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, 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. 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. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Impairment charges on certain investment securities of approximately $1.5 million were recognized in earnings during the nine months ended September 30, 2009 in connection with a pooled trust preferred security and the further writedown on a Lehman Brothers bond. During the nine months ended September 30, 2008, the Corporation recorded $1.4 million of other than temporary impairment charges relating to two equity holdings in bank stocks and the Lehman Brothers bond.

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

Goodwill

The Corporation adopted the provisions of FASB ASC 350-10, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but rather tested for impairment annually or more frequently if impairment indicators arise. No impairment charge was deemed necessary for the nine months ended September 30, 2009 and 2008.

Fair Value of Investment Securities

FASB ASC 820-10-35 clarifies the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. FASB ASC 820-10-35 is effective immediately and applies to the Corporation's December 31, 2008 and September 30, 2009 financial statements. The Corporation applied the guidance in FASB ASC 820-10-35 when determining fair value for the Corporation's private label collateralized mortgage obligations, pooled trust preferred securities and single name corporate trust preferred securities. See Note 6, Fair Value Measurements, for further discussion.

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Corporation adopted FASB ASC 820-10-65 at June 30, 2009.

Earnings Analysis

Net income for the three months ended September 30, 2009 amounted to $1.5 million compared to net income of $1.5 million for the comparable three-month period ended September 30, 2008. The Corporation recorded earnings per diluted common share of $0.11 for the three months ended September 30, 2009 as compared with earnings of $0.12 per diluted common share for the three months ended September 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 increased to 0.46 percent for the three months ended September 30, 2009 as compared to 0.40 percent for the second quarter of 2009 but was down as compared to 0.60 percent for three months ended September 30, 2008. The annualized return on average stockholders' equity was 6.77 percent for the three-month period ended September 30, 2009 as compared to 5.35 percent for the second quarter of 2009 and 7.55 percent for the three months ended September 30, 2008.

Net income for the nine months ended September 30, 2009 amounted to $3.5 million compared to net income of $4.1 million for the comparable nine-month period ended September 30, 2008. The Corporation recorded earnings per diluted common share of $0.24 for the nine months ended September 30, 2009 as compared with earnings of $0.32 per diluted common share for the nine months ended September 30, 2008. Dividends and accretion relating to the preferred stock issued to the U.S. Treasury reduced earnings by approximately $0.03 per fully diluted common share. The annualized return on average assets decreased to 0.39 percent for the nine months ended September 30, 2009 as compared to 0.56 percent for the comparable nine-month period in 2008. The annualized return on average stockholders' equity was 5.21 percent for the nine-month period ended September 30, 2009 as compared to 6.59 percent for the nine months ended September 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 September 30,                          Nine Months Ended September 30,
                                                          Increase        Percent                                  Increase       Percent
(Dollars in Thousands)          2009          2008       (Decrease)       Change         2009         2008        (Decrease)       Change
Interest income:
Investments                  $    4,154     $  3,389     $       765          22.6     $ 10,504     $ 11,164     $       (660 )       (5.9 )
Loans, including net costs        9,255        9,427            (172 )        (1.8 )     27,568       26,575              993          3.7
Federal funds sold and
securities purchased under
agreement to resell                   -            -               -             -            -          109             (109 )     (100.0 )
Restricted investment in
bank stocks, at cost                177          161              16           9.9          465          497              (32 )       (6.4 )
Total interest income            13,586       12,977             609           4.7       38,537       38,345              192          0.5
Interest expense:
Time deposits of $100 or
more                              1,077          618             459          74.3        2,844        1,830            1,014         55.4
All other deposits                2,362        2,434             (72 )        (3.0 )      7,191        8,302           (1,111 )      (13.4 )
Borrowings                        2,611        2,777            (166 )        (6.0 )      7,657        8,171             (514 )       (6.3 )
Total interest expense            6,050        5,829             221           3.8       17,692       18,303             (611 )       (3.3 )
Net interest income on a
fully tax-equivalent basis        7,536        7,148             388           5.4       20,845       20,042              803          4.0
Tax-equivalent adjustment           (95 )       (288 )           193          67.0         (398 )     (1,066 )            668         62.7
Net interest income          $    7,441     $  6,860     $       581           8.5     $ 20,447     $ 18,976     $      1,471          7.8

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 $388,000 or 5.4 percent to $7.5 million for the three months ended September 30, 2009 as compared to the same period in 2008. For the three months ended September 30, 2009, the net interest margin decreased 30 basis points to 2.79 percent from 3.09 percent during the three months ended September 30, 2008. For the three months ended September 30, 2009, a decrease in the average yield on interest-earning assets of 57 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 70 basis points, which increased the Corporation's net interest spread by 13 basis points for the period. On a quarterly linked sequential basis, net interest spread increased 19 basis points and net interest margin increased by 6 basis points, respectively. Net interest margin has been impacted by the high level of uninvested excess cash, which accumulated due to the strong deposit growth experienced predominantly over the past nine months of 2009. 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 $0.8 million or 4.0 percent to $20.8 million for the nine months ended September 30, 2009 as compared to the same period in 2008. For the nine month period ended September 30, 2009, the net interest margin decreased 18 basis points to 2.77 percent from 2.95 percent during the nine months ended September 30, 2008 due primarily to the high level of uninvested excess cash, which accumulated due to the strong deposit growth experienced during the year. For the nine months ended September 30, 2009, a decrease in the average yield on interest-earning assets of 51 basis points was more than offset by a decrease in the average cost of interest-bearing liabilities of 68 basis points, which increased the Corporation's net interest spread by 17 basis points for the period.

For the three-month period ended September 30, 2009, interest income on a tax-equivalent basis increased by $609,000 or 4.7 percent from the comparable three-month period in 2008. This increase was due primarily to both an increase in balances of the Corporation's investment securities and loan portfolios 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. Average investment volume, including short-term investments and restricted investment in bank stocks, increased during the current three month period by $111.9 million (to $385.3 million) compared to the third quarter of 2008. The Corporation's loan portfolio increased on average $41.9 million to $693.7 million from $651.8 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 64.3 percent of the Corporation's interest-earning assets on average during the third quarter of 2009 as compared to 70.5 percent in the same quarter in 2008.

For the nine month period ended September 30, 2009, interest income on a tax-equivalent basis increased by $0.2 million or 0.5 percent from the comparable nine-month period in 2008. This increase was due primarily to an increase in balances of the Corporation's loan and investment securities portfolios 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 $80.3 million to $686.8 million from $606.5 million 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 68.6 percent of the Corporation's interest-earning assets on average during the first nine months of 2009 as compared to 66.9 percent in the same period in 2008. Average investment volume, including short-term investments and restricted investment in bank stocks, increased during the period by $14.7 million on average (to $314.9 million) 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 has allowed the Corporation to further reduce liability costs during 2008 and throughout 2009.

For the three months ended September 30, 2009, interest expense increased by $0.2 million or 3.8 percent from the same period in 2008. The average rate of interest-bearing liabilities decreased 70 basis points to 2.18 percent for the three months ended September 30, 2009 from 2.88 percent for the three months ended September 30, 2008. At the same time, the average volume of interest-bearing liabilities increased by $302.9 million. The increase in the average balance of interest-bearing liabilities during the three months ended September 30, 2009 was primarily in time deposits (CDARS Reciprocal deposits) of $193.0 million, in savings deposits of $118.3 million and in other interest bearing deposits of $25.8 million partially offset by a decline of $13.1 million in money market deposits and a decline of $21.2 million in other borrowings. Steps were taken throughout 2008 and into 2009 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 an improvement in the Corporation's cost of funds. As a result of these factors, for the three months ended September 30, 2009, the Corporation's net interest spread on a tax-equivalent basis increased to 2.86 percent from 2.73 percent for the three months ended September 30, 2008.

For the nine months ended September 30, 2009, interest expense declined by $0.6 million or 3.3 percent from the same period in 2008. The total cost of average interest-bearing liabilities decreased 68 basis points to 2.42 percent for the nine months ended September 30, 2009 from 3.10 percent for the nine months ended September 30, 2008. At the same time, the average volume of interest-bearing liabilities increased by $188.3 million. The increase in the average balance of interest bearing liabilities during the nine months ended September 30, 2009 was primarily in savings, other interest bearing and time deposits of $242.3 million, partially offset by a decrease in money market deposits of $38.0 million and a decrease in borrowings of $16.0 million. For the nine months ended September 30, 2009, the Corporation's net interest spread on a tax-equivalent basis increased to 2.71 percent from 2.54 percent for the nine months ended September 30, 2008.

The following table quantifies the impact on net interest income (on a tax-equivalent basis) resulting from changes in average balances and average rates over the three and nine month periods presented herein. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category.

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

                                        Three Months Ended September 30,              Nine Months Ended September 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                             $     1,643       $      (311 )   $ 1,332     $     2,268       $    (997 )   $  1,271
Non-Taxable                                (412 )            (155 )      (567 )        (1,992 )            61       (1,931 )
Loans                                       585              (757 )      (172 )         3,337          (2,344 )        993
Federal funds sold and securities
purchased under agreement to
resell                                        -                 -           -             (54 )           (55 )       (109 )
Restricted investment in bank
stock                                         9                 7          16              21             (53 )        (32 )
Total interest-earning assets             1,825            (1,216 )       609           3,580          (3,388 )        192
Interest-bearing liabilities:
Money market deposits                       (64 )            (275 )      (339 )          (592 )          (983 )     (1,575 )
Savings deposits                            400               189         589             690             535        1,225
Time deposits                            (1,050 )           1,400         350           3,306          (2,168 )      1,138
Other interest-bearing deposits             116              (329 )      (213 )           128          (1,013 )       (885 )
Borrowings and subordinated
debentures                                 (206 )              40        (166 )          (475 )           (39 )       (514 )
Total interest-bearing
liabilities                                (804 )           1,025         221           3,057          (3,668 )       (611 )
Change in net interest income       $     2,629       $    (2,241 )   $   388     $       523       $     280     $    803

The following table, "Average Statement of Condition with Interest and Average Rates", presents for the three and nine months ended September 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 September 30,
                                                     2009                                        2008
                                                    Interest       Average                      Interest       Average
. . .