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 June 30, 2009 and December 31, 2008. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.

Cautionary Statement Concerning Forward-Looking Statements

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

Critical Accounting Policies and Estimates

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

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

Allowance for Loan Losses and Related Provision

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

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

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

Other-Than-Temporary Impairment of Securities

Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FAS 115-2 and FAS 124-2 clarify the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and
(b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FAS 115-2 and FAS 124-2 change the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. An impairment charge on certain investment securities of approximately $140,000 was recognized during the six months ended June 30, 2009. During the six months ended June 30, 2008, the Corporation recorded $191,000 of other than temporary impairment charges relating to two equity holdings in bank stocks.

Income Taxes

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

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

Goodwill

The Corporation adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the six months ended June 30, 2009 and 2008.

Fair Value of Investment Securities

In October 2008, the FASB issued FSP SFAS No. 157-3, " Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active" ("FSP 157-3"), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to the Corporation's December 31, 2008 and June 30, 2009 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.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Corporation adopted FSP FAS 157-4 at June 30, 2009.

Earnings Analysis

Net income for the three months ended June 30, 2009 amounted to $1.2 million compared to net income of $1.4 million for the comparable three-month period ended June 30, 2008. The Corporation recorded earnings per diluted common share of $0.08 for the three months ended June 30, 2009 as compared with earnings of $0.11 per diluted common share for the three months ended June 30, 2008. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury reduced earnings by approximately $0.01 per fully diluted common share. The annualized return on average assets decreased to 0.40 percent for the three months ended June 30, 2009 as compared to 0.57 percent for the comparable three-month period in 2008. The annualized return on average stockholders' equity was 5.35 percent for the three-month period ended June 30, 2009 as compared to 6.69 percent for the three months ended June 30, 2008

Net income for the six months ended June 30, 2009 amounted to $2.0 million compared to net income of $2.6 million for the comparable six-month period ended June 30, 2008. The Corporation recorded earnings per diluted common share of $0.13 for the six months ended June 30, 2009 as compared with earnings of $0.20 per diluted common share for the six months ended June 30, 2008. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury reduced earnings by approximately $0.02 per fully diluted common share. The annualized return on average assets decreased to 0.35 percent for the six months ended June 30, 2009 as compared to 0.53 percent for the comparable six-month period in 2008. The annualized return on average stockholders' equity was 4.43 percent for the six-month period ended June 30, 2009 as compared to 6.14 percent for the six months ended June 30, 2008.

Net Interest Income/Margin

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

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

Net Interest Income
(tax-equivalent basis)

                              Three Months Ended June 30,                        Six Months Ended June 30,
                                           Increase      Percent                             Increase       Percent
(Dollars in
Thousands)            2009       2008     (Decrease)      Change       2009       2008      (Decrease)      Change
Interest income:
Investments         $  3,420   $  3,688   $      (268 )     (7.27 )  $  6,350   $  7,774   $     (1,424 )     (18.32 )
Loans, including
net costs              9,211      8,677           534        6.15      18,313     17,148          1,165         6.79
Federal funds
sold and
securities
purchased under
agreement to
resell                     -         30           (30 )    (100.0 )         -        109           (109 )    (100.00 )
Restricted
investment in
bank stocks, at
cost                     201        182            19       10.44         288        337            (49 )     (14.54 )
Total interest
income                12,832     12,577           255        2.03      24,951     25,368           (417 )      (1.64 )
Interest expense:
Time deposits of
$100 or more             989        537           452       84.17       1,767      1,212            555        45.79
All other
deposits               2,552      2,499            53        2.12       4,829      5,868         (1,039 )     (17.71 )
Borrowings             2,538      2,765          (227 )     (8.21 )     5,046      5,394           (348 )      (6.45 )
Total interest
expense                6,079      5,801           278        4.79      11,642     12,474           (832 )      (6.67 )
Net interest
income on a fully
tax-equivalent
basis                  6,753      6,776           (23 )     (0.34 )    13,309     12,894            415         3.22
Tax-equivalent
adjustment              (126 )     (347 )         221      (63.69 )      (303 )     (778 )          475       (61.05 )
Net interest
income              $  6,627   $  6,429   $       198        3.08    $ 13,006   $ 12,116   $        890         7.35

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 decreased $23,000 or 0.3 percent to $6.8 million for the three months ended June 30, 2009 as compared to the same period in 2008. For the three months ended June 30, 2009, the net interest margin decreased 27 basis points to 2.73 percent from 3.00 percent during the three months ended June 30, 2008. For the three months ended June 30, 2009, a decrease in the average yield on interest-earning assets of 39 basis points was offset by a decrease in the average cost of interest-bearing liabilities of 45 basis points, which increased the Corporation's net interest spread by 6 basis points for the period. On a quarterly linked sequential basis, net interest spread increased 12 basis points and net interest margin declined by 8 basis points, respectively. Net interest margin was impacted by the high level of uninvested excess cash, which accumulated due to the strong deposit growth experienced during the quarter. This represented growth in the Corporation's customer base and enhanced the Corporation's liquidity position while the Corporation continued to expand its earning asset base in a prudent manner.

Net interest income on a fully tax-equivalent basis increased $0.4 million or 3.2 percent to $13.3 million for the six months end June 30, 2009 as compared to the same period in 2008. For the six month period ended June 30, 2009, the net interest margin decreased 10 basis points to 2.77 percent from 2.87 percent during the six months ended June 30, 2008 due primarily to the high level of uninvested excess cash, which accumulated due to the strong deposit growth experienced during the quarter. For the six months ended June 30, 2009, a decrease in the average yield on interest-earning assets of 47 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 64 basis points, which increased the Corporation's net interest spread by 17 basis points for the period.

For the three-month period ended June 30, 2009, interest income on a tax-equivalent basis increased by $255,000 or 2.0 percent from the comparable three-month period in 2008. This increase was due primarily to an increase in balances of the Corporation's loan portfolio offset in part by 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 $85.0 million to $686.7 million from $601.7 million in the same quarter in 2008, primarily driven by growth in commercial real estate business related sectors of the loan portfolio. The loan portfolio represented approximately 69.3 percent of the Corporation's interest-earning assets on average during the second quarter of 2009 as compared to 66.6 percent in the same quarter in 2008. Average investment volume, including short-term investments and restricted investment in bank stocks, increased during the current three month period by $3.4 million compared to the second quarter of 2008.

For the six month period ended June 30, 2009, interest income on a tax-equivalent basis decreased by $0.4 million or 1.6 percent from the comparable six-month period in 2008. This decrease was due primarily to a decline in balances of the Corporation's investment securities portfolio coupled with a decline in rates due to the actions taken by the Federal Reserve to lower market interest rates over the past year. The Corporation's loan portfolio increased on average $99.6 million to $683.3 million from $583.7million in the same period in 2008, primarily driven by growth in commercial real estate business related sectors of the loan portfolio. The loan portfolio represented approximately 71.0 percent of the Corporation's interest-earning assets on average during the first six months of 2009 as compared to 65.0 percent in the same period in 2008. The increase in loan volume was partially offset by a decline in the volume of the Corporation's investment portfolio. Average investment volume, including short-term investments and restricted investment in bank stocks, decreased during the period by $34.7 million on average compared to the same period of 2008.

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

For the three months ended June 30, 2009, interest expense increased by $0.3 million or 4.8 percent from the same period in 2008. The average rate of interest-bearing liabilities decreased 45 basis points to 2.51 percent for the three months ended June 30, 2009 from 2.96 percent for the three months ended June 30, 2008. At the same time, the average volume of interest-bearing liabilities increased by $185.9 million. The increase in the average balance of interest-bearing liabilities during the three months ended June 30, 2009 was primarily in time deposits (CDARS Reciprocal deposits) of $182.3 million, in savings deposits of $71.7 million and in other interest bearing deposits of $3.2 million partially offset by a decline of $40.3 million in money market deposits and other borrowings of $31.0 million. Steps were taken throughout 2008 to improve the Corporation's net interest margin by allowing the runoff of certain high rate deposits and to position the Corporation for further high cost cash outflows during the year. The result was a steady improvement in the Corporation's cost of funds. As a result of these factors, for the three months ended June 30, 2009, the Corporation's net interest spread on a tax-equivalent basis increased to 2.67 percent from 2.61 percent for the three months ended June 30, 2008.

For the six months ended June 30, 2009, interest expense declined by $0.8 million or 6.7 percent from the same period in 2008. The total cost of average interest-bearing liabilities decreased 64 basis points to 2.57 percent for the six months ended June 30, 2009 from 3.21 percent for the six months ended June 30, 2008. At the same time, the average volume of interest-bearing liabilities increased by $129.9 million. The increase in the average balance of interest bearing liabilities during the six months ended June 30, 2009 was primarily in savings and time deposits of $195.7 million, partially offset by a decrease in money market and other interest bearing deposits of $52.3 million and a decrease in borrowings of $13.5 million. For the six month ended June 30, 2009, the Corporation's net interest spread on a tax-equivalent basis increased to 2.61 percent form 2.44 percent for the six months ended June 30, 2008.

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

                                Three Months Ended June 30,                    Six Months Ended June 30,
                               2009/2008 Increase (Decrease)                 2009/2008 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                 $      626        $    (243 )    $      383     $      523      $    (583 )    $     (60 )
Non-Taxable                   (669 )             18            (651 )       (1,428 )           64         (1,364 )
Loans                        1,169             (635 )           534          2,760         (1,595 )        1,165
Federal funds sold
and securities
purchased under
agreement to resell              -              (30 )           (30 )          (54 )          (55 )         (109 )
Restricted investment
in bank stock                    6               13              19             13            (62 )          (49 )
Total
interest-earning
assets                       1,132             (877 )           255          1,814         (2,231 )         (417 )
Interest-bearing
liabilities:
Money market deposits         (183 )           (163 )          (346 )         (545 )         (692 )       (1,237 )
Savings deposits               237              224             461            292            344            636
Time deposits               (1,101 )          1,730             629          2,198         (1,409 )          789
Other
interest-bearing
deposits                        17             (256 )          (239 )          (22 )         (650 )         (672 )
Borrowings and
subordinated
debentures                    (306 )             79            (227 )         (268 )          (80 )         (348 )
Total
interest-bearing
liabilities                 (1,336 )          1,614             278          1,655         (2,487 )         (832 )
Change in net
interest income         $    2,468        $  (2,491 )    $      (23 )   $      159      $     256      $     415

The following table, "Average Statement of condition with Interest and Average Rates", presents for the three and six months ended June 30, 2009 and 2008 the Corporation's average assets, liabilities and stockholders' equity. The Corporation's net interest income, net interest spreads and net interest income as a percentage of interest-earning assets (net interest margin) are also reflected.

        Average Statements of Condition with Interest and Average Rates

                                                         Three Months Ended June 30,
                                               2009                                       2008
                                              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                       $   268,840     $   3,049          4.54 %   $ 214,866     $   2,666          4.96 %
Tax-exempt                         25,117           371          5.91        70,528         1,022          5.79
Loans (2)                         686,675         9,211          5.37       601,655         8,677          5.77
Federal funds sold and
securities purchased under
agreement to resell                     -             -             -         5,540            30          2.16
Restricted investment in
bank stocks                        10,525           201          7.64        10,185           182          7.15
Total interest-earning
assets                            991,157        12,832          5.18       902,774        12,577          5.57
Non-interest-earning
. . .