 )                              (4,984 )
Total non-interest
earning assets                   87,697                                85,549
Total assets                $ 1,012,798                             $ 986,466
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
. . .