SOMERSET HILLS BANCORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - SOMERSET HILLS BANCORP	Financial_Report.xls
EX-32 - SOMERSET HILLS BANCORP	c69658_ex32.htm
EX-31.2 - SOMERSET HILLS BANCORP	c69658_ex31-2.htm
EX-31.1 - SOMERSET HILLS BANCORP	c69658_ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2012


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 0-50055

SOMERSET HILLS BANCORP

(Exact name of Registrant as Specified in Its Charter)

NEW JERSEY
(State or other jurisdiction of incorporation or organization)

22-3768777
(I.R.S. Employer Identification Number)

155 MORRISTOWN ROAD
BERNARDSVILLE, NEW JERSEY 07924
(Address of Principal Executive Offices)

(908) 221-0100
(Issuer’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 and 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 SD-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer 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 4, 2012 there were 5,331,783 shares of common stock, no par value, outstanding.

SOMERSET HILLS BANCORP
FORM 10-Q

INDEX


		Page(s)
Part I - Financial Information

Item I.	Financial Statements
	Consolidated Balance Sheets As of March 31, 2012 and December 31, 2011 (Unaudited)	3

	Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 (Unaudited)	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 (Unaudited)	5

	Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2012 (Unaudited)	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	8-19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

Part II - Other Information

Item 1.	Legal Proceedings	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

Signatures		27

Certifications		28-29

Exhibit 32		30

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PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

SOMERSET HILLS BANCORP
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)


	March 31, 2012			December 31, 2011


ASSETS
Cash and due from banks	$	5,784		$	4,588
Interest bearing deposits at other banks		37,996			55,411

Total cash and cash equivalents		43,780			59,999

Loans held for sale		1,495			2,969

Investment securities held to maturity (Estimated fair value of $10,104 in 2012 and $10,849 in 2011)		9,936			10,738
Investment securities available for sale		42,177			43,579

Loans receivable		231,777			232,485
Less: allowance for loan losses		(3,001	)		(2,982	)

Net loans receivable		228,776			229,503

Premises and equipment, net		4,963			4,996
Bank owned life insurance		8,068			8,000
Accrued interest receivable		1,139			1,168
Prepaid expenses		970			985
Other assets		2,386			2,088


Total assets	$	343,690		$	364,025


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Non-interest bearing deposits-demand	$	75,283		$	80,532
Interest bearing deposits-NOW, money market and savings		178,567			193,276
Certificates of deposit, under $100,000		20,275			20,875
Certificates of deposit, $100,000 and over		20,148			20,031

Total deposits		294,273			314,714


Federal Home Loan Bank advances		7,500			7,500
Other liabilities		1,227			1,442

Total liabilities		303,000			323,656


Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock – 1,000,000 shares authorized, none issued		—			—
Common Stock-authorized 9,000,000 shares of no par value; issued and outstanding, 5,331,783 shares in 2012 and 5,344,648 in 2011		36,875			36,972
Retained earnings		3,054			2,608
Accumulated other comprehensive income		761			789

Total stockholders’ equity		40,690			40,369


Total liabilities and stockholders’ equity	$	343,690		$	364,025

See accompanying notes to unaudited consolidated financial statements.

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SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)


	Three Months Ended March 31
	2012		2011


INTEREST INCOME
Loans, including fees	$	3,026	$	2,871
Investment securities		403		429
Interest bearing deposits with other banks		26		25

Total interest income		3,455		3,325

INTEREST EXPENSE
Deposits		290		359
Federal Home Loan Bank advances		66		91

Total interest expense		356		450


Net interest income		3,099		2,875

Provision for loan losses		75		75


Net interest income after provision for loan losses		3,024		2,800


NON-INTEREST INCOME
Service fees on deposit accounts		71		75
Gains on sales of mortgage loans, net		307		147
Bank owned life insurance		67		71
Gain on sales of investment securities, net		—		9
Other income		106		94

Total non-interest income		551		396


NON-INTEREST EXPENSE
Salaries and employee benefits		1,367		1,317
Occupancy expense		349		412
Advertising and business promotion		29		29
Stationery and supplies		45		43
Data processing		131		135
Other operating expense		396		417

Total non-interest expense		2,317		2,353


Income before income taxes		1,258		843

Provision for income taxes		438		240


Net income	$	820	$	603


Earnings per share:
Basic	$	0.15	$	0.11

Diluted	$	0.15	$	0.11

See accompanying notes to unaudited consolidated financial statements.

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SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)


	Three Months Ended March 31
	2012			2011


Net income	$	820		$	603
Unrealized holding gains (losses) on available for sale securities arising during the period		(42	)		(69	)
Reclassification adjustment for losses (gains) in realized income		—			(9	)

Net change in unrealized gains (losses)		(42	)		(78	)
Tax effect		14			26

Other comprehensive loss		(28	)		(52	)

Comprehensive income	$	792		$	551

See accompanying notes to unaudited consolidated financial statements.

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SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)


	Common Stock Number of Shares			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (loss), net of tax			Total

Balance, January 1, 2012		5,344,648		$	36,972		$	2,608		$	789		$	40,369

Exercise of common stock options, net of tax benefit		2,812			17			—			—			17
Stock based compensation					13			—			—			13
Net income for the period					—			820			—			820
Cash dividends paid – common ($0.07 per share)					—			(374	)		—			(374	)
Common stock repurchased		(15,677	)		(127	)		—			—			(127	)
Other comprehensive income, net of taxes					—			—			(28	)		(28	)

Total comprehensive income

Balance, March 31, 2012		5,331,783		$	36,875		$	3,054		$	761		$	40,690

See accompanying notes to unaudited consolidated financial statements.

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SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
(Unaudited)


	Three Months Ended March 31,
	2012			2011

OPERATING ACTIVITIES:
Net income	$	820		$	603
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		148			156
Provision for loan losses		75			75
Gain on sale of investment securities, net		—			(9	)
Stock-based compensation		13			12
Mortgage loans originated for sale		(18,396	)		(15,687	)
Proceeds from mortgage loan sales		20,177			16,881
Gain on sale of mortgage loans		(307	)		(147	)
Decrease (increase) in accrued interest receivable		29			(3	)
Increase in bank owned life insurance		(68	)		(71	)
Increase in other assets		(283	)		(360	)
Decrease in other liabilities		(201	)		(270	)


Net cash provided by operating activities		2,007			1,180


INVESTING ACTIVITIES:
Maturity and payments of investment securities held to maturity		801			—
Purchases of investment securities available for sale		(1,966	)		(1,000	)
Maturity and payments of investment securities available for sale		3,261			3,699
Proceeds from sale of investment securities available for sale		—			1,934
Net decrease (increase) in loans receivable		652			(12,198	)
Purchases of premises and equipment		(49	)		(14	)


Net cash provided by (used in) investing activities		2,699			(7,579	)


FINANCING ACTIVITIES:
Net decrease in demand deposit and savings accounts		(19,958	)		(4,322	)
Net decrease in certificates of deposit		(483	)		(531	)
Net change in proceeds from exercise of stock options		17			177
Common stock repurchased		(127	)		—
Cash dividends paid common stock		(374	)		(326	)

Net cash used in financing activities		(20,925	)		(5,002	)


Net decrease in cash and cash equivalents		(16,219	)		(11,401	)
Cash and cash equivalents at beginning of period		59,999			57,566

Cash and cash equivalents at end of period	$	43,780		$	46,165


Supplemental information:
Cash paid during the year for:
Interest	$	366		$	454
Income taxes		447			377

See accompanying notes to unaudited consolidated financial statements.

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SOMERSET HILLS BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Summary of Significant Accounting Policies

a) Basis of Presentation

Somerset Hills Bancorp (“the Company”) is a bank holding company, formed in January 2001 to own all the common stock of Somerset Hills Bank (“the Bank”), a New Jersey chartered commercial bank that opened for business in Bernardsville, Somerset County, New Jersey in December 1998. The only activity of Somerset Hills Bancorp is ownership of Somerset Hills Bank and its subsidiaries. At March 31, 2012, the Bank operated six banking offices: its main office, located in Somerset County, New Jersey, four branch offices in Morris County, New Jersey and one branch office in Union County, New Jersey. The Bank operates a licensed mortgage company subsidiary, Sullivan Financial Services, Inc. The Bank also operates a wealth management subsidiary, Somerset Hills Wealth Management, LLC. The Bank is also a 50% owner of Somerset Hills Title Group, LLC., a full service title agency based in Parsippany, New Jersey. During the first quarter of 2006 the Bank established a subsidiary to hold and manage a portion of the Bank’s investment portfolio, Somerset Hills Investment Holdings Inc. During the second quarter of 2008 the Bank established a subsidiary to hold and manage foreclosed real estate properties the Bank may take title to, SOMH Holdings, LLC. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “FRB”). The Bank’s deposits are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC and the New Jersey Department of Banking and Insurance (the “Department”). The operations of Somerset Hills Wealth Management, LLC are subject to the supervision and regulation of the Department. The operations of Sullivan Financial Services are subject to the supervision and regulation by the U. S. Department of Housing and Urban Development (HUD), the Veterans Administration, the Department and the banking departments in New York, Pennsylvania and Florida.

The accompanying unaudited consolidated financial statements included herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of management, are considered necessary for a fair presentation of the financial condition and results of operations for the periods presented. All adjustments made were of a normal and recurring nature. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The current dividend payments are being made out of income earned during the period. On April 19, 2012, the Board of Directors of the Company declared a quarterly cash dividend of $0.08 per share payable May 31, 2012 to shareholders of record as of May 17, 2012. The Board will review the amount and frequency of the Company’s cash dividends on an ongoing basis, based upon the Company’s results of operations, capital needs and other appropriate factors.

b) Net Income Per Common Share

Basic earnings per share of common stock is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the dilutive effect of potential common shares.

The following tables set forth the computations of basic and diluted earnings per share (dollars and share data in thousands, except per share amounts):


	Three Months Ended March 31, 2012						Three Months Ended March 31, 2011

	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount

Basic earnings per share:
Net income applicable to common stockholders	$	820		5,340	$	0.15	$	603		5,429	$	0.11

Effect of dilutive securities:
Options		—		41				—		61

Diluted EPS:
Net income applicable to common stock holders and assumed conversions	$	820		5,381	$	0.15	$	603		5,490	$	0.11

The tables above exclude options with exercise prices that exceed the average market price of the Company’s common stock during the periods presented because such options would have an anti-dilutive effect on the diluted earnings per common share calculation. The number of anti-dilutive common stock options totaled 26,887 and 10,805 for the three months ended March 31, 2012 and 2011, respectively.

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c) Stock-Based Compensation

Stock Options:


	For accounting purposes, the Company recognizes expense for common stock options awarded over the vesting period at the fair market value of the options on the date they are awarded.

	The following table summarizes stock option activity.


	Number of Shares			Weighted average exercise price		Weighted average life		Aggregate intrinsic value (in thousands)


Outstanding at December 31, 2011		346,018		$	7.64

Granted		—			—
Exercised		(2,812	)		5.97
Forfeited		—			—


Outstanding at March 31, 2012		343,206		$	7.65		4.7 Years	$	338


Exercisable as of March 31, 2012		249,497		$	7.35		3.1 Years	$	318

The total stock-based compensation expense for the first three months of 2012 and 2011 was approximately $13 thousand and $12 thousand, respectively. The total intrinsic value of common stock options exercised for the first three months of 2012 and 2011 was approximately $6 thousand and $84 thousand, respectively.

The per share weighted-average fair values of stock options granted during the first three months of 2011 was $1.96 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions for 2011: expected dividend yield of 2.44%, stock price volatility of 21.69%, risk-free interest rate of 2.84% and expected lives of 7 years. There were no stock options granted during the first three months of 2012.

Stock Awards:

At the 2012 Annual Meeting the stockholders approved the adoption of the 2012 Equity Incentive Plan. The Company established the 2012 Equity Incentive Plan for directors, officers and employees of the Company. Up to 150,000 shares of common stock have been approved for grants of options and restricted stock under the Plan.

For accounting purposes, the Company recognizes compensation expense for grants of restricted stock awarded under the Equity Incentive Plan over the vesting period at the fair market value of the shares on the date they are awarded. For share awards granted to date, the vesting period is four years with 25 percent of the award for each year vesting annually on May 23 of each year. As of March 31, 2012, 3,067 shares were vested. For the three month period ended March 31, 2012, the Company did not recognize any compensation expense related to the shares awarded. As of March 31, 2012 all share awards were vested and no additional costs related to previously granted shares are expected to be recognized.

d) Recent Accounting Pronouncements

Adoption of New Accounting Guidance

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs “which represents the convergence of the FASB’s and the IASB’s guidance on fair value measurement. ASU 2011-04 reflects the common requirements under U.S. GAAP and IFRS for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning for the term “fair value.” The new guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it is already required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. A public company is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s financial condition or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” the provisions of which allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in

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stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively and is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s financial condition or results of operations.

2. Segment Information

The Company’s mortgage operations are managed separately from the traditional banking and related financial services that the Company also offers. The mortgage company originates, predominantly for resale in the secondary market, conventional and non-conventional 1-4 family residential mortgages, Veterans Administration guaranteed mortgages, Department of Housing and Urban Development guaranteed mortgages and non-conventional programs, such as jumbo mortgages and a wide variety of adjustable products.

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments for the three months ended March 31, 2012 (in thousands):


	The Bank and The Bancorp		Sullivan Financial Services, Inc.			Eliminating entries			Consolidated


Interest income	$	3,437	$	30		$	(12	)	$	3,455
Interest expense		356		12			(12	)		356
Provision for loan losses		75		—			—			75
Non-interest income		274		307			(30	)		551
Non-interest expense including tax provision		2,523		262			(30	)		2,755
Net income		757		63			—			820

Total assets	$	343,085	$	3,553		$	(2,948	)	$	343,690

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments for the three months ended March 31, 2011 (in thousands):

	The Bank and The Bancorp		Sullivan Financial Services, Inc.			Eliminating Entries			Consolidated


Interest income	$	3,311	$	23		$	(9	)	$	3,325
Interest expense		450		9			(9	)		450
Provision for loan losses		75		—			—			75
Non-interest income		279		147			(30	)		396
Non-interest expense including tax provision		2,424		199			(30	)		2,593
Net income (loss)		641		(38	)		—			603

Total assets	$	323,898	$	3,622		$	(3,358	)	$	324,162

3. Fair Value

ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:


	Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

	Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

	Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair value of loans held for sale is based upon binding quotes from 3^rd party investors (Level 2 inputs).

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Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below at March 31, 2012 and December 31, 2011 (in thousands):


	Fair Value Measurements at March 31, 2012 Using

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)

Assets:
Available for sale securities
U.S. Government sponsored
Agency Securities		$	—		$	15,632		$	—
Mortgage Backed Securities - Residential			—			22,208			—
Collateralized Mortgage Obligations			—			2,006			—
Corporate debt securities			—			2,331			—
Loans held for sale			—			1,495			—


	Fair Value Measurements at December 31, 2011 Using

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)

Assets:
Available for sale securities
U.S. Government sponsored
Agency Securities		$	—		$	14,753		$	—
Mortgage Backed Securities – Residential			—			23,814			—
Collateralized Mortgage Obligations			—			2,734			—
Corporate debt securities			—			2,278			—
Loans held for sale			—			2,969			—

Assets Measured on a Non-Recurring Basis

There were no assets measured at fair value on a non-recurring basis at March 31, 2012 and December 31, 2011, respectively.

A loan is impaired when full payment under the loan terms is not expected. The fair value measurement for collateral dependent loans is based on the lesser of appraised value, broker opinion or projected list price of the property less estimated expenses for the disposal of the property which include taxes, commissions, first liens and legal fees. As of March 31, 2012 and December 31, 2011, there were no collateral dependent impaired loans for which there was a specific reserve.

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due nor on nonaccrual as of March 31, 2012 and December 31, 2011. No impairment charges were recognized on loans held for sale for the period ending March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31, 2011, the aggregate fair value, contractual balance (including accrued interest), and gain or loss was as follows (in thousands):


	March 31, 2012		December 31, 2011

Aggregate fair value	$	1,495	$	2,969
Contractual balance		1,485		2,928
Gain		10		41

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instrument. The estimation methodologies used, the estimated fair values, and recorded book balances at March 31, 2012 and December 31, 2011 are outlined below.

For cash and due from banks and interest bearing deposits, the recorded book value approximates fair value. The fair values of loans receivable are estimated based on a discounted cash flow analysis using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The estimated fair values of demand deposits (i.e., interest and non-interest bearing checking accounts, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts, and certificates of deposit approximate their fair values at the reporting date. The fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates to a schedule of aggregated expected monthly time deposit maturities. The fair value of fixed-rate Federal Home Loan Bank borrowings are estimated

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using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly Federal Home Loan borrowings maturities. The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value of letters of credit is based on the amount of unearned fees plus the estimated costs to terminate the letters of credit. Fair values of unrecognized financial instruments including commitments to extend credit and the fair value of letters of credit are considered immaterial.

The carrying amounts and estimated fair values of financial instruments not previously presented are summarized below at March 31, 2012 and December 31, 2011 (in thousands):


			Fair Value Measurements at March 31, 2012 Using

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)


Cash and due from banks	$	5,784		$	5,784		$	—		$	—
Interest bearing deposits		37,996			37,996			—			—
Investment securities held to maturity		9,936			—			10,104			—
Loans receivable, including deferred fees and costs		231,777			—			—			233,235
Demand, NOW, money market and savings		253,850			253,850			—			—
Certificates of deposit		40,423			—			41,318			—
Federal Home Loan Bank advances		7,500			—			8,614			—

			Fair Value Measurements at December 31, 2011 Using

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)


Cash and due from banks	$	4,588		$	4,588		$	—		$	—
Interest bearing deposits		55,411			55,411			—			—
Investment securities held to maturity		10,738			—			10,849			—
Loans receivable, including deferred fees and costs		232,485			—			—			235,344
Demand, NOW, money market and savings		273,808			273,808			—			—
Certificates of deposit		40,906			—			41,883			—
Federal Home Loan Bank advances		7,500			—			8,682			—


4.	Securities

	The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities held to maturity and available for sale are as follows at March 31, 2012 (in thousands):


	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value

Held to Maturity

Obligations of US States and Political Subdivisions	$	8,426	$	353	$	(7	)	$	8,772
Corporate debt securities		1,510		—		(178	)		1,332

Total held to maturity	$	9,936	$	353	$	(185	)	$	10,104


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Available for Sale

U.S. Government Sponsored Agency Securities	$	15,499	$	154	$	(21	)	$	15,632
Mortgage Backed Securities - Residential		21,189	$	1,019		—			22,208
Collateralized Mortgage Obligations		1,958		48		—			2,006
Corporate debt securities		2,378		34		(81	)		2,331

Total available for sale	$	41,024	$	1,255	$	(102	)	$	42,177

- 12 -

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities held to maturity and available for sale are as follows at December 31, 2011 (in thousands):


	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value

Held to Maturity

Obligations of US States and Political Subdivisions	$	9,228	$	412	$	—		$	9,640
Corporate debt securities		1,510		—		(301	)		1,209

Total held to maturity	$	10,738	$	412	$	(301	)	$	10,849


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Available for Sale

U.S. Government Sponsored Agency Securities	$	14,560	$	198	$	(5	)	$	14,753
Mortgage Backed Securities - Residential		22,775		1,039		—			23,814
Collateralized Mortgage Obligations		2,677		57		—			2,734
Corporate debt securities		2,372		—		(94	)		2,278

Total available for sale	$	42,384	$	1,294	$	(99	)	$	43,579

The amortized cost and fair value of the Company’s investment securities held to maturity and available for sale at March 31, 2012 and December 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 (in thousands).


March 31, 2012	Amortized Cost		Estimated Fair Value

Held to Maturity
Due in one year or less	$	375	$	376
Due in one to five years		705		654
Due in five years to ten years		2,016		2,113
Due after ten years		6,840		6,961

	$	9,936	$	10,104

Available for Sale
Due in one year or less	$	1,021	$	1,024
Due in one year to five years		6,933		6,971
Due in five years to ten years		4,448		4,506
Due after ten years		5,475		5,462
Mortgage Backed Securities and Collateralized Mortgage Obligations		23,147		24,214

	$	41,024	$	42,177

Gross unrealized losses on securities and the estimated fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 are as follows:


	Less than 12 months				12 Months or longer				Total

	Estimated Fair Value		Unrecog -nized Losses		Estimated Fair Value		Unrecog -nized Losses		Estimated Fair Value		Unrecog -nized Losses

Held to Maturity

Municipal securities	$	313	$	7	$	—	$	—	$	313	$	7
Corporate debt securities		505		6		827		172		1,332		178

Total	$	818	$	13	$	827	$	172	$	1,645	$	185

- 13 -


	Less than 12 months				12 Months or longer				Total

	Estimated Fair Value		Unreal- ized Losses		Estimated Fair Value		Unreal- ized Losses		Estimated Fair Value		Unreal- ized Losses

Available for Sale

U.S. Government Sponsored Agency Securities	$	3,978	$	21	$	—	$	—	$	3,978	$	21
Corporate debt securities		—		—		919		81		919		81

Total	$	3,978	$	21	$	919	$	81	$	4,897	$	102


	Less than 12 months				12 Months or longer				Total

	Estimated Fair Value		Unrecog -nized Losses		Estimated Fair Value		Unrecog -nized Losses		Estimated Fair Value		Unreco g-nized Losses

Held to Maturity

Corporate debt securities	$	450	$	62	$	759	$	239	$	1,209	$	301

Total	$	450	$	62	$	759	$	239	$	1,209	$	301


	Less than 12 months				12 Months or longer				Total

	Estimated Fair Value		Unreal- ized Losses		Estimated Fair Value		Unreal- ized Losses		Estimated Fair Value		Unreal- ized Losses

Available for Sale

U.S. Government sponsored Agency Securities	$	3,010	$	5	$	—	$	—	$	3,010	$	5
Corporate debt securities		1,352		20		926		74		2,278		94

Total	$	4,362	$	25	$	926	$	74	$	5,288	$	99

At March 31, 2012, there were $827 thousand in securities held to maturity with gross unrecognized losses that had been in a continuous unrealized loss position for twelve or more months. Unrealized losses on these securities have not been recognized into income because the issuer(s) bonds are investment grade, management does not intend to sell and it is not likely that management will be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely a result of the securities of these issuers falling out of favor in the broader bond market. The fair value is expected to recover as the bond(s) approach maturity.

For the three months ended March 31, 2011 the gross proceeds on sale of investment securities was approximately $1.9 million. For the three months ended March 31, 2011 gross gains on sale of investment securities were $20 thousand and gross losses on sale of investment securities were $11 thousand. There were no sales of investment securities for the three months ended March 31, 2012.

Securities with an amortized cost of $892 thousand were pledged to secure public funds on deposit at March 31, 2012.

5. Loans

The following schedule presents the components of loans, net of unearned income, for each period presented:


	March 31, 2012						December 31, 2011

	Amount			Percent			Amount			Percent

	(Dollars In Thousands)

Commercial	$	27,256			11.8	%	$	32,206			13.9	%
Construction, land and land development		6,531			2.8			7,505			3.2
Commercial mortgages		120,226			51.9			113,148			48.7
Residential mortgages		38,179			16.5			37,360			16.1
Consumer		39,367			17.0			42,074			18.1

Gross loans		231,559			100.0	%		232,293			100.0	%

Net deferred costs		218						192

Total loans		231,777						232,485
Less: Allowance for loan losses		(3,001	)					(2,982	)

Net loans	$	228,776					$	229,503

- 14 -

The following table presents information about impaired loans by loan portfolio class as of March 31, 2012 and December 31, 2011 (in thousands):


March 31, 2012	Unpaid Principal Balance		Recorded Investment		Related Allowance


With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial mortgage		759		762		—
Construction, land and land development		—		—		—
Consumer		136		136		—
Residential		—		—		—

With an allowance recorded:
Commercial		—		—		—
Commercial mortgage		343		347		10
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—


Total:
Commercial		—		—		—
Commercial mortgage		1,102		1,109		10
Construction, land and land development		—		—		—
Consumer		136		136		—
Residential		—		—		—

December 31, 2011	Unpaid Principal Balance		Recorded Investment		Related Allowance


With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial mortgage		765		768		—
Construction, land and land development		—		—		—
Consumer		146		146		—
Residential		—		—		—

With an allowance recorded:
Commercial		—		—		—
Commercial mortgage		344		344		11
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—


Total:
Commercial		—		—		—
Commercial mortgage		1,109		1,112		11
Construction, land and land development		—		—		—
Consumer		146		146		—
Residential		—		—		—

- 15 -


	Three months ended

	March, 31 2012		March 31 2011

Average of individually impaired loans during period:

Commercial	$	—	$	213
Commercial mortgage		1,105		1,770
Construction, land and land development		—		—
Consumer		144		—
Residential		—		—


Interest income recognized during impairment:

Commercial	$	—	$	3
Commercial mortgage		19		23
Construction, land and land development		—		—
Consumer		—		—
Residential		—		—

There was no cash-basis interest income recognized on any loans for the three months ended March 31, 2012 and 2011, respectively.

The outstanding balances of non-accrual loans, loans past due 90 days and still accruing, other real estate owned, and troubled debt restructured loans as of March 31, 2012 and December 31, 2011 were as follows (in thousands):


	March 31, 2012		December 31, 2011


Nonaccrual loans	$	136	$	146
Loans past due 90 days and still accruing		—		—

Total non-performing loans		136		146
OREO		—		—

Total non-performing assets	$	136	$	146

Troubled debt restructured loans	$	343	$	344

The following table presents loans receivable on nonaccrual status by loan portfolio class as of March 31, 2012 and December 31, 2011 (in thousands):


Nonaccrual loans	March 31, 2012		December 31, 2012


Commercial	$	—	$	—
Commercial mortgage		—		—
Construction, land and land development		—		—
Consumer		136		146
Residential		—		—


Total	$	136	$	146

The balance of troubled debt restructured loans at March 31, 2012 and December 31, 2011 is represented by one credit that is currently performing under its restructured terms and for which the Company has no commitment to lend additional funds. The modification of terms of such loan include one or a combination of the following: a reduction of the stated interest rate on the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction in the recorded investment in the loan. During the three months ended March 31, 2012 there were no new loans modified as troubled debt restructurings. This troubled debt restructured loan did not have any payment defaults.

- 16 -

The following table presents past due and current loans, including non accrual and restructured loans, by the loan portfolio class as of March 31, 2012 and December 31, 2011 (in thousands):


March 31, 2012	30-59 days past due		60-89 days past due		Greater than 90 Days past due		Total past due		Current		Total loans receivable		Loans past due 90 days and still accruing


Commercial	$	125	$	122	$	—	$	247	$	27,009	$	27,256	$	—
Commercial mortgage		455		—		—		455		119,771		120,226		—
Construction, land and land development		—		—		—		—		6,531		6,531		—
Consumer		—		152		136		288		39,079		39,367		—
Residential		—		—		—		—		38,179		38,179		—

Total	$	580	$	274	$	136	$	990	$	230,569	$	231,559	$	—


December 31, 2011	30-59 days past due		60-89 days past due		Greater than 90 Days past due		Total past due		Current		Total loans receivable		Loans past due 90 days and still accruing


Commercial	$	—	$	259	$	—	$	259	$	31,947	$	32,206	$	—
Commercial mortgage		—		468		—		468		112,680		113,148		—
Construction, land and land development		—		—		—		—		7,505		7,505		—
Consumer		—		148		146		294		41,780		42,074		—
Residential		—		—		—		—		37,360		37,360		—

Total	$	—	$	875	$	146	$	1,021	$	231,272	$	232,293	$	—

The Company categorizes loans into risk categories based on relevant information about the quality and realizable value of collateral, if any, and the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed whenever a credit is extended, renewed or modified, or when an observable event occurs indicating a potential decline in credit quality, and no less than annually for large balance loans. The Company uses the following definitions for risk ratings:


	Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

	Substandard - Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor, or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Normal payment from the borrower is in jeopardy, although loss of principal, while still possible, is not imminent.

	Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

The following table presents the risk category of loans by class of loans based on the most recent analysis performed as of March 31, 2012 and December 31, 2011 (in thousands). Each balance in the table below represents unpaid principal balance, which approximates recorded investment:


March 31, 2012
Credit risk profile by internally assigned grades	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	24,298	$	2,958	$	—	$	—	$	27,256
Commercial mortgage		117,988		1,136		1,102		—		120,226
Construction, land and land development		6,531		—		—		—		6,531
Consumer		38,559		672		136		—		39,367
Residential		37,374		805		—		—		38,179

Total	$	224,750	$	5,571	$	1,238	$	—	$	231,559

- 17 -


December 31, 2011

Credit risk profile by internally assigned grades	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	29,215	$	2,991	$	—	$	—	$	32,206
Commercial mortgage		110,500		1,539		1,109		—		113,148
Construction, land and land development		7,505		—		—		—		7,505
Consumer		41,780		148		146		—		42,074
Residential		36,555		805		—		—		37,360

Total	$	225,555	$	5,483	$	1,255	$	—	$	232,293


	The following table represents the allocation of allowance for loan losses and the related loans by loan portfolio segment disaggregated based on the impairment methodology at March 31, 2012 and December 31, 2011.


March 31, 2012

(in thousands)	Commercial		Commercial Mortgage		Construction, Land and Land Development		Consumer		Residential		Unallocated		Total

Allowance for Loan Losses:
Individually evaluated for impairment	$	—	$	10	$	—	$	—	$	—	$	—	$	10
Collectively evaluated for impairment		456		1,618		106		526		219		66		2,991

Total	$	456	$	1,628	$	106	$	526	$	219	$	66	$	3,001


Loans Receivable
Individually evaluated for impairment	$	—	$	1,102	$	—	$	136	$	—			$	1,238
Collectively evaluated for impairment		27,256		119,124		6,531		39,231		38,179				230,321

Total	$	27,256	$	120,226	$	6,531	$	39,367	$	38,179			$	231,559


December 31, 2011

(in thousands)	Commercial		Commercial Mortgage		Construction, Land and Land Development		Consumer		Residential		Unallocated		Total

Allowance for Loan Losses:
Individually evaluated for impairment	$	—	$	11	$	—	$	—	$	—	$	—	$	11
Collectively evaluated for impairment		522		1,531		122		531		215		50		2,971

Total	$	522	$	1,542	$	122	$	531	$	215	$	50	$	2,982


Loans Receivable
Individually evaluated for impairment	$	—	$	1,109	$	—	$	146	$	—			$	1,255
Collectively evaluated for impairment		32,206		112,039		7,505		41,928		37,360				231,038

Total	$	32,206	$	113,148	$	7,505	$	42,074	$	37,360			$	232,293

- 18 -

The following table presents the activity in the Company’s allowance for loan losses by class of loans based on the most recent analysis performed for the three months ended March 31, 2012 (in thousands):


Allowance for Loan Losses	Commercial			Commercial Mortgage		Construction, Land and Land Development			Consumer			Residential		Unallocated		Total

Balance January 1, 2012	$	522		$	1,542	$	122		$	531		$	215	$	50	$	2,982
Charge-offs		(67	)		—		—			—			—		—		(67	)
Recoveries		3			8		—			—			—		—		11
Provision for loan losses		(2	)		78		(16	)		(5	)		4		16		75

Balance, March 31, 2012	$	456		$	1,628	$	106		$	526		$	219	$	66	$	3,001


Allowance for Loan Losses	Commercial			Commercial Mortgage		Construction, Land and Land Development			Consumer			Residential		Unallocated			Total

Balance January 1, 2011	$	186		$	1,821	$	102		$	506		$	205	$	55		$	2,875
Charge-offs		—			—		—			(2	)		—		—			(2	)
Recoveries		5			—		—			—			—		—			5
Provision for loan losses		(19	)		109		(11	)		(12	)		25		(17	)		75

Balance, March 31, 2011	$	172		$	1,930	$	91		$	492		$	230	$	38		$	2,953

- 19 -

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this document discuss future expectations, contain projections or results of operations or financial conditions or state other “forward-looking” information. Those statements are subject to known and unknown risk; uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. We based the forward-looking statements on various factors and using numerous assumptions. Important factors that may cause actual results to differ from those contemplated by forward-looking statements include those disclosed under Item 1A – Risk Factors as included in the Company’s Annual Report Form 10K filed for the year ended December 31, 2011.

CRITICAL ACCOUNTING POLICIES

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements of the Company for the year ended December 31, 2011 included in its Annual Report Form 10-K filed under the Securities Exchange Act of 1934. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management. Management believes the Company’s policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and the Board of Directors of the Company. The allowance for loan losses is based upon management’s evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the portfolio, giving consideration to the size and composition of the loan portfolio, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectability may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short- term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company’s loans are secured by real estate in the state of New Jersey. Accordingly, the collectability of a substantial portion of the carrying value of the Company’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the Company’s market area experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control. Additional information is contained on pages 21 and 23 of this Form 10-Q for the provision and allowance for loan losses.

RESULTS OF OPERATIONS

Overview

For the three months ended March 31, 2012 net income was $820,000, or $0.15 per diluted share, compared to $603,000, or $0.11 per diluted share, for the same period in 2011. The 36.0% increase in net income and the 36.4% increase in diluted earnings per share were due to higher net interest income, higher non-interest income (largely gains on sales of mortgage loans), and lower non-interest expenses. At March 31, 2012, total assets were $343.7 million, a decrease of $20.3 million from $364.0 million at year-end 2011. The decrease was primarily due to a $16.2 million decline in cash and cash equivalents, a $2.2 million decline in investment securities, and a $1.5 million decline in loans held for sale. Total deposits as of March 31, 2012 totaled $294.3 million, representing a $20.4 million decrease from year-end 2011. The decreases in balances as of March 31, 2012 from year-end 2011 largely represent seasonal variances and do not reflect the Bank’s recent trends of growth in loans, securities and deposits (see “Comparative Average Balance Sheets” below).

Net Interest Income

Fully taxable equivalent (“FTE”) net interest income for the first quarter of 2012 totaled $3.146 million, an increase of $221,000, or 7.6%, from $2.925 million earned in the first quarter of 2011. The increase in FTE net interest income was primarily due to an increase in average interest-earning assets, which grew by 10.9% to $329.6 million in 2012 from $297.3 million in 2011. The growth in assets was primarily due to growth in average loans and average investment securities, which measured 7.9% and 16.7%, respectively. The benefit to net interest income attributable to the higher volume of interest-earning assets was partially offset by a contraction in the net interest margin which, due largely to increased excess liquidity, narrowed by 15 basis points to 3.84% in the current quarter from the prior year quarter. Margin contraction was also due to loans and securities re-pricing downward at a faster pace than interest-bearing funding sources, although this was partially mitigated by an improved funding mix, reflecting a 16.0% increase in core deposits.

- 20 -

The following tables present a summary of the Company’s interest-earning assets and their average yields, and interest-bearing liabilities and their average costs and stockholders’ equity for both the three months ended March 31, 2012 and 2011. The average balances are derived from average daily balances. The average balance of loans includes non-accrual loans, and associated yields include loan fees, which are considered an adjustment to yields.

Comparative Average
Balance Sheets
Three Months Ended March 31


	2012								2011

	Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid

	(Dollars in Thousands)
Assets
Interest bearing deposits at other banks	$	40,281		$	26		0.26	%	$	33,469		$	25		0.31	%
Loans		232,507			2,996		5.18	%		215,494			2,850		5.36	%
Loans held for sale		2,327			30		5.13	%		1,402			21		6.07	%
Investment securities		53,719			440		3.30	%		46,035			465		4.10	%
Restricted stock		784			10		4.91	%		947			14		5.77	%

Total interest earning assets	$	329,618		$	3,502		4.27	%	$	297,347		$	3,375		4.60	%

Non-interest earning assets		24,139								23,309
Allowance for loan losses		(3,008	)							(2,913	)

Total Assets	$	350,749							$	317,743


Liabilities and Equity

Interest bearing demand deposits	$	153,769		$	70		0.18	%	$	135,170		$	132		0.40	%
Savings		7,520			2		0.11	%		7,502			4		0.21	%
Money Market		25,936			13		0.21	%		18,554			17		0.37	%
Certificates of deposits		40,561			205		2.03	%		41,082			206		2.04	%
FHLB advances/ other borrowings		7,500			66		3.52	%		11,000			91		3.37	%

Total interest bearing liabilities		235,286			356		0.61	%		213,308			450		0.86	%

Non-Interest Bearing Liabilities:
Non-interest bearing deposits		73,259								63,247
Other liabilities		1,247								1,415


Total Liabilities		309,792								277,970
Stockholders’ Equity		40,957								39,773


Total Liabilities and Stockholders’ Equity	$	350,749							$	317,743


Net Interest Income				$	3,146							$	2,925

Net Interest Spread							3.66	%							3.74	%
Net Interest Margin							3.84	%							3.99	%

The data contained in the table has been adjusted to a tax equivalent basis, based on the Company’s federal statutory rate of 34 percent. Management believes that this presentation provides comparability of net interest income and net interest margin arising from both taxable and tax-exempt sources and is consistent with industry practice and SEC rules.

Provision for Loan Losses

The provision for loan losses was $75,000 for the first quarter of both 2012 and 2011. The loan loss provisioning during 2012 was largely due to the charge-off of one specific credit, whereas the provisioning in 2011 was primarily attributable to loan growth. The Company’s asset quality metrics, such as nonaccrual loan, charge-off, and delinquency ratios remain sound relative to its competitive peer groups, and the relatively low level of loan loss provisioning during both 2012 and 2011 reflects very few new problem credits. Nevertheless, management continues to believe that there remains a heightened risk in certain segments of the loan portfolio. Management regularly reviews the adequacy of its allowance and may provide for additional provisions in future periods due to increased general weakness in the economy or in our geographic trade area, deterioration or impairment of specific credits, or as management may deem necessary.

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Non-Interest Income

Non-interest income increased by $155,000 to $551,000 in the first quarter of 2012 from $396,000 in the first quarter of 2011, primarily due to a $160,000 increase in gains on sales of residential loans at Sullivan Financial Services, Inc., a wholly-owned mortgage banking subsidiary of the Bank, which originates loans for sale on a pre-sold flow-basis and, on a limited basis, for retention in the Bank’s portfolio. Sullivan’s origination volume increased due to higher refinancing activity, reflecting a significantly lower interest rate environment in the current quarter versus the prior year quarter. Additionally, the first quarter of 2011 included $9,000 in net gains from the sale of investment securities, while the first quarter of 2012 reflected a modest net increase in banking and wealth management fees.

Non-Interest Expense

For the first quarter of 2012, noninterest expenses totaled $2.317 million, a decrease of $36,000, or 1.5%, from $2.353 million in the first quarter of 2011. The decrease was due primarily to decreases in occupancy expense, which declined by $63,000, and FDIC insurance assessment, which declined by $40,000. Partially offsetting these declines were a $50,000 increase in salaries and employee benefits, due largely to higher incentive based compensation, and a $12,000 increase in directors’ fees. Management continues its cost containment efforts which have yielded cost savings in all areas of the Company’s operations.

Income Taxes

The Company recorded provisions for income taxes of $438,000 for the first quarter of 2012 compared to $240,000 for the first quarter of 2011. The effective tax rate was 34.8% for the first quarter of 2012 and 28.5% for same period one year ago. The increase in the effective tax rate was due to an increase in revenue from taxable sources.

FINANCIAL CONDITION

March 31, 2012 as compared to December 31, 2011

At March 31, 2012, total assets were $343.7 million, a decrease of $20.3 million from $364.0 million at year-end 2011. The decrease was primarily due to a $16.2 million decline in cash and cash equivalents, a $2.2 million decline in investment securities, and a $1.5 million decline in loans held for sale. Total deposits as of March 31, 2012 totaled $294.3 million, representing a $20.4 million decrease from year-end 2011. The decreases in balances as of March 31, 2012 from year-end 2011 largely represent seasonal variances and do not reflect the Bank’s recent trends of growth in loans, securities and deposits (see “Comparative Average Balance Sheets” below).

Our portfolio of investment securities available for sale decreased slightly, from $43.6 million at year-end 2011 to $42.2 million at March 31, 2012, despite $2.0 million in securities purchases during the first three months of 2012, as the prolonged period of lower interest rates has resulted in continued pay-downs of mortgage-backed securities and calls of certain agency obligations. During the first three months of 2012, $4.1 million in securities matured or were sold, called or prepaid. There were $761 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $66 thousand in net amortization expenses during the first three months of 2012.

Since 2009, management has taken a cautious approach with regard to liquidity and interest rate risk by largely depositing net inflows into the Bank’s Federal Reserve Bank account, which is currently earning 0.25% per annum. As a result, cash and cash equivalents have remained high by historical standards. Cash and cash equivalents totaled $43.8 million at March 31, 2012 and $60.0 million at December 31, 2011.

Total loans receivable at March 31, 2012 decreased $0.7 million to $231.8 million from $232.5 million at year-end 2011. The changes in and composition of the loan portfolio, by category, as of March 31, 2012 compared to December 31, 2011 are as follows: Commercial loans decreased $4.9 million to $27.3 million, construction, land and land development loans decreased by $1.0 million to $6.5 million, commercial mortgage loans increased $7.1 million to $120.2 million; consumer loans decreased by $2.7 million to $39.4 million; and residential mortgage loans increased by $0.8 million to $38.2 million. At the end of the first quarter of 2012, the Bank’s commercial loan pipeline of approved loans approximated $20 million.

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The following schedule presents the components of loans, net of unearned income, for each period presented:


	March 31, 2012					December 31, 2011

	Amount		Percent			Amount		Percent

	(Dollars In Thousands)

Commercial	$	27,256		11.8	%	$	32,206		13.9	%
Construction, land and land development		6,531		2.8			7,505		3.2
Commercial mortgages		120,226		51.9			113,148		48.7
Residential mortgages		38,179		16.5			37,360		16.1
Consumer		39,367		17.0			42,074		18.1

Gross loans		231,559		100.0	%		232,293		100.0	%

Net deferred costs		218					192

Total loans		231,777					232,485
Less: Allowance for loan losses		3,001					2,982

Net loans	$	228,776				$	229,503

Commercial loans are loans made for business purposes and are primarily secured by collateral, such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, inventory and equipment and liens on commercial and residential real estate. Construction, land and land development loans include loans secured by first liens on commercial or residential properties to finance the construction or renovation of such properties. Commercial mortgages include loans secured by first liens on completed commercial properties to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences. Consumer loans consist primarily of home equity loans secured by 1^st or 2^nd liens.

ASSET QUALITY

The following table sets forth information concerning the Company’s non-performing assets and troubled debt restructurings (“TDRs”) as of the dates indicated (in thousands):


	March 31, 2012			December 31, 2011


Non-accrual loans	$	136		$	146
Loans past due 90 days and still accruing		—			—

Total non-performing loans	$	136		$	146
OREO		—			—

Total non-performing assets	$	136		$	146

Troubled debt restructured loans	$	343		$	344


Non-accrual loans to total loans		0.06	%		0.06	%
Non-performing assets to total assets		0.04			0.04
Allowance for loan losses to non-performing loans		2,207			2,042
Allowance for loan losses to total loans		1.30			1.28

Loans delinquent 30-89 days were $854 thousand at March 31, 2012, a decrease from $875 thousand at December 31, 2011.

As of March 31, 2012 and December 31, 2011, there were $1.2 million in impaired loans. The amount of the allowance for loan losses allocated for impaired loans as of March 31, 2012 and December 31, 2011 was $10 thousand and $11 thousand, respectively.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Provisions are charged to expense and the allowance is reduced by charge-offs, net of recoveries, and is increased by the provision. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the Company’s allowance for loan losses.

At March 31, 2012, the allowance for loan losses was $3.0 million, an increase of $19 thousand from year-end 2011. Net charge-offs totaled $56,000 during the first quarter of 2012. Net recoveries totaled $3,000 during the first quarter of 2011. The allowance for loan losses as a percentage of loans receivable was 1.30% at March 31, 2012 and 1.28% at December 31, 2011.

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The following table describes the activity in the allowance for loan losses account for the periods ended (in thousands):


	For the three months ended March 31, 2012			For the three months ended March 31, 2011


Allowance for loan losses at beginning of period	$	2,982			2,875
Charge-offs		(67	)		(2	)
Recoveries		11			5

Net charge-offs		(56	)		3
Provision for loan losses		75			75

Allowance for loan losses at end of period	$	3,001			2,953

INTEREST RATE SENSITIVITY ANALYSIS

The principal objective of the Company’s asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given the Company’s business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. The Company seeks to reduce the vulnerability of its operations to changes in interest rates, and actions in this regard are taken under the guidance of the Asset/Liability Committee (the “ALCO”). The ALCO generally reviews the Company’s liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

The Company currently utilizes net interest income simulation and economic value of portfolio equity (“EVPE”) models to measure the potential impact to the Company of future changes in interest rates. As of March 31, 2012 and 2011, the results of the models were within guidelines prescribed by the Company’s Board of Directors. If model results were to fall outside prescribed ranges, action would be required by the ALCO.

The net interest income simulation model, which is based on multiple assumptions, attempts to measure the change in net interest income over the next one-year period assuming certain changes in the general level of interest rates. In our model, which was run as of March 31, 2012, we estimated that a gradual (often referred to as “ramped”) 200 basis-point increase in the general level of interest rates will decrease our net interest income by 1.3%, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.8%. As of March 31, 2011, our model predicted that a 200 basis point gradual increase in general interest rates would decrease net interest income by 0.4%, while a 200 basis point decrease would decrease net interest income by 1.4%.

An EVPE analysis is also used to dynamically model the present value of asset and liability cash flows with rate shocks of up and down 200 basis points. The economic value of equity is likely to be different as interest rates change. The Company’s estimated variance in EVPE as a percentage of assets as of March 31, 2012, was -1.89% with a rate shock of up 200 basis points, and +0.02% with a rate shock of down 200 basis points. At March 31, 2011, the variances were -1.51% assuming an up 200 basis points rate shock and +0.33% assuming a down 200 basis points rate shock.

LIQUIDITY MANAGEMENT AND CAPITAL RATIOS

The Company’s liquidity is a measure of its ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. The Company’s principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.

At March 31, 2012, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short- and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied. As of December 31, 2011, liquid assets (cash and due from banks, interest bearing deposits at other banks and unencumbered investment securities) were $79.1 million, which represented 23.0% of total assets and 26.2% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of March 31, 2012, had the ability to borrow $76.5 million. The Bank also has a credit facility with the Federal Reserve Bank of New York for direct discount window borrowings that had, as of March 31, 2012, an approximate borrowing capacity based on pledged collateral of $9.5 million. In addition, the Bank has in place additional borrowing capacity of $18.5 million through correspondent banks. At March 31, 2012, the Bank had aggregate available and unused credit of $97.0 million, which represents the aforementioned facilities totaling $104.5 million net of $7.5 million in outstanding borrowings. At March 31, 2012 outstanding commitments for the Bank to extend credit were $89.6 million.

Total stockholders’ equity increased to $40.7 million at March 31, 2012 from $40.4 million at year-end 2011. Activity in stockholders’ equity consisted of an increase in retained earnings of $446 thousand which represents net income of $820 thousand earned during the first three months of 2012 offset by cash dividend payments of $374 thousand. During the first three months of 2012, common stock decreased by $97 thousand due to common stock repurchases of $127 thousand, partially offset by the exercise of previously issued stock options of $17 thousand and $13 thousand in stock based compensation. Accumulated comprehensive income decreased by $28 thousand resulting from a net change in unrealized gain on securities available for sale.

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At March 31, 2012 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at March 31, 2012 and 2011, for the Bank, as well as the minimum regulatory requirements.


	Actual					Minimum Regulatory Requirement					For Classification as Well Capitalized

	Amount		Ratio			Amount		Minimum Ratio			Amount		Ratio


March 31, 2012
Leverage Capital	$	37,823		10.79	%	$	14,018		4.00	%	$	17,522		≥5.00	%
Tier 1-Risk Based		37,823		14.21			10,650		4.00			15,974		≥6.00
Total Risk-Based		40,824		15.33			21,300		8.00			26,624		≥10.00

	Amount		Ratio			Amount		Minimum Ratio			Amount		Ratio


March 31, 2011
Leverage Capital	$	34,723		10.94	%	$	12,699		4.00	%	$	15,873		≥5.00	%
Tier 1-Risk Based		34,723		13.84			10,033		4.00			15,050		≥6.00
Total Risk-Based		37,676		15.02			20,066		8.00			25,084		≥10.00

The Company’s ratio of equity capital to total assets was 11.84% as of March 31, 2012 and 12.28% as of March 31, 2011. As the Company has less than $500 million in consolidated assets, it is not subject to regulatory capital requirements at the consolidated holding company level.

ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4 – CONTROLS AND PROCEDURES


	(a)	Evaluation of disclosure controls and procedures

		The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period reported on in this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

	(b)	Changes in internal controls.

		There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

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Part II Other Information

Item 1. Legal Proceedings

The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses. In the opinion of management, no material loss is expected from any such pending lawsuit.

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

(a) and (b) - none


	(c)	In February of 2007, our Board of Directors adopted a stock repurchase program under which we may repurchase up to 250,000 shares of our common stock in open market or privately negotiated transactions. In October, 2007 the Board increased this program by 250,000 shares and in October, 2011 the Board increased this program by another 250,000 shares. The following table shows the Company’s repurchases during the first quarter of 2012:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

January 1 – January 31		—	$	—		—		309,284
February 1 – February 29		10,769		8.02		10,769		298,515
March 1 – March 31		4,908		8.04		4,908		293,607


Total		15,677		8.03		15,677		293,607

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

Exhibits


	Exhibit 31.1 – Certification of Stewart E. McClure, Jr. pursuant to SEC Rule 13a-14(a)
	Exhibit 31.2 – Certification of William S. Burns pursuant to SEC Rule 13a-14(a)
	Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101	The following materials from Somerset hills Bancorp’s Quarterly Report on Form 10-Q for the period ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

101.INS**	XBRL Instance Document

101.SCH**	XBRL Taxonomy Extension Schema

101.CAL**	XBRL Taxonomy Extension Calculation Linkbase

101.DEF**	XBRL Taxonomy Extension Definition Linkbase

101.LAB**	XBRL Taxonomy Extension Label Linkbase

101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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SIGNATURE

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


	SOMERSET HILLS BANCORP

Date: May 14, 2012			By: /s/ William S. Burns

		William S. Burns
		Executive Vice President and
		Chief Financial Officer

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