Edgar Filing: Community Partners Bancorp

b51310010q.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, 2010
	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 May 5, 2010, there were 7,192,492 shares of the registrant’s common stock, no par value, outstanding.

COMMUNITY PARTNERS BANCORP

FORM 10-Q

INDEX

				Page
PART I.			FINANCIAL INFORMATION

	Item 1.	Financial Statements		3

			Consolidated Balance Sheets (unaudited) at March 31, 2010 and December 31, 2009	3

			Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2010 and 2009	4

			Consolidated Statements of Shareholders’ Equity (unaudited) for the three months ended March 31, 2010 and 2009	5

			Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009	6

			Notes to Consolidated Financial Statements (unaudited)	7

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	35

	Item 4T.		Controls and Procedures	35

PART II.			OTHER INFORMATION

	Item 6.		Exhibits	36

SIGNATURES				37

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COMMUNITY PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

At March 31, 2010 and December 31, 2009

(in thousands, except share data)

	March 31,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	73,586		$	6,841
Federal funds sold		7,000			35,894

Cash and cash equivalents		80,586			42,735

Securities available-for-sale		33,020			37,690
Securities held-to-maturity (fair value of $11,743 and $10,266 at March 31, 2010 and December 31, 2009, respectively)		11,938			10,618
Restricted stocks, at cost		1,000			1,000

Loans		507,958			513,399
Allowance for loan losses		(6,884	)		(6,184	)

Net loans		501,074			507,215

Bank-owned life insurance		7,883			7,770
Premises and equipment, net		3,567			3,764
Accrued interest receivable		1,887			1,876
Goodwill		18,109			18,109
Other intangible assets, net of accumulated amortization of $1,302 and $1,235 at March 31, 2010 and December 31, 2009, respectively		804			871
Other real estate owned		706			-
Other assets		7,591			8,380

TOTAL ASSETS	$	668,165		$	640,028


LIABILITIES
Deposits:
Non-interest bearing	$	76,152		$	69,980
Interest bearing		488,478			465,432

Total Deposits		564,630			535,412

Securities sold under agreements to repurchase		15,349			17,065
Accrued interest payable		133			164
Long-term debt		7,500			7,500
Other liabilities		3,091			3,050

Total Liabilities		590,703			563,191

SHAREHOLDERS' EQUITY
Preferred stock, no par value; 6,500,000 shares authorized; $1,000
liquidation preference per share, 9,000 shares issued and outstanding
at March 31, 2010 and at December 31, 2009, respectively		8,538			8,508
Common stock, no par value; 25,000,000 shares authorized; 7,185,797
and 7,182,397 shares issued and outstanding at March 31, 2010 and
at December 31, 2009, respectively		69,833			69,794
Accumulated deficit		(1,224	)		(1,714	)
Accumulated other comprehensive income		315			249

Total Shareholders' Equity		77,462			76,837

TOTAL LIABILITIES and SHAREHOLDERS’ EQUITY	$	668,165		$	640,028

See notes to the unaudited consolidated financial statements.

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended March 31, 2010 and 2009

(In thousands, except per share data)

	Three Months Ended
	March 31,
	2010			2009
INTEREST INCOME:
Loans, including fees	$	7,193		$	6,467
Investment securities		448			669
Federal funds sold and interest bearing balances		17			18
Total Interest Income		7,658			7,154
INTEREST EXPENSE:
Deposits		1,692			2,471
Securities sold under agreements to repurchase		53			70
Borrowings		74			74
Total Interest Expense		1,819			2,615
Net Interest Income		5,839			4,539
PROVISION FOR LOAN LOSSES		700			150
Net Interest Income after Provision for Loan Losses		5,139			4,389
NON-INTEREST INCOME:
Service fees on deposit accounts		133			156
Other loan fees		147			116
Earnings from investment in life insurance		89			35
Net realized gain on sale of securities		-			487
Other income		111			80
Total Non-Interest Income		480			874
NON-INTEREST EXPENSES:
Salaries and employee benefits		2,337			2,339
Occupancy and equipment		873			848
Professional		213			183
Insurance		81			50
FDIC insurance		264			170
Advertising		75			76
Data processing		150			242
Outside services fees		122			135
Amortization of identifiable intangibles		67			77
Other operating		456			347
Total Non-Interest Expenses		4,638			4,467
Income before Income Taxes		981			796
INCOME TAX EXPENSE		348			284
Net Income		633			512
Preferred stock dividend and discount accretion		(143	)		(96	)
Net income available to common shareholders	$	490		$	416
EARNINGS PER COMMON SHARE:
Basic	$	0.07		$	0.06
Diluted	$	0.07		$	0.06
Weighted average common shares outstanding:
Basic		7,183			7,169
Diluted		7,194			7,175

See notes to the unaudited consolidated financial statements.

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2010 and 2009

(Dollar amounts in thousands)

			Common Stock				(Accumulated			Accumulated
	Preferred Stock		Outstanding Shares		Amount		Deficit) Retained Earnings			Other Comprehensive Income (loss)			Total Shareholders’ Equity

Balance, January 1, 2010	$	8,508		7,182,397	$	69,794	$	(1,714	)	$	249		$	76,837

Comprehensive income:
Net income		-		-		-		633			-			633
Change in net unrealized gain (loss) on securities available for sale, net of reclassification adjustment and tax		-		-		-		-			66			66

Total comprehensive income		-		-		-		-			-			699

Preferred stock discount accretion		30		-		-		(30	)		-			-

Dividends on preferred stock		-		-		-		(113	)		-			(113	)

Options exercised		-		3,400		14		-			-			14

Stock option compensation expense		-		-		25		-			-			25

Balance, March 31, 2010	$	8,538		7,185,797	$	69,833	$	(1,224	)	$	315		$	77,462

Balance January 1, 2009	$	-		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		-		-		-		-			(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

See notes to the unaudited consolidated financial statements.

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Three Months Ended March, 2010 and 2009

	Three Months Ended March 31,
	2010			2009
	(in thousands)
Cash flows from operating activities:
Net income	$	633		$	512
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization		247			279
Provision for loan losses		700			150
Intangible amortization		67			77
Net amortization of securities premiums and discounts		30			10
Net realized gain on sale of securities available for sale		-			(487	)
Earnings from investment in life insurance		(89	)		(35	)
Stock option compensation expense		25			83
Net realized gain on sale of foreclosed real estate		(46	)		-
Decrease (increase) in assets:
Accrued interest receivable		(11	)		(41	)
Other assets		750			(646	)
(Decrease) increase in liabilities:
Accrued interest payable		(31	)		(81	)
Other liabilities		41			131
Net cash provided by (used in) operating activities		2,316			(48	)
Cash flows from investing activities:
Purchase of securities available for sale		-			(9,269	)
Purchase of securities held to maturity		(1,823	)		(1,183	)
Proceeds from sales of securities available for sale		-			7,940
Proceeds from repayments, calls and maturities of securities available for sale		4,748			10,100
Proceeds from repayment and maturities of securities held to maturity		500			-
Purchase of bank-owned life insurance		(24	)		-
Net decrease (increase) in loans		2,503			(14,942	)
Purchases of premises and equipment		(50	)		(55	)
Proceeds from sale of foreclosed real estate		2,278			-
Net cash provided by (used in) investing activities		8,132			(7,409	)
Cash flows from financing activities:
Net increase in deposits		29,218			39,227
Net (decrease) increase in securities sold under agreements to repurchase		(1,716	)		2,127
Proceeds from issuance of preferred stock		-			9,000
Cash dividend paid on preferred stock		(113	)		-
Proceeds from exercise of stock options		14			-
Net cash provided by financing activities		27,403			50,354
Net increase in cash and cash equivalents		37,851			42,897
Cash and cash equivalents – beginning		42,735			23,017

Cash and cash equivalents - ending	$	80,586		$	65,914
Supplementary cash flow information:
Interest paid	$	1,850		$	2,696
Income taxes paid	$	-		$	1,476
Supplementary schedule of non-cash activities:
Other real estate acquired in settlement of loans	$	2,938		$	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” or the “Bank”), and Two River’s wholly-owned subsidiary, TRCB Investment Corporation, and wholly-owned trust, Two River Community Bank Employer’s Trust. 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 pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 8 of Regulation S-X. 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, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2009 included in the Community Partners Annual Report on Form 10-K filed with the SEC on March 31, 2010 (the “2009 Form 10-K”). For a description of the Company’s significant accounting policies, refer to Note 1 of the Notes to Consolidated Financial Statements in the 2009 Form 10-K.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2010 for items that should potentially be recognized or disclosed in these financial statements.

Certain amounts in the Consolidated Statements of Operations for the three months ended March 31, 2009 have been reclassified to conform with the presentation used in the Consolidated Statement of Operations for the three months ended March 31, 2010. These reclassifications had no effect on net income.

NOTE 2 – NEW ACCOUNTING STANDARDS

In October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. The amendments in this Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This Update is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of ASU 2009-16 did not have a material impact on our financial position or results of operations.

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurements as set forth in Codification Subtopic 820-10. The FASB‘s objective is to improve these disclosures and, thus, increase transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

For purposes of reporting fair value measurements for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuance, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years after December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted. The Company has evaluated the impact the adoption of ASU 2010-06, and has determined that it did not and will not have any impact on our financial position or results of operations.

The FASB has issued ASU 2010-08, Technical Corrections to Various Topics, thereby amending the Codification. This ASU resulted from a review by the FASB of its standards to determine if any provisions are outdated, contain inconsistencies, or need clarifications to reflect the FASB’s original intent. The FASB believes the amendments do not fundamentally change U.S. GAAP. However, certain clarifications on embedded derivatives and hedging reflected in Topic 815, Derivatives and Hedging, may cause a change in the application of the guidance in Subtopic 815-15. Accordingly, the FASB provided special transition provisions for those amendments.

ASU 2010-08 contains various effective dates. The clarifications of the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income taxes in a reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are effective as of the first reporting period (including interim periods) beginning after the date this ASU was issued (February 2, 2010). The adoption of ASU 2010-08 did not have a material impact on our financial position or results of operations.

The FASB has issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

In addition, the amendments in this ASU require an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date.

All of the amendments in this ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company has evaluated the impact the adoption of ASU 2010-09, and has determined that it did not and will not have any impact on our financial position or results of operations.

The FASB issued ASU 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The Company has evaluated the impact of the adoption of ASU 2010-13,and has determined that it will not have any impact on our financial position or results of operations.

NOTE 3 – GOODWILL

The Company’s goodwill was recognized in connection with the acquisition of The Town Bank, (“Town Bank”) in April 2006. Accounting principles generally accepted in the United States of America requires that goodwill be tested for impairment annually or more frequently if impairment indicators arise utilizing a two-step methodology. Step one requires the Company to determine the fair value of the reporting unit and compare it to the carrying value, including goodwill, of such reporting unit. The reporting unit was determined to be our community banking operations, which is our only operating segment. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to determine the amount of impairment, if any. The second step compares the fair value of the reporting unit to the aggregate fair values of its individual assets, liabilities and identified intangibles.

The Company performed its goodwill impairment analysis as of September 30, 2009 and based on the results, recorded a $6.7 million impairment charge for the three months ended September 30, 2009.

The $6.7 million goodwill impairment charge was non-deductible for income tax purposes. In addition, since goodwill is excluded from regulatory capital, the impairment charge did not impact the Company’s regulatory capital ratios.

The following table summarizes the changes in goodwill:

	Three Months Ended
	March 31,
	2010		2009
	(in thousands)
Balance at beginning of year	$	18,109	$	24,834
Goodwill impairment		-		-

Balance at end of period	$	18,109	$	24,834

NOTE 4 – 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 25, 2009 and paid October 23, 2009 to shareholders of record as of September 25, 2009.

The following table sets forth the computations of basic and diluted earnings per common share:

	Three Months Ended March 31,
	2010			2009
	(dollars in thousands, except per share data)
Net income	$	633		$	512
Preferred stock dividend and discount accretion		(143	)		(96	)

Net income available to common shareholders	$	490		$	416

Weighted average common shares outstanding		7,182,719			7,168,616
Effect of dilutive securities, stock options and warrants		11,115			6,047

Weighted average common shares outstanding used to calculate diluted earnings per common share		7,193,834			7,174,663

Basic earnings per common share	$	0.07		$	0.06
Diluted earnings per common share	$	0.07		$	0.06

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 1,101,396 and 1,334,368 for the three-month periods ended March 31, 2010 and 2009, respectively.

Note 5 – SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s securities are summarized as follows:

			Gross		Gross Unrealized Losses
(dollars in thousands)	Amortized Cost		Unrealized Gains		Noncredit OTTI			Other			Fair Value

March 31, 2010:
Securities available for sale
U.S. Government agency securities	$	8,057	$	56	$	-		$	(7	)	$	8,106
Municipal securities		2,009		29		-			(10	)		2,028
U.S. Government-sponsored enterprises (“GSE”) – Mortgage-backed securities		17,108		926		-			-			18,034
Collateralized mortgage obligations		1,856		26		-			(3	)		1,879
Corporate debt securities		2,317		28		(242	)		(294	)		1,809

		31,347		1,065		(242	)		(314	)		31,856

Mutual fund		1,146		18		-			-			1,164

	$	32,493	$	1,083	$	(242	)	$	(314	)	$	33,020
Securities held to maturity:
U.S. Government agency securities	$	1,000	$	2	$	-		$	-		$	1,002
Municipal securities		8,624		237		-			(4	)		8,857
Corporate debt securities		2,314		16		-			(446	)		1,884

	$	11,938	$	255	$	-		$	(450	)	$	11,743

			Gross		Gross Unrealized Losses
(dollars in thousands)	Amortized Cost		Unrealized Gains		Noncredit OTTI			Other			Fair Value

December 31, 2009:

Securities available for sale:
U.S. Government agency securities	$	11,068	$	83	$	-		$	(49	)	$	11,102
Municipal securities		2,011		26		-			(12	)		2,025
U.S. Government-sponsored enterprises (“GSE”) – Mortgage-backed securities		18,769		838		-			(1	)		19,606
Collateralized mortgage obligations		1,961		22		-			(5	)		1,978
Corporate debt securities		2,323		29		(204	)		(310	)		1,838

		36,132		998		(204	)		(377	)		36,549

Mutual fund		1,136		5		-			-			1,141

	$	37,268	$	1,003	$	(204	)	$	(377	)	$	37,690

Securities held to maturity:
U.S. Government agency securities	$	1,000	$	-	$	-	$	(21	)	$	979
Municipal securities		6,802		214		-		(5	)		7,011
Corporate debt securities		2,816		16		-		(556	)		2,276

	$	10,618	$	230	$	-	$	(582	)	$	10,266

The amortized cost and fair value of the Company’s debt securities at March 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
		(in thousands)

Due in one year or less	$	1,555	$	1,566	$	2,496	$	2,512
Due in one year through five years		5,525		5,554		1,222		1,304
Due in five years through ten years		-		-		2,059		2,125
Due after ten years		7,159		6,702		6,161		5,802

		14,239		13,822		11,938		11,743
GSE – Mortgage-backed securities		17,108		18,034		-		-

	$	31,347	$	31,856	$	11,938	$	11,743

During the three months ended March 31, 2010, the Company had no securities sales. During the three months ended March 31, 2009, the Company sold $7,940,000 of securities available-for-sale and realized gross gains of $487,000 and no losses on these sales.

Certain of the Company’s investment securities, totaling $17,397,000 and $19,544,000 at March 31, 2010 and December 31, 2009, respectively, were pledged as collateral to secure securities sold under agreements to repurchase and public deposits as required or permitted by law.

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)

March 31, 2010:
U.S. Government agency securities	$	2,993	$	(7	)	$	-	$	-		$	2,993	$	(7	)
Municipal securities		2,739		(14	)		-					2,739		(14	)
Collateralized mortgage obligations		-		-			199		(3	)		199		(3	)
Corporate debt securities		-		-			2,160		(982	)		2,160		(982	)

Total Temporarily
Impaired Securities	$	5,732	$	(21	)	$	2,359	$	(985	)	$	8,091	$	(1,006	)

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
December 31, 2009:
U.S. Government agency securities	$	4,930	$	(70	)	$	-	$	-		$	4,930	$	(70	)
Municipal securities		1,341		(17	)		-		-			1,341		(17	)
GSE – Mortgage-backed securities		42		(1	)		-		-			42		(1	)
Collateralized mortgage obligations		325		(5	)		-		-			325		(5	)
Corporate debt securities		-		-			2,071		(1,070	)		2,071		(1,070	)

Total Temporarily
Impaired Securities	$	6,638	$	(93	)	$	2,071	$	(1,070	)	$	8,709	$	(1,163	)

The Company had 11 securities and 16 securities in an unrealized loss position at March 31, 2010 and December 31, 2009, respectively. In management’s opinion, the unrealized losses in municipal, U.S. Government agency, collateralized mortgage obligations and U.S. GSE mortgage-backed securities reflect changes in interest rates subsequent to the acquisition of specific securities. The unrealized loss for corporate debt securities reflects a widening of spreads due to the liquidity and credit concerns in the financial markets. The Company does not intend to sell these debt securities prior to recovery and it is more likely than not that the Company will not have to sell these debt securities prior to recovery.

Included in corporate debt securities are four individual trust preferred securities issued by large financial institutions with Moody’s ratings from A2 to Baa3. As of March 31, 2010, all of these securities are current with their scheduled interest payments. These single issue securities are from large money center banks. Management concluded that these securities were not other-than-temporarily impaired as of March 31, 2010.

The Company also has one pooled trust preferred security with a Moody’s rating of Ca included in corporate debt securities. This pooled trust preferred security has been remitting reduced amounts of interest as some individual participants of the pool have deferred interest payments. 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. For the pooled trust preferred security, management reviewed expected cash flows and credit support and determined it was not probable that all principal and interest would be repaid. The most significant input to the expected cash flow model was the assumed default rate for each pooled trust preferred security. Financial metrics, such as capital ratios and non-performing asset ratios, of each individual financial institution issuer that comprises the pooled trust preferred securities were evaluated to estimate the expected default rates for each security. Total impairment on this security was $398,000 at March 31, 2010. As the Company does not intend to sell this security and it is more likely than not that the Company will not be required to sell this security, only the credit loss portion of other-than-temporary impairment in the amount of $156,000 was recognized in operations during 2009 and no impairment was recognized in operations for the three months ended March 31, 2010. The remaining $242,000 was recognized in other comprehensive income. Future deterioration in the cash flow of these instruments or the credit quality of the financial institution issuers could result in additional impairment charges in the future.

NOTE 6 – OTHER COMPREHENSIVE INCOME (LOSS)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income (loss).

The components of other comprehensive income (loss) and related tax effects for the three months ended March 31, 2010 and 2009 are as follows:

		Three Months Ended March 31,
		2010			2009
		(dollars in thousands)
Unrealized holding gains (losses) on available for sale securities		$	143		$	(151	)
Unrealized losses on securities for which a portion of the impairment has been recognized in income			(38	)		-
Less:	Reclassification adjustments for gains (losses) included in net income		-			487
			105			(638	)
Tax effect			(39	)		259

Net unrealized (losses) gains		$	66		$	(379	)

NOTE 7 – 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 at the time of the acquisition.

On March 20, 2007, the Board of Directors adopted the Community Partners Bancorp 2007 Equity Incentive Plan (the “Plan”), subject to shareholder approval. 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. As of March 31, 2010, the number of shares of Company common stock remaining and available for future issuance under the Plan is 350,055 after adjusting for the 3% stock dividends declared in 2009 and 2008.

Options awarded under the Plan may be either options that qualify as incentive stock options (“ISOs”) under section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or options that do not, or cease to, qualify as incentive stock options under the Code (“nonqualified stock options” or “NQSOs”). Awards may be granted under the Plan to directors and employees.

Shares delivered under the Plan will be issued out of authorized and unissued shares, or treasury shares, or partly out of each, as determined by the Board. The exercise price per share purchasable under either an ISO or a NQSO may not be less than the fair market value of a share of stock on the date of grant of the option. The Committee will determine the vesting period and term of each option, provided that no ISO may have a term in excess of ten years after the date of grant.

Restricted stock is stock which is subject to certain transfer restrictions and to a risk of forfeiture. The Committee will determine the period over which any restricted stock which is issued under the Plan will vest, and will impose such restrictions on transferability, risk of forfeiture and other restrictions as the Committee may in its discretion determine. Unless restricted by the Committee, a participant granted restricted stock will have all of the rights of a shareholder, including the right to vote the restricted stock and the right to receive dividends with respect to that stock.

Unless otherwise provided by the Committee in the award document or subject to other applicable restrictions, in the event of a Change in Control (as defined in the Plan) all non-forfeited options and awards carrying a right to exercise that was not previously exercisable and vested will become fully exercisable and vested as of the time of the Change in Control, and all restricted stock and awards subject to risk of forfeiture will become fully vested.

On January 20, 2010, the Committee granted options to purchase an aggregate of 44,100 shares of Company’s common stock under the Plan to certain officers of the Company, as follows:

The Company granted to employees ISO’s to purchase an aggregate of 44,100 shares of Company’s common stock. These options are scheduled to vest 33.3% per year over three years beginning January 20, 2011 with a ten year exercise term. The options were granted with an exercise price of $3.25 per share based upon the average trading price of Company’s common stock on the grant date.

Stock based compensation expense related to all grants, was approximately $25,000 and $83,000 during the three months ended March 31, 2010 and 2009, respectively, and is included in salaries and employee benefits on the statements of operations.

Total unrecognized compensation cost related to non-vested options under the Plan was $376,000 as of March 31, 2010 and will be recognized over the subsequent 3.6 years.

The following table presents information regarding the Company’s outstanding stock options at March 31, 2010:

	Number of Shares			Weighted Average Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Options outstanding, beginning of year		1,036,656		$	7.21
Options granted		44,100			3.25
Options exercised		(3,400	)		3.63
Options forfeited		(97,478	)		7.80

Options outstanding, March 31, 2010		979,878		$	6.99	6.2 years	$	44,080
Options exercisable, March 31, 2010		665,506		$	8.59	4.9 years	$	29,474
Option price range at March 31, 2010		$3.25 to $15.33

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. The intrinsic value of options exercised during the three months ended March 31, 2010 was $0, cash received from such exercises was $14,000 and the tax benefit recognized was $0.

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 the stock options granted on January 20, 2010:

Dividend yield		0.00%
Expected volatility		30.09%
Risk-free interest rate		2.84%
Expected life		6.5 years
Weighted average fair value of options granted		$ 1.19

The dividend yield assumption is based on the Company’s history and expectations of cash dividends. The expected volatility is based on historical volatility. The risk-free interest rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the grants. The expected life is based on historical exercise experience.

NOTE 8 – GUARANTEES

The Company has not issued 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, 2010, the Company had $5,639,000 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, 2010 for guarantees under standby letters of credit issued is not material.

NOTE 9 – FAIR VALUE MEASUREMENTS AND DISCLOSURES

Financial Accounting Standards Board (FASB) ASC Topic 820, “Fair Value Measurements and Disclosures” 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 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, 2010 and December 31, 2009 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, 2010

Securities available for sale:
U.S. Government agency securities	$	-	$	8,106	$	-	$	8,106
Municipal securities		-		2,028		-		2,028
GSE: Mortgage-backed securities		-		18,034		-		18,034
Collateralized mortgage obligations		-		1,879		-		1,879
Corporate debt securities		-		1,707		102		1,809
Mutual Fund		1,164		-		-		1,164

Total	$	1,164	$	31,754	$	102	$	33,020

At December 31, 2009

Securities available for sale:
U.S. Government agency securities	$	-	$	11,102	$	-	$	11,102
Municipal securities		-		2,025		-		2,025
GSE: Mortgage-backed securities		-		19,606		-		19,606
Collateralized mortgage obligations		-		1,978		-		1,978
Corporate debt securities		-		1,698		140		1,838
Mutual Fund		1,141		-		-		1,141

Total	$	1,141	$	36,409	$	140	$	37,690

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, 2010			Three Months Ended March 31, 2009
	(in thousands)

Balance at beginning of period	$	140			$	177
Total gains/(losses) – (realized/unrealized):
Included in other comprehensive income (loss)		(38	)			(68	)

Balance at end of period	$	102			$	109

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, 2010 and December 31, 2009 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, 2010
Impaired loans	$	-	$	-	$	9,368	$	9,368
Other real estate owned		-		-		706		706

At December 31, 2009
Impaired loans	$	-	$	-	$	6,959	$	6,959
Goodwill		-		-		18,109		18,109
Property held for sale		-		-		1,100		1,100

The following valuation techniques were used to measure fair value of assets in the tables above:

Impaired loans – Impaired loans measured at fair value, are those loans 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. At March 31, 2010, fair value consists of the loan balances of $9,368,000 net of a valuation allowance of $1,921,000. At December 31, 2009, fair value consists of loan balances of $6,959,000, net of a valuation allowance of $1,313,000.

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. At March 31, 2010, one property totaling $706,000 was acquired through foreclosure and is carried at fair value less estimated selling costs.

Goodwill – Goodwill is evaluated for impairment on an annual basis. See Note 3 for further details on goodwill.

Property held for sale – Real estate originally classified as bank premises for a planned branch, was reclassified during 2009 to held for sale in other assets. At December 31, 2009, the fair value was based upon the appraised value of the property.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2010 and December 31, 2009:

Cash and Cash Equivalents (carried at cost):

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities:

The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) 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). At March 31, 2010 and December 31, 2009, the Company determined that no active market existed for our pooled trust preferred security. This security is classified as a Level 3 investment. Management’s best estimate of fair value consists of both internal and external support on the Level 3 investment. 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 the fair value of the Level 3 investment.

Restricted Investment in Federal Home Loan Bank Stock and ACBB Stock:

The carrying amount of restricted investment in Federal Home Loan Bank stock and Atlantic Central Banker’s Bank stock approximates fair value, and considers the limited marketability of such securities.

Loans Receivable (carried at cost):

The fair values of loans, excluding impaired loans, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Accrued Interest Receivable and Payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates their respective fair values.

Deposit Liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreements to Repurchase (carried at cost):

The carrying amounts of these short-term borrowings approximate their fair values.

Long-term Debt (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance Sheet Financial Instruments (disclosed at cost):

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. The fair values of such fees are not material at March 31, 2010 and December 31, 2009.

The estimated fair value of the Company’s financial instruments at March 31, 2010 and December 31, 2009 were as follows:

	March 31, 2010				December 31, 2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)

Financial assets:
Cash and cash equivalents	$	80,586	$	80,586	$	42,735	$	42,735
Securities available for sale		33,020		33,020		37,690		37,690
Securities held to maturity		11,938		11,743		10,618		10,266
Restricted stock		1,000		1,000		1,000		1,000
Loans receivable		501,074		492,543		507,215		486,729
Accrued interest receivable		1,887		1,887		1,876		1,876

Financial liabilities:
Deposits		564,630		565,434		535,412		536,101
Securities sold under agreements to repurchase		15,349		15,349		17,065		17,065
Long-term debt		7,500		8,196		7,500		8,111
Accrued interest payable		133		133		164		164

Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-

NOTE 10 – SHAREHOLDERS’ EQUITY

In connection with the Emergency Economic Stabilization Act of 2008 (“EESA”), the Department of the Treasury (the “Treasury”) was authorized to establish a Troubled Asset Relief Program (“TARP”) to purchase up to $700 billion in troubled assets from qualified financial institutions (“QFI”). EESA has also been interpreted by the Treasury to allow it to make direct equity investments in QFIs. Subsequent to the enactment of EESA, the Treasury announced the TARP Capital Purchase Program under which QFIs that elected to participate in the TARP Capital Purchase Program were allowed to issue senior perpetual preferred stock to the Treasury, and the Treasury was authorized to purchase such preferred stock of QFIs, subject to certain limitations and terms. EESA was developed to stabilize the financial system and increase lending to benefit the national economy and citizens of the United States.

On January 30, 2009, the Company entered into a Securities Purchase Agreement with the Treasury as part of the TARP Capital Purchase Program, pursuant to which the Company sold to the Treasury 9,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred Stock”), no par value per share and with a liquidation preference of $1,000 per share, and a warrant (the “Warrant”) to purchase 297,116 shares of the Company’s common stock, as adjusted for the 2009 stock dividend declared in August 2009, 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, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”), which amended EESA, was signed into law. EESA, as amended by the Stimulus Act, imposes extensive new restrictions applicable to participants in the TARP, including the Company, and removes the requirement of being limited to using proceeds from only qualifying equity offerings.

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 15, May 15, August 15 and November 15 of each year. The Senior Preferred Stock may be redeemed at any time following consultation by the Company’s primary bank regulator and the Treasury, notwithstanding the terms of the original transaction documents. Participants in the TARP Capital Purchase Program desiring to repay part of an investment by the Treasury must repay a minimum of 25% of the issue price of the Senior 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 has 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 cannot declare or pay any cash dividend on its common stock or with certain limited exceptions, 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 $4.54 per share of common stock, as adjusted for the stock dividend declared in August 2009. In the event that the Company redeems the Senior Preferred Stock, the Company can repurchase the Warrant at “Fair Market Value,” as defined in the Securities Purchase Agreement with the Treasury.

The proceeds received were allocated between the Series A Preferred Stock and the Warrant based upon their relative fair values as of the date of issuance, which resulted in the recording of a discount of the Series A Preferred Stock upon issuance that reflects the value allocated to the Warrant. The discount is accreted by a charge to accumulated deficit on a straight-line basis over the expected life of the preferred stock of five years.

The agreement with the Treasury contains limitations on certain actions by the Company, including Treasury consent prior to the payment of 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 EESA, as amended.

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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements. 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 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, even if subsequently made available on our website or otherwise. 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 discussed under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2009 Form 10-K, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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.

The following information should be read in conjunction with the consolidated financial statements and the related notes thereto included in the 2009 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 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 2009 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 ALLL on a quarterly basis in accordance with Bank policy, and the Interagency Policy Statement on the ALLL released by the Board of Governors of the Federal Reserve System on December 13, 2006 as well as 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 a qualitative and quantitative analysis 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 collectability 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. To be effective, 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 and Union counties. Accordingly, the collectability 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. Stock based 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.

Goodwill Impairment. Although goodwill is not subject to amortization, the Company must test the carrying value for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of our reporting unit be compared to the carrying amount of its net assets, including goodwill. Our reporting unit was identified as our community bank operations. If the fair value of the reporting unit exceeds the book value, no write-down of recorded goodwill is necessary. If the fair value of a reporting unit is less than book value, an expense may be required on the Company’s books to write-down the related goodwill to the proper carrying value.

Investment Securities Impairment Valuation. Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions including, but not limited to, the length of time the investment’s book value has been greater than fair value, the severity of the investment’s decline and the credit deterioration of the issuer. For debt securities, management assesses 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.

In instances when a determination is made that an other-than-temporary impairment exists but the Company 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, 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.

Deferred Tax Assets and Liabilities. We recognize deferred tax assets and liabilities for future tax effects of temporary differences, net operating loss carry forwards and tax credits. 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

The Company reported net income to common shareholders of $490,000 for the quarter ended March 31, 2010, compared to net income to common shareholders of $416,000, for the same period in 2009. Basic and diluted earnings per common share after preferred stock dividends and accretion were both $0.07 for the quarter ended March 31, 2010 compared to basic and diluted earnings of $0.06 per common share for the same period in 2009. Dividends and accretion related to the preferred stock issued to the Treasury reduced earnings for the first quarter of 2010 by $143,000 ($0.02 per fully diluted common share) as compared to $96,000 ($0.01 per fully diluted common share) for the same period last year. The annualized return on average assets increased to 0.39% for the three months ended March 31, 2010 as compared to 0.35% for the same period in 2009. The annualized return on average shareholders’ equity increased to 3.28% for the three month period ended March 31, 2010 as compared to 2.59% for the three months ended March 31, 2009.

Net interest income increased by $1.3 million, or 28.6%, for the quarter ended March 31, 2010 over the same period in 2009, primarily as a result of loan growth and lower deposit costs in 2010 as compared to the same period last year. The Company reported a net interest margin of 3.95% for the quarter ended March 31, 2010, an increase of 3 basis points when compared to the 3.92% for the quarter ended December 31, 2009 and a 58 basis point increase when compared to the 3.37% reported for the comparable quarter in 2009.

Non-interest income for the quarter ended March 31, 2010 totaled $480,000, a decrease of $394,000, or 45.1%, from the same period in 2009. This decrease is primarily due to the $487,000 of gains from the sale of available-for-sale securities during the three months ended March 31, 2009 as compared to no realized gains for the same period in 2010. Non-interest expenses for the quarter ended March 31, 2010 totaled $4.6 million, an increase of $171,000, from $4.5 million, or 3.8%, over the same period in 2009. Approximately $94,000 of this increase was the result of higher FDIC insurance premiums primarily from both higher risk-based assessment rates coupled with increased deposit levels.

Total assets at March 31, 2010 were $668.2 million, up 4.4% from total assets of $640.0 million at December 31, 2009. Total deposits were $564.6 million at March 31, 2010, an increase of 5.5% from total deposits of $535.4 million at December 31, 2009. Total loans for the first quarter of 2010 declined 1.1% to $508.0 million, compared with $513.4 million at December 31, 2009.

At March 31, 2010, the Company’s allowance for loan losses was $6.9 million, compared with $6.2 million at December 31, 2009. Non-accrual loans were $12.7 million at March 31, 2010, a decline of $1.5 million when compared to the $14.2 million at December 31, 2009. The allowance for loan losses as a percentage of total loans at March 31, 2010 was 1.36%, compared with 1.20% at December 31, 2009.

RESULTS OF OPERATIONS

The Company’s principal source of revenue is net interest income, which is 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 (loss) 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, FDIC insurance, any potential goodwill impairment and other operating expenses.

The following table provides information on our performance ratios for the dates indicated.

	(Annualized) Three months ended March 31,
	2010	2009
Performance Ratios:
Return on average assets	0.39%	0.35%
Return on average tangible assets	0.40%	0.37%
Return on average shareholders' equity	3.28%	2.59%
Return on average tangible shareholders' equity	4.34%	3.83%
Net interest margin	3.95%	3.37%
Average equity to average assets	11.92%	13.48%
Average tangible equity to average tangible assets	9.27%	9.54%

We anticipate that our earnings will remain challenged in 2010 principally due to the sluggish economic conditions in the New Jersey commercial and real estate markets. In addition, should a further general decline in economic conditions in New Jersey continue throughout 2010 and beyond, the Company may suffer higher default rates on its loans, decreased value of assets it holds as collateral, and potentially lower loan originations due to heightened competition for lending relationships coupled with our higher credit standards and requirements.

Three months ended March 31, 2010 compared to March 31, 2009

Net Interest Income

Net interest income increased by $1.3 million, or 28.6%, to $5.8 million for the three months ended March 31, 2010 compared to $4.5 million for the corresponding period in 2009, as a result of both balance sheet growth and lower deposit costs. The net interest margin and spread increased to 3.95% and 3.69% respectively, for the three months ended March 31, 2010 from 3.37% and 2.91%, respectively, for the three months ended March 31, 2009.

Total interest income for the three months ended March 31, 2010 increased by $504,000, or 7.0%, to $7.7 million from $7.2 million for the three months ended March 31, 2009. The increase in interest income was primarily due to volume-related increases in interest income amounting to $701,000, partially offset by interest rate-related decreases in income of $197,000 for the first quarter of 2010 as compared to the same prior year period.

Interest and fees on loans increased by $726,000, or 11.2%, to $7.2 million for the three months ended March 31, 2010 compared to $6.5 million for the corresponding period in 2009. Of the $726,000 increase in interest and fees on loans, $814,000 was attributable to volume-related increases which were partially offset by $88,000 attributable to interest rate-related decreases. The average balance of the loan portfolio for the three months ended March 31, 2010 increased by $57.2 million, or 12.6%, to $510.2 million from $453.0 million for the corresponding period in 2009. The average annualized yield on the loan portfolio was 5.72% for the quarter ended March 31, 2010 compared to 5.79% for the quarter ended March 31, 2009 due primarily to lower market rates. Additionally, the average balance of non-accrual loans, which amounted to $13.4 million and $13.2 million at March 31, 2010 and 2009, respectively, impacted the Company’s loan yield for both periods presented.

Interest income on Federal funds sold and interest bearing deposits was $17,000 for the three months ended March 31, 2010, representing a decrease of $1,000, or 5.6%, from $18,000 for the three months ended March 31, 2009. For the three months ended March 31, 2010, Federal funds sold had an average balance of $30.1 million with an average annualized yield of 0.15%, as compared to $35.4 million with an average yield of 0.21% for the three months ended March 31, 2009. During the first quarter 2010, in order to maximize earnings on excess liquidity and increased safety of our funds, the Bank transferred its cash balances to the Federal Reserve Bank of New York, which paid approximately 10 basis points more than our correspondent banks. Accordingly, for the three months ended March 31, 2010, interest bearing deposits had an average balance of $10.5 million and averaged 0.23% as compared to no interest bearing deposits for the same period in 2009.

Interest income on investment securities totaled $448,000 for the three months ended March 31, 2010 compared to $669,000 for the three months ended March 31, 2009. The decrease in interest income on investment securities was primarily attributable to the partial replacement of maturities, calls, sales and principal paydowns of existing securities with new purchases that had generally lower rates resulting from the lower rate environment. For the three months ended March 31, 2010, investment securities had an average balance of $48.6 million with an average annualized yield of 3.69% compared to an average balance of $58.6 million with an average annualized yield of 4.56% for the three months ended March 31, 2009.

Interest expense on interest-bearing liabilities amounted to $1.8 million for the three months ended March 31, 2010 compared to $2.6 million for the corresponding period in 2009, a decrease of $796,000, or 30.4%. Of this decrease in interest expense, $1.0 million was due to rate-related decreases on interest-bearing liabilities primarily resulting from lower deposit costs. This decrease was partially offset by $250,000 of volume-related increases on interest-bearing liabilities.

During 2010, management continued to focus on developing core deposit relationships in the Company. Additionally, management continued to restructure the mix of interest-bearing liabilities portfolio by decreasing our funding dependence from high-cost time deposits to lower-cost core money market and savings account deposit products. The average balance of interest-bearing liabilities increased to $494.0 million for the three months ended March 31, 2010 from $444.0 million for the same period last year, an increase of $49.9 million, or 11.2%. Our average balance in certificates of deposit decreased by $1.3 million, or 1.0%, to $125.9 million with an average yield of 1.99% for the first quarter of 2010 from $127.2 million with an average yield of 2.87% for the same period in 2009. This average balance decrease was more than offset by increases of $31.0 million in average savings deposits, which increased from $166.1 million with an average yield of 2.47% during the first quarter of 2009, to $197.0 million with an average yield of 1.40% during the first quarter of 2010. Additionally, average money market deposits increased by $8.3 million over this same period while the average yield declined by 90 basis points. During the first quarter of 2010, our average demand deposits reached $73.1 million, an increase of $8.8 million, or 13.6%, over the same period last year. For the three months ended March 31, 2010, the average cost for all interest-bearing liabilities was 1.49%, compared to 2.39% for the three months ended March 31, 2009.

Our strategies for increasing and retaining core relationship 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 2010 increased to $14.9 million, with an average interest rate of 1.45%, compared to $13.0 million, with an average interest rate of 2.18%, for the first quarter of 2009.

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, 2010								Three Months Ended March 31, 2009

(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rate			Average Balance			Interest Income/ Expense		Average Rate
ASSETS
Interest Earning Assets:
Interest bearing due from banks	$	10,456		$	6		0.23	%	$	-		$	-		-
Federal funds sold		30,146			11		0.15	%		35,404			18		0.21	%
Investment securities		48,572			448		3.69	%		58,629			669		4.56	%
Loans, net of unearned fees (1) (2)		510,199			7,193		5.72	%		453,005			6,467		5.79	%

Total Interest Earning Assets		599,373			7,658		5.18	%		547,038			7,154		5.30	%

Non-Interest Earning Assets:
Allowance for loan losses		(6,278	)							(6,712	)
All other assets		54,865								54,316

Total Assets	$	647,960							$	594,642

LIABILITIES & SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW deposits	$	46,257			85		0.75	%	$	36,128			69		0.77	%
Savings deposits		197,034			681		1.40	%		166,065			1,011		2.47	%
Money market deposits		102,407			308		1.22	%		94,121			492		2.12	%
Time deposits		125,921			618		1.99	%		127,226			899		2.87	%
Repurchase agreements		14,856			53		1.45	%		13,005			70		2.18	%
Short-term borrowings		-			-		-			-			-		-
Long-term debt		7,500			74		4.00	%		7,500			74		4.00	%

Total Interest Bearing Liabilities		493,975			1,819		1.49	%		444,045			2,615		2.39	%

Non-Interest Bearing Liabilities:
Demand deposits		73,089								64,320
Other liabilities		3,629								3,591

Total Non-Interest Bearing Liabilities		76,718								67,911

Shareholders' Equity		77,267								82,686

Total Liabilities and Shareholders' Equity	$	647,960							$	594,642

NET INTEREST INCOME				$	5,839							$	4,539

NET INTEREST SPREAD (3)							3.69	%							2.91	%

NET INTEREST MARGIN(4)							3.95	%							3.37	%

(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:

	Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
	Increase (Decrease) Due To
	Volume			Rate			Net
(dollars in thousands)
Interest Earned On:
Interest bearing deposits	$	-		$	6		$	6
Federal funds sold		-			(7	)		(7	)
Investment securities		(113	)		(108	)		(221	)
Loans		814			(88	)		726

Total Interest Income		701			(197	)		504

Interest Paid On:
NOW deposits		19			(3	)		16
Savings deposits		188			(518	)		(330	)
Money market deposits		42			(226	)		(184	)
Time deposits		(9	)		(272	)		(281	)
Repurchase agreement		10			(27	)		(17	)
Short-term borrowings		-			-			-
Long-term debt		-			-			-

Total Interest Expense		250			(1,046	)		(796	)

Net Interest Income	$	451		$	849		$	1,300

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, 2010 increased to $700,000, as compared to a provision for loan losses of $150,000 for the corresponding 2009 period. During the quarter ended March 31, 2010, we recorded the additional provision based on our assessment and evaluation of risk inherent in the loan portfolio, continued review of our non-performing loans and the persistent economic challenges.

In management’s opinion, the allowance for loan losses, totaling $6.9 million at March 31, 2010, is adequate to cover losses inherent in the portfolio. In accordance with Company policy, we do not become involved in any sub-prime lending activity. In the current interest rate and credit quality environment, our prudent risk management philosophy has been to stay within our established credit culture. We anticipate increased loan volume during 2010 as we continue to target credit worthy customers that have become dissatisfied with their relationships with larger institutions. Management will continue to review the need for additions to its allowance for loan losses based upon its ongoing 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, 2010, non-interest income amounted to $480,000 compared to $874,000 for the corresponding period in 2009. This decrease of $394,000, or 45.1%, is primarily due to the recording of $487,000 in realized gains for the sales of securities available for sale during the three months ended March 31, 2009 as compared to no realized gains during the first quarter 2010. Excluding net securities gains, non-interest income for the first quarter of 2010 increased by $93,000, or 24.0%, over the same period last year. This increase was primarily due to higher bank-owned life insurance income resulting from increased purchases of such investments during the fourth quarter of 2009 and the first quarter of 2010. Additionally, other loan fees for the first quarter of 2010 increased to $147,000 from $116,000 during the first quarter of 2009 primarily due to an increase in exit fees collected by the Bank. Other non-interest income increased by $31,000, or 17.4%, primarily as a result of fees generated by our Residential Mortgage department. These increases were partially offset by a decrease in service fees on deposits of $23,000, or 14.7%, from the quarter ended March 31, 2009, primarily due to less fee income revenue.

Non-Interest Expense

Non-interest expenses for the three months ended March 31, 2010 increased $171,000, to $4.6 million compared to $4.5 million for the three months ended March 31, 2009. FDIC insurance and assessments totaled $264,000 for the first quarter of 2010 compared to $170,000 during the same prior year quarter. This increase of $94,000 resulted primarily from the increased risk-based assessment rates applicable to our deposit liabilities, which was uniformly applicable to all FDIC insured institutions as well as growth in our deposit base. Other operating expenses increased by $109,000, or 31.4%, to $456,000 for the first quarter of 2010 from $357,000 for the first quarter of 2009, primarily due to a $96,000 increase in net carrying costs and workout expenses relating to both our other real estate owned properties and impaired loans. Insurance costs increased by $31,000, or 62.0%, for the first quarter of 2010 as compared to the first quarter of 2009. Professional expenses increased by $30,000, or 16.4%, for the first quarter of 2010 as compared to the first quarter of 2009. Occupancy and equipment expense increased by $25,000, or 2.9%, for the three months ended March 31, 2010 as compared to the prior year period. These increases were partially offset by data processing fees, which decreased by $92,000, or 38.0%, for the three months ended March 31, 2010 as compared to the prior year period. This decrease was primarily due to the successful completion of the Town Bank conversion, which consummated during the fourth quarter 2009. Additionally outside service fees decreased $13,000, or 9.6%, for the first quarter of 2010 as compared to the first quarter of 2009. Subsequent to the acquisition of Town Bank as of April 1, 2006, the Company began amortizing identifiable intangible assets and incurred $67,000 in amortization expense for the first quarter of 2010 compared to $77,000 for the corresponding period in 2009.

Income Taxes

The Company recorded income tax expense of $348,000 for the three months ended March 31, 2010 compared to $284,000 for the three months ended March 31, 2009. The effective tax rate for the three months ended March 31, 2010, was 35.5%, compared to 35.7% for the corresponding period in 2009.

FINANCIAL CONDITION

Assets

At March 31, 2010, our total assets were $668.2 million, an increase of $28.1 million, or 4.4%, over total assets of $640.0 million at December 31, 2009. At March 31, 2010, our total loans were $508.0 million, a decrease of $5.4 million or 1.1% from the $513.4 million reported at December 31, 2009. Investment securities were $46.0 million at March 31, 2010 as compared to $49.3 million at December 31, 2009, a decrease of $3.3 million, or 6.8%. At March 31, 2010, cash and cash equivalents totaled $80.6 million compared to $42.7 million at December 31, 2009, an increase of $37.9 million or 88.6%, as our liquidity position increased due to the continued strong deposit growth experienced during the first quarter of 2010. Goodwill totaled $18.1 million at both March 31, 2010 and December 31, 2009.

Liabilities

Total deposits increased $29.2 million, or 5.5%, to $564.6 million at March 31, 2010, from $535.4 million at December 31, 2009. Deposits are the Company’s primary source of funds. The deposit increase during 2010 was primarily attributable to the Company’s strategic initiative to continue to grow our market presence. The Company anticipates continued loan demand increases during 2010 and beyond, and will depend on the expansion and maturation of our branch network as the primary funding source. As a secondary funding source, the Company intends to utilize borrowed funds at opportune times during changing rate cycles. The Company also experienced a positive change in the mix of the deposit products through promotional activities at the branches, which were targeted to gain market penetration. In order to fund future quality loan demand, the Company intends to raise the most cost-effective funding available within the market area.

Securities Portfolio

Investment securities, including restricted stock, totaled $46.0 million at March 31, 2010 compared to $49.3 million at December 31, 2009, a decrease of $3.3 million, or 6.8%. During the first quarter of 2010, investment securities purchases amounted to $1.8 million, while repayments and maturities amounted to $5.2 million. There were no sales of securities available for sale during the first quarter in 2010 as compared to $7.9 million in the comparable period in 2009.

The Company maintains an investment portfolio to fund increased loans and liquidity needs (resulting from decreased deposits or otherwise) and to provide an additional source of interest income. The portfolio is composed of obligations of the U.S. Government agencies and U.S. Government-sponsored entities, municipal securities and a limited amount of corporate debt securities. All of our mortgage-backed investment securities are collateralized by pools of mortgage obligations that are guaranteed by privately managed, U.S. Government-sponsored enterprises (“GSE”), such as Fannie Mae, Freddie Mac and Government National Mortgage Association. Due to these GSE guarantees, these investment securities are susceptible to less risk of non-performance and default than other corporate securities which are collateralized by private pools of mortgages. At March 31, 2010, the Company maintained $18.0 million of GSE mortgage-backed securities in the investment portfolio, all of which are current as to payment of principal and interest and are performing to the terms set forth in their respective prospectuses.

Included within the Company’s investment portfolio are trust preferred securities, which consists of four single issue securities and one pooled issue security. These securities have an amortized cost value of $3.1 million and a fair value of $2.2 million at March 31, 2010. The unrealized loss on these securities is related to general market conditions, the widening of interest rate spread and downgrades in credit ratings. 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. The Company holds a mezzanine tranche. For the pooled trust preferred security, management reviewed expected cash flows and credit support and determined it was not probable that all principal and interest would be repaid. Total impairment on this security was $398,000 at March 31, 2010. As the Company does not intend to sell this security and it is more likely than not that the Company will not be required to sell this security, only the credit loss portion of other-than-temporary impairment in the amount of $156,000 was recognized on the income statement for the year ended December 31, 2009. The Company recognized the remaining $242,000 of the other-than-temporary impairment in other comprehensive income for the quarter end March 31, 2010. The Company had no other-than-temporary impairment charge to earnings during the first quarter of 2010.

Management evaluates all securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluations. As of March 31, 2010, all of these securities are current with their scheduled interest payments, with the exception of the one pooled trust preferred security which has been remitting reduced amounts of interest as some individual participants of the pool have deferred interest payments. Future deterioration in the cash flow of these instruments or the credit quality of the financial institution issuers could result in additional impairment charges in the future.

The Company accounts for its investment securities as available for sale or held to maturity. Management determines the appropriate classification at the time of purchase. Based on an evaluation of the probability of the occurrence of future events, we determine if we have the ability and intent to hold the investment securities to maturity, in which case we classify them as held to maturity. All other investments are classified as available for sale.

Securities classified as available for sale must be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of taxes. Gains or losses on the sales of securities available for sale are recognized upon realization utilizing the specific identification method. The net effect of unrealized gains or losses, caused by marking our available for sale portfolio to fair value, could cause fluctuations in the level of shareholders’ equity and equity-related financial ratios as changes in market interest rates cause the fair value of fixed-rate securities to fluctuate.

Securities classified as held to maturity are carried at cost, adjusted for amortization of premium and accretion of discount over the terms of the maturity in a manner that approximates the interest method.

Loan Portfolio

The following table summarizes total loans outstanding, by loan category and amount as of March 31, 2010 and December 31, 2009.

	March 31,						December 31,
	2010						2009
	Amount			Percent			Amount			Percent
	(in thousands, except for percentages)

Commercial and industrial	$	130,457			25.7	%	$	133,916			26.1	%
Real estate – construction		58,036			11.4	%		67,011			13.0	%
Real estate – commercial		234,871			46.2	%		228,818			44.5	%
Real estate – residential		20,805			4.1	%		19,381			3.8	%
Consumer		64,085			12.6	%		64,547			12.6	%
Other		152			0.0	%		176			0.0	%
Net unearned fees		(448	)		0.0	%		(450	)		0.0	%
Total loans	$	507,958			100.0	%	$	513,399			100.0	%

For the three months ended March 31, 2010, loans decreased by $5.4 million, or 1.1%, to $508.0 million from $513.4 million at December 31, 2009. We anticipate increased loan volume to be a major challenge during 2010 as we continue to target creditworthy customers.

Asset Quality

One of our key operating objectives has been, and continues to be, to maintain a high level of asset quality. Through a variety of strategies we have been proactive in addressing problem and non-performing assets. These strategies, as well as our prudent maintenance of sound credit standards for new loan originations have resulted in relatively low levels of non-performing loans and charge-offs. Since the later part of 2008, the financial and capital markets have been faced with significant disruptions and volatility. These disruptions have been exacerbated by the continued weakness in the real estate and housing markets as well as the prolonged high unemployment rate. We closely monitor local and regional real estate markets and other factors related to risks inherent in our loan portfolio.

Non-Performing Assets

Loans are considered to be non-performing if they are on a non-accrual basis, past due 90 days or more and still accruing, or have been restructured to provide a reduction of or deferral of interest or principal because of a weakening in the financial condition of the borrowers. A loan is placed on non-accrual status when collection of all principal or interest is considered unlikely or when principal or interest is past due for 90 days or more, unless the loan is well-secured and in the process of collection, in which case, the loan will continue to accrue interest. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. At March 31, 2010 and December 31, 2009, the Company had $12.7 million and $14.2 in non-accrual loans, respectively.

The following table summarizes our non-performing assets as of March 31, 2010 and December 31, 2009.

	March 31, 2010			December 31, 2009
Non-Performing Assets:

Non-Performing Loans:
Commercial and industrial	$	5,544		$	4,720
Real estate-construction		5,023			7,120
Consumer		2,086			2,311

Total Non-Performing Loans		12,653			14,151

Other Real Estate Owned		706			-

Total Non-Performing Assets	$	13,359		$	14,151

Ratios:

Non-Performing loans to total loans		2.49	%		2.76	%

Non-Performing assets to total assets		2.00	%		2.21	%

Restructured Loans	$	5,035		$	4,717

At March 31, 2010, non-performing commercial and industrial loans increased by $824,000 and real estate construction loans decreased by $2.1 million from December 31, 2009. During the three month period ending March 31, 2010, there were three non-performing commercial construction loans totaling $2.1 million and one commercial and industrial loan in the amount of $839,000 that were removed from non-performing loans and taken into other real estate owned (“OREO”) inventory. This action was the result of Deed-in-Lieu(s) and Sheriff Sale(s). During the first quarter of 2010, $2.2 million of OREO inventory was sold and liquidated for a net gain of $46,000. At March 31, 2010, one property in the amount of $706,000 remained in OREO.

At March 31, 2010, non-performing consumer loans decreased by $225,000 from December 31, 2009, due to one loan in the amount of $225,000, which was transferred to performing status under the term of a restructure agreement. This one loan contributed to the overall March 31, 2010 restructured loan total of $5.0 million compared to $4.7 million at December 31, 2009.

Restructured loans are primarily commercial loans for which the Bank granted a concession to the borrower for economic or legal reasons due to the borrower’s financial difficulties. The Bank continues to work with all the related restructured loans and, at March 31, 2010, all such loans continued to pay as agreed under the terms of the restructuring agreement.

The recorded investment in impaired loans, not requiring a specific allowance for loan losses, was $11.9 million and $17.3 million at March 31, 2010 and December 31, 2009, respectively. The recorded investment in impaired loans requiring a specific allowance for loan losses was $11.3 million and $8.3 million at March 31, 2010 and December 31, 2009, respectively. The allowance allocated to these impaired loans was $1.9 million and $1.3 million at March 31, 2010 and December 31, 2009, respectively.

Allowance for Loan Losses

The following table summarizes our allowance for loan losses for the three months ended March 31, 2010 and 2009 and for the year ended December 31, 2009.

	March 31,						December 31,
	2010			2009			2009
	(in thousands, except percentages)

Balance at beginning of year	$	6,184		$	6,815		$	6,815
Provision charged to expense		700			150			2,205
Loans (charged off) recovered, net		-			(231	)		(2,836	)

Balance of allowance at end of period	$	6,884		$	6,734		$	6,184

Ratio of net charge-offs to average loans outstanding		-			0.05	%		0.59	%

Balance of allowance as a percent of loans at period-end		1.36	%		1.46	%		1.20	%

At March 31, 2010, the Company’s allowance for loan losses was $6.9 million, compared with $6.2 million at December 31, 2009. Loss allowance as a percentage of total loans at March 31, 2010 was 1.36%, compared with 1.20% at December 31, 2009. There were no charge-offs or recoveries for the three months ended March 31, 2010, compared to $2.8 million in net charge-offs for the year ended December 31, 2009. Non-performing loans at March 31, 2010 are either well-collateralized or adequately reserved for in the allowance for loan losses.

Credit quality trends of the portfolio has shown improvement since year end. As a result, our non-performing loans to total loans and non-performing assets to total assets ratios at March 31, 2010 declined by 27 basis points and 21 basis points, respectively, when compared to December 31, 2009. Additionally, there were no net charge-offs taken during the three months ended March 31, 2010 as compared to $231,000 for the same period last year.

While there are some signs of increasing economic stability in some of our markets, the economy remains challenging, and as such prudent risk management must be maintained. Along with this conservative approach, we have further stressed our qualitative and quantitative allowance reserve factors to primarily reflect the current state of the economy and prolonged high levels of unemployment. Collectively, these actions have resulted in an increase in our reserve levels. We apply this process and methodology in a consistent manner and reassess and modify the estimation methods and assumptions on a regular basis.

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

In November of 2004, the Company invested in $3.5 million of bank-owned life insurance as a source of funding for additional life insurance benefits for officers and employee benefit expenses related to the Company’s non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain executive officers implemented in 2004 that provides for payments upon retirement, death or disability. On December 26, 2009, the Company purchased an additional $3.5 million of bank-owned life insurance in order to provide additional life insurance benefits for additional officers upon death or disability and to provide a source of funding future enhancements of the benefits under the SERP. Expenses related to the SERP were approximately $23,000 and $16,000 for the three months ended March 31, 2010 and 2009, respectively. Bank-owned life insurance involves our purchase of life insurance on a chosen group of officers. The Company is 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 operations. Income on bank-owned life insurance amounted to $89,000 for the three months ended March 31, 2010 as compared to $35,000 for the three months ended March 31, 2009, an increase of $54,000.

Premises and Equipment

Premises and equipment totaled approximately $3.6 million and $3.8 million at March 31, 2010 and December 31, 2009, respectively. The Company purchased premises and equipment amounting to $50,000 primarily to replace fully depreciated and un-repairable equipment, while depreciation expenses totaled $247,000 during the three months ended March 31, 2010.

Goodwill and Other Intangible Assets

Intangible assets totaled $18.9 million and $19.0 million at March 31, 2010 and December 31, 2009, respectively. The Company’s intangible assets at March 31, 2010 were comprised of $18.1 million of goodwill and $804,000 of core deposit intangibles, net of accumulated amortization of $1.3 million. At December 31, 2009, the Company’s intangible assets were comprised of $18.1 million of goodwill and $871,000 of core deposit intangibles, net of accumulated amortization of $1.2 million.

Deposits

Deposits are the primary source of funds used by the Company in lending and for general corporate purposes. In addition to deposits, the Company 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, 2010, total deposits amounted to $564.6 million, reflecting an increase of $29.2 million, or 5.5%, from December 31, 2009. Decreases in certificates of deposit balances were more than offset by increases in our non-interest bearing accounts, NOW accounts, savings deposits, and money market accounts. We believe that the net increase in our deposits was primarily 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 currently fund our loan originations.

One of the primary strategies is the accumulation and retention of core deposits. Core deposits consist of all deposits, except certificates of deposit in excess of $100,000. Core deposits at March 31, 2010 accounted for 87.4% of total deposits, compared to 86.4% at December 31, 2009. The balance in our certificates of deposit over $100,000 at March 31, 2010 totaled $71.2 million as compared to $72.9 million at December 31, 2009. During the three months ended March 31, 2010, the Company continued to grow savings and checking account products, as well as other interest-bearing deposit products without promoting certificates of deposit. The Company found this strategy was able to provide a more cost-effective source of funding. During the first quarter of 2010, this strong deposit growth resulted in an increase in our cash position, which provides for stronger liquidity position.

Borrowings

The 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 outstanding borrowings under this line at March 31, 2010 and December 31, 2009. The Bank also maintains secured borrowing lines with the FHLB in an amount of up to approximately $62.4 million. At March 31, 2010 and December 31, 2009, we had no short-term borrowings outstanding 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 Bank 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 decreased to $15.3 million at March 31, 2010 from $17.1 million at December 31, 2009, a decrease of $1.8 million, or 10.0%.

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 the Bank are primarily met by cash on hand, Federal funds sold position, maturing investment securities and short-term borrowings on a temporary basis. The Bank invests the funds not needed to meet its cash requirements in overnight Federal funds sold and an interest bearing account with the Federal Reserve Bank of New York. 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, 2010, the Company had $80.6 million in cash and cash equivalents as compared to $42.7 million at December 31, 2009. Cash and cash equivalent balances consisted of $7.0 million in Federal funds sold and $64.2 million at the Federal Reserve Bank of New York at March 31, 2010, as compared to $35.9 million and $70,000 at December 31, 2009. It was determined by management during the three month period ended March 31, 2010, to transfer most of the Bank’s investable funds out of the Federal funds sold position and into the interest bearing deposit account at the Federal Reserve Bank of New York due primarily to a higher rate of return, which averaged approximately 10 basis points higher. Additionally, balances at the Federal Reserve Bank of New York provided the highest level of safety for our investable funds.

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, 2010 and December 31, 2009:

	March 31, 2010		December 31, 2009
	(dollars in thousands)
Home equity lines of credit	$	29,557	$	29,443
One-to-four family residential lines of credit		39,339		36,300
Commitments to grant commercial and construction loans secured by real estate		49,844		46,928
Commercial and financial letters of credit		5,639		5,824
	$	124,379	$	118,495

Capital

Shareholders’ equity increased by approximately $625,000, or 0.8%, to $77.5 million at March 31, 2010 compared to $76.8 million at December 31, 2009. Net income for the three month period ended March 31, 2010 added $633,000 to shareholders’ equity. Additionally, stock option compensation expense of $25,000 as well as $14,000 in options exercised and $66,000 in the net unrealized gains on securities available for sale, net of tax, all contributed to the increase. Shareholders’ equity was reduced by $113,000 relating to the cash dividends accrued on the preferred stock.

The Company and the Bank are subject to various regulatory and capital requirements administered by the Federal banking agencies. Our federal banking regulators, the Board of Governors of the Federal Reserve System (which regulates bank holding companies) and the Federal Deposit Insurance Corporation (which regulates the 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 the 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 the Bank is also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company’s and the Bank’s Tier 1 Capital to Risk Weighted Assets Ratio and Total Capital to Risk Weighted Assets Ratio increased during the three month period ended March 31, 2010 as compared to year end December 31, 2009, primarily due to the transfer of cash balances to the Federal Reserve Bank of New York and, to a lesser degree, the decrease in the Bank’s loan portfolio. The transfer of cash balances was a decision based on maximizing the Bank’s earnings on excess liquidity, increased safety of the Bank’s funds and the resultant positive effect on capital ratios. Deposits held at the Federal Reserve Bank of New York are measured at a 0% percent risk weight as compared to a 20% risk weight if held at other institutions.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the 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, 2010, the Company and the Bank met all capital adequacy requirements to which they are subject.

The capital ratios of Community Partners and the Bank, at March 31, 2010 and December 31, 2009, 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, 2010			Dec. 31, 2009			March 31, 2010			Dec. 31, 2009			March 31, 2010			Dec. 31, 2009
Community Partners		9.26	%		9.28	%		11.00	%		10.60	%		12.25	%		11.74	%
Two River		9.26	%		9.18	%		10.97	%		10.55	%		12.22	%		11.68	%

“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 4T. 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 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, 2010 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.

	31.1	*	Certification of principal executive officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a)

	31.2	*	Certification of 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 the principal executive officer of the Company and the principal financial officer of the Company


	* Filed herewith.

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 17, 2010	By:	/s/ WILLIAM D. MOSS
		William D. Moss President and Chief Executive Officer (Principal Executive Officer)


Date: May 17, 2010	By:	/s/ A. RICHARD ABRAHAMIAN
		A. Richard Abrahamian Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)