10-Q

UNITED STATES OF AMERICA
SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

^{______________}

FORM 10-Q

^{______________}

ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

OR

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

For the transition period from _______ to ________                   

^{Commission file number 2-81353}

^{______________}

CENTER BANCORP, INC.

^{(Exact Name of Registrant as Specified in Its Charter)}

New Jersey	52-1273725
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

2455 Morris Avenue,
Union, New Jersey 07083

(Address of Principal Executive Offices) (Zip Code)

(908) 688-9500

(Registrant’s Telephone Number, Including Area Code)

^{______________}

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” (in Rule 12b-12 of the Exchange Act).

Large Accelerated Filer ¨ Accelerated Filer ý Non-accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No ý

——————

Common stock, no par value:	13,231,461
(Title of Class)	(Outstanding at July 28, 2006)

CENTER BANCORP, INC.

INDEX TO FORM 10-Q

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition at June 30, 2006 (unaudited) and December 31, 2005 (audited)	2
	Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005 (unaudited)	3
	Consolidated Statement of Changes in Stockholders Equity for the six months ended June 30, 2006 and 2005 (unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (unaudited)	5
	Notes to Consolidated Financial Statements	6-11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-28
Item 3.	Qualitative and Quantitative Disclosures about Market Risks	28
Item 4.	Controls and Procedures	29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Default upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
	Signatures	31
	Certifications

PART I – FINANCIAL INFORMATION

The following unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006, or for any other interim period. The Center Bancorp Inc. 2005 Annual Report on Form 10-K should be read in conjunction with these statements.

1

Item 1. Financial Statements

CENTER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CONDITION

	June 30,			December 31,
(Dollars in thousands)	2006			2005
	(unaudited)			(audited)
ASSETS
Cash and due from banks	$	17,007		$	19,343
Federal funds sold and securities purchased under agreement to resell		30,228			—
Total cash and cash equivalents		47,235			19,343
Investment securities held to maturity (approximate market value of $134,294 in 2006 and $140,628 in 2005)		136,224			140,514
Investment securities available-for-sale		296,117			388,170
Total investment securities		432,341			528,684
Loans, net of unearned income		530,650			505,826
Less – Allowance for loan losses		4,935			4,937
Net Loans		525,715			500,889
Premises and equipment, net		18,425			18,343
Accrued interest receivable		4,925			5,875
Bank owned life insurance		20,972			18,588
Other Assets		5,725			5,670
Goodwill and other intangible assets		17,375			17,437
Total assets	$	1,072,713		$	1,114,829
LIABILITIES
Deposits:
Non-interest bearing	$	132,098		$	139,911
Interest-bearing
Certificates of deposit $100 and over		125,614			154,409
Interest-bearing transactions, savings and time deposits $100 and less		515,251			406,281
Total deposits		772,963			700,601
Short-term borrowings		29,373			122,093
Long-term borrowings		157,682			171,870
Subordinated debentures		15,465			15,465
Accounts payable and accrued liabilities		3,012			5,311
Total liabilities	$	978,495		$	1,015,340
STOCKHOLDERS’ EQUITY
Preferred Stock, no par value:
Authorized 5,000,000 shares; none issued	$	—		$	—
Common stock, no par value:
Authorized 20,000,000 shares; issued 14,467,962 shares in 2006 and 2005, respectively		65,592			65,592
Additional paid in capital		3,912			3,787
Retained earnings		36,336			38,453
Treasury stock, at cost (1,236,501 and 1,036,334 shares in 2006 and 2005, respectively)		(6,242	)		(3,701	)
Accumulated other comprehensive loss		(5,380	)		(4,642	)
Total stockholders’ equity		94,218			99,489
Total liabilities and stockholders’ equity	$	1,072,713		$	1,114,829

See accompanying notes to consolidated financial statements

2

CENTER BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2006		2005		2006			2005
	(unaudited)				(unaudited)
Interest income:
Interest and fees on loans	$	7,777	$	5,928	$	15,138		$	10,961
Interest and dividends on investment securities:
Taxable interest income		3,912		4,935		8,401			9,423
Non-taxable interest income		1,010		992		2,026			1,965
Dividends		214		465		569			915
Interest on Federal funds sold and securities purchased under agreement to resell		141		17		151			29
Total interest income		13,054		12,337		26,285			23,293
Interest expense:
Interest on certificates of deposit $100 and over		1,354		987		2,703			1,986
Interest on other deposits		2,819		1,896		4,889			3,456
Interest on borrowings		2,573		2,605		5,985			4,587
Total interest expense		6,746		5,488		13,577			10,029
Net interest income		6,308		6,849		12,708			13,264
Provision for loan losses		0		0		0			0
Net interest income after provision for loan losses		6,308		6,849		12,708			13,264
Other income:
Service charges, commissions and fees		449		475		887			970
Other income		91		160		210			255
Annuity and Insurance		53		72		105			114
Bank Owned Life Insurance		203		184		384			367
Gain (loss) on securities sold		77		23		(3,578	)		36
Total other income (loss)		873		914		(1,992	)		1,742
Other expense:
Salaries and employee benefits		3,037		3,004		6,319			5,881
Occupancy, net		521		442		1,127			1,012
Premises and equipment		467		483		915			941
Stationery and printing		178		181		389			302
Marketing and advertising		187		160		301			332
Other		1,376		1,153		2,916			2,294
Total other expense		5,766		5,423		11,967			10,762
Income (loss) before income tax expense (benefit)		1,415		2,340		(1,251	)		4,244
Income tax expense (benefit)		43		407		(1,556	)		566
Net income	$	1,372	$	1,933	$	305		$	3,678
Earnings per share:
Basic	$	0.10	$	0.18	$	0.02		$	0.34
Diluted	$	0.10	$	0.18	$	0.02		$	0.34
Weighted average common shares outstanding:
Basic		13,276,568		10,962,507		13,355,459			10,697,411
Diluted		13,353,176		11,005,043		13,423,412			10,741,239

All per common share amounts have been adjusted retroactively for common stock splits and common stock dividends impacting the periods presented.

See accompanying notes to consolidated financial statements

3

CENTER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands)	Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance – December 31, 2004	$	30,441	$	4,477		$	36,973		$	(3,775	)	$	527		$	68,643
Cash dividend		—		—			(1,933	)		—			—			(1,933	)
Issuance of common stock		21,874		(925	)		(1,637	)		—			—			19,312
Common stock issued in Red Oak acquisition		13,277		—			—			—			—			13,277
Exercise of stock options		—		148			—			23			—			171
Restricted stock award		—		75			—			31			—			106
Net income		—		—			3,678			—			—			3,678
Unrealized holding loss on securities arising during the period (net of tax benefit of $821)		—		—			—			—			(1,546	)
Less reclassification adjustment for gains included in net income (net of tax of $12)		—		—			—			—			24
Net unrealized holding loss on securities arising during the period (net of tax benefit of $809)		—		—			—			—			—			(1,570	)
Total comprehensive Income (loss)		—		—			—			—			—			2,108
Balance, June 30, 2005	$	65,592	$	3,775		$	37,081		$	(3,721	)	$	(1,043	)	$	101,684
Balance – December 31, 2005	$	65,592	$	3,787		$	38,453		$	(3,701	)	$	(4,642	)	$	99,489
Cash dividend		—		—			(2,411	)		—			—			(2,411	)
Issuance of common stock		—		—			(11	)		—			—			(11	)
Exercise of stock options		—		51			—			32			—			83
Treasury stock purchase		—		—			—			(2,573	)		—			(2,573	)
Net income		—		—			305			—			—			305
Stock-based compensation		—		74			—			—			—			74
Unrealized holding gain on securities arising during the period (net of tax of ($1,914))		—		—			—			—			(2,872	)
Less reclassification adjustment for losses included in net loss (net of tax of ($1,444))		—		—			—			—			(2,134	)
Net unrealized holding loss on securities arising during the period (net of tax of ($470))		—		—			—			—			—			(738	)
Total comprehensive income (loss)		—		—			—			—			—			(355	)
Balance, June 30, 2006	$	65,592	$	3,912		$	36,336		$	(6,242	)	$	(5,380	)	$	94,218

See accompanying notes to consolidated financial statements

4

CENTER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

	Six Months Ended June 30,
(Dollars in thousands)	2006			2005
	(unaudited)
Cash Flows from Operating Activities:
Net income	$	305		$	3,678
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		883			851
Stock-based compensation expense		74			—
Losses (gains) on sales of investment securities available-for-sale		3,578			(36	)
Decrease (increase) in accrued interest receivable		950			(1,116	)
(Increase) decrease in other assets		(66	)		398
Decrease in other liabilities		(1,078	)		(304	)
Increase in cash surrender value of bank owned life insurance		(384	)		(367	)
Amortization of premium and accretion of discount on investment securities, net		155			240
Net cash provided by operating activities		4,417			3,344
Cash Flows from Investing Activities:
Proceeds from maturities of investment securities available-for-sale		102,592			177,542
Proceeds from maturities, calls and paydowns of securities held to maturity		4,200			8,325
Proceeds (purchase) of FHLB and FRB Stock, net		4,003			(2,779	)
Proceeds from sales of investment securities available-for-sale		105,261			48,183
Purchase of securities available-for-sale		(125,394	)		(207,876	)
Purchase of securities held to maturity		—			(30,561	)
Net increase in loans		(24,826	)		(30,459	)
Cash and cash equivalents acquired from Red Oak		—			2,433
Cash consideration paid to acquire Red Oak		—			(13,279	)
Property and equipment expenditures, net		(903	)		(844	)
Purchase of bank owned life insurance		(2,000	)		—
Net cash provided by (used in) investing activities		62,933			(49,315	)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits		72,362			(51,741	)
Net (decrease) increase in short-term borrowings		(39,720	)		54,948
Proceeds from FHLB advances		—			152,439
Payment on FHLB advances		(67,188	)		(107,257	)
Dividends paid		(2,411	)		(1,933	)
Proceeds from issuance of common stock		72			19,483
Purchase of treasury stock		(2,573	)		—
Net cash (used in) provided by financing activities		(39,458	)		65,939
Net increase in cash and cash equivalents		27,892			19,968
Cash and cash equivalents at beginning of period		19,343			12,033
Cash and cash equivalents at end of year	$	47,235		$	32,001
Supplemental Disclosures of Cash Flow Information:
Interest paid on deposits and borrowings	$	13,044		$	9,853
Income taxes paid	$	108		$	615
Supplemental Disclosures of Cash Flow Information at Date of Acquisition:
Fair value of assets acquired	$	—		$	113,669
Goodwill and core deposit intangible	$	—		$	15,411
Liabilities assumed	$	—		$	88,518
Common stock issued for the Red Oak Bank, acquisition, net	$	—		$	13,277

See accompanying notes to consolidated financial statements

5

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements of Center Bancorp, Inc. (the “Corporation”) are prepared on the accrual basis and include the accounts of the Corporation and its wholly owned subsidiaries, including Union Center National Bank (the “Bank”). All significant inter-company accounts and transactions have been eliminated from the accompanying consolidated financial statements.

Business

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

Basis of Financial Statement Presentation and Use of Estimates

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. 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 dates of the statement of condition and revenues and expenses for the reported periods. Actual results could differ significantly from those estimates.

In the opinion of Management, all adjustments necessary for a fair presentation of the Corporation’s financial condition and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. Certain reclassifications have been made for 2005 to conform to the classifications presented in 2006. Results for the period ended June 30, 2006 are not necessarily indicative of results for any other interim period or for the entire fiscal year. Reference is made to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005 for information regarding accounting principles.

Stock Based Compensation

Effective January 1, 2006, the Corporation adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the six months ended June 30, 2006 includes compensation expense for all stock-based compensation awards granted, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 “Accounting for stock-based compensation”. The stock-based compensation expense for all stock-based compensation awards granted after that date is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Corporation will recognize these expenses on a straight-line method over the requisite service period of the stock award, which is the vesting term. Prior to the adoption of SFAS 123R, the Corporation recognized stock-based compensation expense in accordance with APB 25. In March of 2005, the Securities and Exchange Commission (the “SEC”) issued a Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Corporation has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 3 of the Consolidated Financial Statements for a further discussion.

Note 2 — Acquisitions

The Corporation completed the acquisition of Red Oak Bank as of the close of business on May 20, 2005. Pursuant to the terms of the Agreement and Plan of Merger, 50% of Red Oak Bank’s common stock was converted into Center Bancorp, Inc. common stock at an exchange rate of .9227 Center Bancorp, Inc. shares per each Red Oak

6

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 — Acquisitions – (continued)

Bank share and 50% was converted into $12.06 in cash for each Red Oak Bank share. The aggregate consideration paid in the merger consisted of $13.3 million in cash and 1,015,816 shares of the Corporation’s common stock. The Corporation additionally converted remaining stock options covering 56,266 shares of Red Oak Bank common stock outstanding at the time of the merger and were exchanged for options covering 54,514 shares of Center Bancorp, Inc. common stock.

As a result of the Red Oak Bank acquisition, the Corporation acquired assets having a fair value of $115.3 million, including $89.6 million of net loans, $5.4 million of investment securities and $2.4 million of cash and cash equivalents, and assumed $70.7 million of deposits, $17.1 million of borrowings, and $792,000 of other liabilities.

The acquisition was accounted for as a purchase and the excess cost over the fair value of net assets acquired (“goodwill”) in the transaction was $14.7 million. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized in connection with this transaction and the goodwill will not be deductible for income tax purposes. The Corporation also recorded a core deposit intangible of $702,617 in connection with the acquisition, which is being amortized on a 10-year sum of the digits method. The amortization of premiums and discounts resulting from the fair value adjustments of assets and liabilities amounted to approximately $323,342 for the year ended December 31, 2005. The results of operations for 2005 include Red Oak Bank’s results of operations from May 20, 2005 forward.

Note 3 — Stock-Based Compensation

At June 30, 2006, the Corporation maintained a number of stock-based compensation plans that new grants could be issued from. The Corporation’s Stock Option Plans permit Center Bancorp, Inc.’s common stock to be issued to key employees and directors of the Corporation and the Bank. The options and/or awards made under the plans are intended to be Incentive Stock Options, Non-qualified Stock Options or Restricted Awards. Under the 1999 Employee Stock Incentive Plan, an aggregate of 217,284 shares remain available under the plan and are authorized for issuance. Under the 2003 non-employee director stock option plan, an aggregate of 455,170 shares remain available under the plan and are authorized for issuance. Such shares may be Treasury shares, newly issued or a combination thereof. These plans also authorize the use of restricted stock awards.

The total compensation expense related to these plans was $44,031 and $73,552 for the three and six months respectively, ended June 30, 2006. Prior to December 31, 2005, the Corporation accounted for those plans under the recognition and measurement provisions of APB 25. Accordingly, the Corporation generally recognized compensation expense only when it granted options with a discounted exercise price. As a result during that period, no stock-based employee compensation expense or any resulting compensation expense was recognized ratably over the associated service period, which was generally the option vesting term.

Prior to December 31, 2005, the Corporation provided pro forma disclosure amounts in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation.

Effective January 1, 2006, the Corporation adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior period results. Under this transition method, stock-based compensation expense for the first six months of fiscal 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Corporation recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of 3 years. The Corporation estimated the forfeiture rate for the first six months of fiscal 2006 based on its historical experience during the preceding seven fiscal years.

7

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 — Stock-Based Compensation – (continued)

As a result of adopting SFAS 123R, the impact to the Consolidated Financial Statements for the six months ended June 30, 2006, for income before income taxes and net income was $73,552 and $44,176 lower, respectively. There was no impact on either basic or diluted earnings per share for the six months ended June 30, 2006.

The pro forma table below reflects net earnings and basic and diluted net earnings per share for the three and six months ended June 30, 2005, had the Corporation applied the fair value recognition provisions of SFAS 123, as follows:

(In thousands, except per share amounts)	Three Months Ended June 30, 2005		Six Months Ended June 30, 2005
Net earnings, as reported	$	1,933	$	3,678
Add: Stock-based compensation included in reported net earnings, net of related tax effects		—		69
Less: Stock-based compensation expense determined under the fair-value-based method for all awards, net of related tax effects		198		286
Pro forma net earnings	$	1,735	$	3,461
Basic net earnings per share:
As reported	$	0.18	$	0.34
Pro forma	$	0.16	$	0.32
Diluted net earnings per share:
As reported	$	0.18	$	0.34
Pro forma	$	0.16	$	0.32

Under the principal option plans, the Corporation may grant certain employees restricted stock awards. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The Corporation expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

In light of new accounting guidance under SFAS 123R, beginning in the first quarter of fiscal 2006, the Corporation reviewed its assumptions used in estimating the fair value of employee options granted. As part of this review, management will use historical volatility. There were no grants of restricted stock for the six months ended June 30, 2006. In 2005, 8,500 restricted stock were awarded.

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:

	Stock Options
	Three Months Ended June 30, 2006
Weighted average fair value of grants	$	5.53
Risk-free interest rate		5.03	%
Dividend yield		2.70	%
Expected volatility		49.5	%
Expected life in months		72

8

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 — Stock-Based Compensation – (continued)

Option activity under the principal option plans as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Outstanding at December 31, 2005	377,894		$	6.37-$11.17		$	1,175
Granted	31,500			13.17			41
Exercised	(8,137	)		9.42-  11.03			17
Forfeited/cancelled/expired	—			—			—
Outstanding at June 30, 2006	401,257		$	5.41-  15.88	7.25	$	1,177
Exercisable at June 30, 2006	316,533		$	5.41-  15.88	6.57	$	966

The aggregate intrinsic value of options above represents the total pretax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the first six months of fiscal 2006 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 June 30, 2006. This amount changes based on the fair market value of the Corporation’s stock.

As of June 30, 2006, $328,663 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.3 years.

Note 4 — Recent Accounting Pronouncements

FIN 48

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

SFAS No. 156

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends Statement 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because this Statement permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. The Statement is effective in the first fiscal year beginning after September 15, 2006 with earlier adoption permitted. The Company does not expect the adoption of Statement No. 156 to have a material impact on its financial statements.

9

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 — Comprehensive Income

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

Disclosure of comprehensive income (loss) for the six months ended June 30, 2006 and 2005 is presented in the Consolidated Statements of Changes in Stockholders’ Equity.

Note 6 — Earnings Per Share Reconcilement

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.

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

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	2006		2005		2006		2005
Net income	$	1,372	$	1,933	$	305	$	3,678
Average number of common shares outstanding		13,277		10,962		13,355		10,697
Effect of dilutive options		76		43		68		44
Average number of common shares outstanding used to calculate diluted earnings per common share		13,353		11,005		13,423		10,741
Net income per share
Basic	$	.10	$	.18	$	0.02	$	0.34
Diluted	$	.10	$	.18	$	0.02	$	0.34

Note 7 — Components of Net Period Benefit Cost

	Three Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
(Dollars in thousands)	2006			2005			2006		2005
Service cost	$	236		$	187		$	14	$	12
Interest cost		134			131			22		18
Expected return on plan assets		(148	)		(133	)		—		—
Amortization of prior service cost		1			1			1		3
Amortization of the net loss		1			6			27		13
Net periodic benefit cost	$	224		$	192		$	64	$	46

10

CENTER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7 — Components of Net Period Benefit Cost – (continued)

	Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits
(Dollars in thousands)	2006			2005			2006		2005
Service cost	$	472		$	374		$	28	$	24
Interest cost		268			263			43		37
Expected return on plan assets		(296	)		(267	)		—		—
Amortization of prior service cost		2			2			2		5
Amortization of the net loss		3			11			54		27
Net periodic benefit cost	$	449		$	383		$	127	$	93

Contributions

The Corporation previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $750,000 to its pension plans in 2006. As of June 30, 2006, the Corporation has contributed $375,000 to its pension plans. The Corporation presently does not anticipate increasing its total contributions for the year to fund its pension plan obligations in 2006.

Note 8 — Variable Interest Entities

During 2001 and 2003, the Corporation issued $10.3 million and $5.2 million, respectively, of subordinated debentures and formed statutory business trusts, which exist for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of the trusts; (ii) investing the gross proceeds of the trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Corporation; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trusts are not consolidated in accordance with FASB interpretation No. 46 “Consolidation of Variable interest Entities.” Distributions on the subordinated debentures owned by the subsidiary trusts below are classified as interest expense in the Consolidated Statement of Income.

The characteristics of the business trusts and capital securities have not changed with the deconsolidation of the trusts. The capital securities provide an attractive source of funds since they constitute Tier 1 capital for regulatory purposes, but have the same tax advantages as debt for Federal income tax purposes.

On March 1, 2005, the Board of Governors of the Federal Reserve System adopted a final rule that allows the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier I capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The new quantitative limits become effective after a five-year transition period ending March 31, 2009. Under the final rules, trust preferred securities and other restricted core capital elements are limited to 25% of all core capital elements. Amounts of restricted core capital elements in excess of these limits may be included in Tier II Capital. At June 30, 2006, the only restricted core capital element owned by the Corporation is trust preferred securities. Based on a preliminary review of the final rule, the Corporation believes that its trust preferred issues qualify as Tier I Capital. However, in the event that the trust preferred issues would not qualify as Tier I Capital, the Corporation would remain well capitalized.

As of June 30, 2006, assuming the Corporation was not allowed to include the $15.5 million in subordinated debentures in Tier 1 capital, the Corporation would have had a Tier 1 capital ratio of 12.24% and a total risk based capital ratio of 12.98%.

To the extent that the trusts have funds available to make payments, as guarantor, the Corporation continues to unconditionally guarantee payment of required distributions on the capital securities; the redemption price when a capital security is redeemed; and the amounts due if a Trust is liquidated or terminated. During the first six months of 2006, the business trusts did not repurchase any capital securities or related debentures.

11

Item 2 — Management’s Discussion & Analysis of Financial Condition and Results of Operations

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, with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp, including statements preceded by, followed by or that include the 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. Such forward-looking statements involve inherent risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from historical performance and from 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) the interest rate environment may change; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may reduce interest margins; (4) general economic conditions may be less favorable than expected; (5) political developments, wars, terrorism 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 affect the Corporation’s common stock; (8) a delayed or incomplete resolution of regulatory issues may negatively impact the services provided by Union Center National Bank, the banking subsidiary of Center Bancorp (the “Bank”); (9) the developments discussed above may have a material adverse effect on the Corporation’s business generation and retention, funding and liquidity; and (10) the outcome of regulatory and legal investigations and proceedings cannot always be predicted accurately. Further information on other factors that could affect the financial results of Center Bancorp are included in Center Bancorp’s 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. The Corporation assumes no obligation for updating any such forward-looking statement at any time.

Critical Accounting Policies

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 results of operations for the periods indicated. 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 in the Corporation’s 2005 annual report incorporated by reference to its 2005 report on Form 10K. The Corporation has identified its policies on the allowance for loan losses and income tax liabilities to be critical because management has to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

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. Note 1 of the Notes to Consolidated Financial Statements in the Corporation’s 2005 Annual Report incorporated by reference to its 2005 report on Form 10-K and pages 20-22 of this Quarterly Report on Form 10-Q under “Allowance for Loan Losses and Related Provisions”, describe the methodology used to determine the allowance for loan losses and discuss the factors driving changes in the amount of the allowance for loan losses.

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

12

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, specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category, 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 would adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements in the Corporation’s 2005 Annual Report on Form 10-K.

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. Notes 1 and 10 of the Notes to Consolidated Financial Statements in the Corporation’s 2005 Annual Report on Form 10-K include additional discussion on the accounting for income taxes.

The Company accounts for goodwill and other identifiable intangible assets in accordance with SFAS No. 142, “Goodwill and intangible assets.” SFAS No. 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The Corporation tested the goodwill as of December 31, 2005, and determined that it is not impaired.

Earnings Analysis

Net income for the three months ended June 30, 2006 amounted to $1,372,000 compared to $1,933,000 earned for the comparable three-month period ended June 30, 2005. On a fully diluted per share basis, earnings decreased to $.10 per share as compared with $.18 per share for the three months ended June 30, 2005. The annualized return on average assets decreased to .54 percent compared with .71 percent for the comparable three-month period in 2005. The annualized return on average stockholders’ equity was 5.75 percent for the three-month period ended June 30, 2006 as compared to 10.45 percent for the three months ended June 30, 2005.

In March 2006, the Corporation restructured its balance sheet. As part of the restructuring, the Corporation sold $86.3 million available for sale securities, which were yielding less than 4% per annum. The sale resulted in a charge of $3.6 million ($2.4 million net of tax). As a result, the Corporation recorded net income for the six months ended June 30, 2006 in the amount of $305,000 compared to net income of $3,678,000 for the comparable six-month period ended June 30, 2005. On a fully diluted per share basis, earnings decreased to $.02 per share as compared with $.34 per share for the six months ended June 30, 2005. The annualized return on average assets decreased to 0 .06 percent compared with 0.70 percent for the comparable six-month period in 2005. The annualized return on average stockholders’ equity was 0.63 percent for the six-month period ended June 30, 2006 as compared to 10.31 percent for the six months ended June 30, 2005.

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 short-term borrowings, which support these assets. Net interest income is presented below first 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.

13

Net Interest Income

	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in thousands)	2006 Amount			2005 Amount			Percent Change			2006 Amount			2005 Amount			Percent Change
Interest Income:
Investments	$	5,661		$	7,015			(19.30	)	$	12,077		$	13,522			(10.69	)
Loans, including fees		7,777			5,928			31.19			15,138			10,961			38.11
Federal funds sold and securities purchased under agreement to resell		141			17			729.41			151			29			420.69
Total interest income		13,579			12,960			4.78			27,366			24,512			11.64
Interest expense:
Certificates of $100 or more		1,354			987			37.18			2,703			1,986			36.10
Deposits		2,819			1,896			48.68			4,889			3,456			41.44
Borrowings		2,572			2,605			(1.27	)		5,984			4,587			30.48
Total interest expense		6,745			5,488			22.90			13,576			10,029			35.37
Net interest income on a fully tax-equivalent basis		6,834			7,472			(8.54)			13,790			14,483			(4.78	)
Tax-equivalent adjustment		(525	)		(623	)		(15.73	)		(1,081	)		(1,219	)		(11.32	)
Net interest income*	$	6,309		$	6,849			(7.88	)	$	12,709			$13,264			(4.18	)

——————

*

Before the provision for loan losses.  

NOTE: The tax-equivalent adjustment was computed based on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest earned on securities of state and political subdivisions.

Net interest income on a fully tax-equivalent basis decreased $638,000 or 8.54 percent to $6.8 million for the three months ended June 30, 2006, from $7.5 million for the comparable period in 2005. For the three months ended June 30, 2006, the net interest margin decreased 1 basis point to 2.92 percent from 2.93 percent due primarily to higher rates paid on interest-bearing liabilities. For the three months ended June 30, 2006, an increase in the average yield on interest-earning assets of 71 basis points was offset by an increase in the average cost of interest-bearing liabilities of 93 basis points, which reduced the Corporation’s net interest spread by 22 basis points.

Net interest income on a fully tax-equivalent basis decreased $693,000 or 4.78 percent to $13.8 million for the six-month period ended June 30, 2006, from $14.5 million for the comparable period in 2005. For the six months ended June 30, 2006, the net interest margin decreased 12 basis points to 2.83 percent from 2.95 percent due primarily to higher rates paid on interest-bearing liabilities. For the six months ended June 30, 2006, an increase in the average yield on interest-earning assets of 63 basis points was offset by an increase in the average cost of interest-bearing liabilities of 94 basis points, which reduced the Corporation’s net interest spread by 31 basis points.

For the three-month period ended June 30, 2006, interest income on a tax-equivalent basis increased by $619,000 or 4.78 percent over the comparable three-month period in 2005. This increase reflects an increase in the loan portfolio and rates on earning assets. The Corporation’s loan portfolio increased on average $74.6 million to $510.1 million from $435.5 million in the same quarter of 2005, primarily driven by growth in commercial and home equity loans. The loan portfolio represented approximately 54.5 percent of the Corporation’s interest-earning assets (on average) during the second quarter of 2006 and 42.7 percent in the same quarter in 2005. Average investment volume decreased during the period by $167.0 million compared to 2005.

For the six-month period ended June 30, 2006, interest income on a tax-equivalent basis increased by $2.9 million or 11.64 percent over the comparable six-month period in 2005. This increase primarily reflects an increase in loans and federal funds sold in the mix of average earning assets. The increase in average earning assets for both the three and six month comparison periods includes assets acquired in the purchase of Red Oak Bank as well as internal growth. The Corporation’s loan portfolio increased on average $98.1 million to $506.4 million from $408.3 million in the same period in 2005, primarily driven by growth in commercial loans, commercial real estate and home equity loans. The loan portfolio represented approximately 52.0 percent of the Corporation’s interest earning assets (on average) during the first six months of 2006 and 41.6 percent in the same period in 2005. Average investment volume decreased during the period by $111.4 million compared to 2005.

The factors underlying the quarter-to-quarter changes in net interest income are reflected in the tables appearing on pages 17, 18 and 19, each of which has been presented on a tax-equivalent basis (assuming a 34 percent tax

14

rates). The tables on pages 18 and 19 (Average Statements of Condition Sheet with Interest and Average Rates) shows the Corporation’s consolidated average balance of assets, liabilities, and stockholders’ equity, the amount of income produced from interest-earning assets and the amount of expense resulting from interest-bearing liabilities and the interest income as a percentage of average interest-earning assets, for the three and six month periods ended June 30, 2006 and 2005. The table presented below (Analysis of Variance in Net Interest Income Due to Volume and Rates) quantifies the impact on net interest income resulting from changes in average balances and average rates over the periods presented; 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.

The Federal Reserve Open Market Committee increased interest rates eight times in the past year, a total of 200 basis points. The yield on interest-earning assets, during the second quarter, grew to 5.80 percent from 5.09 percent in 2005 (a change of 71 basis points); this change was offset by higher rates paid for deposits and borrowings. The total cost of interest-bearing liabilities increased to 3.44 percent, a change of 93 basis points, for the three months ended June 30, 2006 from 2.51 percent for the three months ended June 30, 2005. For the three months ended June 30, 2006, the Corporation’s net interest spread on a tax-equivalent basis decreased to 2.36 percent from 2.58 percent for the three months ended June 30, 2005.

For the six months ended June 30, 2006, the Corporation’s yield on interest-earning assets increased to 5.62 percent from 4.99 percent in the comparable period in 2005 (a change of 63 basis points). This change was partially offset by higher rates paid for deposits and borrowings. The total cost of interest-bearing liabilities increased to 3.33 percent, a change of 94 basis points, for the six months ended June 30, 2006 from 2.39 percent for the six months ended June 30, 2005. For the six months ended June 30, 2006, the Corporation’s net interest spread on a tax-equivalent basis decreased to 2.29 percent from 2.60 percent for the six months ended June 30, 2005.

The following table, “Analysis of Variance in Net Interest Income due to Volume and Rates”, analyzes net interest income 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 June 30, 2006/2005 Increase (Decrease)									Six Months Ended June 30, 2006/2005 Increase (Decrease)
	Due to Change In:									Due to Change In:
(Tax equivalent basis, dollars in thousands)	Average Volume			Average Rate			Net Change			Average Volume			Average Rate			Net Change
Interest-earning assets:
Investment securities:
Taxable	$	(1,721	)	$	790		$	(931	)	$	(1,901	)	$	(1,075	)	$	(826	)
Non-Taxable		(456	)		33			(423	)		(934	)		315			(619	)
Federal funds sold and securities purchased under agreement to resell		104			20			124			84			38			122
Loans, net of unearned discounts		1,087			762			1,849			2,836			1,341			4,177
Total interest-earning assets		(986	)		1,605			619			85			2,769			2,854
Interest-bearing liabilities:
Money market deposits		25			107			132			(99	)		125			26
Savings deposits		(154	)		212			58			(108	)		300			192
Time deposits		55			859			914			(6	)		1,494			1,488
Other interest-bearing deposits		39			147			186			0			444			444
Short-term borrowings		(688	)		558			(130	)		26			1,168			1,194
Trust preferred		0			97			97			0			203			203
Total interest-bearing liabilities		(723	)		1,980			1,257			(187	)		3,734			3,547
Change in net interest income	$	(263	)	$	(375	)	$	(638	)	$	272		$	(965	)	$	(693	)

15

The following table, “Average Balance Sheet with Interest and Average Rates”, presents for the six months ended June 30, 2006 and 2005 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 are also reflected.

Average Statements of Condition with Interest and Average Rates

	Six Month Period Ended June 30,
	2006							2005
(Tax-equivalent basis, dollars in thousands)	Average Balance		Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense			Average Yield/ Rate
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable	$	347,897	$	8,850		5.09	%	$	425,932		$	9,676		4.54	%
Non-taxable		112,585		3,227		5.73	%		145,900			3,846		5.27	%
Federal funds sold and securities purchased under agreement to resell		6,255		151		4.83	%		2,201			29		2.64	%
Loans, net of unearned income(2)		506,36		515,138		5.98	%		408,292			10,961		5.37	%
Total interest-earning assets	$	973,102	$	27,366		5.62	%	$	982,325		$	24,512		4.99	%
Non-interest-earning assets
Cash and due from banks	$	21,811						$	19,840
BOLI		19,275							18,013
Intangible assets		17,408							6,066
Other assets		28,088							27,475
Allowance for possible loan losses		(4,936)							(4,082	)
Total non-interest-earning assets		81,646							67,312
Total assets	$	1,054,748						$	1,049,637
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Money market deposits	$	79,022	$	958		2.42	%	$	87,849		$	932		2.12	%
Savings deposits		99,090		957		1.93	%		113,732			765		1.35	%
Time deposits		239,851		4,799		4.00	%		240,274			3,311		2.76	%
Other interest-bearing deposits		120,766		878		1.45	%		120,873			434		0.72	%
Short-term Borrowings and FHLB Advances		261,670		5,319		4.07	%		260,048			4,125		3.17	%
Subordinated Debentures		15,465		665		8.60	%		15,465			462		5.97	%
Total interest-bearing liabilities	$	815,864	$	13,576		3.33	%	$	838,241		$	10,029		2.39	%
Non-interest-bearing liabilities:
Demand deposits	$	135,509						$	132,781
Other non-interest-bearing deposits		2,547							2,224
Other liabilities		3,697							5,042
Total non-interest-bearing  liabilities		141,753							140,047
Stockholders’ equity		97,131							71,349
Total liabilities and stockholders’ equity	$	1,054,748						$	1,049,637
Net interest income (tax-equivalent basis)			$	13,790							$	14,483
Net Interest Spread						2.29	%							2.60	%
Net interest income as percent of earning-assets (net interest margin)						2.83	%							2.95	%
Tax-equivalent adjustment(3)				(1,081	)							(1,219	)
Net interest income			$	12,709							$	13,264

——————

(1)

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

(2)

Average balances for loans include loans on non-accrual status

(3)

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

16

The following table, “Average Balance Sheet with Interest and Average Rates”, presents for the three months ended June 30, 2006 and 2005 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 are also reflected.

Average Statements of Condition with Interest and Average Rates

	Three Month Period Ended June 30,
	2006								2005
(Tax-equivalent basis, dollars in thousands)	Average Balance			Interest Income/ Expense			Average Yield/ Rate		Average Balance			Interest Income/ Expense			Average Yield/ Rate
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable	$	303,421		$	4,110		5.42	%	$	437,799		$	5,041		4.61	%
Non-taxable		110,872			1,551		5.60	%		143,506			1,974		5.50	%
Federal funds sold and securities purchased under agreement to resell		11,553			141		4.88	%		2,397			17		2.84	%
Loans, net of unearned income(2)		510,126			7,777		6.10	%		435,539			5,928		5.44	%
Total interest-earning assets	$	935,972		$	13,579		5.80	%	$	1,019,241		$	12,960		5.09	%
Non-interest-earning assets
Cash and due from banks	$	23,272							$	20,478
BOLI		19,884								18,103
Intangible Assets		17,393								9,961
Other assets		27,800								28,182
Allowance for possible loan losses		(4,936	)							(4,343	)
Total non-interest-earning assets		83,413								72,381
Total assets	$	1,019,385							$	1,091,622
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Money market deposits	$	95,371		$	658		2.76	%	$	91,206		$	526		2.31	%
Savings deposits		94,498			468		1.98	%		137,004			410		1.20	%
Time deposits		242,804			2,586		4.26	%		235,311			1,672		2.84	%
Other interest-bearing deposits		123,348			461		1.49	%		109,153			275		1.01	%
Short-term Borrowings & FHLB Advances		212,549			2,234		4.20	%		286,144			2,364		3.30	%
Subordinated Debentures		15,465			338		8.74	%		15,465			241		6.23	%
Total interest-bearing liabilities	$	784,035		$	6,745		3.44	%	$	874,283		$	5,488		2.51	%
Non-interest-bearing liabilities:
Demand deposits	$	135,299							$	135,433
Other non-interest-bearing deposits		1,803								2,785
Other liabilities		2,782								5,150
Total non-interest-bearing liabilities		139,884								143,368
Stockholders’ equity		95,466								73,971
Total liabilities and stockholders’ equity	$	1,019,385							$	1,091,622
Net interest income (tax-equivalent basis)				$	6,834							$	7,472
Net Interest Spread							2.36	%							2.58	%
Net interest income as percent of earning-assets (net interest margin)							2.92	%							2.93	%
Tax-equivalent adjustment(3)					(525	)							(623	)
Net interest income				$	6,309							$	6,849

——————

(1)

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

(2)

Average balances for loans include loans on non-accrual status

(3)

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

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Investments

For the three months ended June 30, 2006, the average volume of investment securities decreased to $414.3 million, or 44.3 percent of average earning-assets, a decrease of $167.0 million on average as compared to the same period in 2005. The decrease in volume reflects a repositioning of the Corporation’s balance sheet during the fourth quarter of 2005 and first quarter 2006. At June 30, 2006, the Corporation had reduced its investment portfolio by approximately $96.3 million from December 31, 2005 and $155.4 million from June 30, 2005. The tax-equivalent yield on investments increased by 64 basis points to 5.47 percent from a yield of 4.83 percent during the three-month period ended June 30, 2005. The 64 basis points improvement in the tax-equivalent yield on the portfolio was largely due to the sale and maturity of lower yielding securities in the investment portfolio and to a lesser extent reflects the favorable impact of the higher interest rate environment in 2006 on purchases made. The volume related figures during the three-month period ended June 30, 2006, contributed a decrease in revenue of $2.2 million while rate related changes amounted to an increase of $823,000. At June 30, 2006, the principal components of the investment portfolio are U.S. Treasury & Agency securities, Federal Agency securities, Obligations of U.S. States and Political subdivisions, FHLB stock and other equity securities.

For the six-months ended June 30, 2006, the average volume of investment securities amounted to $460.5 million, or 47.3 percent of average earning assets, a decrease of $111.4 million on average as compared to the same period in 2005. The tax-equivalent yield on investments increased by 52 basis points to 5.25 percent from a yield of 4.73 percent during the six-month period ended June 30, 2005. The 52 basis points improvement in the tax-equivalent yield on the portfolio was largely due to the sale and maturity of lower yielding securities in the investment portfolio and to a lesser extent reflects the favorable impact of the higher interest rate environment in 2006 on purchases made. The volume related figures during the six-month period ended June 30, 2006 contributed a decrease in revenue of $2.8 million while rate related changes amounted to an increase in revenue of $1.4 million.

Securities available-for-sale are a part of the Corporation’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. For the three-month period ended June 30, 2006, the Corporation sold from its available-for-sale portfolio securities totaling approximately $17.9 million which resulted in a net gain of $77,000. For the six months ended June 30, 2006, the Corporation sold from its available-for-sale portfolio securities totaling approximately $108.2 million which resulted in a net loss of $3.6 million.

At June 30, 2006 the net unrealized loss carried as a component of other comprehensive income (loss) and included in stockholders’ equity net of tax amounted to a net unrealized loss of $5.2 million as compared with a net unrealized loss of $1.0 million at June 30, 2005. The unrealized loss resulted from an increase in interest rates promulgated by the Federal Open Market Committee’s actions to continue to raise the Federal Funds rate and the associated shift in the yield curve.

Loans

Loan growth during the six months ended June 30, 2006 occurred primarily in the commercial related sectors of the loan portfolio. Improvement in the commercial component of the loan portfolio resulted from the Corporation’s business development efforts and has been enhanced in recent years by the Corporation’s expanded branch network. The merger with Red Oak Bank in May 2005 also contributed to the mix and net growth of the loan portfolio as compared to June 30, 2005. The increase in the loan portfolio yields for the three-month period was the result of a more favorable interest rate environment as compared with the comparable period in 2005, offset in part by a competitive rate pricing structure maintained by the Corporation to attract new loans and further by the heightened competition for lending relationships that exists in the Corporation’s market. The Corporation’s desire to grow this segment of the earning-asset mix is reflected in its current business development and marketing plans.

For the three months ended June 30, 2006, average loan volume increased $74.6 million or 17.1 percent, while portfolio yield increased by 66 basis points as compared with the same period in 2005. The volume related factors during the period contributed revenue of $1.1 million and rate related changes amounted to an improvement in revenue of $762,000. Total average loan volume increased to $510.1 million with a yield of 6.10 percent, as compared to $435.5 million with a yield of 5.44 percent for the three months ended June 30, 2005. The increased portfolio yield was a result of increased volume and a higher interest rate environment during the second quarter of 2006 compared with the similar quarter of 2005.

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For the six months ended June 30, 2006, average loan volume increased $98.1 million or 24.02 percent, while portfolio yield increased by 61 basis points as compared with the same period in 2005. The volume related factors during the period contributed revenue of $2.8 million and rate related changes amounted to an improvement in revenue of $1.3 million. Total average loan volume increased to $506.4 million with a yield of 5.98 percent, as compared to $408.3 million with a yield of 5.37 percent for the six months ended June 30, 2005. The increased portfolio yield was a result of increased volume and a more favorable interest rate environment during the first six months of 2006, compared with the similar period of 2005.

Allowance for Loan Losses and Related Provisions

The purpose of the allowance for loan losses is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for potential credit losses inherent in the loan portfolio based upon a periodic evaluation of the risk characteristics of the loan portfolio. The determination of the amount of the loan loss provision and the level of the allowance for loan losses are critical accounting policies of the Corporation. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience, a review of peer group loss experience and an analysis of the levels and trends of loan categories, delinquencies, and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions are also reviewed. At June 30, 2006, the allowance amounted to $4,935,000 as compared to $4,937,000 at December 31, 2005, and $4,995,000 at June 30, 2005. The Corporation did not add any provision to the allowance for loan losses during the three-month periods ended June 30, 2006 and June 30, 2005. The level of the allowance during the respective three-month periods of 2006 and 2005 reflects continued high credit quality trends.

At June 30, 2006 the allowance for loan losses amounted to 0.93 percent of total loans, as compared with 1.00 percent at June 30, 2005. In management’s view, the level of the allowance as of June 30, 2006 is adequate to cover the risk of loss inherent in the loan portfolio. The Corporation’s statements herein regarding the adequacy of the allowance for loan losses constitute “Forward-Looking Statements” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon factors considered by management in establishing the allowance.

Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term changes. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examinations. Future adjustments to the allowance may be necessary due to economic, operating, regulatory, and other conditions beyond the Corporation’s control. To the extent actual results differ from forecasts or management’s judgment, the allowance for loan losses may be greater or less than future charge-offs.

During the three-month and six-month periods ended June 30, 2006 and 2005, the Corporation did not experience any substantial credit problems within its loan portfolio. Net charge-offs for the six months ended June 30, 2006 were approximately $2,000 and were comprised of installment loans as compared with net recoveries of approximately $4,000 for the comparable six month period in 2005, which were also comprised of installment loans.

The Corporation had non-accrual loans of $431,000 at June 30, 2006, $387,000 at December 31, 2005 and $350,000 at June 30, 2005. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off.

The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependant. Impaired loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000, are measured for possible impairment. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment. The reserves allocated to such loans at June 30, 2006, December 31, 2005 and June 30, 2005, were $44,000, $44,000 and $32,300, respectively. At June 30, 2006, total impaired loans were approximately $296,550 compared to $299,850 at December 31, 2005 and $778,856 at June 30, 2005. Although classified as substandard, impaired loans (other than those in non-accrual status) were current with respect to principal and interest payments.

19

Changes in the allowance for possible loan losses for the six-month period ended June 30, 2006 and 2005, respectively, are set forth below.

Allowance for Loan Losses

	Six Months Ended June 30,
(Dollars in thousands)	2006			2005
Average loans outstanding	$	506,365		$	408,292
Total loans at end of period		530,650			498,602
Analysis of the Allowance for Loan Losses
Balance at the beginning of year		4,937			3,781
Charge-offs:
Commercial		0			0
Installment loans		15			12
Total charge-offs		15			12
Recoveries:
Commercial		0			0
Installment loans		13			16
Total recoveries		13			16
Net charge-offs/(recoveries):		2			(4	)
Addition of Red Oak Bank Reserve – May 20, 2005		0			1,210
Provision for loan losses		0			0
Balance at end of period	$	4,935		$	4,995
Ratio of net charge-offs during the period to average loans outstanding during the period		N/M			N/M
Allowance for loan losses as a percentage of total loans at end of period		0.93	%		1.00	%

Asset Quality

The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values and to maintain an adequate allowance for loan losses at all times. These practices have protected the Corporation during economic downturns and periods of uncertainty.

It is generally the Corporation’s policy to discontinue interest accruals once a loan is past due as to interest and/or principal payments for a period of ninety days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may 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. Accruing loans past due 90 days or more are generally well secured and in the process of collection.

At June 30, 2006, December 31, 2005 and June 30, 2005, the Corporation had no restructured loans. At June 30, 2006 the Corporation had $2,000,000 in loans 90 days past due and still accruing. There were $179,000 and $88,000 in loans 90 days past due and still accruing at December 31, 2005 and June 30, 2005, respectively. Non-accrual loans totaled $431,000 at June 30, 2006, $387,000 at December 31, 2005 and $350,000 at June 30, 2005.

The outstanding balances of non-accrual loans and accruing loans which are 90 days or more past due as to principal or interest payments, at June 30, 2006, December 31, 2005 and June 30, 2005, were as follows:

20

Non-Performing Loans

(Dollars in thousands)	June 30, 2006		December 31, 2005		June 30, 2005
Non-accrual loans	$	431	$	387	$	350
Accruing loans past due 90 days or more		2,000		179		88
Total non-performing assets	$	2,431	$	566	$	438

The Corporation had non-performing assets of $2,431,000 at June 30, 2006, $566,000 at December 31, 2005 and $438,000 at June 30, 2005. The increase in accruing loans past due 90 days or more at June 30, 2006, is related to one loan to a commercial borrower secured by real-estate in the amount of $1.5 million that was past due 90 days  and classified as a problem loan. On March 15, 2006, the loan was not renewed and the Corporation initiated foreclosure action. The Corporation received full payment on this loan on August 3, 2006.

The Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with the present loan and repayment terms and which are expected to fall into one of the categories set forth in the table above. At June 30, 2006, December 31, 2005 and June 30, 2005 the Corporation did not have any other real estate owned.

Other Income

The following table presents the principal categories of other income during the three and six month periods ended June 30, 2006 and 2005.

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2006		2005		% Change		2006			2005		% Change
Service charges, commissions and fees	$	449	$	475	(5.47	)	$	887		$	970	(8.56	)
Other income		91		159	(42.77	)		210			255	(17.65	)
Annuity & Insurance		53		72	(26.39	)		105			114	(7.90	)
Bank Owned Life Insurance		203		185	9.73			384			367	4.64
(Losses)/gains on securities sold		77		23	234.78			(3,578	)		36	(10,038.89	)
Total other income	$	873	$	914	(4.49	)		(1,992	)	$	1,742	(214.36	)

For the three-month period ended June 30, 2006, non-interest income, exclusive of gains/ (losses) on securities sold, decreased $95,000 or 10.66 percent from the comparable quarter of 2005. Non-interest income, including gains on securities sold, decreased $41,000 or 4.49 percent for the second quarter of 2006 as compared with the comparable quarter in 2005. The value of bank owned life insurance and gains on securities sold increased while service charges, commissions and fees and annuity and insurance income declined for the quarter compared to the three months ending June 30, 2005. The decline in other income during the period was primarily attributable to a one-time commission on deluxe checkbook charges in 2005.

For the six-month period ended June 30, 2006, non-interest income, exclusive of gains/ (losses) on securities decreased $120,000 or 7.03 percent from the comparable quarter of 2005. Non-interest income, including gains on securities sold, decreased $3.7 million for the first six months of 2006 compared with the comparable period in 2005. The value of bank owned life insurance and gains on securities sold increased while service charges, commissions and fees and annuity and insurance income declined for the period compared to the six months ending June 30, 2005. The decline in other income during the period was primarily attributable to a one-time commission on deluxe checkbook charges in 2005.

For the three-month period ended June 30, 2006, the Corporation recorded a net gain of $77,000 on securities sold from the available-for-sale investment portfolio compared to gains of $23,000 for the three-month period ended June 30, 2005. During the six-month period ended June 30, 2006, the Corporation recorded a net loss of $3,578,000 on securities sold from the available-for-sale investment portfolio compared to gains of $36,000 for the six-month period ended June 30, 2005. The sales in 2006 were made as part of the Company’s decision to reposition its balance sheet to improve the Company’s interest rate profile and the proceeds from the sales were used to pay down borrowings.

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Other Expense

The following table presents the principal categories of other expense during the three months and six-month periods ended June 30, 2006 and 2005.

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2006		2005		% Change		2006		2005		% Change
Salaries and employee benefits	$	3,037	$	3,004	1.10		$	6,319	$	5,881	7.45
Occupancy expense, net		521		442	17.87			1,127		1,012	11.36
Premises and equipment		467		483	(3.31	)		915		941	(2.76	)
Stationery and printing		178		181	(1.66	)		389		302	28.81
Marketing and advertising		187		160	16.88			301		332	(9.34	)
Other		1,376		1,153	19.34			2,916		2,294	27.11
Total other non-interest expense	$	5,766	$	5,423	6.32		$	11,967	$	10,762	11.20

For the three months ended June 30, 2006, total other expenses increased $343,000 or 6.32 percent over the comparable three months ended June 30, 2005. The increases for the period are primarily related to salary and employee benefits, occupancy and bank premise expense and other operating expenses as compared to the comparable period in 2005. The Corporation’s ratio of non-interest expenses (annualized) to average assets increased to 2.26 percent in the second quarter of 2006 from 1.99 percent for the comparable quarter of 2005.

Salaries and employee benefits increased $33,000 or 1.10 percent for the three months ended June 30, 2006 as compared to the comparable three-month period ended June 30, 2005. This increase is primarily attributable to costs associated with increased employee benefits expense and merit and promotional pay increases. Salary and benefit expense for the three months ended June 30, 2006 also includes compensation expense of $44,031 for share-based payments pursuant to the adoption of FASB 123(R). Staffing levels decreased to 210 full-time equivalent employees at June 30, 2006 compared to 212 full-time equivalent employees at June 30, 2005.

For the three months ended June 30, 2006, occupancy and premises expenses increased $63,000 or 6.81 percent over the comparable three-month period in 2005. The increase in occupancy and equipment expenses reflects higher operating costs (utilities, rent, real-estate taxes and general repair and maintenance) of the Corporation’s expanded facilities, as well as depreciation expense of the expanded bank facilities, which includes the acquisition of Red Oak Bank.

Marketing and advertising expense for the three months ended June 30, 2006 increased $27,000 or 16.88 percent over the comparable period in 2005 due to an increase in business activity.

Other expense for the three-month period ended June 30, 2006 increased $233,000 or 19.34 percent compared to same quarter in 2005 and was primarily attributable to increases in general administrative expense including computer, compliance, audit, insurance and other professional fees and legal expenses. Other expenses for the three months ended June 30, 2006, included the core deposit intangible amortization of $31,000 resulting from the Red Oak Bank acquisition.

Total non-interest expense for the six months ended June 30, 2006 increased $622,000 or 27.11% as compared to the comparable quarter in 2005, and was primarily attributable to salary and employee benefits, occupancy and bank premise expense, stationery and printing, and other operating expenses as compared to the comparable period in 2005. The Corporation’s ratio of other expenses (annualized) to average assets increased to 2.27 percent for the period from 2.05 percent for the comparable six months of 2005.

Salaries and employee benefits increased $438,000 or 7.45 percent for the six months ended June 30, 2006 as compared to the comparable six-month period ended June 30, 2005. This increase is primarily attributable to costs associated with increased employee benefits expense and merit and promotional pay increases. Salary and benefit expense for the three months ended June 30, 2006, also includes compensation expense of $73,552 for share-based payments under the adoption of FASB 123(R).

For the six months ended June 30, 2006, occupancy and premises expenses increased $89,000 or 4.56 percent over the comparable six-month period in 2005. The increase in occupancy and equipment expenses reflects higher operating costs (utilities, rent, real-estate taxes and general repair and maintenance) of the Corporation’s expanded

22

facilities, as well as depreciation expense of the expanded bank facilities, which includes the acquisition of Red Oak Bank.

Stationary and printing expense increased $87,000 or 28.81 percent for the six months ended June 30, 2006 compared to the comparable six-month period ended June 30,2005 due to an increase in business activity, offset partially by marketing and advertising expense which decreased by $31,000 or 9.34 percent compared to the six-month period ended June 30, 2005.

Total other expenses for the six months ended June 30, 2006 increased $622,000 or 27.11 percent over the comparable six months ended June 30, 2005 and was primarily attributable to increased computer, compliance, audit, insurance and other professional fees expenses. Other expenses for the six months ended June 30, 2006, included the core deposit intangible amortization of $63,000 resulting from the Red Oak Bank acquisition.

Provision for Income Taxes

For the three-month period ended June 30, 2006, the effective tax rate was 3.04 percent as compared to 17.4 percent for the three-month period ended June 30, 2005. For the six months ended June 30, 2006, the Corporation recorded a benefit of $1.55 million for income taxes compared to an expense of $566,000 for the comparable period of 2005. Current six-month results include the effect of a pre-tax net loss on securities sales of $3.7 million which occurred in March 2006. The Corporation adjusts its expected annual tax rate on a quarterly basis based on current projections of non-deductible expenses, tax-exempt interest, increase in the cash surrender values of bank owned life insurance and pre-tax net earnings. Tax-exempt interest income decreased by $423,000 or 21.4 percent for the three-month period ended June 30, 2006, and decreased $619,000 or 16.1 percent for the six-month period ended June 30, 2006 as compared to the comparable three and six month periods in 2005, respectively.

Asset and Liability Management

Asset and liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation’s statement of condition is planned and monitored by the Asset and Liability Committee (“ALCO”). In general, management’s objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring these components of the statement of condition.

Interest Sensitivity

Market Risk

“Market risk” represents the risk of loss from adverse changes in market prices and rates. The Corporation’s market rate risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect the Corporation’s earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation’s net interest income and capital, while structuring the Corporation’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. The management of the Corporation believes that hedging instruments currently available are not cost-effective, and, therefore, has focused its efforts on increasing the Corporation’s yield-cost spread through wholesale and retail growth opportunities.

The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation’s exposure to differential changes in interest rates between assets and liabilities is the Corporation’s analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts.

23

The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over one and two-year time horizons has enabled management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on both an immediate rise and fall in interest rates (“rate shock”), as well as gradual changes in interest rates over a 12 month time period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model incorporates assumptions regarding earning-asset and deposit growth, prepayments, interest rates and other factors.

Management believes that both individually and taken together, these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation, of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturity or payment schedules.

The Corporation’s rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position and a ratio less than 1 indicates a liability sensitive position.

A negative gap and/or a rate sensitivity ratio less than 1, tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.

At June 30, 2006, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of 0.67:1.00 at the cumulative one-year position. For the six months ended June 30, 2006 and all of 2005 the Corporation had a negative interest sensitivity gap. Management’s perception is that interest rates will continue to be volatile; therefore emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2006. However, no assurance can be given that this objective will be met.

Estimates of Fair Value

The estimation of fair value is significant to a number of the Corporation’s assets, including loans held for sale, and available for sale investment securities. These are all recorded at either fair value or lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available for sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

These estimates are subjective in nature, and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Impact of Inflation and Changing Prices

The financial statements and notes thereto, presented elsewhere herein, have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations, since unlike most industrial companies nearly all of the Corporation’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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Liquidity Management

The liquidity position of the Corporation is dependent on successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers’ requests for loans. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows, can satisfy such needs. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner.

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

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

Liquidity is measured and monitored for the Corporation’s bank subsidiary, Union Center National Bank (the “Bank”). The Corporation reviews its net short-term mismatch. This measures the ability of the Corporation to meet obligations should access to bank dividends be constrained. At June 30, 2006, the parent Corporation had $8.8 million in cash compared to $19.4 million at June 30, 2005. The parent Corporation has less cash available in 2006 due to the acceleration of the repositioning of its balance sheet to enhance its earnings profile and reduce exposure to future interest rate risk. Expenses at the parent Corporation are minimal and management believes that the parent Corporation has adequate liquidity to fund its obligations.

Certain provisions of long-term debt agreements prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of June 30, 2006 the Corporation was in compliance with all covenants and provisions of these agreements.

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

Anticipated cash-flows at June 30, 2006, projected to July 2007, indicates that the Bank’s liquidity should remain strong, with an approximate projection of $240.2 million in anticipated cash flows over the next twelve months. This projection represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this projection depending upon a number of factors, including the liquidity needs of the Bank’s customers, the availability of sources of liquidity and general economic conditions.

Deposits

Total deposits increased from $700.6 million on December 31, 2005 to $773.0 million on June 30, 2006, an increase of $72.4 million, or 10.3%. Total non-interest bearing deposits decreased from $139.9 million to $132.1 million, a decrease of $7.8 million or 5.6%. Savings and interest bearing transaction accounts increased from $560.7 million on December 31, 2005 to $640.9 million on June 30, 2006, an increase of $80.2 million or 14.3%. Time deposits under $100,000 increased $51.5 million to $138.7 million, while time deposits $100,000 and over increased $7.5 million to $125.6 million.

The Corporation derives a significant proportion of its liquidity from its core deposit base  For the six months ended June 30, 2006, core deposits, comprised of total demand deposits, savings and money market accounts, increased by $56.9 million or 12.6% from December 31, 2005 to $508.6 million. At June 30, 2006, core deposits were 65.8% of total deposits compared to 64.5% at December 31, 2005. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally which consists of total demand and savings accounts (excluding Super Max and money market accounts under $100,000) and excludes time deposits as part of core deposits as a percentage of total deposits. This number represented 44.2 percent of total deposits at June 30, 2006 as compared with 47.8 percent at December 31, 2005.

25

More volatile rate sensitive deposits, concentrated in time certificates of deposit greater than $100,000, decreased to 16.3 percent of total deposits at June 30, 2006 from 16.4 percent at June 30, 2005

The following table depicts the Corporation’s core deposit mix at June 30, 2006 and 2005.

Core Deposit Mix

	June 30,
(Dollars in thousands)	2006			Percentage	2005			Percentage	Net Change In Volume 2006 Vs. 2005
Demand Deposits	$	131,722		38.5	$	148,742		39.5	$	(17,020	)
Interest-Bearing Demand		101,376		29.7		117,683		31.3		(16,307	)
Regular Savings		64,382		18.8		82,282		21.9		(17,900	)
Money Market Deposits under $100		44,351		13.0		27,412		7.3		16,939
Total core deposits		341,831		100.0		376,119		100.0		(34,288	)
Total deposits		772,963				721,206				51,757
Core deposits to total deposits	$	44.2	%		$	52.2	%

Short-term borrowings can be used to satisfy daily funding needs. Balances in these accounts fluctuate significantly on a day-to-day basis. The Corporation’s principal short-term funding sources are securities sold under agreements to repurchase, advances from the Federal Home Loan Bank and federal funds purchased. Average borrowings during the six months ended June 30, 2006 were $261.7 million, an increase of $1.6 million or 0.62 percent from $260.0 million in average borrowings during the comparable six months ended June 30, 2005.

During the six months ended June 30, 2006, average funding sources decreased by approximately $19.3 million or 1.99 percent, compared to the same period in 2005. Interest-bearing deposit liabilities decreased approximately $24.0 million on average and were comprised primarily of declines in money market, savings, time deposits and other interest-bearing deposits. Non-interest-bearing funding sources as a percentage of the total funding mix increased to 14.5 percent on average as compared to 13.9 percent for the six-month period ended June 30, 2005. This reflects a shift in deposit mix to interest-bearing funding sources as a percentage of the funding base as compared with overall deposit growth.

Operating, Investing and Financing Cash Flow

The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During the six months ended June 30, 2006, cash and cash equivalents (which increased overall by $27.9 million) were provided (on a net basis) by operating activities in the amount of approximately $4.4 million and investing activities in the amount of approximately $62.9 million, primarily due to $105.3 million in proceeds from the sale of investment securities available for sale and another $102.6 million in proceeds from maturing investment securities available for sale offset by purchases of $125.4 million of securities available for sale and a $24.8 million increase in loans. Financing activities primarily consisted of cash provided by increases in deposits of $73.4 million offset by a decrease in borrowings of $39.7 million and payments on Federal Home Loan Bank advances of $67.2 million.

Stockholders’ Equity

Total stockholders’ equity averaged $97.1 million or 9.21 percent of average assets for the six month period ended June 30, 2006, as compared to $71.3 million, or 6.80 percent, during the same period in 2005. The Corporation’s dividend reinvestment and optional stock purchase plan contributed approximately $78,000 in new capital for the six months ended June 30, 2006 as compared with $382,000 for the comparable period in 2005. Book value per common share was $7.12 at June 30, 2006 as compared to $7.57 at June 30, 2005. Tangible book value (i.e., book value less goodwill and other intangible assets) per common share was $5.81 at June 30, 2006 and $6.20 at June 30, 2005.

26

As of June 30, 2006 the Corporation has purchased 265,634 common shares at an average cost per share of $11.71 under the stock buyback program announced on January 24, 2002 for the repurchase of up to 671,802 shares of the Corporation’s outstanding common stock. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholder’s equity. For the six-month period ended June 30, 2006 the Corporation repurchased 208,304 shares at an average cost per share of $12.36.

Capital

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

Risk-Based Capital/Leverage

Banking regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at June 30, 2006, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.00% and 8.00%, respectively.

At June 30, 2006, the Corporation’s total Tier 1 capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) amounted to $97.5 million or 9.73 percent of total assets. Tier I capital excludes the effect of SFAS No. 115, $5.4 million of net unrealized losses, after tax, on securities available-for-sale (included as a component of other comprehensive (loss)/income) and goodwill and other intangible assets of approximately $17.4 million as of June 30, 2006. At June 30, 2006 the Corporation’s estimated Tier I risk-based and total risk-based capital ratios were 14.55 percent and 15.29 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of June 30, 2006.

Under prompt corrective action regulations, bank regulators are required to take certain supervisory actions (and may take additional discretionary 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 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.

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 bank regulators about capital components, risk weightings and other factors. As of June 30, 2006, management believes that each of the Bank and the Corporation meet all capital adequacy requirements to which it is subject.

Subordinated Debentures

On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities qualify as Tier 1 capital. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part, prior to maturity but after January 23, 2009.The floating interest rate on the subordinated debentures is three month LIBOR plus 2.85% and reprices quarterly. The rate at June 30, 2006 was 8.00 %.

On December 18, 2001, Center Bancorp Statutory Trust I, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $10.0 million of floating rate capital trust pass through securities to investors due on December 18, 2031. The trust loaned the proceeds of this offering to the Corporation and received in exchange $10.3 million of the Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part, prior to maturity but after December 18, 2006. The floating interest rate on the subordinated debentures is three month LIBOR plus 3.60% and reprices quarterly. The rate at June 30, 2006 was 9.00 %.

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The additional capital raised with respect to the issuance of the above mentioned securities was used to bolster the Corporation’s capital and for general corporate purposes, including capital contributions to Union Center National Bank.

Looking Forward

One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:

The financial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The Corporation’s performance in the future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.

Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations is mitigated by ALCO strategies, significant changes in interest rates can have an adverse impact on profitability.

The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.

Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has already taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to react to future technological changes.

This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the Corporation’s forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to above and in other sections of this quarterly report and the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 3 — Qualitative and Quantitative Disclosures about Market Risks

The primary market risk faced by the Corporation is interest rate risk. The Corporation’s Asset/Liability Committee (“ALCO”) monitors the changes in the movement of funds and rate and volume trends to enable appropriate management responses to changing market and rate conditions.

The Corporation’s income simulation model analyzes interest rate sensitivity by projecting net interest income over the next 24 months in a flat rate scenario versus net interest in alternative interest rate scenarios. Management reviews and refines its interest rate risk management process in response to the changing economic climate. The low level of interest rates experienced for several years necessitated a modification of the Corporation’s standard rate scenario of a shock down 200 basis points over 12 months to down 100 basis points over a 12-month period. However, given the recent rise in rates for the period ended June 30, 2006 the Corporation has returned to a -200 basis point shock down over a 12-month period.

Based on the results of the interest simulation model as of June 30, 2006, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 7.20 percent in net interest income if interest rates decreased 200 basis points from the current rates in an immediate and parallel shock over a 12-month period. In a rising rate environment, based on the results of the model as of June 30, 2006, the Corporation would expect a decrease of 8.56 percent in net interest income if interest rates increased by 200 basis points from current rates in an immediate shock over a twelve month period.

The statements in this Quarterly Report regarding the effects of hypothetical interest rate changes represent forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results could differ

28

materially from these statements. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and duration of deposits, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that ALCO could undertake in response to changes in interest rates.

Item 4 — Controls and Procedures

(a) Disclosure controls and procedures.

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), as of  June 30, 2006. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report (June 30, 2006), our disclosure controls and procedures were not effective due to the material weakness described below.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, the Corporation has identified a material weakness in internal control over financial reporting as of December 31, 2005 related to accounting for income taxes. Specifically, the Corporation did not employ an adequate number of skilled personnel in its tax department to prepare the reconciliation of internal tax schedules to the general ledger and supporting documentation in a timely manner, and there was inadequate and ineffective analysis and management review of the relevant documentation supporting the deferred tax accounts related to the accounting for an acquisition of a business.

(b) Changes in internal controls over financial reporting.

There were no changes in the Corporation’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the last fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting, except as described below. Subsequent to December 31, 2005, the Corporation has taken and will take various corrective actions to remediate the material weakness noted above. By their nature, such actions require a period of time to become fully effective. These remedial actions are as follows:

·

the Corporation has hired an additional staff person in April  of 2006;

·

the Corporation has increased its use, and will further increase its use, of third-party tax service providers for the more complex areas of the Corporation’s income tax accounting; and

·

the Corporation has increased the formality and rigor to controls and procedures over accounting for income taxes.

29

PART II – OTHER INFORMATION

Item 1 — Legal Proceedings

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

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

As of June 30, 2006, the Corporation has purchased 265,634 common shares at an average cost per share of $11.71 under the stock buyback program amended on March 27, 2006 for the repurchase of up to 671,802 shares of the Corporation’s outstanding common stock. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholder’s equity. During the three months ended June 30, 2006 there were 208,304 shares repurchased at an average cost of $12.36 per share.

Information concerning the second quarter 2006 stock repurchases is set forth below.

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1  through April 30, 2006	117,000	$	11.89	174,330	497,472
May 1 through  May 31, 2006	91,304	$	12.95	265,634	406,168
June 1 through June 30, 2006	0		—	265,634	406,168
Total	265,634	$	12.36	265,634	406,168

Item 3 — Defaults upon Senior Securities

Not Applicable

Item 4 — Submission of Matters to a Vote of Security Holders

Not Applicable

Item 5 — Other Information

Not Applicable

Item 6 — Exhibits

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

30

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.

CENTER BANCORP, INC.
By:	/s/ Anthony C. Weagley
	Anthony C. Weagley, Treasurer (Chief Financial Officer)

Date: August 9, 2006

31

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, John J. Davis, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Center Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period on which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing that equivalent functions):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2006

/s/: John J. Davis

John J. Davis

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Anthony C. Weagley, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Center Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period on which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing that equivalent functions):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 9, 2006

/s/: Anthony C. Weagley

Anthony C. Weagley

Treasurer and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Center Bancorp, Inc. (the “Corporation”) on Form 10-Q for the quarter ended June 30, 2006 filed with the Securities and Exchange Commission (the “Report”), I, John J. Davis, President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Corporation as of the dates presented and the consolidated results of operations of the Corporation for the periods presented.

Dated: August 9, 2006	By:	/s/ JOHN J. DAVIS
		John J. Davis President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Center Bancorp, Inc. (the “Corporation”) on Form 10-Q for the quarter ended June 30, 2006 filed with the Securities and Exchange Commission (the “Report”), I, Anthony C. Weagley, Treasurer and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Corporation as of the dates presented and the consolidated results of operations of the Corporation for the periods presented.

Dated: August 9, 2006	By:	/s/ ANTHONY C. WEAGLEY
		Anthony C. Weagley Treasurer and Chief Financial Officer