Two River Bancorp (TRCB) 10-Q 2011 Q1 Quarterly report

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, 2011

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, 2011, there were 7,652,557 shares of the registrant’s common stock, no par value, outstanding.

COMMUNITY PARTNERS BANCORP

FORM 10-Q

INDEX

PART I.			FINANCIAL INFORMATION	Page
	Item 1.	Financial Statements		3
			Consolidated Balance Sheets (unaudited) at March 31, 2011 and December 31, 2010	3
			Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2011 and 2010	4
			Consolidated Statements of Shareholders’ Equity (unaudited) for the three months ended March 31, 2011 and 2010	5
			Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2011 and 2010	6
			Notes to Consolidated Financial Statements (unaudited)	7
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.		Controls and Procedures	46
PART II.			OTHER INFORMATION
	Item 6.		Exhibits	47
SIGNATURES				48

PART I.   FINANCIAL INFORMATION

Item 1.           Financial Statements

COMMUNITY PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)

	March 31,			December 31,
	2011			2010
ASSETS
Cash and due from banks	$	7,207		$	6,171
Interest-bearing deposits in bank		26,558			21,272
Federal funds sold		7,000			7,000
Cash and cash equivalents		40,765			34,443
Securities available-for-sale		38,942			35,079
Securities held-to-maturity (fair value of $8,228 and $10,643 at March 31, 2011 and December 31, 2010, respectively)		8,342			10,829
Restricted stock. at cost		1,420			1,420
Loans		521,986			512,994
Allowance for loan losses		(6,541	)		(6,246	)
Net loans		515,445			506,748
Other real estate owned		7,686			8,098
Bank-owned life insurance		9,267			9,174
Premises and equipment, net		2,969			3,089
Accrued interest receivable		1,945			1,911
Goodwill		18,109			18,109
Other intangible assets, net of accumulated amortization of $1,532 and $1,474 at March 31, 2011 and December 31, 2010, respectively		574			632
Other assets		7,212			7,311
TOTAL ASSETS	$	652,676		$	636,843
LIABILITIES
Deposits:
Non-interest bearing	$	82,730		$	77,378
Interest bearing		453,938			447,093
Total Deposits		536,668			524,471
Securities sold under agreements to repurchase		17,475			14,857
Accrued interest payable		86			93
Long-term debt		13,500			13,500
Other liabilities		3,807			3,734
Total Liabilities		571,536			556,655
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, 2011 and at December 31, 2010		8,659			8,628
Common stock, no par value; 25,000,000 shares authorized; 7,633,793   and 7,620,929 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		70,154			70,067
Retained earnings		2,105			1,325
Accumulated other comprehensive income		222			168
Total Shareholders' Equity		81,140			80,188
TOTAL LIABILITIES and SHAREHOLDERS’ EQUITY	$	652,676		$	636,843

See notes to the unaudited consolidated financial statements.

3

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended March 31, 2011 and 2010

     (in thousands, except per share data)

	Three Months Ended March 31,
	2011			2010
INTEREST INCOME:
Loans, including fees	$	7,251		$	7,193
Securities:
Taxable		289			355
Tax-exempt		86			93
Federal funds sold and interest bearing deposits		19			17
Total Interest Income		7,645			7,658
INTEREST EXPENSE:
Deposits		1,174			1,692
Securities sold under agreements to repurchase		31			53
Borrowings		107			74
Total Interest Expense		1,312			1,819
Net Interest Income		6,333			5,839
PROVISION FOR LOAN LOSSES		525			700
Net Interest Income after Provision for Loan Losses		5,808			5,139
NON-INTEREST INCOME:
Service fees on deposit accounts		124			133
Other loan fees		109			147
Earnings from investment in life insurance		93			89
Other income		115			111
Total Non-Interest Income		441			480
NON-INTEREST EXPENSES:
Salaries and employee benefits		2,621			2,337
Occupancy and equipment		833			873
Professional		187			213
Insurance		99			95
FDIC insurance and assessments		227			264
Advertising		50			75
Data processing		154			150
Outside services fees		96			122
Amortization of identifiable intangibles		58			67
Loan workout and OREO expenses		134			122
Other operating		332			320
Total Non-Interest Expenses		4,791			4,638
Income before Income Taxes		1,458			981
INCOME TAX EXPENSE		535			348
Net Income		923			633
Preferred stock dividend and discount accretion		(143	)		(143	)
Net income available to common shareholders	$	780		$	490
EARNINGS  PER COMMON SHARE:
Basic	$	0.10		$	0.07
Diluted	$	0.10		$	0.07
Weighted average common shares outstanding:
Basic		7,625			7,542
Diluted		7,801			7,554

See notes to the unaudited consolidated financial statements.

4

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Three Months Ended March 31, 2011 and 2010

(dollar amounts in thousands)

			Common Stock				Retained			Accumulated
	Preferred Stock		Outstanding shares		Amount		Earnings (Accumulated Deficit)			Other Comprehensive Income		Total Shareholders’ Equity
Balance, January 1, 2011	$	8,628		7,620,929	$	70,067	$	1,325		$	168	$	80,188
Comprehensive income:
Net income		-		-		-		923			-		923
Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax		-		-		-		-			54		54
Total comprehensive income		-		-		-		-			-		977
Preferred stock discount accretion		31		-		-		(31	)		-		-
Dividends on preferred stock		-		-		-		(112	)		-		(112	)
Options exercised		-		12,864		43		-			-		43
Tax-benefit-exercised non-qualified stock options		-		-		5		-			-		5
Stock option compensation expense		-		-		39		-			-		39
Balance, March 31, 2011	$	8,659		7,633,793	$	70,154	$	2,105		$	222	$	81,140
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 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

See notes to the unaudited consolidated financial statements.

5

COMMUNITY PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Three Months Ended March 31, 2011 and 2010

	Three Months Ended  March 31,
	2011			2010
	(in thousands)
Cash flows from operating activities:
Net income	$	923		$	633
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		194			247
Provision for loan losses		525			700
Intangible amortization		58			67
Net amortization of securities premiums and discounts		35			30
Earnings from investment in life insurance		(93	)		(89	)
Net realized loss (gain) on sale of foreclosed real estate		5			(46	)
Stock option compensation expense		39			25
(Increase) decrease in assets:
Accrued interest receivable		(34	)		(11	)
Other assets		66			750
(Decrease) increase in liabilities:
Accrued interest payable		(7	)		(31	)
Other liabilities		73			41
Net cash provided by operating activities		1,784			2,316
Cash flows from investing activities:
Purchase of securities available-for-sale		(5,750	)		-
Purchase of securities held-to-maturity		(938	)		(1,823	)
Proceeds from repayments, calls and maturities of securities available-for-sale		1,942			4,748
Proceeds from repayments, calls and maturities of securities held to maturity		3,422			500
Purchase of bank-owned life insurance		-			(24	)
Net (increase) decrease  in loans		(9,222	)		2,503
Purchases of premises and equipment		(74	)		(50	)
Proceeds from sale of foreclosed real estate		407			2,278
Net cash (used in) provided by investing activities		(10,213)			8,132
Cash flows from financing activities:
Net increase in deposits		12,197			29,218
Net increase (decrease) in securities sold under agreements to repurchase		2,618			(1,716	)
Cash dividends paid on preferred stock		(112	)		(113	)
Proceeds from exercise of stock options		43			14
Tax benefit of options exercised		5			-
Net cash provided by financing activities		14,751			27,403
Net increase in cash and cash equivalents		6,322			37,851
Cash and cash equivalents – beginning		34,443			42,735
Cash and cash equivalents - ending	$	40,765		$	80,586
Supplementary cash flow information:
Interest paid	$	1,319		$	1,850
Income taxes paid	$	200		$	-
Supplementary schedule of non-cash activities:
Other real estate acquired in settlement of loans	$	-		$	2,938

See notes to the unaudited consolidated financial statements.

6

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 subsidiaries, TRCB Investment Corporation, TRCB Holdings One LLC, TRCB Holdings Two LLC, TRCB Holdings Three LLC, TRCB Holdings Four LLC, TRCB Holdings Five LLC 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 months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2010 included in the Community Partners Annual Report on Form 10-K filed with the SEC on March 31, 2011 (the “2010 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 2010 Form 10-K.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2011 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, 2010 have been reclassified to conform to the presentation used in the Consolidated Statement of Operations for the three months ended March 31, 2011. These reclassifications had no effect on net income.

NOTE 2 – NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (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 was effective for the 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. The Company has evaluated the impact of the adoption of ASU 2010-06, and has determined that it did not have any impact on our financial position or results of operations. 

7

NOTE 2 – NEW ACCOUNTING STANDARDS (Continued)

The FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

These amendments eliminate an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice.

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities.

Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. The implementation of ASU 2010-28 did not have a material impact on our financial position or results of operation.

ASU No 2011-01, Receivables (Topic 310) – Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No 2010-20, was issued in January 2011 and postpones the effective date of the disclosures about troubled debt restructurings.  The new effective date for disclosures about troubled debt restructurings will be aligned with the finalization of the effective date of the exposure drafts Clarifications to Accounting for Troubled Debt Restructurings by Creditors, which was finalized as ASU 2011-02.

ASU 2011-02; The FASB has issued this Update to clarify the accounting principles applied to loan modifications, as defined by FASB ASC Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. The Update clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than a focus on specific criteria, such as the effective interest rate test, to determine a concession. The Update goes on to provide guidance on specific types of modifications such as changes in the interest rate of the borrowing, and the insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a debtor is experiencing financial difficulties.

For public entities, the amendments in the Update are effective for the first interim or annual periods beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The entity should also disclose information required by ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which had previously been deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructuring in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Nonpublic entities are required to adopt the amendments in this Update for annual periods ending on or after December 15, 2012. Early adoption is permitted. The implementation of ASU 2011-02 is not expected to have a material impact on our financial position or results of operation.

NOTE 3 – GOODWILL

The Company’s goodwill was recognized in connection with the acquisition of The Town Bank (“Town Bank”) in April 2006. GAAP 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 step one annual goodwill impairment analysis as of September 30, 2010 and based on the results there was no impairment on the current goodwill balance of $18.1 million.

8

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 5% stock dividend declared on August 23, 2010 and paid October 22, 2010 to shareholders of record as of September 24, 2010.

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

	Three Months Ended  March 31,
	2011			2010
	(dollars in thousands, except per share data)
Net income	$	923		$	633
Preferred stock dividend and discount accretion		(143	)		(143	)
Net income applicable to common shareholders	$	780		$	490
Weighted average common shares outstanding		7,625,338			7,541,855
Effect of dilutive securities, stock options and warrants		175,756			11,671
Weighted average common shares outstanding used to
calculate diluted earnings per share		7,801,094			7,553,526
Basic earnings per common share	$	0.10		$	0.07
Diluted earnings per common share	$	0.10		$	0.07

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 330,908 and 1,156,466 for the three-month periods ended March 31, 2011 and 2010, respectively.

9

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
(in thousands)	Amortized Cost		Unrealized Gains		Noncredit  OTTI			Other			Fair Value
March 31, 2011:
Securities available for sale:
U.S. Government agency securities	$	5,761	$	16	$	-		$	(4	)	$	5,773
Municipal securities		1,516		20		-			(7	)		1,529
U.S. Government-sponsored enterprises (“GSE”) –         Residential mortgage-backed securities		16,617		730		-			(27	)		17,320
Collateralized residential mortgage obligations		8,872		69		-			(26	)		8,915
Corporate debt securities, primarily financial     institutions		3,589		12		(177	)		(222	)		3,202
		36,355		847		(177	)		(286	)		36,739
Community Reinvestment Act (“CRA”)
mutual fund		2,213		-		-			(10	)		2,203
	$	38,568	$	847	$	(177	)	$	( 296	)	$	38,942
Securities held to maturity:
Municipal securities	$	6,535	$	203	$	-		$	(6	)	$	6,732
Corporate debt securities, primarily financial     institutions		1,807		-		-			(311	)		1,496
	$	8,342	$	203	$	-		$	(317	)	$	8,228

10

NOTE 5 – SECURITIES (Continued)

			Gross		Gross  Unrealized Losses
(in thousands)	Amortized Cost		Unrealized Gains		Noncredit OTTI			Other			Fair Value
December 31, 2010:
Securities available for sale:
U.S. Government agency securities	$	5,773	$	25	$	-		$	(12	)	$	5,786
Municipal securities		2,006		22		-			(12	)		2,016
GSE – Residential mortgage-backed securities		15,519		760		-			(28	)		16,251
Collateralized residential mortgage obligations		5,702		75		-			(32	)		5,745
Corporate debt securities, primarily financial     institutions		3,597		15		(243	)		(282	)		3,087
		32,597		897		(243	)		(366	)		32,885
CRA  mutual fund		2,196		-		-			(2	)		2,194
	$	34,793	$	897	$	(243	)	$	(368	)	$	35,079
Securities held to maturity:
Municipal securities	$	8,522	$	182	$	-		$	(6	)	$	8,698
Corporate debt securities, primarily financial     institutions		2,307		1		-			(363	)		1,945
	$	10,829	$	183	$	-		$	(369	)	$	10,643

The amortized cost and fair value of the Company’s debt securities at March 31, 2011, 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	$	510	$	521	$	-	$	-
Due in one year through five years		5,564		5,553		1,329		1,394
Due in five years through ten years		425		432		2,211		2,290
Due after ten years		4,367		3,998		4,802		4,544
		10,866		10,504		8,342		8,228
GSE – Residential mortgage-backed securities		16,617		17,320		-		-
Collateralized residential mortgage obligations		8,872		8,915		-		-
	$	36,355	$	36,739	$	8,342	$	8,228

The Company had no securities sales during the three months ended March 31, 2011 and 2010, respectively.

Certain of the Company’s investment securities, totaling $21,967,000 and $17,170,000 at March 31, 2011 and December 31, 2010, respectively, were pledged as collateral to secure securities sold under agreements to repurchase and public deposits as required or permitted by law.

11

NOTE 5 – SECURITIES (Continued)

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010:

	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, 2011:
U.S. Government agency securities	$	2,497	$	(4	)	$	-	$	-		$	2,497	$	(4	)
Municipal securities		1,026		(13	)		-		-			1,026		(13	)
GSE – Residential mortgage-backed securities		4,198		(27	)		-		-			4,198		(27	)
Collateralized residential mortgage obligations		2,955		(26	)		-		-			2,955		(26	)
Corporate debt securities, primarily financial institutions		1,513		(10	)		2,372		(700	)		3,885		(710	)
CRA mutual fund		2,203		(10	)		-		-			2,203		(10	)
Total Temporarily
Impaired Securities	$	14,392	$	(90	)	$	2,372	$	(700	)	$	16,764	$	(790	)

	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, 2010:
U.S. Government agency securities	$	3,739	$	(12	)	$	-	$	-		$	3,739	$	(12	)
Municipal securities		1,024		(18	)		-		-			1,024		(18	)
GSE – Residential mortgage-backed securities		3,033		(28	)		-		-			3,033		(28	)
Collateralized residential mortgage obligations		1,982		(32	)		-		-			1,982		(32	)
Corporate debt securities, primarily financial institutions		1,794		(24	)		2,207		(864	)		4,001		(888	)
CRA mutual fund		2,194		(2	)		-		-			2,194		(2	)
Total Temporarily
Impaired Securities	$	13,766	$	(116	)	$	2,207	$	(864	)	$	15,973	$	(980	)

The Company had 20 securities in an unrealized loss position at March 31, 2011. In management’s opinion, the unrealized losses in municipal, U.S. Government agency, collateralized residential mortgage obligations and U.S. GSE residential mortgage-backed securities reflect changes in interest rates subsequent to the acquisition of specific securities. The unrealized loss for corporate debt securities also 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, 2011, 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, 2011.

12

NOTE 5 – SECURITIES (Continued)

The Company also has one pooled trust preferred security with a Moody’s rating of Ca included in corporate debt securities with an amortized cost basis of $272,000 at March 31, 2011. 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 other-than-temporary impairment on this security was $405,000 at March 31, 2011.  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 $0 and $72,000 was recognized in operations during the three month period ending March 31, 2011 and for the year ended December 31, 2010, respectively. The Company recognized $177,000 and $243,000 of the other-than-temporary impairment in other comprehensive income at March 31, 2011 and December 31, 2010, respectively. The Company had no other-than-temporary impairment charge to earnings during the three months ended March 31, 2011. 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 following roll forward reflects the amounts related to other-than-temporary credit losses recognized in earnings for the three month periods ended March 31, 2011 and 2010 (in thousands):

Beginning balance, January 1, 2010	$	156
Amount related to the credit loss for which an
other-than-temporary impairment was
previously recognized		-
Ending balance, March 31, 2010		156
Beginning balance, January 1, 2011		228
Additional increases to the amount related to the credit loss
for which an other-than-temporary impairment was
previously recognized		-
Ending balance, March 31, 2011	$	228

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan.

The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial and industrial, real estate-construction and real estate-commercial. Consumer loans consist of the following classes: real estate-residential and consumer.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest previously accrued on these loans is reversed from income. Interest received on nonaccrual loans including impaired loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

13

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet, which at March 31, 2011 and December 31, 2010, the Company had no such reserves. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectable are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial and industrial, real estate-construction and real estate-commercial not considered impaired as well as smaller balance homogeneous loans such as real estate-residential and consumer.

These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

1. Changes in lending policy and procedures, including changes in underwriting standards and collection practices not previously considered in estimating credit losses.

2. Changes in relevant economic and business conditions.

3. Changes in nature and volume of the loan portfolio and in the terms of loans.

4. Changes in experience, ability and depth of lending management and staff.

5. Changes in the volume and severity of past due loans, the volume of non-accrual loans and the volume and severity of adversely classified loans.

6. Changes in the quality of the loan review system.

7. Changes in the value of underlying collateral for collateral-dependent loans.

8. The existence and effect of any concentration of credit and changes in the level of such concentrations.

9. The effect of other external forces such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Each factor is assigned a risk value to reflect low, moderate or high risk assessments based on management’s best judgment using current market, macro and other relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation in each factor and accompanies the allowance for loan loss calculation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

14

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

A loan is considered impaired when, based on current information events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial, real estate-commercial, real estate-construction, real estate-residential and consumer loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristics that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectable and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

15

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The components of the loan portfolio at March 31, 2011 and December 31, 2010 are as follows:

		March 31, 2011			December 31, 2010
		(In Thousands)
Commercial and industrial	$	134,632		$	134,266
Real estate – construction		34,578			33,909
Real estate – commercial		273,143			262,996
Real estate – residential		20,623			21,473
Consumer		59,593			60,879
		522,569			513,523
Allowance for loan losses		(6,541	)		(6,246	)
Unearned fees		(583	)		(529	)
Net Loans	$	515,445		$	506,748

The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of March 31, 2011 and December 31, 2010:

	30-59 Days Past Due		60-89 Days Past Due		90 Days & Greater		Total Past Due		Current		Total Loans Receivable		Loans Receivable >90 Days and Accruing
March 31, 2011	(In Thousands)
Commercial and industrial	$	1,287	$	1,216	$	1,374	$	3,877	$	130,755	$	134,632	$	-
Real estate – construction		-		-		523		523		34,055		34,578		-
Real estate – commercial		5,835		2,038		597		8,470		264,673		273,143		-
Real estate – residential		415		-		-		415		20,208		20,623		-
Consumer		75		277		3,724		4,076		55,517		59,593		-
Total	$	7,612	$	3,531	$	6,218	$	17,361	$	505,208	$	522,569	$	-

	30-59 Days Past Due		60-89 Days Past Due		90 Days & Greater		Total Past Due		Current		Total Loans Receivable		Loans  Receivable >90 Days and Accruing
December 31, 2010	(In Thousands)
Commercial and industrial	$	1,492	$	235	$	792	$	2,519	$	131,747	$	134,266	$	-
Real estate – construction		-		-		523		523		33,386		33,909		-
Real estate – commercial		3,779		2,039		605		6,423		256,573		262,996		-
Real estate – residential		808		-		-		808		20,665		21,473		-
Consumer		31		278		3,729		4,038		56,841		60,879		-
Total	$	6,110	$	2,552	$	5,649	$	14,311	$	499,212	$	513,523	$	-

16

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents non-accrual loans by classes of the loan portfolio at March 31, 2011 and December 31, 2010:

		March 31, 2011		December 31, 2010
		(In Thousands)
Commercial and industrial	$	1,374	$	792
Real estate – construction		523		523
Real estate – commercial		597		605
Consumer		3,724		3,729
Total	$	6,218	$	5,649

The following tables summarize information in regards to impaired loans by loan portfolio class at or for the three months ended March 31, 2011 and at or for the year ended December 31, 2010:

	At or for the three months ended March 31, 2011
	Recorded Investment, Net of Charge- offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2011	(In Thousands)
With no related allowance recorded:
Commercial and industrial	$	2,446	$	2,446	$	-	$	2,482	$	30
Real estate – construction		532		532		-		536		7
Real estate – commercial		2,261		2,261		-		2,270		41
Real estate – residential		225		375		-		225		3
Consumer		351		351		-		352		4
With an allowance recorded:
Commercial and industrial	$	774	$	2,023	$	374	$	944	$	30
Real estate – construction		2,347		2,471		142		2,422		30
Real estate – commercial		1,524		1,524		182		1,528		27
Real estate – residential		-		-		-		-		-
Consumer		3,700		3,970		608		3,700		1
Total:
Commercial and industrial	$	3,220	$	4,469	$	374	$	3,426	$	60
Real estate – construction		2,879		3,003		142		2,958		37
Real estate – commercial		3,785		3,785		182		3,798		68
Real estate – residential		225		375		-		225		3
Consumer		4,051		4,321		608		4,052		5
	$	14,160	$	15,953	$	1,306	$	14,459	$	173

17

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

	At or for the year ended December 31, 2010
	Recorded Investment, Net of Charge- offs		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2010	(In Thousands)
With no related allowance recorded:
Commercial and industrial	$	2,751	$	2,751	$	-	$	3,546	$	187
Real estate – construction		532		532		-		532		23
Real estate – commercial		2,278		2,278		-		2,279		133
Real estate – residential		225		375		-		225		8
Consumer		353		353		-		353		13
With an allowance recorded:
Commercial and industrial	$	1,010	$	2,071	$	476	$	1,010	$	46
Real estate – construction		2,348		3,638		142		2,348		1
Real estate – commercial		1,531		1,531		66		1,535		21
Real estate – residential		-		-		-		-		-
Consumer		3,629		4,129		327		3,632		108
Total:
Commercial and industrial	$	3,761	$	4,822	$	476	$	4,556	$	233
Real estate – construction		2,880		4,170		142		2,880		24
Real estate – commercial		3,809		3,809		66		3,814		154
Real estate – residential		225		375		-		225		8
Consumer		3,982		4,482		327		3,985		121
	$	14,657	$	17,658	$	1,011	$	15,460	$	540

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2011 and December 31, 2010:

		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2011		(In Thousands)
Commercial and industrial	$	116,528	$	9,122	$	8,982	$	-	$	134,632
Real estate – construction		33,906		-		672		-		34,578
Real estate – commercial		259,754		4,207		9,182		-		273,143
Real estate – residential		20,623		-		-		-		20,623
Consumer		55,063		39		4,491		-		59,593
Total:	$	485,874	$	13,368	$	23,327	$	-	$	522,569

18

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

		Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2010		(In Thousands)
Commercial and industrial	$	115,815	$	9,186	$	9,265	$	-	$	134,266
Real estate – construction		33,386		-		523		-		33,909
Real estate – commercial		250,735		3,024		9,237		-		262,996
Real estate – residential		21,473		-		-		-		21,473
Consumer		56,415		40		4,424		-		60,879
Total:	$	477,824	$	12,250	$	23,449	$	-	$	513,523

The following tables present the balance in the allowance for loan losses at March 31, 2011 and December 31, 2010 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable
	Balance		Balance Related to Loans Individually Evaluated  for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Balance Individually Evaluated for Impairment		Balance Collectively Evaluated for Impairment
March 31, 2011	(In Thousands)
Commercial and industrial	$	1,925	$	374	$	1,551	$	134,632	$	3,220	$	131,412
Real estate – construction		863		142		721		34,578		2,879		31,699
Real estate – commercial		2,422		182		2,240		273,143		3,785		269,358
Real estate – residential		259		-		259		20,623		225		20,398
Consumer		1,061		608		453		59,593		4,051		55,542
Unallocated		11		-		11		-		-		-
Total:	$	6,541	$	1,306	$	5,235	$	522,569	$	14,160	$	508,409

	Allowance for Loan Losses						Loans Receivable
	Balance		Balance  Related to Loans Individually Evaluated for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Balance Individually Evaluated for Impairment		Balance Collectively  Evaluated for Impairment
December 31, 2010	(In Thousands)
Commercial and industrial	$	2,081	$	476	$	1,605	$	134,266	$	3,761	$	130,505
Real estate – construction		895		142		753		33,909		2,880		31,029
Real estate – commercial		2,193		66		2,127		262,996		3,809		259,187
Real estate – residential		276		-		276		21,473		225		21,248
Consumer		793		327		466		60,879		3,982		56,897
Unallocated		8		-		8		-		-		-
Total:	$	6,246	$	1,011	$	5,235	$	513,523	$	14,657	$	498,866

19

NOTE 6 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)

The following table presents the change in the allowance for loan losses by classes of loans at March 31, 2011:

Allowance for Credit Losses	Commercial and Industrial			Real Estate - Commercial		Real Estate - Construction			Real Estate - Residential			Consumer		Unallocated		Total
						(In Thousands)
Beginning balance,    January 1, 2011	$	2,081		$	2,193	$	895		$	276		$	793	$	8	$	6,246
Charge-offs		(235	)		-		-			-			-		-		(235	)
Recoveries		5			-		-			-			-		-		5
Provision		74			229		(32	)		(17	)		268		3		525
Ending balance,   March 31, 2011	$	1,925		$	2,422	$	863		$	259		$	1,061	$	11	$	6,541

NOTE 7 – COMPREHENSIVE INCOME

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.

The components of other comprehensive income for the three months ended March 31, 2011 and 2010 are as follows:

	Three Months Ended March 31,
	2011			2010
	(dollars in thousands)
Unrealized holding gains on available for sale securities	$	21		$	143
Unrealized gains (losses) on securities for which a portion of the impairment has been recognized in income		66			(38	)
Tax effect		(33	)		(39	)
Net of tax amount	$	54		$	66

20

NOTE 8 – 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, 2011, the number of shares of Company common stock remaining and available for future issuance under the Plan is 403,437 after adjusting for subsequent stock dividends.

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 reserved 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, 2009, the Committee granted options to purchase an aggregate of 446,659 shares, after adjusting for the 5% stock dividend declared in August 2010, of Company common stock under the Plan to directors and officers of the Company, as follows:

· The Company granted to directors non-qualified stock options to purchase an aggregate of 70,297 shares of Company common stock.  These options vested immediately and were granted with an exercise price of $3.47 per share based upon the average trading price of Company common stock on the grant date.

· The Company granted to employees incentive stock options to purchase an aggregate of 376,362 shares of Company common stock.  These options are scheduled to vest 20% per year over five years beginning January 20, 2010.  The options were granted with an exercise price of $3.47 per share based upon the average trading price of Company common stock on the grant date.

On January 20, 2010, the Company awarded officers ISOs to purchase an aggregate of 46,305 shares of Company’s common stock, after adjusting for the 5% stock dividend declared in August 2010. These options are scheduled to vest 33.3% per year over three years beginning on the first anniversary of the grant date with a ten year exercise term. The options were granted with an exercise price of $3.10 per share based upon the average trading price of Company’s common stock on the grant date.

On April 20, 2010, the Company awarded officers ISOs to purchase an aggregate of 21,000 shares of Company’s common stock, after adjusting for the 5% stock dividend declared in August 2010. These options are scheduled to vest 20% per year over five years beginning on the first anniversary of the grant date with a ten year exercise term. The options were granted with an exercise price of $3.95 per share based upon the average trading price of Company’s common stock on the grant date.

On September 9, 2010, the Company awarded officers ISOs to purchase an aggregate of 13,650 shares of Company’s common stock, after adjusting for the 5% stock dividend declared in August 2010. These options are scheduled to vest over a five year period with 33.3% of the award vesting on each of September 10, 2013, September 10, 2014 and September 10, 2015 with a ten year exercise term. The options were granted with an exercise price of $4.52 per share based upon the average trading price of Company’s common stock on the grant date.

21

NOTE 8 – STOCK BASED COMPENSATION PLANS (Continued)

Stock based compensation expense related to the stock option grants, was approximately $30,000 and $25,000 during the three months ended March 31, 2011 and 2010, 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 $351,000 as of March 31, 2011 and will be recognized over the subsequent 2.7 years.

The following table presents information regarding the Company’s outstanding stock options at March 31, 2011:

	Number of Shares			Weighted Average Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Options outstanding, December 31, 2010		847,450		$	6.90
Options exercised		(12,864	)		3.39
Options outstanding, March 31, 2011		834,586		$	6.95	5.2 years	$	771,139
Options exercisable, March 31, 2011		598,250		$	8.30	4.1 years	$	429,091
Option price range at March 31, 2011		$3.10 to $14.60

The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010, was $19,000 and $0, respectively. Cash received from such exercises was $43,000 and $14,000, respectively. A tax benefit of $5,000 was recognized during the three month period ended March 31, 2011 as compared to $0 for the same period in 2010.

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	%
Forfeiture rate		5.00	%
Expected life	6.5 years
Weighted average fair value  of options granted	$	1.19

The following weighted average assumptions were used to estimate the fair value of the stock options granted on April 20, 2010:

Dividend yield		0.00	%
Expected volatility		33.51	%
Risk-free interest rate		2.91	%
Forfeiture rate		5.00	%
Expected life	6.5 years
Weighted average fair value of options granted	$	1.64

The following weighted average assumptions were used to estimate the fair value of the stock options granted on September 9, 2010:

Dividend yield		0.00	%
Expected volatility		32.40	%
Risk-free interest rate		2.09	%
Forfeiture rate		0.00	%
Expected life	7.5 years
Weighted average fair value of options granted	$	1.87

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 expected life of the grants which is based on historical exercise experience.

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NOTE 8 – STOCK BASED COMPENSATION PLANS (Continued)

Restricted stock is valued at the market value on the date of grant and expense is evenly attributed to the period in which the restrictions lapse.

On August 18, 2010, the Company awarded officers 20,000 shares of the Company’s restricted common stock, which were subsequently issued on September 30, 2010. These awards are scheduled to vest on the first day of the fourth year following the grant date, with 7,500 of these awards subject to an earnings condition.

On October 20, 2010, the Company awarded officers 1,400 shares of the Company’s restricted common stock. These awards are scheduled to vest on the first day of the fourth year following the grant date, with 525 of these awards subject to an earnings condition.

Total unrecognized compensation cost related to restricted stock options under the Plan was $68,000 as of March 31, 2011 and will be recognized over the subsequent 2.3 years.

Compensation expense related to the restricted stock was $9,000 and $0 for the three month periods ended March 31, 2011 and 2010, respectively, and is included in salaries and employee benefits on the statement of operations. There was no deferred tax benefit recognized during the three month period ended March 31, 2011 and 2010 related to the restricted stock compensation.

The following table summarizes information about restricted stock for the three month period ended March 31, 2011 (share amounts in thousands):

	Number of Shares		Weighted Average Price
Outstanding at December 31, 2010		21,400	$	4.05
Granted		-		-
Outstanding at March 31, 2011		21,400	$	4.05

All share and per share data have been retroactively adjusted to reflect the 5% stock dividend issued on October 22, 2010 to shareholders of record as of September 24, 2010.

NOTE 9 – GUARANTEES

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of March 31, 2011, the Company had $5,332,000 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, 2011 for guarantees under standby letters of credit issued is not material.

NOTE 10 – BORROWINGS

Borrowings consist of long-term debt fixed rate advances from the FHLB. Information concerning long-term borrowings at March 31, 2011 and December 31, 2010, respectively, as follows:

	Amount	Rate	Original Term	Maturity
(dollars in thousands)
Convertible Note	$   7,500	3.97%	10  years	November 2017
Fixed Rate Note	1,500	1.67%	4  years	August 2014
Fixed Rate Note	1,500	2.00%	5  years	August 2015
Fixed Rate Note	1,500	2.41%	6  years	August 2016
Fixed Rate Note	1,500	2.71%	7  years	August 2017
	$ 13,500	3.18%

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NOTE 10 – BORROWINGS (Continued)

The $7.5 million convertible note contains an option which allows the FHLB to adjust the rate on the note in November 2012 to the then current market rate offered by the FHLB. The Company has the option to repay this advance, if converted, without penalty.

The Company has unsecured lines of credit totaling $17,000,000 with two financial institutions that bear interest at a variable rate and are renewed annually. There were no borrowings under these lines of credit at March 31, 2011 and December 31, 2010.

There were no short-term borrowings from the FHLB at March 31, 2011 and December 31, 2010. Advances from the FHLB are secured by qualifying assets of the Bank.

NOTE 11 – FAIR VALUE MEASUREMENTS

Accounting guidance 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 assets 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.

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NOTE 11 – FAIR VALUE MEASUREMENTS (Continued)

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, 2011 and December 31, 2010 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, 2011
Securities available for sale:
U.S. Government agency securities	$	-	$	5,773	$	-	$	5,773
Municipal securities		-		1,529		-		1,529
GSE: Residential mortgage-backed securities		-		17,320		-		17,320
Collateralized residential mortgage obligations		-		8,915		-		8,915
Corporate debt securities, primarily financial institutions		-		3,107		95		3,202
CRA mutual Fund		2,203		-		-		2,203
Total	$	2,203	$	36,644	$	95	$	38,942
At December 31, 2010
Securities available for sale:
U.S. Government agency securities	$	-	$	5,786	$	-	$	5,786
Municipal securities		-		2,016		-		2,016
GSE: Residential mortgage-backed securities		-		16,251		-		16,251
Collateralized residential mortgage obligations		-		5,745		-		5,745
Corporate debt securities, primarily financial institutions		-		3,058		29		3,087
CRA mutual Fund		2,194		-		-		2,194
Total	$	2,194	$	32,856	$	29	$	35,079

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 NOTE 11 – FAIR VALUE MEASUREMENTS (Continued)

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, 2011		Three Months Ended March 31, 2010
	(in thousands)
Beginning balance January 1	$	29	$	140
Total gains/(losses) – (realized/unrealized):
Included in other comprehensive income		66		(38	)
Balance at end of period	$	95	$	102

 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, 2011 and December 31, 2010 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, 2011
Impaired loans	$	-	$	-	$	7,039	$	7,039
Other real estate owned		-		-		7,686		7,686
At December 31, 2010
Impaired loans	$	-	$	-	$	7,507	$	7,507
Other real estate owned		-		-		8,098		8,098

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 loansin which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon either 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.

· Other real estate owned (“OREO”) – Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and 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, 2011, properties totaling $7,686,000 million were acquired through foreclosure and are carried at fair value less estimated selling costs based on current appraisals.

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 NOTE 11 – FAIR VALUE MEASUREMENTS (Continued)

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, 2011 and December 31, 2010:

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, 2011 and December 31, 2010, 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 (carried at cost):

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

Loans Receivable (carried at cost):

The fair values of loans, excluding collateral dependent 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.

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NOTE 11 – FAIR VALUE MEASUREMENTS (Continued)

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, 2011 and December 31, 2010.

The estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010 were as follows:

	March 31, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Financial assets:
Cash and cash equivalents	$	40,765	$	40,765	$	34,443	$	34,443
Securities available for sale		38,942		38,942		35,079		35,079
Securities held to maturity		8,342		8,228		10,829		10,643
Restricted stock		1,420		1,420		1,420		1,420
Loans receivable		515,445		522,649		506,748		507,968
Accrued interest receivable		1,945		1,945		1,911		1,911
Financial liabilities:
Deposits		536,668		538,119		524,471		526,142
Securities sold under agreements to repurchase		17,475		17,475		14,857		14,857
Long-term debt		13,500		14,646		13,500		14,649
Accrued interest payable		86		86		93		93
Off-balance sheet financial instruments:
Commitments to extend credit and outstanding letters of credit		-		-		-		-

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NOTE 12 – 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 311,972 shares of the Company’s common stock, as adjusted for the stock dividend declared in August 2010, 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 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 and supplemented EESA, was signed into law. EESA, as amended and supplemented 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 $4.33 per share of common stock, as adjusted for the stock dividend declared in August 2010. 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 Senior 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 Senior 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 the 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 of EESA, as amended.

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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 2010 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 2010 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 2010 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.We maintain an allowance for loan losses at a level that we believe is adequate to provide for probable losses inherent in the loan portfolio. Loan losses are charged directly to the allowance when they occur and any recovery is credited to the allowance when realized. Risks from the loan portfolio are analyzed on a continuous basis by the Bank’s senior management, outside independent loan review auditors, the directors’ loan committee, and the Board of Directors.

The level of the allowance is determined by assigning specific allowances to impaired loans and general allowances on all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of the underlying collateral. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and set appropriate general allowances. Along with the risk system, senior management evaluates risk characteristics of the loan portfolio under current and anticipated 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 allowance. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are realized in the periods in which they become known. Additions to the allowance are made by provisions charged to expense and the allowance is reduced by net charge-offs (i.e., loans judged to be uncollectible and charged against the reserve, less any recoveries on such loans).

Although management attempts to maintain the allowance at a level deemed adequate to cover any losses, future additions to the allowance may be necessary based upon any 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 our allowance for loan losses, and may require us to take additional provisions based on their judgments about information available to them at the time of their examination.

30

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 is 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 $780,000 for the three months ended March 31, 2011, compared to $490,000, for the same period in 2010, an increase of 59.2%. Basic and diluted earnings per common share after preferred stock dividends and accretion were $0.10 for the quarter ended March 31, 2011 compared to $0.07 for the same period in 2010. Dividends and accretion related to the preferred stock issued to the Treasury reduced earnings for the first quarter of 2011 and 2010 by $143,000, or $0.02 per fully diluted common share. The annualized return on average assets increased to 0.57% for the three months ended March 31, 2011 as compared to 0.39% for the same period in 2010. The annualized return on average shareholders’ equity increased to 4.57% for the three month period ended March 31, 2011 as compared to 3.28% for the three months ended March 31, 2010.

Net interest income increased by $494,000, or 8.5%, for the quarter ended March 31, 2011 over the same period in 2010, primarily as a result of lower deposit rates and a higher level of core checking deposits. On a linked quarter basis, net interest income decreased by $132,000, or 2.0%, from the $6.5 million earned in the fourth quarter of 2010, due primarily to two less days in the first quarter compared to the fourth quarter of 2010. The Company reported a net interest margin of 4.33% for the quarter ended March 31, 2011, an increase of 6 basis points when compared to the 4.27% for the quarter ended December 31, 2010 and 38 basis points when compared to the 3.95% reported for the quarter ended March 31, 2010. This increase was primarily due to lower deposit rates, a higher level of core checking deposits and, to a lesser degree, an improvement in our earning asset mix.

The provision for loan losses for the three months ended March 31, 2011 decreased to $525,000, as compared to a provision for loan losses of $700,000 for the corresponding 2010 period. The $525,000 provision for three months ended March 31, 2011 was primarily due to our assessment of the current state of the economy, prolonged high levels of unemployment in our market, allowances related to impaired loans and loan growth.

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Non-interest income for the quarter ended March 31, 2011 totaled $441,000, a decrease of $39,000, or 8.1%, compared to the same period in 2010. The decrease is primarily due to lower fees generated by the residential loan department resulting from lower origination volume.  

Non-interest expense for the quarter ended March 31, 2011 totaled $4.8 million, an increase of $153,000, or 3.3%, from the same period in 2010.  The increase was primarily due to higher salary and benefits costs resulting in part from the expansion of our lending division, annual salary increases and rising medical insurance costs.

Total assets at March 31, 2011 were $652.7 million, up 2.5% from total assets of $636.8 million at December 31, 2010. Total deposits were $536.7 million at March 31, 2011, an increase of 2.3% from total deposits of $524.5 million at December 31, 2010. Total loans at March 31, 2011 were $522.0 million, an increase of 1.8% from the total loans of $513.0 million at December 31, 2010.

At March 31, 2011, the Company’s allowance for loan losses was $6.5 million, compared with $6.2 million at December 31, 2010. The allowance for loan losses as a percentage of total loans at March 31, 2011 was 1.25%, compared with 1.22% at December 31, 2010. Non-accrual loans were $6.2 million at March 31, 2011, compared with $5.6 million at December 31, 2010. OREO properties were $7.7 million at March 31, 2011, compared to $8.1 million at December 31, 2010.

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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 income is also affected by its provision for loan losses, other income and other expenses. Other income consists primarily of service charges, commissions and fees, earnings from investment in life insurance and gains on security sales, while other expenses are primarily comprised of salaries and employee benefits, occupancy costs and other operating expenses.

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

	(Annualized) Three months ended March 31,
	2011	2010
Return on average assets	0.57%	0.39%
Return on average tangible assets	0.59%	0.40%
Return on average shareholders' equity	4.57%	3.28%
Return on average tangible shareholders' equity	5.95%	4.34%
Net interest margin	4.33%	3.95%
Average equity to average assets	12.53%	11.92%
Average tangible equity to average tangible assets	9.91%	9.27%

We anticipate that our earnings will remain challenged in 2011 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 2011 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, 2011 compared to March 31, 2010

Net Interest Income

Net interest income increased by $494,000, or 8.5%, to $6.3 million for the three months ended March 31, 2011 compared to $5.8 million for the corresponding period in 2010, primarily as a result of lower deposit rates and a higher level of core checking deposits. The net interest margin and net interest spread increased to 4.33% and 4.12%, respectively, for the three months ended March 31, 2011 from 3.95% and 3.69%, respectively, for the three months ended March 31, 2010.

Total interest income for the three months ended March 31, 2011 decreased by $13,000, or 0.2%. The decrease in interest income was primarily due to an interest rate related decrease in interest income of $74,000 partially offset by a volume related increase in interest income of $61,000 for the first quarter of 2011 as compared to the same prior year period.

Interest and fees on loans increased $58,000, or 0.8%, to $7.3 million for the three months ended March 31, 2011 compared to $7.2 million for the corresponding period in 2010. Of the $58,000 increase in interest and fees on loans, $69,000 was attributable to volume-related increases. This increase was partially offset by an interest rate-related decrease of $11,000. The average balance of the loan portfolio for the three months ended March 31, 2011 increased by $4.9 million, or 1.0%, to $515.1 million from $510.2 million for the corresponding period in 2010. The average annualized yield on the loan portfolio was 5.71% for the quarter ended March 31, 2011 compared to 5.72% for the quarter ended March 31, 2010. Additionally, the average balance of non-accrual loans, which amounted to $6.2 million and $13.4 million at March 31, 2011 and 2010, respectively, impacted the Company’s loan yield for both periods presented.

Interest income on Federal funds sold and interest bearing deposits was $19,000 for the three months ended March 31, 2011, representing an increase of $2,000, or 11.8%, from $17,000 for the three months ended March 31, 2010.  For the three months ended March 31, 2011, Federal funds sold had an average balance of $7.0 million with an average annualized yield of 0.23%, as compared to $30.1 million with an average annualized yield of 0.15% for the three months ended March 31, 2010. 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, 2011, interest bearing deposits had an average balance of $24.0 million and an average annualized yield of 0.25% as compared to an average balance of $10.5 million and an average annualized yield of 0.23% for the same period in 2010.

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Interest income on investment securities totaled $375,000 for the three months ended March 31, 2011 compared to $448,000 for the three months ended March 31, 2010, a decrease of $73,000, or 16.3%. The decrease in interest income on investment securities was primarily attributable to the partial replacement of maturities, calls 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, 2011, investment securities had an average balance of $46.8 million with an average annualized yield of 3.20% compared to an average balance of $48.6 million with an average annualized yield of 3.69% for the three months ended March 31, 2010.

Interest expense on interest-bearing liabilities amounted to $1.3 million for the three months ended March 31, 2011 compared to $1.8 million for the corresponding period in 2010, a decrease of $507,000, or 27.9%. Of this decrease in interest expense, $462,000 was due to rate-related decreases primarily resulting from lower deposit costs, as well as a $45,000 in volume-related decreases.

During 2010 and into 2011, management continued to focus on developing core deposit relationships at the Bank. 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 decreased to $477.6 million for the three months ended March 31, 2011 from $494.0 million for the same period last year, a decrease of $16.4 million, or 3.3%. Our average balance in certificates of deposit decreased by $15.2 million, or 12.1%, to $110.7 million with an average annualized yield of 1.91% for the first quarter of 2011 from $125.9 million with an average annualized yield of 1.99% for the same period in 2010. Average money market deposits decreased by $10.3 million over this same period while the average annualized yield declined by 55 basis points. Additionally, average savings deposits decreased by $3.2 million over this same period and the average annualized yield declined by 48 basis points. These average balance decreases were partially offset by increases of $6.0 million in average NOW deposits, which increased from $46.3 million with an average annualized yield of 0.75% during the first quarter of 2010, to $52.3 million with an average annualized yield of 0.45% during the first quarter of 2011. During the first quarter of 2011, our average demand deposits reached $81.5 million, an increase of $8.4 million, or 11.5%, over the same period last year. For the three months ended March 31, 2011, the average annualized cost for all interest-bearing liabilities was 1.11%, compared to 1.49% for the three months ended March 31, 2010, a decrease of 38 basis points.

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 2011 were $15.2 million, with an average interest rate of 0.82%, compared to $14.9 million, with an average interest rate of 1.45%, for the first quarter of 2010.

The Company also utilizes FHLB term borrowings as an additional funding source. The average balance of such borrowings for the first quarter of 2011 were $13.5 million, with an average interest rate of 3.21%, compared to $7.5 million, with an average interest rate of 4.00%, for the first quarter of 2010.

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.

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	Three Months Ended  March 31, 2011								Three Months Ended  March 31, 2010
(dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rate			Average Balance			Interest Income/ Expense		Average Rate
ASSETS
Interest Earning Assets:
Interest bearing deposits in banks	$	24,004		$	15		0.25	%	$	10,456		$	6		0.23	%
Federal funds sold		7,000			4		0.23	%		30,146			11		0.15	%
Investment securities		46,829			375		3.20	%		48,572			448		3.69	%
Loans, net of unearned fees (1) (2)		515,080			7,251		5.71	%		510,199			7,193		5.72	%
Total Interest Earning Assets		592,913			7,645		5.23	%		599,373			7,658		5.18	%
Non-Interest Earning Assets:
Allowance for loan losses		(6,263	)							(6,278	)
All other assets		58,017								54,865
Total Assets	$	644,667							$	647,960
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW deposits	$	52,289			58		0.45	%	$	46,257			85		0.75	%
Savings deposits		193,806			442		0.92	%		197,034			681		1.40	%
Money market deposits		92,074			153		0.67	%		102,407			308		1.22	%
Time deposits		110,701			521		1.91	%		125,921			618		1.99	%
Repurchase agreements		15,249			31		0.82	%		14,856			53		1.45	%
FHLB-term borrowings		13,500			107		3.21	%		7,500			74		4.00	%
Total Interest Bearing Liabilities		477,619			1,312		1.11	%		493,975			1,819		1.49	%
Non-Interest Bearing Liabilities:
Demand deposits		81,530								73,089
Other liabilities		4,753								3,629
Total Non-Interest Bearing Liabilities		86,283								76,718
Shareholders' Equity		80,765								77,267
Total Liabilities and Shareholders' Equity	$	644,667							$	647,960
NET INTEREST INCOME				$	6,333							$	5,839
NET INTEREST SPREAD (3)							4.12	%							3.69	%
NET INTEREST MARGIN(4)							4.33	%							3.95	%

(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.

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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, 2011
	Compared to Three Months Ended
	March 31, 2010
	Increase (decrease) due to change in
	Volume			Rate			Net
	(in thousands)
Interest Earned On:
Interest bearing deposits in banks	$	8		$	1		$	9
Federal funds sold		-			(7	)		(7	)
Investment securities		(16	)		(57	)		(73	)
Loans		69			(11	)		58
Total Interest Income		61			(74	)		(13	)
Interest Paid On:
NOW deposits		11			(38	)		(27	)
Savings deposits		(11	)		(228	)		(239	)
Money market deposits		(31	)		(124	)		(155	)
Time deposits		(74	)		(23	)		(97	)
Repurchase agreements		1			(23	)		(22	)
Long-term debt		59			(26	)		33
Total Interest Expense		(45	)		(462	)		(507	)
Net Interest Income	$	106		$	388		$	494

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, 2011 decreased to $525,000, as compared to a provision for loan losses of $700,000 for the corresponding 2010 period. The $525,000 provision for three months ended March 31, 2011 was primarily due to our assessment of the current state of the economy, prolonged high levels of unemployment in our market, allowances related to impaired loans and loan growth. The allowance for loan loss totaled $6.5 million, or 1.25% of total loans at March 31, 2011, as compared to $6.2 million, or 1.22% at December 31, 2010.

In management’s opinion, the allowance for loan losses, totaling $6.5 million at March 31, 2011, is adequate to cover losses inherent in the portfolio. 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 continued loan volume during 2011 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.

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Non-Interest Income

For the three months ended March 31, 2011, non-interest income amounted to $441,000 compared to $480,000 for the corresponding period in 2010. This decrease was primarily due to other loan fees decreasing approximately $38,000, or 25.9%, due primarily to lower fees generated by our residential mortgage department and, to a lesser degree, a decrease of $9,000, or 6.6%, in service fees on deposit accounts. These decreases were partially offset by higher bank-owned life insurance income of approximately $4,000, or 4.5%, resulting from increased purchases of such investments during 2010, and an increase of $4,000, or 3.6%, in other income primarily due to higher debit card activity.

Non-Interest Expenses

Non-interest expenses for the three months ended March 31, 2011 increased $153,000, or 3.3%, to $4.8 million compared to $4.6 million for the three months ended March 31, 2010. This increase was primarily due to salaries and employee benefits increasing $284,000, or 12.2%, resulting in part to the expansion of our lending division, annual salary merit increases and rising medical insurance costs. Loan workout and OREO expenses increased $12,000, or 9.8% primarily due to an increase in carrying costs and workout expenses relating to our impaired loans and OREO assets. These increases were offset by decreases in occupancy and equipment expense of $40,000, or 4.6%, primarily due to lower depreciation on capitalized expenditures. FDIC insurance and assessments decreased by $37,000, or 14.0%, primarily due to lower deposit levels as compared to the same period last year. Outside service fees decreased $26,000, or 21.3% due to lower network processing charges and appraisal costs. Subsequent to the acquisition of Town Bank as of April 1, 2006, the Company began amortizing identifiable intangible assets and incurred $58,000 in amortization expense for the first quarter of 2011 compared to $67,000 for the corresponding period in 2010.

Income Taxes

The Company recorded income tax expense of $535,000 for the three months ended March 31, 2011 compared to $348,000 for the three months ended March 31, 2010. The effective tax rate for the three months ended March 31, 2011 was 36.7%, compared to 35.5% for the corresponding period in 2010.

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FINANCIAL CONDITION

Assets

At March 31, 2011, our total assets were $652.7 million, an increase of $15.9 million, or 2.5%, over total assets of $636.8 million at December 31, 2010. At March 31, 2011, our total loans were $522.0 million, an increase of $9.0 million, or 1.8%, from the $513.0 million reported at December 31, 2010. Investment securities were $48.7 million at March 31, 2011 as compared to $47.3 million at December 31, 2010, an increase of $1.4 million, or 2.9%. At March 31, 2011, cash and cash equivalents totaled $40.8 million compared to $34.4 million at December 31, 2010, an increase of $6.4 million, or 18.4%, as our liquidity position continues to be strong at March 31, 2011. Goodwill totaled $18.1 million at both March 31, 2011 and December 31, 2010.

Liabilities

Total deposits increased $12.2 million, or 2.3%, to $536.7 million at March 31, 2011, from $524.5 million at December 31, 2010. Deposits are the Company’s primary source of funds. The deposit increase during the three month period ending March 31, 2011 was primarily attributable to the Company’s strategic initiative to continue to grow market share through core deposit relationships. The Company anticipates continued loan demand increases during 2011 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 continues to experience change in the mix of the deposit products through its branch sales efforts, which are 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 $48.7 million at March 31, 2011 compared to $47.3 million at December 31, 2010, an increase of $1.4 million, or 2.9%. During the three months ended March 31, 2011, investment securities purchases amounted to $6.7 million, while repayments and maturities amounted to $5.4 million. There were no sales of securities available for sale during the three months ended March 31, 2011 and 2010.

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, 2011, the Company maintained $17.3 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 in accordance with 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 $2.4 million at March 31, 2011. 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. 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 $405,000 at March 31, 2011.  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 $0 and $72,000 was recognized on the statement of operations during the three month period ending March 31, 2011 and for the year ended 2010, respectively. The Company recognized $177,000 and $243,000 of the other-than-temporary impairment in other comprehensive income at March 31, 2011 and 2010, respectively. The Company had no other-than-temporary impairment charge to earnings during the three months ended March 31, 2011 and 2010, respectively.

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, 2011, all of these securities are current with their scheduled interest payments, with the exception of the one pooled trust preferred security with an amortized cost basis of $272,000 at March 31, 2011, 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.

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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, 2011 and December 31, 2010.

	March 31,					December 31,
	2011					2010
	Amount			Percent		Amount			Percent
	(in thousands, except for percentages)
Commercial and industrial	$	134,632			25.8%	$	134,266			26.1%
Real estate – construction		34,578			6.6%		33,909			6.6%
Real estate – commercial		273,143			52.3%		262,996			51.2%
Real estate – residential		20,623			3.9%		21,473			4.2%
Consumer		59,593			11.4%		60,879			11.9%
Unearned fees		(583	)		0.0%		(529	)		0.0%
Total loans	$	521,986			100.0%	$	512,994			100.0%

For the three months ended March 31, 2011, total loans increased by $9.0 million, or 1.8%, to $522.0 million from $513.0 million at December 31, 2010. Adverse credit conditions have created a difficult environment for both borrowers and lenders.

Real estate commercial loans increased $10.1 million, or 3.9%, to $273.1 million at March 31, 2011 from $263.0 million at December 31, 2010. Commercial and industrial loans increased by $366,000, or 0.3%, to $134.6 million at March 31, 2011 from $134.3 million at December 31, 2010. Real estate construction loans increased by $669,000, or 2.0%, to $34.6 million at March 31, 2011 from $33.9 million at December 31, 2010. These increases were partially offset by decreases in real estate residential loans which decreased by $850,000, or 4.0%, to $20.6 million at March 31, 2011 from $21.5 million at December 31, 2010, and consumer loans which decreased $1.3 million, or 2.1%, to $59.6 million at March 31, 2011 from $60.9 million at December 31, 2010.

Other Real Estate Owned (“OREO”)

OREO represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried at the lower of cost or fair value less estimated selling costs. When a property is acquired, the excess of the loan balance over fair value is charged to the allowance for loan losses. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned are recorded as incurred. At March 31, 2011, the Bank had $7.7 million in other real estate owned as compared to $8.1 million in other real estate owned at December 31, 2010.

The decrease of $412,000 is due to the sale of one property located in Middlesex County for $407,000, for which the Company recognized a $5,000 loss. The OREO balance at March 31, 2011 includes our single largest OREO asset in the amount of $3.3 million, which was a commercial construction loan taken into OREO as a result of Deeds-in-Lieu. Our second largest OREO is related to a $2.4 million commercial time note, which was comprised of five pieces of collateral, subsequent to the sale of the aforementioned property. This OREO is now comprised of four pieces of collateral. The remaining $2.0 million is comprised principally of real estate construction and residential real estate properties obtained in partial or total satisfaction of loan obligations. All of our OREO are being aggressively marketed, and based on recent analysis, we do not currently anticipate any further loss from the ultimate liquidation of these properties.

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Asset Quality

One of our key operating objectives has been, and continues to be, to maintain a high level of credit 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. Our loan portfolio composition generally consists of loans secured by commercial real estate, development and construction of real estate projects in the Union and Monmouth County New Jersey area. We continue to have lending success and growth in the Medical markets through our Private Banking Department. Since the later part of 2008, the financial and capital markets have been faced with significant disruptions and volatility. The weakened economy has contributed to an overall challenge in building loan volume and we continue to be faced with declines in real estate values, which tend to reduce the collateral coverage of our existing loans. Efficient and effective asset-management strategies reflect the type and quality of assets being originated.

There is 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.

At March 31, 2011, commercial and industrial loans accounted for 25.8% of total loans, real estate - construction loans accounted for 6.6% of total loans and real estate – commercial loans accounted for 52.3% of total loans.  Real estate - residential accounted for 3.9% of total loans and consumer loans accounted for 11.4% of total loans. These percentages are well below our policy limits.

The Bank does not originate or purchase loans with payment options, negative amortization loans or sub-prime loans. For loans involved in a workout situation, a new or updated appraisal or evaluation, as appropriate, is ordered to address current project plans and market conditions that were considered in the development of the workout plan. The consideration include whether there has been material deterioration in the following factors: the performance of the project; conditions for the geographic market and property type; variances between actual conditions and original appraisal assumptions; changes in project specifications (e.g., changing a planned condominium project to an apartment building); loss of a significant lease or a take-out commitment; or increases in pre-sales fallout.  A new appraisal may not be necessary in instances where an internal evaluation is used and appropriately updates the original appraisal assumptions to reflect current market conditions and provides an estimate of the collateral’s fair value for impairment analysis.

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, 2011 and December 31, 2010, the Company had $6.2 million and $5.6 million, respectively, in non-accrual loans. The increase in non-performing loans at March 31, 2011 from December 31, 2010 was due largely to the addition of one $582,000 commercial and industrial loan, and management believes that this is not indicative of any systemic trends that we are aware of. All of the non-performing loans are secured by real estate. There were no loan balances past due 90 days or more and still accruing at March 31, 2011 and December 31, 2010.

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The following table summarizes our non-performing assets as of March 31, 2011 and December 31, 2010.

(dollars in thousands)	March 31, 2011			December 31, 2010
Non-Performing Assets:
Non-Performing Loans:
Commercial and industrial	$	1,374		$	792
Real estate-construction		523			523
Real estate-commercial		597			605
Consumer		3,724			3,729
Total Non-Performing Loans		6,218			5,649
Other Real Estate Owned		7,686			8,098
Total Non-Performing Assets	$	13,904		$	13,747
Ratios:
Non-Performing loans to total loans		1.19	%		1.10	%
Non-Performing assets to total assets		2.13	%		2.16	%
Restructured Loans	$	4,895		$	5,435

At March 31, 2011, non-performing commercial and industrial loans increased by $582,000 and real estate construction loans and consumer loans decreased by $8,000 and $5,000, respectively, from December 31, 2010. During the three month period ending March 31, 2011, there was one non-performing commercial construction loan in the amount of $523,000 and three commercial and industrial loans totaling $1.4 million. Real estate commercial loans consisted of two loans totaling $597,000 and consumer loans totaled $3.7 million consisting of three loans. At March 31, 2011, OREO balance was at $7.7 million as compared to $8.1 at December 31, 2010. Our single largest OREO asset is a $3.3 million commercial construction loan, which was taken into OREO as a result of Deeds-in-Lieu. Our second largest OREO relates to a $2.4 million commercial time note, which is currently comprised of four pieces of collateral. The remaining $2.0 million is comprised principally of real estate construction and residential real estate properties obtained in partial or total satisfaction of loan obligations. The decrease in the OREO balance from December 31, 2010 of $412,000 is due to the sale of one property located in Middlesex County for $407,000, for which the Company recognized a $5,000 loss.

At March 31, 2011, non-performing commercial and industrial loans increased by $582,000 from December 31, 2010, due to the addition of one loan during the first quarter.

At March 31, 2011, non-performing real-estate commercial loans decreased by $8,000 from December 31, 2010, due primarily to one loan which is making current payments through the Chapter 13 bankruptcy plan.

At March 31, 2011, non-performing consumer loans decreased by $5,000 from December 31, 2010, due primarily to one loan which is making current payments through the Chapter 13 bankruptcy plan.

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, 2011, all such loans continued to pay as agreed under the terms of the restructuring agreement.

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Allowance for Loan Losses

The following table summarizes our allowance for loan losses for the three months ended March 31, 2011 and 2010 and for the year ended December 31, 2010.

	March 31,						December 31,
	2011			2010			2010
	(in thousands, except percentages)
Balance at beginning of year	$	6,246		$	6,184		$	6,184
Provision charged to expense		525			700			3,100
Loans charged off, net		(230	)		-			(3,038	)
Balance of allowance at end of period	$	6,541		$	6,884		$	6,246
Ratio of net charge-offs to average loans outstanding		0.04	%		-			0.59	%
Balance of allowance as a percent of loans at period-end		1.25	%		1.36	%		1.22	%

At March 31, 2011, the Company’s allowance for loan losses was $6.5 million, compared with $6.2 million at December 31, 2010.  Loss allowance as a percentage of total loans at March 31, 2011 was 1.25%, compared with 1.22% at December 31, 2010. The Company had total provisions to the allowance for loan losses for the three month period ended March 31, 2011 in the amount of $525,000 as compared to $700,000 for the comparable period in 2010. There was $230,000 in net charge-offs for the three months ended March 31, 2011, compared to none for the same period in 2010. During the first quarter of 2011, the Company recorded a charge-off of $235,000 in connection with one commercial and industrial loan which was classified as troubled debt restructuring and had been previously reserved for. Non-performing loans at March 31, 2011 are either well-collateralized or adequately reserved for in the allowance for loan losses.

Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. Our methodology for evaluating the appropriateness of the allowance includes segmentation of the loan portfolio into its various asset components, tracking the historical levels of criticized loans and delinquencies, and assessing the nature and trend of loan charge-offs. Additionally, the volume of non-performing loans, concentration risks by size, type, and geography, new products and markets, collateral adequacy, credit policies and procedures, staffing, underwriting consistency, and economic conditions are taken  into consideration. 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.

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 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 allowance 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.  The level of the allowance is determined by assigning specific allowances to impaired loans and general allowances on all other loans. The portion of the allowance that is allocated to impaired loans is determined by estimating the inherent loss on each credit after giving consideration to the value of the underlying collateral. 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 allowance. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are realized in the periods in which they become known. Although management attempts to maintain the allowance at a level deemed adequate to cover any losses, 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 our 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.

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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. In 2009 and 2010, the Company purchased an additional $3.5 million and $1.0 million, respectively, 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 for future enhancements of the benefits under the SERP. Expenses related to the SERP were approximately $23,000 for the three months ended March 31, 2011 and 2010. Bank-owned life insurance involves our purchase of life insurance on a selected 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 statement of operations. Income on bank-owned life insurance amounted to $93,000 and $89,000 for the three months ended March 31, 2011 and 2010, respectively.

Premises and Equipment

Premises and equipment totaled approximately $3.0 million and $3.1 million at March 31, 2011 and December 31, 2010, respectively. The Company purchased premises and equipment amounting to $74,000 primarily to replace fully depreciated and un-repairable equipment, while depreciation expenses totaled $194,000 during the three months ended March 31, 2011.

Goodwill and Other Intangible Assets

Intangible assets totaled $18.7 million at March 31, 2011 and December 31, 2010. The Company’s intangible assets at March 31, 2011 were comprised of $18.1 million of goodwill and $574,000 of core deposit intangibles, net of accumulated amortization of $1.5 million. At December 31, 2010, the Company’s intangible assets were comprised of $18.1 million of goodwill and $632,000 of core deposit intangibles, net of accumulated amortization of $1.5 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, 2011, total deposits amounted to $536.7 million, reflecting an increase of $12.2 million, or 2.3%, from December 31, 2010. Core checking deposits increased $6.4 million, or 4.9%, savings accounts, inclusive of money market deposits, increased $1.0 million, or 0.4%, and time deposits increased $4.8 million, or 4.4%, during the first quarter of 2011. The Bank has continued to focus on building non-interest-bearing deposits, as this lowers the institution’s costs of funds. Additionally, our savings accounts and other interest-bearing deposit products, excluding high-cost certificates of deposit, provide an efficient and cost-effective source to 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, 2011 accounted for 90.1% of total deposits, compared to 89.8% at December 31, 2010. The balance in our certificates of deposit (“CD’s”) over $100,000 at March 31, 2011 totaled $53.3 million as compared to $53.5 million at December 31, 2010. During the three months ended March 31, 2011, the Company placed $5.0 million in brokered CD’s. The term on these CD’s range from 54 to 66 months with interest rates ranging from 2.15% to 2.25%. The Company found this strategy was able to provide a more cost-effective source of longer-term funding as the rates paid for these brokered CD’s were lower than current fixed rate term advances at the FHLB of New York.

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 and established a $7.0 million credit facility with another correspondent bank during the first quarter of 2011. These borrowings are priced on a daily basis. There were no outstanding borrowings under these lines at March 31, 2011 and December 31, 2010.  The Bank also has a remaining borrowing capacity with the FHLB of approximately $46.8 million based on current collateral pledged. At March 31, 2011 and December 31, 2010, the Bank had no short-term borrowings outstanding under this line.

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Long-term debt consisted of the following FHLB fixed rate advances at March 31, 2011 and at December 31, 2010:

	Amount	Rate	Original Term	Maturity
(dollars in thousands)
Convertible Note	$   7,500	3.97%	10 years	November 2017
Fixed Rate Note	1,500	1.67%	4 years	August 2014
Fixed Rate Note	1,500	2.00%	5 years	August 2015
Fixed Rate Note	1,500	2.41%	6 years	August 2016
Fixed Rate Note	1,500	2.71%	7 years	August 2017
	$   13,500	3.18%

The $7.5 million convertible note contains an option which allows the FHLB to adjust the rate on the note in November 2012 to the then current market rate offered by the FHLB. The Company has the option to repay this advance, if converted, without penalty.

Repurchase Agreements

Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days after the transaction date. Securities sold under agreements to repurchase are reflected as the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Securities sold under agreements to repurchase increased to $17.5 million at March 31, 2011 from $14.9 million at December 31, 2010, an increase of $2.6 million, or 17.6%.

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, 2011, the Company had $40.8 million in cash and cash equivalents as compared to $34.4 million at December 31, 2010. Cash and cash equivalent balances consisted of $7.0 million in Federal funds sold at March 31, 2011 and December 31, 2010, and $26.6 million and $21.3 million at the Federal Reserve Bank of New York at March 31, 2011 and December 31, 2010, respectively. It was determined by management during 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 averages 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.

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Management believes that any amounts actually drawn upon these commitments can be funded in the normal course of operations.  The following table sets forth the Bank’s off-balance sheet arrangements as of March 31, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010
	(dollars in thousands)
Home equity lines of credit	$	28,569	$	27,897
Commitments to fund commercial real estate and construction loans		52,475		32,908
Commitments to fund commercial and industrial loans		42,513		43,734
Commercial and financial letters of credit		5,332		5,661
	$	128,889	$	110,200

Capital

Shareholders’ equity increased by approximately $952,000, or 1.2%, to $81.1 million at March 31, 2011 compared to $80.2 million at December 31, 2010. Net income for the three month period ended March 31, 2011 added $923,000 to shareholders’ equity. Additionally, stock option compensation expense of $39,000, $48,000 in options exercised and $54,000 in the net unrealized gains on securities available for sale, net of tax, all contributed to the increase. These increases were partially offset by $112,000 relating to the dividends 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.

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, 2011, the Company and the Bank met all capital adequacy requirements to which they are subject.

The capital ratios of the Company and the Bank, at March 31, 2011 and December 31, 2010, 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, 2011			December 31, 2010			March 31, 2011			December 31, 2010			March 31, 2011			December 31, 2010
Community Partners		9.94	%		9.75	%		11.18	%		11.19	%		12.36	%		12.33	%
Two River		9.93	%		9.73	%		11.17	%		11.16	%		12.35	%		12.31	%
“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	%

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4.    Controls and Procedures.

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the 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, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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.

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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 16, 2011	By:	/s/ WILLIAM D. MOSS
			William D. Moss
			President and Chief Executive Officer
			(Principal Executive Officer)
Date:  May 16, 2011	By:	/s/ A. RICHARD ABRAHAMIAN
			A. Richard Abrahamian
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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