c5139010q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________

FORM 10-Q
(Mark One)

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

 
For the quarterly period ended March 31, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from _____ to _____

Commission file number:   000-51889                      

 
COMMUNITY PARTNERS BANCORP
  
 
(Exact Name of Registrant as Specified in Its Charter)
  

New Jersey
  
20-3700861
(State of Other Jurisdiction
of Incorporation or Organization)
  
(I.R.S. Employer Identification No.)

1250 Highway 35 South, Middletown, New Jersey
  
07748
(Address of Principal Executive Offices)
  
(Zip Code)
 
 
(732) 706-9009
  
 
(Registrant’s Telephone Number, Including Area Code)
  
 
     
 
(Former name, former address and former fiscal year, if changed since last report)
  

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 x       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
 o
Accelerated filer
 o
Non-accelerated filer
(Do not check if a smaller reporting company)
 o
Smaller reporting company
 x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
As of April 29, 2009, there were 6,959,821 shares of the registrant’s common stock, no par value, outstanding.
 
 
COMMUNITY PARTNERS BANCORP
 
FORM 10-Q

INDEX

     
Page
  
     
         
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    31  
           
      34  


 
PART I.   FINANCIAL INFORMATION

Item 1.                  Financial Statements

COMMUNITY PARTNERS BANCORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
At March 31, 2009 and December 31, 2008
(In thousands, except share data)
   
March 31,
    
December 31,
  
   
2009
    
2008
  
ASSETS
            
Cash and due from banks
   $ 12,394     $ 8,110  
Federal funds sold
     53,520       14,907  
                 
Cash and cash equivalents
     65,914       23,017  
                 
Securities available-for-sale
     47,796       56,726  
Securities held-to-maturity (fair value of $8,217 and $7,074 at March 31,
          2009 and December 31, 2008, respectively)
     9,121       7,940  
                 
Loans
     462,466       448,780  
Allowance for loan losses
     (6,734 )     (6,815 )
                 
Net loans
     455,732       441,965  
                 
Bank-owned life insurance
     4,136       4,101  
Premises and equipment, net
     5,434       5,658  
Accrued interest receivable
     1,992       1,951  
Goodwill and other intangible assets, net of accumulated amortization
          of $1,034 and $957 at March 31, 2009 and December 31, 2008,
          respectively
     25,906       25,983  
Other real estate owned
     1,025       -  
Other assets
     3,804       2,899  
                 
TOTAL ASSETS
   $ 620,860     $ 570,240  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                
LIABILITIES
                
Deposits:
                
Non-interest bearing
   $ 67,149     $ 65,115  
Interest bearing
     446,917       409,724  
                 
Total deposits
     514,066       474,839  
                 
Securities sold under agreements to repurchase
     13,504       11,377  
Accrued interest payable
     201       282  
Long-term debt
     7,500       7,500  
Other liabilities
     3,137       2,930  
                 
Total liabilities
     538,408       496,928  
                 
SHAREHOLDERS' EQUITY
                
Preferred stock, no par value; 6,500,000 shares authorized; 9,000 shares
issued and outstanding at March 31, 2009 and -0- at December 31, 
2008
     8,418       -  
Common stock, no par value; 25,000,000 shares authorized;  6,959,821
shares issued and outstanding at March 31, 2009 and December 31,
2008
     68,882       68,197  
Retained earnings
     5,154       4,738  
Accumulated other comprehensive (loss) income
     (2 )     377  
                 
Total shareholders' equity
     82,452       73,312  
                 
TOTAL LIABILITIES and SHAREHOLDERS’ EQUITY
   $ 620,860     $ 570,240  
 
See notes to the unaudited consolidated financial statements.
 
 
COMMUNITY PARTNERS BANCORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended March 31, 2009 and 2008
(In thousands, except per share data)

   
Three Months Ended
   
March 31,
   
2009
    
2008
INTEREST INCOME:
            
Loans, including fees
   $ 6,467     $ 7,234  
Investment securities
     669       749  
Federal funds sold
     18       36  
Total Interest Income
     7,154       8,019  
INTEREST EXPENSE:
                
Deposits
     2,471       2,941  
Securities sold under agreements to repurchase
     70       128  
Borrowings
     74       83  
Total Interest Expense
     2,615       3,152  
Net Interest Income
     4,539       4,867  
PROVISION FOR LOAN LOSSES
     150       85  
Net Interest Income after Provision for Loan Losses
     4,389       4,782  
NON-INTEREST INCOME:
                
Service fees on deposit accounts
     156       178  
Other loan customer service fees
     18       31  
Earnings from investment in life insurance
     35       38  
Net realized gain on sale of securities
     487       -  
Other income
     178       131  
Total Non-Interest Income
     874       378  
NON-INTEREST EXPENSES:
                
Salaries and employee benefits
     2,339       2,174  
Occupancy and equipment
     824       818  
Professional
     183       206  
Insurance
     234       155  
Advertising
     76       56  
Data processing
     242       112  
Outside services fees
     135       114  
Amortization of identifiable intangibles
     77       87  
Other operating
     357       322  
Total Non-Interest Expenses
     4,467       4,044  
Income before Income Taxes
     796       1,116  
INCOME TAX EXPENSE
     284       401  
                 
Net Income
     512       715  
Preferred stock dividend and discount accretion
     (96 )     -  
                 
Net income available to common shareholders
   $ 416     $ 715  
                 
EARNINGS PER COMMON SHARE:
                
Basic
   $ 0.06     $ 0.10  
Diluted
   $ 0.06     $ 0.10  
Weighted average common shares outstanding (in thousands):
                
Basic
     6,960       6,937  
Diluted
     6,966       7,080  
 
See notes to the unaudited consolidated financial statements.
 
 
COMMUNITY PARTNERS BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended March 31, 2009 and 2008
(Dollar amounts in thousands)

         
Common Stock
                    
   
 
Preferred
Stock
    
Outstanding
Shares
    
Amount
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income/(Loss)
    
Total
Shareholders’
Equity
  
Balance December 31, 2008
   $ -       6,959,821     $ 68,197     $ 4,738     $ 377     $ 73,312  
                                                 
Comprehensive income:
                                                
Net income
     -       -       -       512       -       512  
Change in net unrealized gain (loss)
        on securities available for sale,
        net of reclassification
        adjustment and tax effect
     -       -       -       -       (379 )     (379 )
                                                 
Total comprehensive income
     -       -       -       -       -       133  
                                                 
Preferred stock and common stock
         warrants issued
     8,398       -       602       -       -       9,000  
Preferred stock discount accretion
     20       -       -       (20 )     -       -  
                                                 
Dividends on preferred stock
     -       -       -       (76 )     -       (76 )
                                                 
Stock option compensation expense
     -       -       83       -       -       83  
                                                 
Balance, March 31, 2009
   $ 8,418       6,959,821     $ 68,882     $ 5,154     $ (2 )   $ 82,452  
                                                 
Balance December 31, 2007
   $ -       6,722,784     $ 66,552     $ 5,805     $ 100     $ 72,457  
                                                 
Comprehensive income:
                                                
Net income
     -       -       -       715       -       715  
Change in net unrealized gain (loss)
        on securities available for sale,
        net of tax effect
     -       -       -       -       417       417  
                                                 
Total comprehensive income
                                             1,132  
                                                 
Options exercised
     -       14,519       82       -       -       82  
                                                 
Cumulative effect adjustment –
adoption of accounting for post
retirement benefit costs
       -         -       -       (386 )     -       (386 )
                                                 
Balance, March 31, 2008
   $ -       6,737,303     $ 66,634     $ 6,134     $ 517     $ 73,285  

See notes to the unaudited consolidated financial statements.
 
 
COMMUNITY PARTNERS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2009 and 2008

   
Three Months Ended 
March 31,
  
   
2009
    
2008
  
   
(in thousands)
  
Cash flows from operating activities:
            
Net income
   $ 512     $ 715  
Adjustments to reconcile net income to net cash provided by (used in)
 operating activities:
                
Depreciation and amortization
     279       251  
Provision for loan losses
     150       85  
Intangible amortization
     77       87  
Net amortization (accretion) of securities premiums and discounts
     10       (4 )
Earnings from investment in life insurance
     (35 )     (38 )
Stock option compensation expense
     83       -  
Net realized gain on sale of securities
     (487 )     -  
Decrease (increase) in assets:
                
Accrued interest receivable
     (41 )     140  
Other assets
     (646 )     509  
(Decrease) increase in liabilities:
                
Accrued interest payable
     (81 )     (123 )
Other liabilities
     131       (234 )
Net cash (used in) provided by operating activities
     (48 )     1,388  
                 
Cash flows from investing activities:
                
Purchase of securities available-for-sale
     (9,269 )     (10,754 )
Purchase of securities held-to-maturity
     (1,183 )     -  
Proceeds from sales of securities available-for-sale
     7,940          
Proceeds from repayments and maturities of securities available-for-sale
     10,100       14,237  
Net  increase in loans
     (14,942 )     (6,293 )
Purchases of premises and equipment
     (55 )     (626 )
Net cash used in investing activities
     (7,409 )     (3,436 )
                 
Cash flows from financing activities:
                
Net increase in deposits
     39,227       10,684  
Net increase in securities sold under agreements to repurchase
     2,127       2,811  
Proceeds from issuance of preferred stock
     9,000       -  
Proceeds from exercise of stock options
     -       82  
Net cash provided by financing activities
     50,354       13,577  
                 
Net increase in cash and cash equivalents
     42,897       11,529  
Cash and cash equivalents – beginning
     23,017       10,013  
                 
Cash and cash equivalents - ending 
   $ 65,914     $ 21,542  
                 
Supplementary cash flow information:
                
Interest paid
   $ 2,696     $ 3,275  
Income taxes paid
   $ 1,476     $ -  
Supplementary schedule of non-cash activities:
                
Other real estate acquired in settlement of loans
   $ 1,025     $ -  

See notes to the unaudited consolidated financial statements.
 

COMMUNITY PARTNERS BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements include the accounts of Community Partners Bancorp (the “Company” or “Community Partners”), a bank holding company, and its wholly-owned subsidiary, Two River Community Bank (“Two River”) and Two River’s wholly-owned subsidiary, TRCB Investment Corporation, and wholly-owned trust, Two River Community Bank Employer’s Trust.  Effective December 31, 2008, Community Partners Bancorp finalized the legal consolidation of its two wholly-owned bank subsidiaries, The Town Bank and Two River into one New Jersey State chartered bank, Two River. All inter-company balances and transactions have been eliminated in the consolidated financial statements.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by GAAP for full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the three-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2008 included in the Community Partners Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.
 
 
NOTE 2 – EARNINGS PER COMMON SHARE
 
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per common share reflects additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued relating to outstanding stock options and warrants.  Potential shares of common stock issuable upon the exercise of stock options and warrants are determined using the treasury stock method.  All share and per share data have been retroactively adjusted to reflect the 3% stock dividend declared on August 29, 2008 and paid October 17, 2008 to shareholders of record as of September 30, 2008.

 
The following table sets forth the computations of basic and diluted earnings per common share:
 
   
Three Months Ended
 March 31,
  
     
2009
      
2008
  
   
(Dollars in thousands, except per share data)
  
Net income
   $ 512     $ 715  
Preferred stock dividend and discount accretion
     (96 )     -  
                 
Net income available to common shareholders
   $ 416     $ 715  
                 
Weighted average common shares outstanding
     6,959,821       6,937,482  
Effect of dilutive securities, stock options and warrants
     5,871       142,927  
                 
  Weighted average common shares outstanding used to
       calculate diluted earnings per common share
     6,965,692       7,080,409  
                 
Basic earnings per common share
   $ 0.06     $ 0.10  
Diluted earnings per common share
   $ 0.06     $ 0.10  
 
Dilutive securities in the table above exclude common stock options and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented.  Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation.  Stock options and warrants that had no intrinsic value because their effect would be anti-dilutive and therefore would not be included in the diluted earnings per common share calculation were 1,295,503 and 415,348 for the three-month periods ended March 31, 2009 and 2008, respectively.
 
NOTE 3 – OTHER COMPREHENSIVE (LOSS) INCOME
 
The components of other comprehensive (loss) income for the three months ended March 31, 2009 and 2008 are as follows:
 
   
Three Months Ended
 March 31,
  
   
2009
    
2008
  
   
(Dollars in thousands)
  
Unrealized holding (losses) gains on 
available-for-sale securities
   $ (151 )   $ 686  
Less:  
Reclassification adjustments for
gains (losses) included in net
income
     487       -  
      (638 )     686  
Tax effect
     259       (269 )
                 
Net unrealized (losses) gains
   $ (379 )   $ 417  
 
NOTE 4 – STOCK BASED COMPENSATION PLANS
 
Both Two River and Town Bank had stock option plans for the benefit of their employees and directors outstanding at the time of their acquisition by Community Partners.  The plans provided for the granting of both incentive and non-qualified stock options.  All stock options outstanding at the time of acquisition, April 1, 2006, became fully vested.  There were no shares available for grant under these prior plans.
 
 
On March 20, 2007, the Board of Directors adopted the Community Partners Bancorp 2007 Equity Incentive Plan (the “Plan”).  The Plan, which was approved by the Company’s shareholders at the 2007 annual meeting of shareholders held on May 15, 2007, provides that the Compensation Committee of the Board of Directors (the “Committee”) may grant to those individuals who are eligible under the terms of the Plan stock options, shares of restricted stock, or such other equity incentive awards as the Committee may determine.  The number of shares of Company common stock to be reserved and available for awards under the Plan is 795,675 after adjusting for the 3% stock dividends declared in 2008 and 2007.
 
On January 20, 2009, the Committee granted 413,000 options to directors and officers of the Company.

The Company granted non-qualified stock options to directors totaling 65,000 shares.  The options vested immediately with an exercise price of $3.75 based upon the average trading price on the grant date.

The Company granted incentive stock options to employees totaling 348,000 shares.  The granted options vest 20% per year over five years beginning January 20, 2010.  The exercise price of the options is $3.75 based upon the average trading price on the grant date.

Stock based compensation expense related to the above grants, totaling approximately $83,000 was recorded during the quarter ended March 31, 2009 and is included in salaries and employee benefits on the income statement.  A deferred tax benefit of $27,000 was recognized during the quarter ended March 31, 2009 related to this stock based compensation.

Total unrecognized compensation cost related to non-vested options under the Plan was $419,000 as of March 31, 2009 and will be recognized over the next 4.8 years.

The following table presents information regarding the Company’s outstanding stock options as of March 31, 2009.
 
   
Number of
Shares
    
Weighted
Average
Price
  
Weighted
Average
Remaining
Life
  
Aggregate
Intrinsic
Value
  
                     
Options outstanding, beginning of year
     744,696     $ 9.28          
Options forfeited
     (17,722 )     6.58          
Options granted
     413,000       3.75          
                         
Options outstanding, March 31, 2009
     1,139,974     $ 7.32  
5.96 years
   $ -0-  
Options exercisable, March 31, 2009
     791,974     $ 8.89  
4.27 years
   $ -0-  
Option price range at March 31, 2009
   $ 3.35 to $15.79                    
 
The aggregate intrinsic value represents the amount by which the market price of the shares issuable upon the exercise of an option on the measurement date exceeds the exercise price of the option.  There were no options exercised during the three months ended March 31, 2009.
 
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.  The following weighted average assumptions were used to estimate the fair value of stock options granted in the quarter ended March 31, 2009:
 
Dividend yield
     0.00 %
Expected volatility
     28.35 %
Risk-free interest rate
     1.79 %
Expected life
  
7 years
    
Weighted average fair value
       of options granted
   $ 1.28  
 
NOTE 5 – GUARANTEES
 
The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers.  The Company generally holds collateral and/or personal guarantees supporting these commitments.  As of March 31, 2009, the Company had $9,584,000 of commercial and similar letters of credit.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  Management believes that the current amount of the liability as of March 31, 2009 for guarantees under standby letters of credit issued is not material.
 
NOTE 6 – FAIR VALUE MEASUREMENTS
 
Financial Accounting Standards Board Statement No. 157 Fair Value Measurements (SFAS 157) establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under SFAS 157 are as follows:
 
 
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
Level 2:
Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
 
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity).
 
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 and December 31, 2008 are as follows:
 
Description
  
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
    
(Level 2)
Significant
Other
Observable
Inputs
    
 
(Level 3)
Significant
Unobservable
Inputs
    
Total
  
   
(in thousands)
  
At March 31, 2009
                        
Securities available for sale
   $ -     $ 47,687     $ 109     $ 47,796  
                                 
At December 31, 2008
                                
Securities available for sale
   $ -     $ 56,549     $ 177     $ 56,726  
 
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods presented:
 
   
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
   
Securities available for sale
   
Three Months Ended
March 31, 2009
  
Three Months Ended
March 31, 2008
   
(in thousands)
         
Balance at beginning of period
   $ 177     $ 974  
Total gains/(losses) – (realized/unrealized):
                
Included in earnings
     -       -  
Included in other comprehensive income (loss)
     (68 )     (104 )
Purchases, issuances and settlements
     -       -  
Transfers in and/or out of Level 3
     -       -  
                 
Balance at end of period
   $ 109     $ 870  
 
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2009 and December 31, 2008 are as follows:
 
Description
  
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
    
(Level 2)
Significant
Other
Observable
Inputs
    
(Level 3)
Significant
 Unobservable
Inputs
    
 
Total
  
                                 
At March 31, 2009
            
Impaired loans
  
$
- 
   
$
- 
   
$
4,334
    
$
4,334
  
Other real estate owned
  
$
- 
   
$
- 
   
$
1,025
    
$
1,025
  
               
At December 31, 2008
              
Impaired loans
  
$
- 
   
$
- 
   
$
6,175
    
$
6,175
  
 
 
The following valuation techniques were used to measure fair value of assets in the tables above:
 
·  
Securities – The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.
 
·  
Impaired loans – Impaired loans are those that are accounted for under FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS 114”), in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  For the quarter ended March 31, 2009, fair value consists of the loan balances of $4,334,000 net of valuation allowances of $1,288,000.  For the year ended December 31, 2008, fair value consists of loan balances of $6,175,000, net of a valuation allowance of $2,257,000.  Additional provisions for loan losses on impaired loans of $42,000 and $2,257,000 were recorded during the three months ended March 31, 2009 and the year ended December 31, 2008, respectively.
 
·  
Other real estate owned – Real estate properties acquired through, or in lieu of loan foreclosure are to be sold and are carried at fair value less cost to sell.  Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral.  These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.  Two properties were acquired through foreclosure in the period ending March 31, 2009 and are carried at their net realizable value of $1,025,000 based on current appraisals.
 
 
NOTE 7 – SHAREHOLDERS’ EQUITY
 
In connection with the Emergency Economic Stabilization Act of 2008 (EESA), the U.S. Treasury Department (Treasury) initiated a Capital Purchase Program (CPP) which allows for qualifying financial institutions to issue preferred stock to the Treasury, subject to certain limitations and terms.  The EESA was developed to attract broad participation by strong financial institutions, to stabilize the financial system and increase lending to benefit the national economy and citizens of the U.S.

On January 30, 2009, the Company entered into a Securities Purchase Agreement with the Treasury as part of the Capital Purchase Program, pursuant to which the Company sold to the Treasury 9,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Senior Preferred Stock”), no par value per share and a liquidation preference of $1,000 per share, and a warrant (“Warrant”) to purchase 288,462 shares of the Company’s common stock, no par value per share, for an aggregate purchase price of $9,000,000.

The shares of Senior Preferred Stock have no stated maturity, do not have voting rights except in certain limited circumstances and are not subject to mandatory redemption or a sinking fund.  The terms of the Senior Preferred Stock indicate that the Company cannot redeem the shares during the first three years except with the proceeds from a qualifying equity offering.  Thereafter, the Senior Preferred Stock may be redeemed at liquidation preference plus accrued and unpaid dividends.  The Company must provide at least 30 days and no more than 60 days notice to the holder of its intention to redeem the shares.  In February 2009, legislation was signed that may result in changes in those terms.  The Senior Preferred Stock has priority over the Company’s Common Stock with regard to the payment of dividends and liquidation distribution.  The Senior Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  Dividends are payable quarterly on February 15th, May 15th, August 15th and November 15th.  The Senior Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and Treasury, notwithstanding the terms of the original transaction documents.  Under FAQ’s issued recently by Treasury, participants in the Capital Purchase Program desiring to repay part of an investment by Treasury must repay a minimum of 25% of the issue price of the preferred stock.

Prior to the earlier of the third anniversary date (January 30, 2012) of the issuance of the Senior Preferred stock or the date on which the Senior Preferred Stock have been redeemed in whole or the Treasury has transferred all of the Senior Preferred Stock to third parties which are not affiliates of the Treasury, the Company can not declare or pay any cash dividend on its common stock or redeem, purchase or acquire any shares of the Company’s stock without the consent of the Treasury.
 
The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $4.68 per share of common stock.  If the Company receives aggregate gross cash proceeds of not less than $9,000,000 from qualified equity offerings on or prior to December 31, 2009, the number of shares of common stock issuable pursuant to exercise of the Warrant will be reduced by one half of the original number of shares underlying the Warrant.  In addition, in the event that the Company redeems the Senior Preferred Stock, the Company can repurchase the warrant at “fair value” as defined in the investment agreement with Treasury.
 
 
The agreement with the Treasury contains limitations on certain actions of the Company, including forbidding the payment of quarterly cash dividends on the Company’s common stock and the repurchase of its common stock during the first three years of the agreement.  In addition, the Company agreed that, while the Treasury owns the Senior Preferred Stock, the Company’s employee benefit plans and other executive compensation arrangements for its senior executive officers must comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008.
 
NOTE 8 – NEW ACCOUNTING STANDARDS
 
In December 2007, the FASB issued Statement No. 141 (R), “Business Combinations” (“SFAS 141R”).  SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The guidance will become effective for fiscal years beginning after December 15, 2008.  This new pronouncement will impact the Company’s accounting for business combinations beginning January 1, 2009.
 
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.
 
In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives.  Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 has been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows.  Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The impact to the Company will be to require the Company to expand its disclosure regarding its derivative instruments, if applicable.
 
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4).  FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.
 
 
FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2).   FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.
 
 
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  The Company is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. When used in this and in our future filings with the Securities and Exchange Commission (the “SEC”), in our press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook” or similar expressions (including confirmations by one of our authorized executive officers of any such expressions made by a third party with respect to us) are intended to identify forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
 
Factors that may cause actual results to differ from those results, expressed or implied, include, but are not limited to, those listed under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K filed by Community Partners Bancorp (the “Company” or “Community Partners”) with the SEC on March 31, 2009 (the “Form 10-K”).
 
Although management has taken certain steps to mitigate any negative effect of these factors, significant unfavorable changes could severely impact the assumptions used and have an adverse effect on profitability.  The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.
 
 
The following information should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Form 10-K.
 
 
Critical Accounting Policies and Estimates
 
The following discussion is based upon the financial statements of the Company, which have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”).  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.
 
Note 1 to the Company’s consolidated financial statements included in the Form 10-K contains a summary of our significant accounting policies.  Management believes the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Allowance for Loan Losses. Management believes our policy with respect to the methodology for the determination of the allowance for loan losses involves a high degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters.  Changes in these judgments, assumptions or estimates could materially impact the results of operations. This critical policy and its application are reviewed quarterly with our audit committee and board of directors.
 
Management is responsible for preparing and evaluating the allowance for loan losses on a quarterly basis in accordance with Bank policy, the Interagency Policy Statement on the Allowance for Loan and Lease Losses released by the Board of Governors of the Federal Reserve System on December 13, 2006 and GAAP.  We believe that our allowance for loan losses is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.  The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance account, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions.  Although management utilizes the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short term change.  Various regulatory agencies may require us and our banking subsidiary to make additional provisions for loan losses based upon information available to them at the time of their examination.  Furthermore, the majority of our loans are secured by real estate in New Jersey, primarily in Monmouth county and Union County.  Accordingly, the collectibility of a substantial portion of the carrying value of our loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the New Jersey and/or our local market areas experience economic shock.
 
 
Stock Based Compensation. The Company accounts for all awards under its stock-based compensation plan in accordance with FASB Statement No. 123 (revised 2004), Share-Based Payment (FASB No. 123R).  Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.  The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date.  The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model.  The model requires the use of numerous assumptions, many of which are highly subjective in nature.
                          
Investment Securities Impairment Valuation.  Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
 
Deferred Tax Assets and Liabilities.  We recognize deferred tax assets and liabilities for future tax effects of temporary differences.  Deferred tax assets are subject to management’s judgment based upon available evidence that future realization is more likely than not. If management determines that we may be unable to realize all or part of net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the expected realizable amount.
 
 
Overview
 
Community Partners reported net income of $512 thousand for the quarter ended March 31, 2009, or $0.06 for both basic and diluted earnings per share after the preferred stock dividends and discount accretion on preferred shares, compared to net income of $715 thousand for the quarter ended March 31, 2008, or $0.10 for both basic and diluted earnings per share, a decrease of $203 thousand, or 28.4%.  The decline in net income was primarily due to lower net interest income as we experienced margin compression, higher non-interest expenses which were more than offset by higher non-interest income and the Company’s determination to record an additional $150 thousand for potential loan losses.  On a linked quarter basis, the Company returned to profitability during the first quarter, after reporting a net loss of $(536,000), or $(0.08) for both basic and fully diluted earnings per share for the prior linked quarter.  The increase was primarily due to a lower amount of provision for potential loan losses and higher non-interest income.  During the first quarter of 2009, management added $150 thousand to the allowance for potential loan losses compared to $1.3 million added to the allowance for potential loan losses during the fourth quarter of 2008, as management continued to assess the potential impact of challenges imposed on our loan portfolio as a result of the current economic environment.  The net interest margin also stabilized and began to improve during the first quarter of 2009 as the margin increased to 3.37% compared to 3.33% for the prior linked quarter.  Higher non-interest income was earned during the current quarter compared to the prior linked quarter primarily as a result of $487 thousand realized in gains from the sale of securities available-for-sale, as we repositioned our investment securities portfolio to a shorter duration.  Other non-interest expenses remained level during the first quarter of 2009 compared to the prior linked quarter.  Our net interest margin was negatively affected due to the $35.4 million of Federal funds sold that we averaged during the first quarter of 2009 and for which we earned an average return of 0.21%.
 
 
At March 31, 2009, assets totaled $620.9 million, an increase of $50.7 million, or 8.9%, over December 31, 2008 assets of $570.2 million.  The increase in total assets was the result of loan growth and liquidity growth in the form of Federal funds sold, both of which were funded by our deposit growth and $9.0 million of U.S. Government funds under the Troubled Asset Relief Program (“TARP”).  We also increased our liquidity with securities transactions which provided a net increase of $8.8 million in cash equivalents during the first quarter of 2009.  Total deposits were $514.1 million at March 31, 2009, compared to $474.8 million at December 31, 2008, an increase of $39.3 million, or 8.3%.  The increase in deposits was the result of our marketing efforts as we continued to promote our products.
 
The Company’s loan portfolio, net of allowances for loan losses, increased to $455.7 million at March 31, 2009, compared to $442.0 million at December 31, 2008, an increase of $13.7 million, or 3.1%.  The allowance for loan losses totaled $6.7 million, or 1.46% of total loans at March 31, 2009, compared to $6.8 million, or 1.52%, of total loans at December 31, 2008.  The decrease in the allowance for loan losses was the result of loan charge-offs in excess of additional provisions taken, as we managed our loan portfolio and assumed $1.0 million of other real estate owned.  Although loan originations continued to increase during the first quarter of 2009, our deposit growth exceeded our loan growth by 187.0%, as we balance our efforts to maintain our high credit standards in a challenging market while exploring prudent ways of employing the resources provided by our TARP funding.  During the second half of 2008, as an alternative to focusing on the growth of earning assets during weak economic conditions, we decided to invest our time and resources in the start-up of two new branch offices in Manasquan and Fanwood, New Jersey, and enhanced our loan origination and business development operations, which we believe have positioned our franchise to take quick advantage of opportunities when the economic conditions become more favorable.

The following table provides information on our performance ratios for the dates indicated.
 
   
(Annualized)
Three
Months
ended March
31, 2009
    
For the
Year ended
December
31, 2008
Performance Ratios:
      
Return on average assets
0.35%
  
0.15%
Return on average tangible assets
0.37%
  
0.15%
Return on average shareholders' equity
2.59%
  
1.09%
Return on average tangible shareholders' equity
3.83%
  
1.69%
Average equity to average assets
13.48%
  
13.35%
Average tangible equity to average tangible assets
9.54%
  
9.03%
Dividend payout
0.00%
  
0.00%
 
We anticipate that our performance ratios will remain challenged as we expect income from continuing operations in 2009 to continue to be impacted by higher costs related to the expansion of our branch system and our lending activities. Our results for 2009 will also be impacted by increased FDIC insurance premiums and special assessments, which may add an additional $0.5 million to $1.0 million to our operating expenses.  In addition, should poor economic conditions in the New Jersey real estate market or a further general decline in economic conditions in New Jersey continue throughout 2009 and beyond, the Company may suffer higher default rates on its loans and decreased value of assets it holds as collateral. 
 
 
Results of Operations
 
Community Partners’ principal source of revenue is net interest income, the difference between interest income on earning assets and interest expense on deposits and borrowings.  Interest earning assets consist primarily of loans, investment securities and Federal funds sold.  Sources to fund interest-earning assets consist primarily of deposits and borrowed funds.  The Company’s net income is also affected by its provision for loan losses, other income and other expenses.  Other income consists primarily of gains on security sales, service charges and commissions and fees, while other expenses are comprised of salaries and employee benefits, occupancy costs and other operating expenses.


RESULTS OF OPERATIONS
Three months ended March 31, 2009 compared to the three months ended March 31, 2008

Net Interest Income

Interest income for the three months ended March 31, 2009 decreased by $865 thousand, or 10.8%, to $7.2 million, from $8.0 million in the same 2008 period.  The decrease in interest income was primarily due to interest rate-related decreases in income amounting to $1.6 million.  This decrease was partially offset by volume-related increases in interest income amounting to $737 thousand.  The decrease in market interest rates from late 2007 through the first quarter of 2009 accounted for the decrease in yield on interest-earning assets.  Between September 18, 2007 and March 31, 2009, the Federal Reserve decreased the Federal funds rate 5.25% to an intended Federal funds target rate ranging from 0% to 0.25%.

Interest and fees on loans decreased by $767 thousand, or 10.6%, to $6.5 million for the three months ended March 31, 2009 compared to $7.2 million for the corresponding period in 2008.  Of the $767 thousand decrease in interest and fees on loans, $1.3 million is attributable to interest rate-related decreases.  This decrease was partially offset by $546 thousand attributable to volume-related increases.  The Company experienced reduced yields on our loan portfolio, as interest rates on its new and variable rate loans decreased as the Federal Reserve reduced the Federal funds rate.  The average balance of the loan portfolio for the three months ended March 31, 2009 increased by $33.0 million, or 7.9%, to $453.0 million from $420.0 million for the corresponding period in 2008.  The average annualized yield on the loan portfolio was 5.79% for the quarter ended March 31, 2009 compared to 6.93% for the quarter ended March 31, 2008.  Also contributing to the decrease in yield on our loan portfolio was the increase in the average balance of non-accruing loans, which averaged $13.2 million during the first quarter of 2009, compared to no non-accruing loan balances during the corresponding period in the prior year.

Interest income on Federal funds sold was $18 thousand for the three months ended March 31, 2009, representing a decrease of $18 thousand, or 50%, from $36 thousand for the three months ended March 31, 2008.  For the three months ended March 31, 2009, Federal funds sold had an average balance of $35.4 million with an average annualized yield of 0.21%.  For the three months ended March 31, 2008, this category had average balances of $5.0 million with an average annualized yield of 2.88%.  The Federal funds rate decreased over 400 basis points between December 2007 and March 31, 2009.
 
 
Interest income on investment securities totaled $669 thousand for the three months ended March 31, 2009 compared to $749 thousand for the three months ended March 31, 2008.  The decrease in interest income on investment securities was primarily attributable to our replacement of maturities, calls and principal pay-downs of existing securities with new purchases that had generally lower rates resulting from the lower rate environment.  For the three months ended March 31, 2009, investment securities had an average balance of $58.6 million with an average annualized yield of 4.56% compared to an average balance of $60.6 million with an average annualized yield of 4.94% for the three months ended March 31, 2008.
 
Interest expense on interest-bearing liabilities amounted to $2.6 million for the three months ended March 31, 2009, compared to $3.2 million for the corresponding period in 2008, a decrease of $537 thousand, or 17.0%.  Of this decrease in interest expense, $563 thousand was due to rate-related decreases on interest-bearing liabilities.  This decrease was partially offset by $26 thousand of volume related increases on interest-bearing liabilities.
 
During 2008 and through the first quarter of 2009, management employed promotional programs designed to increase core deposit growth in the Company. These programs included remote deposit capture, the offering of health savings accounts, a revised deposit availability schedule, “prestige savings” accounts for new branch promotional purposes, and the “CDARS” product, which is a deposit-gathering tool that supplies customers with higher limits for insured certificate of deposit balances.  In addition, uniform products and services were offered throughout our expanding branch network.  Also during this period, as the Federal funds rate was decreasing, management restructured the mix of our interest-bearing liabilities portfolio by decreasing our funding dependence on high-cost time deposits to lower-cost money market deposit products, savings account deposit products and borrowed funds.  The average balance of our deposit accounts and agreements to repurchase securities products, excluding certificates of deposit, was $373.6 million for the three months ended March 31, 2009 compared to $274.8 million for the three months ended March 31, 2008, an increase of $98.8 million, or 36.0%.  The major components of our average deposit mix changed from $28.5 million in savings deposits, $120.4 million in money market account deposits, $170.9 million in time deposits and $73.3 million in non-interest demand deposits during the first quarter of 2008 to $166.1 million in savings deposits, $94.1 million in money market account deposits, $127.2 million in time deposits and $64.3 million in non-interest demand deposits during the first quarter of 2009.  This represents an increase of $137.6 million, or 482.8%, in savings deposits; a decrease of $26.3 million, or 21.8% in money market account deposits;   a decrease of $43.5 million, or 25.5% in time deposits;  and a decrease of $9.0 million, or 12.3%, in non-interest bearing demand deposits.  For the three months ended March 31, 2009, the average interest cost for all interest-bearing liabilities was 2.39% compared to 3.33% for the three months ended March 31, 2008.
 
On occasion, management utilizes its borrowing lines and accesses wholesale certificates of deposit to fund the growth in its loan portfolio pending deposit inflows and to fund daily cash outflows in excess of daily cash deposits and Federal funds sold.  During the first quarters of 2009 and 2008, management did not find it necessary to access additional funding through these sources, as our deposit growth throughout our expanding branch network exceeded our funding needs associated with maintaining adequate liquidity and funding our loan portfolio increases.  We view these funding sources as alternatives to pursuing higher costing certificates of deposit originated in our market area, when necessary.  Our Company’s strategies for increasing and retaining deposits, managing loan originations within our acceptable credit criteria and loan category concentrations, and our planned branch network growth have combined to meet our liquidity needs.  The Company also offers agreements to repurchase securities, commonly known as repurchase agreements, to its customers as an alternative to other insured deposits.  Average balances of repurchase agreements for the first quarter of 2009 decreased to $13.0 million, with an average interest rate of 2.18%, compared to $16.7 million, with an average interest rate of 3.09%, for the first quarter of 2008.  The lower interest rates paid during the first quarter of 2009 resulted from the Federal Reserve’s decreases in the Federal funds rate, as previously described.
 
 
Net interest income decreased by $328 thousand, or 6.7%, to $4.5 million for the three months ended March 31, 2009 compared to the corresponding period in 2008.  The decrease in net interest income was due to changes in interest income and interest expense described previously.  The net interest margin decreased to 3.37% for the three months ended March 31, 2009 from 4.03% for the three months ended March 31, 2008.  This decrease is also attributed to the decreases in interest income that were partially offset by the changes in interest expense as previously discussed.
 
The following tables reflect, for the periods presented, the components of our net interest income, setting forth (1) average assets, liabilities, and shareholders’ equity, (2) interest income earned on interest-earning assets and interest expenses paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities), and (5) our margin on interest-earning assets.  Yields on tax-exempt assets have not been calculated on a fully tax-exempt basis.
 
   
Three Months Ended
 March 31, 2009
    
Three Months Ended
 March 31, 2008
  
(dollars in thousands)
    
Average
Balance
      
Interest
Income/
Expense
    
Average
Rate 
    
Average
Balance 
      
Interest
Income/
Expense
      
Average
Rate
  
ASSETS
                                    
Interest Earning Assets:
                                    
Federal funds sold
   $ 35,404     $ 18       0.21%     $ 5,035     $ 36       2.88%  
Investment securities
     58,629       669       4.56%       60,611       749       4.94%  
Loans (1) (2)
     453,005       6,467       5.79%       419,968       7,234       6.93%  
                                                 
Total Interest Earning Assets
     547,038       7,154       5.30%       485,614       8,019       6.64%  
                                                 
Non-Interest Earning Assets:
                                                
 Allowance for loan losses
     (6,712 )                     (4,709 )                
 All other assets
     54,316                       49,443                  
                                                 
Total Assets
   $ 594,642                     $ 530,348                  
                                                 
LIABILITIES & SHAREHOLDERS' EQUITY
                                          
Interest-Bearing Liabilities:
                                                
NOW deposits
   $ 36,128       69       0.77%     $ 35,861       114       1.28%  
Savings deposits
     166,065       1,011       2.47%       28,532       150       2.11%  
Money market deposits
     94,121       492       2.12%       120,420       980       3.27%  
Time deposits
     127,226       899       2.87%       170,698       1,697       4.00%  
Repurchase agreements
     13,005       70       2.18%       16,654       128       3.09%  
Short-term borrowings
     -       -       -       1,020       10       3.98%  
Long-term debt
     7,500       74       4.00%       7,500       73       3.89%  
                                                 
Total Interest Bearing Liabilities
     444,045       2,615       2.39%       380,685       3,152       3.33%  
                                                 
Non-Interest Bearing Liabilities:
                                                
Demand deposits
     64,320                       73,349                  
Other liabilities
     3,591                       3,721                  
                                                 
Total Non-Interest Bearing Liabilities
     67,911                       77,070                  
                                                 
Shareholders' Equity
     82,686                       72,593                  
                                                 
Total Liabilities and Shareholders' Equity
   $ 594,642                     $ 530,348                  
                                                 
NET INTEREST INCOME
           $ 4,539                     $ 4,867          
                                                 
NET INTEREST SPREAD (3)
                     2.91%                       3.31%  
                                                 
NET INTEREST MARGIN(4)
                     3.37%                       4.03%  
    
(1)  Included in interest income on loans are loan fees.
(2)  Includes non-performing loans.
(3)
The interest rate spread is the difference between the weighted average yield on average interest earning assets and the weighted average cost of average interest bearing liabilities.
(4)
The interest rate margin is calculated by dividing annualized net interest income by average interest earning assets.
 
 
Analysis of Changes in Net Interest Income
 
The following table sets forth for the periods indicated a summary of changes in interest earned and interest paid resulting from changes in volume and changes in rates (in thousands):
 
   
Three Months Ended March 31, 2009
Compared to Three Months Ended
March 31, 2008
  
   
Increase (Decrease) Due To
  
   
Volume
    
Rate
    
Net
  
                   
Interest Earned On:
                  
Federal funds sold
   $ 215     $ (233 )   $ (18 )
Investment securities
     (24 )     (56 )     (80 )
Loans
     546       (1,313 )     (767 )
                         
Total Interest Income
     737       (1,602 )     (865 )
                         
Interest Paid On:
                        
NOW deposits
     1       (46 )     (45 )
Savings deposits
     716       145       861  
Money market deposits
     (216 )     (272 )     (488 )
Time deposits
     (437 )     (361 )     (798 )
Repurchase agreement
     (28 )     (30 )     (58 )
Short-term borrowings
     (10 )     -       (10 )
Long-term debt
     -       1       1  
                         
Total Interest Expense
     26       (563 )     (537 )
                         
Net Interest Income
   $ 711     $ (1,039 )   $ (328 )
 
The change in interest due to both volume and rate has been allocated proportionally to both, based on their relative absolute values.
 
Provision for Loan Losses
 
The provision for loan losses for the three months ended March 31, 2009 increased to $150 thousand, as compared to a provision for loan losses of $85 thousand for the corresponding 2008 period.  During the quarter ended March 31, 2009 the Company recorded the additional provision based on our assessment and evaluation of risk inherent in the loan portfolio, containment of our non-performing loans, continued growth of the loan portfolio, $231 thousand of loan charge-offs  and the generally weakening economic conditions.  In management’s opinion, the allowance for loan losses, totaling $6.7 million at March 31, 2009, is adequate to cover losses inherent in the portfolio.  As a Company policy, we do not become involved in any sub-prime lending activity.  In the current interest rate and credit quality environment, the Company’s strategy has been to stay within our established credit culture.  Net loan originations increased to $14.9 million in the first quarter of 2009 compared to an increase in loan volume of $6.3 million experienced in the first quarter of 2008.  During the first quarter or 2009, we also charged-off $231 thousand in loan balances and foreclosed on loan collateral which resulted in $1.0 million in other real estate owned.  The moderate increase in net loan originations reflects management’s more stringent credit qualification criteria and the overall difficult economic environment within our market area.  Increasing loan volume continues to be challenging in 2009, as management desires to maintain our loan pricing strategy even though some competitive institutions offer lower than market justified loan rates.  Management will continue to review the need for additions to its allowance for loan losses based upon its monthly review of the loan portfolio, the level of delinquencies and general market and economic conditions.

 
Non-Interest Income

For the three months ended March 31, 2009, non-interest income amounted to $874 thousand compared to $378 thousand for the corresponding period in 2008.  This increase of $496 thousand, or 131.2%, is attributable to realized gains from the sale of securities-available-for sale which amounted to $487 thousand.  The gains from sales of available-for-sale securities resulted from our strategic initiative to reposition our investment securities portfolio to a shorter duration.  Customer service fees were $156 thousand for the quarter ended March 31, 2009, a decrease of $22 thousand, or 12.4%, from $178 thousand for the quarter ended March 31, 2008.  The decrease in customer service fees was due primarily to a lower amount of account overdraft fees resulting from a reduced number of overdraft occurrences by our customers. The decrease in other loan customer service fees for the first quarter of 2009 to $18,000 from $35,000 in 2008 resulted from a lower amount of loan prepayment penalty fees, as fixed rate loan prepayments decreased during the first quarter of 2009 compared to the same period in 2008.  Our other non-interest income increased by $47 thousand, or 35.9%, primarily as a result of fees generated by our Residential Mortgage operating unit.

Non-Interest Expense

Non-interest expense for the three months ended March 31, 2009 increased $423 thousand, or 10.5%, to $4.5 million compared to $4.0 million for the three months ended March 31, 2008.  The Company’s salary and employee benefits increased $165 thousand, or 7.6%, primarily as a result of higher health insurance costs, which increased $47 thousand, or 22.9%, from $205 thousand for the first quarter of 2008 to $252 thousand for the first quarter of 2009; residential mortgage department commission expenses which increased due to greater activity, increased from $23 thousand during the first quarter of 2008 to $45 thousand during the first quarter of 2009; and generally higher employment costs, including approximately $83 thousand in stock based compensation expense for the first quarter of 2009 compared to no stock based compensation expense for the same prior year period.  Subsequent to March 31, 2008, we opened two new branches which were operating by the end of 2008.  At March 31, 2009, our full-time equivalent number of employees totaled 145 compared to 136 at March 31, 2008.

Advertising expense increased by $20 thousand, or 35.7%, as management reallocated its resources and targeted additional promotions of our products and branch network.  Data processing fees increased by $130 thousand, or 116.1%, due primarily to $83 thousand allocated to conversions of operating systems, which are scheduled to be completed by the end of the second quarter of 2009, servicing of new financial products, and the implementation of new data circuit technology.  Occupancy and equipment expense rose by $6 thousand, or 0.7%, as we opened three new branches but realized reduced overall leasehold and equipment expenses due to fully-depreciated assets.  Professional expenses decreased by $23 thousand, or 11.2%, primarily due to internal control efficiencies.  Outside service fees increased by $21 thousand, or 18.4%, as we experienced higher costs associated with our expanding branch network.  Insurance costs increased by $79 thousand, or 51.0%, due primarily to higher costs associated with Federal Deposit Insurance (“FDIC”), which increased by $103 thousand, or 153.7%, from $67 thousand to $170 thousand.  Other operating expenses increased by $35 thousand, or 10.9%, to $357 thousand for the first quarter of 2009 from $322 thousand for the first quarter of 2008 and reflected normal operating increases associated with the overall growth of the Company.  Subsequent to the acquisition of Town Bank as of April 1, 2006, the Company began amortizing identifiable intangible assets and incurred $77 thousand in amortization expense for the first quarter of 2009 compared to $87 thousand for the corresponding period in 2008.  We currently anticipate continued increases in non-interest expense for the remainder of 2009 and beyond, as we incur costs related to the expansion of our branch system and our lending activities, and ongoing efforts to penetrate our target markets.  In addition, we anticipate increased non-recurring costs associated with the scheduled second quarter conversion of our operating systems and the FDIC special assessment.

 
Income Taxes

The Company recorded income tax expense of $284 thousand for the three months ended March 31, 2009 compared to $401 thousand for the three months ended March 31, 2008.  The decrease is primarily due to lower pre-tax income earned during the first quarter of 2009 compared to the first quarter of 2008.  The effective tax rate for the three months ended March 31, 2009 was 35.7%, compared to 35.9% for the corresponding period in 2008.

Financial Condition

General
 
Total assets increased to $620.9 million at March 31, 2009, compared to $570.2 million at December 31, 2008, an increase of $50.7 million, or 8.9%.  The increase in total assets was funded primarily by the growth in our deposit base, which increased by $39.3 million, or 8.3%, to $514.1 million at March 31, 2009 from $474.8 million at December 31, 2008.  Additional capital amounting to $9.0 million was provided by U.S. Government TARP funds which we obtained during the first quarter of 2009.  We also increased our liquidity with securities transactions which provided a net of $8.8 million of additional liquidity.  Funds supplied by these sources were used to increase our loan portfolio, which grew by $13.7 million, or 3.1%, to $462.5 million at March 31, 2009 compared to $448.8 million at December 31, 2008.  A significant amount of our asset growth occurred in our cash and cash equivalents, which increased by $42.9 million, or 186.5%, to $65.9 million at March 31, 2009 compared to $23.0 million at December 31, 2008.  Although we are currently experiencing reduced earnings as a result of the excess liquidity in the form of Federal funds sold and the corresponding low earning rate, management anticipates redeploying this liquidity into higher earning loans and investment securities during future periods.
 
Securities Portfolio
 
We maintain an investment portfolio to fund increased loans or decreased deposits and other liquidity needs and to provide an additional source of interest income.  The portfolio is composed of obligations of the U.S. government and agencies, government-sponsored entities, tax-exempt municipal securities and a limited amount of corporate debt securities.  All of our mortgage-backed investment securities are collateralized by pools of mortgage obligations which are guaranteed by privately managed, United States government-sponsored agencies such as Fannie Mae, Freddie Mac, Federal Home Loan Mortgage Association and Government National Mortgage Association.  At March 31, 2009, we maintained $28.3 million of mortgage-backed securities in our investment securities portfolio, all of which are current as to payment of principal and interest.
 
 
Investments totaled $56.9 million at March 31, 2009 compared to $64.7 million at December 31, 2008, a decrease of $7.8 million, or 12.1%. Investment securities purchases amounted to $9.3 million during the three months ended March 31, 2009.  Funding for the investment securities purchases came primarily from proceeds from repayments and maturities of securities, which amounted to $10.1 million and sales of securities available-for-sale, which amounted to $7.9 million during the three months ended March 31, 2009.  Included in the Company’s investment portfolio are trust preferred securities consisting of 4 single issue securities and 1 pooled issue security.  These securities have an amortized cost value of $3.3 million and a fair value of $1.3 million at March 31, 2009.  The unrealized loss on these securities is related to general market conditions and the resultant lack of liquidity in the market.  The single issue securities are from large money center banks.  The pooled instrument consists of securities issued by financial institutions and insurance companies and we hold the mezzanine tranche of such security.  Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches.  Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluations.  Consideration is given to (1) the length of time and the extent to which the fair market value of the securities has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) the current status of the underlying cash flows for both principal and interest.  As of March 31, 2009, all of these securities are current with their scheduled interest payments.  For the pooled trust preferred security, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid.  Because we believe underlying cash flows of these securities have not been impaired and the Company has the ability and intent to hold these investments until recovery or maturity, management does not consider these investments to be other than temporarily impaired at March 31, 2009.  Future deterioration in the cash flow of these instruments or the credit quality of the financial institution issuers could result in impairment charges in the future.
 
Loan Portfolio
 
The following table summarizes total loans outstanding, by loan category and amount as of March 31, 2009 and December 31, 2008.
 
   
March 31,
    
December 31,
  
   
2009
    
2008
  
   
Amount
    
Percent
    
Amount
    
Percent
  
   
(in thousands, except for percentages)
  
Commercial and industrial
   $ 130,966       28.3%     $ 120,404       26.8%  
Real estate – construction
     74,279       16.1%       76,128       17.0%  
Real estate – commercial
     174,832       37.8%       177,650       39.6%  
Real estate – residential
     25,084       5.4%       19,860       4.4%  
Consumer
     57,532       12.4%       54,890       12.2%  
Other
     56       0.0%       119       0.0%  
Unearned fees
     (283 )     (0.0)%       (271 )     (0.0)%  
Total loans
   $ 462,466       100.0%     $ 448,780       100.0%  
 
 
For the three months ended March 31, 2009, loans increased by $13.7 million, or 3.1%, to $462.5 million from $448.8 million at December 31, 2008.  For the three months ended March 31, 2009, our loan portfolio increased moderately in volume and continued to deemphasize construction lending, as we focused on maintaining our established credit culture during an increasingly difficult economic environment.
 
The Company is not involved in any sub-prime lending activity.
 
Asset Quality
 
Non-performing loans consist of non-accrual loans, loans past due 90 days or more and still accruing, and loans that have been renegotiated to provide a reduction of or deferral of interest or principal because of a weakening in the financial positions of the borrowers.  Loans are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more and the loan is not fully secured.  Any unpaid interest previously accrued on those loans is reversed from income.  Payments received on non-accrual loans are either applied to the outstanding principal or recorded as interest income, depending on management’s assessment of the collectibility of the loan.  At March 31, 2009, the Company had $12.5 million of non-accrual loans, no restructured loans, no loans past due 90 days or more and still accruing, and $4.3 million of loans which management reviewed for potential impairment but are current as to payment of principal and interest.

A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.  At March 31, 2009 and December 31, 2008, the recorded investment in loans for which impairment had been recognized in accordance with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan-an amendment of FASB Statements No. 5 and 15, totaled $16.5 and $17.7 million, respectively, of which $10.0 million and $9.3 million, respectively, required no specific allowance for loan losses.  The recorded investment in impaired loans requiring a specific allowance for loan losses was $7.8 million and $8.4 million at March 31, 2009 and December 31, 2008, respectively.  The allowance allocated to these impaired loans was $2.0 million and $2.3 million at March 31, 2009 and December 31, 2008, respectively.

At December 31, 2008, the Company had $13.0 million of non-accrual loans, no restructured loans, and no loans past due 90 days or more and still accruing.  The Company also had $1.0 million of other real estate owned due to foreclosure at March 31, 2009 compared to none at December 31, 2008.

Allowance for Loan Losses
 
The following table summarizes our allowance for loan losses for the three months ended March 31, 2009 and 2008 and for the year ended December 31, 2008.
 
 
   
March 31,
    
December 31,
  
   
2009
    
2008
    
2008
  
   
(in thousands, except percentages)
  
                   
Balance at beginning of year
   $ 6,815     $ 4,675     $ 4,675  
Provision charged to expense
     150       85       2,301  
Loans (charged off) recovered, net
     (231 )     -       (161 )
                         
Balance of allowance at end of period
   $ 6,734     $ 4,760     $ 6,815  
                         
Ratio of net charge-offs to average
loans outstanding
     0.05 %     0.00 %     0.04 %
                         
Balance of allowance as a percent of
        loans at period-end
     1.46 %     1.12 %     1.52 %


The allowance for loan losses is a valuation reserve available for losses incurred or expected on extensions of credit.  Additions are made to the allowance through periodic provisions that are charged to expense.
 
All losses of principal are charged to the allowance when incurred or when a determination is made that a loss is expected.  Subsequent recoveries, if any, are credited to the allowance.
 
We attempt to maintain an allowance for loan losses at a sufficient level to provide for probable losses in the loan portfolio.  Risks within the loan portfolio are analyzed on a continuous basis by the bank’s senior management, outside independent loan review auditors, directors’ loan committee, and board of directors.  A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and set appropriate reserves.  Along with the risk system, senior management evaluates risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors management feels deserve recognition in establishing an appropriate reserve.  Although management attempts to maintain the allowance at a level deemed adequate, future additions to the allowance may be necessary based upon changes in market conditions, either generally or specific to our area, or changes in the circumstances of particular borrowers.  In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Company to take additional provisions based on their judgments about information available to them at the time of their examination.
 
Bank-owned Life Insurance
 
During 2004, we invested in $3.5 million of bank-owned life insurance as a source of funding for employee benefit expenses and for the Company’s non-qualified Supplemental Executive Retirement Plan for certain executive officers implemented in 2004 that provides for payments upon retirement, death or disability.  Expenses related to the Salary Continuation Plan were approximately $16,000 and $19,000 for the quarters ended March 31, 2009 and 2008, respectively.  Bank-owned life insurance involves our purchase of life insurance on a chosen group of officers.  We are the owner and beneficiary of the policies.  Increases in the cash surrender values of this investment are recorded in other income in the statements of income.
 
 
In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”).  EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement.  The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee.  For transition, an entity can choose to apply the guidance using either the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption.  The EITF is effective for fiscal years beginning after December 15, 2007, with early adoption permitted.  The Company chose approach (b) and recorded a cumulative effect adjustment as of January 1, 2008 to the balance of retained earnings of $385,000, with approximately $16,000 and $13,000 of expense recorded during the first quarter of 2009 and 2008, respectively.
 
Bank-owned life insurance increased by $35 thousand during the three months ended March 31, 2009 as a result of increases in the cash surrender value of this investment, which amounted to $4.1 million at March 31, 2009.
 
Premises and Equipment
 
Premises and equipment totaled approximately $5.4 million and $5.7 million at March 31, 2009 and December 31, 2008, respectively.  Although the Company purchased premises and equipment amounting to $55 thousand primarily to replace fully depreciated and un-repairable equipment in the first quarter of 2009, the Company’s premises and equipment decreased, as such purchases were more than offset by depreciation expenses totaling $279 thousand.

Intangible Assets

Intangible assets totaled $25.9 million at March 31, 2009 compared to $26.0 million at December 31, 2008.  The Company’s intangible assets at March 31, 2009 were comprised of $24.8 million of goodwill and $1.1 million of core deposit intangibles, net of accumulated amortization of $1.0 million.  At December 31, 2008, the Company’s intangible assets were comprised of $24.8 million of goodwill and $1.1 million of core deposit intangibles, net of accumulated amortization of $957 thousand.
 
LIABILITIES

Deposits

Deposits are the primary source of funds used by the Company in lending and for general corporate purposes.  In addition to deposits, Community Partners may derive funds from principal repayments on loans, the sale of loans and securities designated as available for sale, maturing investment securities and borrowing from financial intermediaries.  The level of deposit liabilities may vary significantly and is dependent upon prevailing interest rates, money market conditions, general economic conditions and competition. The Company’s deposits consist of checking, savings and money market accounts along with certificates of deposit and individual retirement accounts.  Deposits are obtained from individuals, partnerships, corporations, unincorporated businesses and non-profit organizations throughout the Company’s market area.  We attempt to control the flow of deposits primarily by pricing our deposit offerings to be competitive with other financial institutions in our market area, but not necessarily offering the highest rate.

 
At March 31, 2009, total deposits amounted to $514.1 million, reflecting an increase of $39.3 million, or 8.3%, from December 31, 2008.  Decreases in certificates of deposit balances and money market account balances, were more than offset by increases in our savings account deposits.  The net increase in our deposits was due to our pricing strategies, as we balanced our desire to retain and grow deposits with asset funding needs and interest expense costs.  Banks generally prefer to increase non-interest-bearing deposits, as this lowers the institution’s costs of funds.  However, due to market rate changes and competitive pressures, we have found savings account promotions and promotions of other interest-bearing deposit products, excluding high-cost certificates of deposit, to be our most efficient and cost-effective source to fund our loan originations at present.
 
Core deposits consist of all deposits, except certificates of deposit in excess of $100 thousand.  Core deposits at March 31, 2009 accounted for 84.7% of total deposits, compared to 86.8% at December 31, 2008.  During the three months ended March 31, 2009, the Company marketed savings account products and other interest-bearing deposit products instead of promoting certificates of deposit, for the purpose of increasing deposits to fund the loan portfolio and increase liquidity.  The Company found this strategy was able to provide a more cost-effective source of funding when used in conjunction with the utilization of our borrowing lines at the Federal Home Loan Bank of New York (“FHLB”) and other correspondents.  However, during the quarter ended March 31, 2009, we experienced an increase in our certificates of deposit over $100 thousand, which increased from $62.9 million at December 31, 2008 to $78.5 million at March 31, 2009.  We believe the increase in our balance of certificates of deposit over $100 thousand to be the result of the “CDARS” product, which is a deposit gathering tool that supplies customers with higher limits for insured certificate of deposit balances.
 
Borrowings
 
Our bank utilizes its account relationship with Atlantic Central Bankers Bank to borrow funds through its Federal funds borrowing line in an aggregate amount up to $10.0 million.  These borrowings are priced on a daily basis.  There were no borrowings under this line at March 31, 2009 and December 31, 2008.  The bank also maintains secured borrowing lines with the FHLB in an amount of up to approximately $69.0 million.  At March 31, 2009 and December 31, 2008, we had no short-term borrowings under this line.
 
Long-term debt consists of a $7.5 million convertible note due in November 2017 at an interest rate of 3.965% from the FHLB that is collateralized by a portion of the bank’s real estate-collateralized loans.  The convertible note contains an option which allows the FHLB to adjust the rate on the note in November 2012 to the then-current market rate offered by the FHLB.  The Company has the option to repay this advance, if converted, without penalty.
 
Repurchase Agreements
 
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days after the transaction date.  Securities sold under agreements to repurchase are reflected as the amount of cash received in connection with the transaction.  The Company may be required to provide additional collateral based on the fair value of the underlying securities.  Securities sold under agreements to repurchase increased to $13.5 million at March 31, 2009 from $11.4 million at December 31, 2008, an increase of $2.1 million, or 18.4%.
 
 
Liquidity
 
Liquidity defines the Company’s ability to generate funds to support asset growth, meet deposit withdrawals, maintain reserve requirements and otherwise operate on an ongoing basis.  An important component of the Company’s asset and liability management structure is the level of liquidity available to meet the needs of our customers and requirements of our creditors.  The liquidity needs of our bank subsidiary are primarily met by cash on hand, Federal funds sold position, maturing investment securities and short-term borrowings on a temporary basis.  Our bank invests the funds not needed to meet its cash requirements in overnight Federal funds sold.  With adequate deposit inflows coupled with the above-mentioned cash resources, management is maintaining short-term assets which we believe are sufficient to meet our liquidity needs.  At March 31, 2009, the Company had $53.5 million of Federal funds sold, compared to $14.9 million of Federal funds sold at December 31, 2008.  The increase in Federal funds sold was primarily due to cash inflows resulting from our deposit growth exceeding our loan growth and the investment securities transactions and TARP transaction previously discussed.
 
Off-Balance Sheet Arrangements
 
The Company’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business.  These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.
 
Management believes that any amounts actually drawn upon these commitments can be funded in the normal course of operations.  The following table sets forth our off-balance sheet arrangements as of March 31, 2009 and December 31, 2008:
 
   
March 31,
2009
    
December 31,
2008
  
   
(Dollars in thousands)
  
Commercial lines of credit
   $ 57,464     $ 41,220  
One-to-four family residential lines of credit
     29,517       29,257  
Commitments to grant commercial and construction
       loans secured by real estate
     30,910       32,092  
Commercial and financial letters of credit
     9,584       8,651  
    $ 127,475     $ 111,220  
 
Capital
 
Shareholders’ equity increased by approximately $9.2 million, or 12.6%, to $82.5 million at March 31, 2009 compared to $73.3 million at December 31, 2008.  Net income for the three-month period ended March 31, 2009 added $512 thousand to shareholders’ equity.  Shareholders’ equity was also increased by stock option compensation amounting to $83 thousand, $9.0 million in TARP proceeds as previously discussed, and was reduced by $76 thousand pertaining to cash dividends accrued on preferred stock.  These changes in shareholders’ equity were further decreased by net unrealized losses on securities available for sale, net of tax, amounting to $379 thousand.
 
The Company and the subsidiary bank are subject to various regulatory and capital requirements administered by the Federal banking agencies.  Our regulators, the Board of Governors of the Federal Reserve System (which regulates bank holding companies) and the Federal Deposit Insurance Corporation (which regulates the subsidiary bank), have issued guidelines classifying and defining capital.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The capital amounts and classification of the Company and its subsidiary bank is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
 
Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary bank to maintain minimum amounts and ratios, set forth in the following tables of Tier 1 Capital to Average Assets (Leverage Ratio), Tier 1 Capital to Risk Weighted Assets and Total Capital to Risk Weighted Assets.  Management believes that, at March 31, 2009, the Company and the bank subsidiary met all capital adequacy requirements to which they are subject.
 
The capital ratios of Community Partners and its subsidiary bank, Two River, at March 31, 2009 and December 31, 2008, are presented below.
 
 
Tier I
Capital to
Average Assets Ratio
(Leverage Ratio)
  
Tier I
Capital to
Risk Weighted
Assets Ratio
  
Total Capital to
Risk Weighted
Assets Ratio
 
March 31,
2009
  
Dec. 31,
2008
  
March 31,
2009
  
Dec. 31,
2008
  
March 31,
2009
  
Dec. 31,
2008
Community Partners
  9.94%
  
8.53%
  
   11.39%
  
10.00%
  
           12.64%
  
11.25%
Two River
9.13%
  
8.38%
  
11.23%
  
9.80%
  
12.48%
  
11.05%
                       
“Adequately capitalized” institution (under Federal regulations)
4.00%
  
4.00%
  
4.00%
  
4.00%
  
8.00%
  
8.00%
                       
“Well capitalized” institution
(under Federal regulations)
5.00%
  
5.00%
  
6.00%
  
6.00%
  
10.00%
  
10.00%

 
Item 3.            Quantitative and Qualitative Disclosures About Market Risk
 
Not required.

Item 4.            Controls and Procedures.
 
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
 
 
The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.  Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
 
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
PART II.   OTHER INFORMATION                              
 
Item 6.   Exhibits.       
         
 
10.1
*
#
First Amendment to the Two River Community Bank Supplemental Executive Retirement Agreement dated January 1, 2005 by and between Two River Community Bank and Barry B. Davall, effective as of January 1, 2005
         
 
10.2
*
#
First Amendment to Change in Control and Assumption Agreement dated June 1, 2007 (the “2007 Davall CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and Barry B. Davall, made as of October 31, 2008
         
 
10.3
*
#
Continuation of Benefits Agreement, made as of October 31, 2008, by and between Community Partners Bancorp, Two River Community Bank and Barry B. Davall related to the 2007 Davall CIC Agreement
         
 
10.4
*
#
First Amendment to Change in Control Agreement dated December 14, 2004 (the “2004 Davall CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and Barry B. Davall, made as of October 31, 2008
         
 
10.5
*
#
Continuation of Benefits Agreement, made as of October 31, 2008, by and between Community Partners Bancorp, Two River Community Bank and Barry B. Davall related to the 2004 Davall CIC Agreement
         
 
10.6
*
#
First Amendment to Excise Tax Reimbursement Agreement dated on and as of June 1, 2007 by and between Community Partners Bancorp and Barry B. Davall, entered into as of October 31, 2008
         
 
10.7
*
#
First Amendment to the Two River Community Bank Supplemental Executive Retirement Agreement dated January 1, 2005 by and between Two River Community Bank and Michael J. Gormley, effective as of January 1, 2005
 
 
 
10.8
*
#
First Amendment to Change in Control and Assumption Agreement dated June 1, 2007 (the “2007 Gormley CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and Michael J. Gormley, made as of October 30, 2008
         
 
10.9
*
#
Continuation of Benefits Agreement, made as of October 30, 2008, by and between Community Partners Bancorp, Two River Community Bank and Michael J. Gormley related to the 2007 Gormley CIC Agreement
         
 
10.10
*
#
First Amendment to Change in Control Agreement dated December 9, 2004 (the “2004 Gormley CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and Michael J. Gormley, made as of October 30, 2008
         
 
10.11
*
#
Continuation of Benefits Agreement, made as of October 30, 2008, by and between Community Partners Bancorp, Two River Community Bank and Michael J. Gormley related to the 2004 Gormley CIC Agreement
         
 
10.12
*
#
First Amendment to Excise Tax Reimbursement Agreement dated on and as of June 1, 2007 by and between Community Partners Bancorp and Michael J. Gormley, entered into as of October 30, 2008
         
 
10.13
*
#
First Amendment to the Two River Community Bank Supplemental Executive Retirement Agreement dated July 7, 2005 by and between Two River Community Bank and William D. Moss, effective as of January 1, 2005
         
 
10.14
*
#
First Amendment to Change in Control and Assumption Agreement dated June 1, 2007 (the “2007 Moss CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and William D. Moss, made as of October 31, 2008
         
 
10.15
*
#
Continuation of Benefits Agreement, made as of October 31, 2008, by and between Community Partners Bancorp, Two River Community Bank and William D. Moss related to the 2007 Moss CIC Agreement
         
 
10.16
*
#
First Amendment to Change in Control Agreement dated December 27, 2004 (the “2004 Moss CIC Agreement”) by and between Community Partners Bancorp, Two River Community Bank and William D. Moss, made as of October 31, 2008
 
 
 
10.17
*
#
Continuation of Benefits Agreement, made as of October 31, 2008, by and between Community Partners Bancorp, Two River Community Bank and William D. Moss related to the 2004 Moss CIC Agreement
         
 
10.18
*
#
First Amendment to Excise Tax Reimbursement Agreement dated on and as of June 1, 2007 by and between Community Partners Bancorp and William D. Moss, entered into as of October 31, 2008
         
 
10.19
*
#
First Amendment to the Two River Community Bank Supplemental Executive Retirement Agreement dated January 1, 2005 by and between Two River Community Bank and Antha J. Stephens, effective as of January 1, 2005
         
 
10.20
*
#
First Amendment to the Two River Community Bank Supplemental Executive Retirement Agreement dated January 1, 2005 by and between Two River Community Bank and Alan B. Turner, effective as of January 1, 2005
         
 
10.21
    
Letter Agreement, dated January 30, 2009, including Securities Purchase Agreement – Standard Terms incorporated by reference therein, between the Registrant and the United States Department of the Treasury, with respect to the issuance and sale of the Senior Preferred Stock and the Warrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 30, 2009)
         
 
10.22
  
#
Form of Waiver, executed by each of Messrs. Barry B. Davall, Michael J. Gormley and William D. Moss (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 30, 2009)
         
 
10.23
  
#
Form of Senior Executive Officer Agreement, executed by each of Messrs. Barry B. Davall, Michael J. Gormley and William D. Moss (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 30, 2009)
         
 
31.1
*
  
Certification of Charles T. Parton, interim president and principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
         
 
31.2
*
  
Certification of Michael J. Gormley, principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
         
 
32
*
  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Charles T. Parton, interim president and principal executive officer of the Company, and Michael J. Gormley, principal financial officer of the Company
         
_____________________
*           Filed herewith.
#           Management contract or compensatory plan or arrangement.
 
SIGNATURES
 
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.

 
  COMMUNITY PARTNERS BANCORP  
       
       
Date: May 15, 2009  
By:
/s/ CHARLES T. PARTON  
    Charles T. Parton  
    Interim President and Chief Executive Officer   
    (Principal Executive Officer)   
 
       
Date: May 15, 2009  
By:
/s/ MICHAEL J. GORMLEY        
    Michael J. Gormley  
   
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
  
    (Principal Financial Officer)   
 
34