SOMERSET HILLS BANCORP - FORM 10-Q

Attached files

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EX-32 - SOMERSET HILLS BANCORP	c66579_ex32.htm
EX-31.1 - SOMERSET HILLS BANCORP	c66579_ex31-1.htm
EX-31.2 - SOMERSET HILLS BANCORP	c66579_ex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - SOMERSET HILLS BANCORP	Financial_Report.xls

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 June 30, 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 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 August 4, 2011 there were 5,455,316 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 June 30, 2011 and December 31, 2010 (Unaudited)	3

	Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 (Unaudited)	4

	Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2011 (Unaudited)	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	7-21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

Part II - Other Information

Item 1.	Legal Proceedings	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3.	Defaults Upon Senior Securities	29

Item 4.	[Removed and Reserved]	29

Item 5.	Other Information	29

Item 6.	Exhibits	29

Signature		30

Certifications		31-32

Exhibit 32		33

- 2 -

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

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


	June 30, 2011			December 31, 2010

ASSETS
Cash and due from banks	$	5,721		$	5,480
Interest bearing deposits at other banks		46,577			52,086

Total cash and cash equivalents		52,298			57,566

Loans held for sale		2,920			2,230

Investment securities held to maturity (Approximate market value of $10,869 in 2011 and $10,548 in 2010)		10,739			10,740
Investment securities available-for-sale		34,859			35,993

Loans receivable		222,260			207,146
Less: allowance for loan losses		(2,986	)		(2,875	)

Net loans receivable		219,274			204,271

Premises and equipment, net		5,078			5,285
Bank owned life insurance		8,196			8,053
Accrued interest receivable		1,140			1,111
Prepaid expenses		1,056			1,251
Other assets		2,896			2,396


Total assets	$	338,456		$	328,896


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Non-interest bearing deposits-demand	$	73,123		$	68,521
Interest bearing deposits-NOW, money market and savings		170,581			166,304
Certificates of deposit, under $100,000		21,601			21,101
Certificates of deposit, $100,000 and over		20,209			20,615

Total deposits		285,514			276,541


Federal Home Loan Bank advances		11,000			11,000
Other liabilities		1,593			1,964

Total liabilities		298,107			289,505


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, 5,455,316 shares in 2011 and 5,421,924 in 2010		37,833			37,600
Retained earnings		1,746			1,145
Accumulated other comprehensive income		770			646

Total stockholders’ equity		40,349			39,391


Total liabilities and stockholders’ equity	$	338,456		$	328,896

See accompanying notes to unaudited consolidated financial statements.

- 3 -

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


	Three Months Ended June 30				Six Months Ended June 30

	2011		2010		2011		2010

INTEREST INCOME
Loans, including fees	$	2,945	$	2,895	$	5,816	$	5,700
Investment securities		397		461		826		937
Interest bearing deposits with other banks		34		24		60		52

Total interest income		3,376		3,380		6,702		6,689

INTEREST EXPENSE
Deposits		371		455		730		1,005
Federal Home Loan Bank advances		92		93		184		184

Total interest expense		463		548		914		1,189

Net interest income		2,913		2,832		5,788		5,500

Provision for loan losses		30		—		105		75


Net interest income after provision for loan losses		2,883		2,832		5,683		5,425


NON-INTEREST INCOME
Service fees on deposit accounts		69		69		144		148
Gains on sales of mortgage loans, net		139		262		286		449
Bank owned life insurance		72		74		143		149
Gain on sales of investment securities, net		—		—		9		—
Other income		88		80		183		161

Total non-interest income		368		485		765		907


NON-INTEREST EXPENSE
Salaries and employee benefits		1,288		1,314		2,606		2,680
Occupancy expense		361		427		774		862
Advertising and business promotion		40		65		69		108
Stationery and supplies		38		35		81		75
Data processing		138		136		272		263
FDIC insurance		60		91		143		201
Other operating expense		353		357		687		686

Total non-interest expense		2,278		2,425		4,632		4,875


Income before provision for income taxes		973		892		1,816		1,457

Provision for income taxes		322		291		562		446


Net income	$	651	$	601	$	1,254	$	1,011


Earnings per share:
Basic	$	0.12	$	0.11	$	0.23	$	0.19

Diluted	$	0.12	$	0.11	$	0.23	$	0.18

See accompanying notes to unaudited consolidated financial statements.

- 4 -

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


	Common Stock Number of Shares			Common Stock		Retained Earnings			Accumulated Other Comprehensive Income		Comprehensive Income		Total Stockholders’ Equity

Balance, January 1, 2011		5,421,924		$	37,600	$	1,145		$	646			$	39,391

Exercise of common stock options, net of tax benefit		34,371			211		—			—				211
Stock based compensation		(979	)		22		—			—				22
Net income for the period					—		1,254			—	$	1,254		1,254
Cash dividends paid – common ($0.12 per share)					—		(653	)		—				(653	)
Other comprehensive income, net of taxes					—		—			124		124		124

Total comprehensive income											$	1,378


Balance, June 30, 2011		5,455,316		$	37,833	$	1,746		$	770			$	40,349

See accompanying notes to unaudited consolidated financial statements.

- 5 -

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


	Six Months Ended June 30
	2011			2010

OPERATING ACTIVITIES:
Net income	$	1,254		$	1,011
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		301			273
Provision for loan losses		105			75
Gain on sale of investment securities, net		(9	)		—
Mortgage loans originated for sale		(27,937	)		(57,682	)
Proceeds from mortgage loan sales		27,533			61,583
Gain on sale of mortgage loans		(286	)		(449	)
Increase in accrued interest receivable		(29	)		(25	)
Increase in bank owned life insurance		(143	)		(149	)
Stock based compensation		22			16
(Increase) decrease in other assets		(305	)		51
Decrease in other liabilities		(436	)		(33	)


Net cash provided by operating activities		70			4,671


INVESTING ACTIVITIES:
Purchases of investment securities available for sale		(7,131	)		(7,033	)
Maturity and payments of investment securities available for sale		6,449			8,904
Maturity and payments of investment securities held to maturity		1			735
Proceeds from sale of investment securities available for sale		1,934			—
Net increase in loans receivable		(15,108	)		(904	)
Purchases of premises and equipment		(14	)		(118	)


Net cash (used in) provided by investing activities		(13,869	)		1,584


FINANCING ACTIVITIES:
Net increase (decrease) in demand deposit and savings accounts		8,879			(4,210	)
Net increase (decrease) in certificates of deposit		94			(10,124	)
Cash dividends paid		(653	)		(520	)
Net change in proceeds from exercise of stock options		211			117

Net cash provided by (used in) financing activities		8,531			(14,737	)
Net decrease in cash and cash equivalents		(5,268	)		(8,482	)
Cash and cash equivalents at beginning of period		57,566			56,292

Cash and cash equivalents at end of period	$	52,298		$	47,810


Supplemental information:
Cash paid during the year for:
Interest	$	977		$	1,222
Income taxes		927			518

See accompanying notes to unaudited consolidated financial statements.

- 6 -

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 June 30, 2011, 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 and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. 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, 2010.

The current dividend payments are being made out of income earned during the period. On July 21, 2011, the Board of Directors of the Company declared a quarterly cash dividend of $0.06 per share payable August 31, 2011 to shareholders of record as of August 17, 2011. 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 net income 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 net income 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):


	Six Months Ended June 30, 2011						Six Months Ended June 30, 2010

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

Basic earnings per share:
Net income applicable to common stockholders	$	1,254		5,442	$	0.23	$	1,011		5,457	$	0.19

Effect of dilutive securities:
Options		—		57				—		46

Diluted EPS:
Net income applicable to common stock holders and assumed conversions	$	1,254		5,499	$	0.23	$	1,011		5,503	$	0.18

- 7 -


	Three Months Ended June 30, 2011						Three Months Ended June 30, 2010

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

Basic earnings per share:
Net income applicable to common stockholders	$	651		5,454	$	0.12	$	601		5,459	$	0.11

Effect of dilutive securities:
Options		—		60				—		53

Diluted EPS:
Net income applicable to common stock holders and assumed conversions	$	651		5,514	$	0.12	$	601		5,512	$	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 10,407 and 17,330 for the three months ended June 30, 2011 and 2010, respectively. The number of anti-dilutive common stock options totaled 12,909 and 20,776 for the six months ended June 30, 2011 and 2010, respectively.

c) Comprehensive Income

The components of other comprehensive income for the three and six months ended June 30, 2011 and 2010 are as follows (in thousands):


	Three Months Ended June 30						Six Months Ended June 30

	2011			2010			2011			2010


Net income	$	651		$	601		$	1,254		$	1,011
Change in unrealized holding gains (losses) on available for sale securities arising during the period		265			198			196			323
Reclassification adjustment for losses (gains) in realized income		—			—			(9	)		—

Net change in unrealized gains (losses)		265			198			187			323

Tax effect		(89	)		(67	)		(63	)		(110	)

Net unrealized (losses) gains		176			131			124			213

Comprehensive income	$	827		$	732		$	1,378		$	1,224

d) 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, 2010		302,591		$	7.15

Granted		45,750			9.83
Exercised		(34,371	)		6.07
Forfeited		(7,004	)		8.95


Outstanding at June 30, 2011		306,966		$	7.63		4.8 Years	$	438


Exercisable as of June 30, 2011		230,641		$	7.24		3.4 Years	$	397

The total stock-based compensation expense for the first six months of 2011 and 2010 was approximately $22 thousand and $16 thousand, respectively. The total intrinsic value of common stock options exercised for the first six months of 2011 and 2010 was approximately $99 thousand and $44 thousand, respectively.

The per share weighted-average fair values of stock options granted during 2011 and 2010 was $1.96 and $1.57, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions for 2011 and 2010: expected dividend yield of 2.44% and 2.53%, stock price volatility of 21.69% and 20.60%, risk-free interest rate of 2.84% and 3.12% and expected lives of 7 years.

During the first quarter of 2011, the expiration date of 25,000 options with a strike price of $6.05, held by the Company’s Chief Executive Officer, was extended by three years to March 19, 2014. No additional expense was recorded, since there was no increase in the fair value of the options resulting from the modification using the Black-Scholes option pricing model.

- 8 -

Stock Awards:

At the 2007 Annual Meeting the stockholders approved the adoption of the 2007 Equity Incentive Plan. The Company established the 2007 Equity Incentive Plan for directors, officers and employees of the Company. Up to 125,000 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 June 30, 2011, 3,067 shares were vested. For the six month period ended June 30, 2011, the Company recognized $2 thousand of compensation expense related to the shares awarded. As of June 30, 2011 all share awards were vested and no additional costs are expected to be recognized

A summary of the status of the Company’s nonvested plan shares as of June 30, 2011 and changes during the quarter ended is as follows:


For the Three Months Ended June 30, 2011

	Shares			Weighted Average Grant Date Share Value

Nonvested at beginning of period		731		$	11.56
Granted		—			—
Forfeited		(138	)		11.56
Vested		(593	)		11.56

Nonvested at end of period		—		$	—

e) Recent Accounting Pronouncements

Adoption of New Accounting Guidance

In July 2010, the FASB issued ASU No. 2010-20 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASU requires significantly more information about credit quality in a financial institution’s portfolio and the allowance for credit losses. The disclosure requirements are effective for interim and annual reporting periods ending on or after December 15, 2010. The impact of adoption was not material.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 amend and clarify GAAP related to the accounting for debt restructurings. Specifically, ASU No. 2011-02 requires that, when evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. In evaluating whether a concession has been granted, a creditor must evaluate whether (i) a debtor has access to funds at a market rate for debt with similar risk characteristics as the restructured debt in order to determine if the restructuring would be considered to be at a below-market rate, indicating that the creditor has granted a concession, (ii) a temporary or permanent increase in the contractual interest rate as a result of a restructuring may be considered a concession because the new contractual interest rate on the restructured debt is still below the market interest rate for new debt with similar risk characteristics, and (iii) a restructuring that results in a delay in payment is either significant and is a concession or is insignificant and is not a concession. In evaluating whether a debtor is experiencing financial difficulties, a creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without a modification of the debt. The provisions of ASU No. 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retroactively to the beginning of the annual period of adoption. The impact of adoption was not material.

2. Segment Information

The Company’s mortgage operations are managed separately from the traditional banking and related financial services that the Company also offers. Sullivan Financial Services, Inc. originates, for resale in the secondary market, conventional and non-conventional 1-4 family residential mortgages, Veteran 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 June 30, 2011 (in thousands):


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


Interest income	$	3,364	$	19		$	(7	)	$	3,376
Interest expense		463		7			(7	)		463
Provision for loan losses		30		—			—			30
Non-interest income		259		139			(30	)		368
Non-interest expense including tax provision		2,444		186			(30	)		2,600
Net income		686		(35	)		—			651

Total assets	$	337,504	$	4,970		$	(4,018	)	$	338,456

- 9 -

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 June 30, 2010 (in thousands):


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


Interest income	$	3,352	$	43	$	(15	)	$	3,380
Interest expense		548		15		(15	)		548
Provision for loan losses		—		—		—			—
Non-interest income		255		262		(32	)		485
Non-interest expense including tax provision		2,486		262		(32	)		2,716
Net income		576		28		—			601

Total assets	$	315,795	$	3,580	$	(2,685	)	$	316,690

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments for the six months ended June 30, 2011 (in thousands):


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


Interest income	$	6,675	$	42		$	(15	)	$	6,702
Interest expense		914		15			(15	)		914
Provision for loan losses		105		—			—			105
Non-interest income		539		286			(60	)		765
Non-interest expense including tax provision		4,869		385			(60	)		5,194
Net income		1,326		(72	)		—			1,254

Total assets	$	327,504	$	4,970		$	(4,018	)	$	338,456

The following table sets forth certain information about and the reconciliation of reported net income for each of the reportable segments for the six months ended June 30, 2010 (in thousands):


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


Interest income	$	6,640	$	75	$	(26	)	$	6,689
Interest expense		1,189		26		(26	)		1,189
Provision for loan losses		75		—		—			75
Non-interest income		525		449		(67	)		907
Non-interest expense including tax provision		4,901		487		(67	)		5,321
Net income		1,000		11		—			1,011

Total assets	$	315,795	$	3,580	$	(2,685	)	$	316,690

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 to 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).

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Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below at June 30, 2011 and December 31, 2010 (in thousands):


	Fair Value Measurements at June 30, 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	$	—	$	9,694	$	—
Mortgage Backed Securities - Residential		—		19,438		—
Collateralized Mortgage Obligations		—		4,263		—
Corporate debt securities		—		1,464		—

	Fair Value Measurements at December 31, 2010 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	$	—	$	9,023	$	—
Mortgage Backed Securities – Residential		—		19,847		—
Collateralized Mortgage Obligations		—		5,677		—
Corporate debt securities		—		1,446		—

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below at June 30, 2011 and December 31, 2010 (in thousands):


	Fair Value Measurements at June 30, 2011 Using

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

Assets:
Impaired loans	$	—	$	—	$	145

	Fair Value Measurements at December 31, 2010 Using

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

Assets:
Impaired loans	$	—	$	—	$	356

A loan is impaired when full payment under the loan terms is not expected. The fair value measurement 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. Collateral dependent impaired loans for which there is a specific reserve had a recorded investment of $253 thousand with a valuation allowance of $108 thousand as of June 30, 2011, and had a recorded investment of $471 thousand with a valuation allowance of $114 thousand as of December 31, 2010. Specific reserves for impaired loans decreased by $6 thousand during the first six months of 2011. At June 30, 2011 there was one commercial mortgage loan in this loan portfolio class. At December 31, 2010 there was one commercial loan and one commercial mortgage in this loan portfolio class.

The recorded value of loans held for sale is approximately $2.9 million and $2.2 million at June 30, 2011 and December 31, 2010, respectively, and approximates their fair value. No impairment charges were recognized on loans held for sale for the period ending June 30, 2011 and December 31, 2010.

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 June 30, 2011 and December 31, 2010 are outlined below.

- 11 -

For cash and due from banks and interest bearing deposits, the recorded book value approximates fair value. The fair values of loans 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 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.


	June 30, 2011				December 31, 2010

(in thousands)	Carrying amount		Estimated Fair value		Carrying amount		Estimated Fair value

Cash and due from banks	$	5,721	$	5,721	$	5,480	$	5,480
Interest bearing deposits		46,577		46,577		52,086		52,086
Loans, including deferred fees and costs		222,260		224,173		207,146		208,199
Non-time deposits		243,704		243,704		234,825		234,825
Time deposits		41,810		42,702		41,716		42,456
Federal Home Loan Bank borrowings		11,000		12,639		11,000		12,707

- 12 -


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 June 30, 2011 (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Held to Maturity

Obligations of US States and Political Subdivisions	$	9,228	$	259	$	(22	)	$	9,465
Corporate debt securities		1,511		—		(107	)		1,404

Total held to maturity	$	10,739	$	259	$	(129	)	$	10,869


Available for Sale

U.S. Government Sponsored Agency Securities	$	9,624	$	70	$	—		$	9,694
Mortgage Backed Securities - Residential		18,418	$	1,020		—			19,438
Collateralized Mortgage Obligations		4,178		85		—			4,263
Corporate debt securities		1,473		6		(15	)		1,464

Total available for sale	$	33,693	$	1,181	$	(15	)	$	34,859

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, 2010 (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

Held to Maturity

Obligations of US States and Political Subdivisions	$	9,227	$	120	$	(138	)	$	9,209
Corporate debt securities		1,513		—		(174	)		1,339

Total held to maturity	$	10,740	$	120	$	(312	)	$	10,548


Available for Sale

U.S. Government Sponsored Agency Securities	$	9,051	$	15	$	(43	)	$	9,023
Corporate debt securities		1,470		5		(29	)		1,446
Mortgage Backed Securities - Residential		18,909		940		(2	)		19,847
Collateralized Mortgage Obligations		5,583		94		—			5,677

Total available for sale	$	35,013	$	1,054	$	(74	)	$	35,993

The amortized cost and fair value of the Company’s investment securities held to maturity and available for sale at June 30, 2011 and December 31, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).


June 30, 2011	Amortized Cost		Estimated Fair Value

Held to Maturity
Due in one year or less	$	375	$	384
Due in one to five years		706		686
Due in five years to ten years		1,416		1,472
Due after ten years		8,242		8,327

	$	10,739	$	10,869

Available for Sale
Due in one year or less	$	—	$	—
Due in one year to five years		4,525		4,536
Due in five years to ten years		5,009		5,057
Due after ten years		1,563		1,565
Mortgage Backed Securities and Collateralized Mortgage Obligations		22,596		23,701

	$	33,693	$	34,859

- 13 -


December 31, 2010	Amortized Cost		Estimated Fair Value

Held to Maturity
Due in one year or less	$	—	$	—
Due in one to five years		581		608
Due in five years to ten years		1,917		1,894
Due after ten years		8,242		8,046

	$	10,740	$	10,548

Available for Sale
Due in one year or less	$	—	$	—
Due in one year to five years		3,542		3,538
Due in five years to ten years		5,564		5,528
Due after ten years		1,415		1,403
Mortgage Backed Securities and Collateralized Mortgage Obligations		24,492		25,524

	$	35,013	$	35,993

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 June 30, 2011 are as follows:


	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


Held to Maturity
Municipal securities	$	—	$	—	$	297	$	22	$	297	$	22
Corporate debt securities		509		4		896		103		1,405		107

Total	$	506	$	4	$	1,193	$	125	$	1,702	$	129


	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
Corporate debt securities	$	985	$	15	$	—	$	—	$	985	$	15

Total	$	985	$	15	$	—	$	—	$	985	$	15


	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


Held to Maturity
Municipal securities	$	3,708	$	98	$	279	$	40	$	3,987	$	138
Corporate debt securities		503		11		836		163		1,339		174

Total	$	4,211	$	109	$	1,115	$	203	$	5,326	$	312


	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	$	5,576	$	43	$	—	$	—	$	5,576	$	43
Mortgage Backed Securities - Residential		1,004		2		—		—		1,004		2
Corporate debt securities		971		29		—		—		971		29

Total	$	7,551	$	74	$	—	$	—	$	7,551	$	74

- 14 -

For the six months ended June 30, 2011 the gross proceeds on sale of investment securities was approximately $1.9 million. For the six months ended June 30, 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 six months ended June 30, 2010.

At June 30, 2011, there were $1.2 million in securities held to maturity with gross unrealized 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.

Securities with an amortized cost of $1.1 million were pledged to secure public funds on deposit at June 30, 2011.

5. Loans

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


	June 30, 2011					December 31, 2010

	Amount		Percent			Amount		Percent

	(Dollars In Thousands)

Commercial	$	30,304		13.6	%	$	31,556		15.2	%
Construction, land and land development		7,568		3.4			7,489		3.6
Commercial mortgages		110,261		49.7			98,183		47.4
Residential mortgages		32,922		14.8			26,907		13.0
Consumer		41,017		18.5			42,864		20.8

Gross loans		222,072		100.0	%		206,999		100.0	%

Net deferred costs		188					147

Total loans		222,260					207,146
Less: Allowance for loan losses		2,986					2,875

Net loans	$	219,274				$	204,271

The following table presents information about impaired loans by loan portfolio class as of June 30, 2011 and December 31, 2010 (in thousands):

Impaired Loans


June 30, 2011	Unpaid Principal Balance		Recorded Investment		Related Allowance

With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial mortgage		773		773		—
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

With an allowance recorded:
Commercial		—		—		—
Commercial mortgage		987		1,008		126
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

Total:
Commercial		—		—		—
Commercial mortgage		1,760		1,781		126
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

- 15 -

Impaired Loans


December 31, 2010	Unpaid Principal Balance		Recorded Investment		Related Allowance

With no related allowance recorded:
Commercial	$	—	$	—	$	—
Commercial mortgage		782		787		—
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

With an allowance recorded:
Commercial		217		217		5
Commercial mortgage		992		862		134
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

Total:
Commercial		217		217		5
Commercial mortgage		1,774		1,649		134
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—


	Three months ended

	June 30 2011		June 30 2010

Average of individually impaired loans during period:

Commercial	$	69	$	886
Commercial mortgage		1,762		2,030
Construction, land and land development		—		914
Consumer		—		105
Residential		—		—

Interest income recognized during impairment:

Commercial	$	1	$	9
Commercial mortgage		23		29
Construction, land and land development		—		7
Consumer		—		—
Residential		—		—


	Six months ended

	June 30 2011		June 30 2010

Average of individually impaired loans during period:

Commercial	$	141	$	890
Commercial mortgage		1,766		2,035
Construction, land and land development		—		914
Consumer		—		155
Residential		—		—

Interest income recognized during impairment:

Commercial	$	4	$	9
Commercial mortgage		46		29
Construction, land and land development		—		7
Consumer		—		—
Residential		—		—

There was no cash-basis interest income recognized on any loans for the three months ended June 30, 2011 and 2010, respectively.

The following table presents loans receivable on nonaccrual status by loan portfolio class as of June 30, 2011 and December 31, 2010 (in thousands):


Nonaccrual loans	June 30, 2011		December 31, 2010


Commercial	$	—	$	—
Commercial mortgage		253		254
Construction, land and land development		—		—
Consumer		—		—
Residential		—		—


Total	$	253	$	254

- 16 -

The balance of troubled debt restructured loans at June 30, 2011 and December 31, 2010 is represented by two credits that are currently performing under their restructured terms and for which the Company has no commitment to lend additional funds. The following table presents information about restructured loans by loan portfolio class as of June 30, 2011 (in thousands):


June 30, 2011 Troubled Debt Restructurings	Number of loans		Pre-modification outstanding recorded investment		Post-modification outstanding carrying amount


Commercial		—	$	—	$	—
Commercial mortgage		2		744		721
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

The following table presents information about restructured loans by loan portfolio class as of December 31, 2010 (in thousands):


December 31, 2010 Troubled Debt Restructurings	Number of loans		Pre-modification outstanding recorded investment		Post-modification outstanding carrying amount


Commercial		—	$	—	$	—
Commercial mortgage		2		744		719
Construction, land and land development		—		—		—
Consumer		—		—		—
Residential		—		—		—

The following table presents past due and current loans, including non accrual and restructured loans, by the loan portfolio class as of June 30, 2011 and December 31, 2010 (in thousands):


June 30, 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	$	—	$	—	$	—	$	—	$	30,304	$	30,304	$	—
Commercial mortgage		493		—		253		746		109,515		110,261		—
Construction, land and land development		—		—		—		—		7,568		7,568		—
Consumer		5		—		—		5		41,012		41,017		—
Residential		—		—		—		—		32,922		32,922		—

Total	$	498	$	—	$	253	$	751	$	221,321	$	222,072	$	—

- 17 -


December 31, 2010	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	$	2	$	—	$	—	$	2	$	31,554	$	31,556	$	—
Commercial mortgage		510		—		254		764		97,419		98,183		—
Construction, land and land development		—		—		—		—		7,489		7,489		—
Consumer		—		—		—		—		42,864		42,864		—
Residential		—		—		—		—		26,907		26,907		—

Total	$	512	$	—	$	254	$	766	$	206,233	$	206,999	$	—

- 18 -

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 June 30, 2011 and December 31, 2010 (in thousands). Each balance in the table below represents unpaid principal balance, which approximates recorded investment:


June 30, 2011

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


Commercial	$	27,250	$	3,054	$	—	$	—	$	30,304
Commercial mortgage		107,312		1,190		1,759		—		110,261
Construction, land and land development		7,568		—		—		—		7,568
Consumer		40,867		150		—		—		41,017
Residential		32,117		805		—		—		32,922

Total	$	215,114	$	5,199	$	1,759	$	—	$	222,072


December 31, 2010

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


Commercial	$	28,367	$	2,973	$	217	$	—	$	31,557
Commercial mortgage		95,191		1,217		1,774		—		98,182
Construction, land and land development		7,489		—		—		—		7,489
Consumer		42,592		272		—		—		42,864
Residential		26,102		805		—		—		26,907

Total	$	199,741	$	5,267	$	1,991	$	—	$	206,999


	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 June 30, 2011 and December 31, 2010.

- 19 -


June 30, 2011

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

Allowance for Loan Losses:
Individually evaluated for impairment	$	—	$	126	$	—	$	—	$	—	$	—	$	126
Collectively evaluated for impairment		163		1,825		100		479		241		52		2,860


Total	$	163	$	1,951	$	100	$	479	$	241	$	52	$	2,986


Loans Receivable
Individually evaluated for impairment	$	—	$	1,759	$	—	$	—	$	—			$	1,759
Collectively evaluated for impairment		30,304		108,502		7,568		41,017		32,922				220,313


Total	$	30,304	$	110,261	$	7,568	$	41,017	$	32,922			$	222,072


December 31, 2010

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

Allowance for Loan Losses:

Individually evaluated for impairment	$	5	$	134	$	—	$	—	$	—	$	—	$	139
Collectively evaluated for impairment		181		1,687		102		506		205		55		2,736

Total	$	186	$	1,821	$	102	$	506	$	205	$	55	$	2,875

Loans Receivable
Individually evaluated for impairment	$	217	$	1,774	$	—	$	—	$	—			$	1,991
Collectively evaluated for impairment		31,340		96,408		7,489		42,864		26,907				205,008

Total	$	31,557	$	98,182	$	7,489	$	42,864	$	26,907			$	206,999

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 six months ended June 30, 2011 (in thousands):


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

Balance December 31, 2010	$	186		$	1,821	$	102		$	506		$	205	$	55		$	2,875
Charge-offs		—			—		—			(2	)		—		—			(2	)
Recoveries		8			—		—			—			—		—			8
Provision charged to expense		(31	)		130		(2	)		(25	)		36		(3	)		105

Balance, June 30, 2011	$	163		$	1,951	$	100		$	479		$	241	$	52		$	2,986

- 20 -

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 June 30, 2011 (in thousands):


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

Balance March 31, 2011	$	172		$	1,930	$	91	$	492		$	230	$	38	$	2,953
Charge-offs		—			—		—		—			—		—
Recoveries		3			—		—		—			—		—		3
Provision charged to expense		(12	)		21		9		(13	)		11		14		30

Balance, June 30, 2011	$	163		$	1,951	$	100	$	479		$	241	$	52	$	2,986

- 21 -

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, 2010.

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, 2010 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 24 and 26 of this Form 10-Q for the provision and allowance for loan losses.

RESULTS OF OPERATIONS

Overview

Net income was $651,000 for the second quarter of 2011, an 8.3% increase over $601,000 earned during the second quarter of 2010. Diluted earnings per share were $0.12 in the second quarter of 2011, up from $0.11 in the second quarter of 2010. For the first six months of 2011, net income was $1.3 million, representing a 24.0% increase from net income of $1.0 million in 2010. Six-month diluted earnings per share were $0.23 in 2011 versus $0.18 in 2010.

At June 30, 2011, total assets were $338.5 million, an increase of $9.6 million from $328.9 million at year-end 2010. The increase was primarily due to a $14.9 million increase in loans receivable and partially offset by a $5.3 million decrease in cash and cash equivalents. The increase in assets was largely funded by an $8.9 million increase in core deposits. (Core deposits are defined as all deposits less time deposits.)

Net Interest Income

Net interest income, on a fully taxable equivalent basis, for the second quarter of 2011 totaled $2.962 million, an increase of $73,000, or 2.5%, from $2.889 million earned in the year ago quarter. Net interest income, on a fully taxable equivalent basis, for the first half of 2011 totaled $5.887 million, an increase of $274,000, or 4.9%, from $5.613 million earned in the first half of the prior year. The increases in net interest income were due to increases in the volume of interest-earning assets, which grew by 9.0% in the quarterly comparison and by 5.9% in the first half comparison. The benefit to net interest income from the higher volume of interest-earning assets was partially offset by a contraction in the net interest margin, which narrowed by 24 basis points to 3.82% in the current quarter from the prior year quarter and narrowed by 4 basis points to 3.90% in the first half of 2011 from the first half of 2010. Growth in average loans, which measured 5.7% for the current quarter versus the prior year quarter and 5.2% for the first half 2011 versus the first half 2010, was outpaced by growth in average core deposits, which increased by 12.2% quarter over quarter and by 9.6% first half over first half. The Company is currently investing these excess funds in overnight investments, which provides Management with increased flexibility but yields a relatively lower return and contribute to a contraction in the net interest margin.

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 and six months ended June 30, 2011 and 2010. The average balances

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are derived from average daily balances. The average balance of loans includes non-accrual loans, and associated yields include loan fees, which are considered adjustment to yields.

Comparative Average
Balance Sheets
Three Months Ended June 30


	2011								2010

	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	$	46,874		$	34		0.29	%	$	29,864		$	24		0.32	%
Loans		219,469			2,929		5.35	%		207,706			2,854		5.51	%
Loans held for sale		1,322			16		5.01	%		3,075			41		5.33	%
Investment securities		42,751			436		4.09	%		43,967			509		4.63	%
Restricted stock		942			10		4.35	%		916			9		4.03	%

Total interest earning assets		311,358			3,425		4.41	%		285,528			3,437		4.83	%

Non-interest earning assets		23,544								22,573
Allowance for loan losses		(2,971	)							(3,195	)
Total Assets	$	331,931							$	304,906

Liabilities and Equity

Interest bearing demand deposits	$	145,052		$	141		0.39	%	$	131,901		$	213		0.65	%
Savings		7,215			4		0.20	%		6,112			4		0.27	%
Money Market		15,677			13		0.34	%		18,051			20		0.45	%
Certificates of deposits		41,634			213		2.05	%		41,651			218		2.11	%
FHLB advances		11,000			92		3.37	%		11,000			93		3.37	%

Total interest bearing liabilities		220,578			463		0.84	%		208,715			548		1.05	%

Non-Interest Bearing Liabilities:
Non-interest bearing deposits		69,899								55,914
Other liabilities		1,085								1,146

Total Liabilities		291,562								265,775
Stockholders’ Equity		40,369								39,131

Total Liabilities and Stockholders’ Equity	$	331,931							$	304,906

Net Interest Income				$	2,962							$	2,889

Net Interest Spread							3.57	%							3.78	%
Net Interest Margin							3.82	%							4.06	%

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Comparative Average
Balance Sheets
Six Months Ended June 30


	2011								2010

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

	(Dollars in Thousands)
Assets

Cash and due from banks	$	40,209		$	60		0.30	%	$	32,630		$	52		0.32	%
Loans		217,492			5,778		5.36	%		206,822			5,630		5.49	%
Loans held for sale		1,362			38		5.55	%		2,579			70		5.48	%
Investment securities		44,384			901		4.09	%		44,392			1,029		4.68	%
Restricted stock		944			24		5.06	%		898			21		4.86	%

Total interest earning assets		304,391			6,801		4.51	%		287,321			6,802		4.77	%

Non-interest earning assets		23,427								22,487
Allowance for loan losses		(2,942	)							(3,177	)

Total Assets	$	324,876							$	306,631


Liabilities and Equity

Interest bearing demand deposits	$	140,138		$	273		0.39	%	$	129,136		$	449		0.70	%
Savings		7,358			8		0.21	%		6,252			9		0.28	%
Money Market		17,108			30		0.35	%		21,461			48		0.46	%
Certificates of deposits		41,359			419		2.04	%		44,480			499		2.26	%
FHLB advances		11,000			184		3.37	%		11,000			184		3.37	%

Total interest bearing liabilities		216,963			914		0.85	%		212,329			1,189		1.13	%

Non-Interest Bearing Liabilities:
Non-interest bearing deposits		66,592								54,069
Other liabilities		1,248								1,251


Total Liabilities		284,803								267,649
Stockholders’ Equity		40,073								38,982


Total Liabilities and Stockholders’ Equity	$	324,876							$	306,631


Net Interest Income				$	5,887							$	5,613

Net Interest Spread							3.66	%							3.64	%
Net Interest Margin							3.90	%							3.94	%

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 $30,000 and $105,000 for the second quarter and first half of 2011, respectively compared with zero and $75,000 for the second quarter and first half of 2010, respectively. The loan loss provisioning during 2011 was largely due to loan growth, whereas the provisioning in 2010 was primarily attributable to deterioration of specific credits, consistent with the continued downturn in the economy at that time. Although the Company’s asset quality metrics, such as nonaccrual loan, charge-off, and delinquency ratios remain among the soundest relative to its competitive peer groups, management believes there continue to be heightened risks 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.

Non-Interest Income

Non-interest income declined to $368,000 and $765,000 in the second quarter and first half of 2011, respectively, from $485,000 and $907,000 in the second quarter and first half of 2010, respectively, due primarily to lower 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 strictly on a pre-sold flow-basis. The reduction in gains on sale of mortgages was largely attributable to a significant decline in Sullivan’s origination volume, reflecting lower residential mortgage refinancing activity and continued low home purchase activity. Partially offsetting the reduction in mortgage banking revenue were higher banking and wealth management fees. The first half of 2011 also benefitted from $9,000 in net gains from the sale of investment securities realized during the first quarter of 2011.

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Non-Interest Expense

Non-interest expenses decreased by $147,000, or 6.1%, to $2.278 million in the second quarter of 2011 from $2.425 million in the prior year second quarter, and by $243,000, or 5.0%, to $4.632 million in the first half of 2011 from $4.875 million in the prior year first half. The declines in operating expenses were due primarily to decreases in (i) salaries and employee benefits, due to reduced staff levels, (ii) occupancy expense, due largely to the consolidation of back office space, and (iii) FDIC insurance, due to changes in the method of calculating assessment rates. Management continues its expense containment efforts which have yielded cost savings in many areas of the Company’s operations.

Income Taxes

The Company recorded provisions for income taxes of $322,000 and $562,000 for the second quarter and first half of 2011, respectively, versus $291,000 and $446,000 for the second quarter and first half of 2010, respectively. The effective tax rates were 33.1% and 30.9% for the second quarter and first half of 2011, respectively versus 32.6% and 30.6% for the second quarter and first half of 2010, respectively. The increase in the effective tax rate for this year’s second quarter versus the prior year quarter was due to an increase in the level of income from taxable sources. The increase in the effective tax rate for this year’s first half versus the prior year first half was due to an increase in income from taxable sources, partially offset by an income tax benefit in 2011 resulting from a restructuring of certain employee stock options previously granted.

FINANCIAL CONDITION

June 30, 2011 as compared to December 31, 2010

Total assets increased by $9.6 million to $338.5 million at June 30, 2011 from $328.9 million at December 31, 2010. The increase in assets was due to growth in loans receivable, which increased by $15.2 million to $222.3 million at June 30, 2011 from $207.1 million at year-end 2010. Growth in loans receivable reflected stabilizing economic conditions in the Bank’s operating region, as well as Management’s successful efforts to generate loan originations to credit-worthy borrowers. The increase in loans receivable was funded largely by a $9.0 million increase in core deposits (i.e., all deposits other than time deposits) combined with a $5.3 decrease in cash and cash equivalents and $1.1 million decrease in investment securities available for sale.

Our portfolio of investment securities available for sale declined, despite $7.1 million in securities purchases during the first six months of 2011, 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 six months of 2011, $8.4 million in securities matured or were sold, called or prepaid. There were $770 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $80 thousand in net amortization expenses during the first six months of 2011. Securities sold in 2011 included sales of $2.0 million of U.S. Treasury securities as part of the Bank’s interest-rate risk management processes. The sales resulted in a pretax capital gain of $9,000 which was recorded in the first quarter of 2011.

Over the course of 2009 and 2010 and into 2011, 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 $52.3 million at June 30, 2011 and $57.6 million at December 31, 2010.

Total loans at June 30, 2011 increased $15.2 million to $222.3 million from $207.1 million at year-end 2010. The changes in and composition of the loan portfolio, by category, as of June 30, 2011 compared to December 31, 2010 are as follows: Commercial loans decreased $1.3 million to $30.3 million, construction, land and land development loans increased by $0.1 million to $7.6 million, commercial mortgage loans increased $12.1 million to $110.3 million; consumer loans decreased by $1.9 million to $41.0 million; and residential mortgage loans increased by $6.0 million to $32.9 million. During the first six months of 2011, the loan portfolio was positively impacted by an increase in commercial real estate loan demand, as well as refinancing strategies employed by many of the Bank’s borrowers. With regard to new loan originations, the Bank has made a strategic decision to hold in its loan portfolio a portion of residential mortgages that meet our credit quality standards that were closed by Sullivan Financial, the Bank’s mortgage banking subsidiary.

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


	June 30, 2011					December 31, 2010

	Amount		Percent			Amount		Percent

	(Dollars In Thousands)

Commercial	$	30,304		13.6	%	$	31,556		15.2	%
Construction, land and land development		7,568		3.4			7,489		3.6
Commercial mortgages		110,261		49.7			98,183		47.4
Residential mortgages		32,922		14.8			26,907		13.0
Consumer		41,017		18.5			42,864		20.8

Gross loans		222,072		100.0	%		206,999		100.0	%

Net deferred costs		188					147

Total loans		222,260					207,146
Less: Allowance for loan losses		2,986					2,875

Net loans	$	219,274				$	204,271

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.

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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):


	June 30, 2011			December 31, 2010


Non-accrual loans	$	253		$	254
Loans past due 90 days and still accruing		—			—

Total non-performing loans	$	253		$	254
OREO		—			—

Total non-performing assets	$	253		$	254

Troubled debt restructured loans	$	734		$	738


Non-accrual loans to total loans		0.11	%		0.12	%
Non-performing assets to total assets		0.07			0.08
Allowance for loan losses as a % of non-performing loans		1,180			1,132
Allowance for loan losses to total loans		1.34			1.39

Loans delinquent 30-89 days were $498,000 at June 30, 2011, down from $512 thousand at December 31, 2010.

As of June 30, 2011 and December 31, 2010, there were $1.8 million and $2.0 million in impaired loans, respectively. The amount of the allowance for loan losses allocated for impaired loans as of June 30, 2011 and December 31, 2010 was $126 thousand and $139 thousand, respectively.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for probable incurred 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 June 30, 2011, the allowance for loan losses was $3.0 million, up $111 thousand from year-end 2010. Net recoveries totaled $3,000 during the second quarter 2011, $6,000 during the first half 2011, and $3,000 for both the second quarter and first half of 2010. The allowance for loan losses as a percentage of loans receivable was 1.34% at June 30, 2011 and 1.39% at December 31, 2010.

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


	For the six months ended June 30, 2011			For the six months ended June 30, 2010


Allowance for loan losses at beginning of period	$	2,875		$	3,111
Charge-offs		(2	)		—
Recoveries		8			2

Net recoveries		6			2
Provision for loan losses		105			75

Allowance for loan losses at end of period	$	2,986		$	3,188

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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 June 30, 2011 and 2010 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 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 June 30, 2011, we estimated that a gradual (often referred to as “ramped”) 200 basis-point increase in the general level of interest rates will have no effect on our net interest income, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.8%. As of June 30, 2010, our model predicted that a 200 basis point gradual increase in general interest rates would increase net interest income by 1.2%, while a 200 basis point decrease would decrease net interest income by 2.0%.

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 variance in EVPE as a percentage of assets as of June 30, 2011, was -1.55% with a rate shock of up 200 basis points, and -0.02% with a rate shock of down 200 basis points. At June 30, 2010, the variances were -0.84% assuming an up 200 basis points rate shock and -0.42% assuming a down 200 basis points rate shock.

LIQUIDITY MANAGEMENT AND CAPITAL RATIOS

At June 30, 2011, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.

At June 30, 2011, liquid assets (cash and due from banks, interest bearing deposits at other banks, and investment securities available for sale) were approximately $87.2 million, which represents 25.8% of total assets and 29.4% of total deposits and borrowings.

The Bank is a member of the Federal Home Loan Bank of New York and has the ability to borrow a total of $84.6 million (subject to available qualified collateral) with current borrowings of $11.0 million outstanding at June 30, 2011. In addition, during 2009, the Bank established a credit facility (with an approximate borrowing capacity based on pledged collateral as of June 30, 2011 of $10.1 million) with the Federal Reserve Bank of New York for direct discount window borrowings. In addition, the Bank has, as of June 30, 2011, $25.8 million (market value) in unencumbered securities and an additional borrowing capacity of $18.5 million through correspondent banks. At June 30, 2011 outstanding commitments for the Bank to extend credit were $91.0 million. Management believes that our combined aggregate liquidity position is sufficient to meet the funding requirements of loan demand and deposit maturities and withdrawals over the next twelve months.

Total stockholders’ equity increased to $40.3 million at June 30, 2011. Activity in stockholders’ equity consisted of an increase in retained earnings of $601 thousand which represents net income of $1.254 million earned during the first six months of 2011 offset by cash dividend payments of $653 thousand. Common stock increased by $233 thousand from the exercise of stock options during the first six months of 2011. Accumulated comprehensive income increased by $124 thousand resulting from a net change in unrealized gain on securities available for sale.

At June 30, 2011 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at June 30, 2011 and 2010, for the Bank, as well as the minimum regulatory requirements.


	Actual					Minimum Regulatory Requirement					For Classification as Well Capitalized

June 30, 2011	Amount		Ratio			Amount		Minimum Ratio			Amount		Ratio


The Bank:
Leverage Capital	$	35,390		10.67	%	$	13,265		4.00	%	$	16,581		≥5.00	%
Tier 1-Risk Based	$	35,390		13.83	%	$	10,236		4.00	%	$	15,354		≥6.00	%
Total Risk-Based	$	38,376		15.00	%	$	20,472		8.00	%	$	25,590		≥10.00	%

June 30, 2010		Amount		Ratio			Amount	Minimum Ratio				Amount		Ratio


The Bank:
Leverage Capital	$	32,614		10.70	%	$	12,196		4.00	%	$	15,245		≥5.00	%
Tier 1-Risk Based	$	32,614		13.59	%	$	9,600		4.00	%	$	14,400		≥6.00	%
Total Risk-Based	$	35,621		14.84	%	$	19,200		8.00	%	$	24,000		≥10.00	%

The Company’s tangible common equity ratio was 11.92% as of June 30, 2011 and 12.33% as of June 30, 2010. 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.

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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, the Registrant’s Board of Directors approved a repurchase program pursuant to which the registrant may repurchase up to 250,000 shares of its outstanding common stock. In October, 2007 the Board increased this program by another 250,000 shares. There were no securities repurchased during the second quarter of 2011.


Item 3.	Defaults Upon Senior Securities

Not applicable


Item 4.	Reserved

Item 5.	Other Information

Not applicable


Item 6.	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 June 30, 2011, 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 (iv) 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 Sections 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: August 12, 2011	By: /s/ William S. Burns

	William S. Burns
	Executive Vice President and
	Chief Financial Officer

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