Somerset Hills Bancorp (SOMH) 10-Q 2010 Q1 Quarterly report

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, 2010
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________________ to _____________________

Commission file number0-50055

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. Yesx Noo

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).

Yesx                              Noo

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

Large accelerated filero           Accelerated filero            Non-accelerated filero            Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yeso Nox

As of May 5, 2010 there were 5,198,604 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, 2010 and December 31, 2009 (Unaudited)	3
	Consolidated Statements of Income for the Three Months ended March 31, 2010 and 2009 (Unaudited)	4
	Consolidated Statements of Stockholders’ Equity For the Three Months ended March 31, 2010 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
Part II - Other Information
Item 1.	Legal Proceedings	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20
Certifications
Exhibit 32

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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, 2010		December 31, 2009
ASSETS
Cash and due from banks	$	5,211	$	4,911
Interest bearing deposits at other banks		37,528		51,381
Total cash and cash equivalents		42,739		56,292
Loans held for sale		2,148		5,360
Investment securities held to maturity (Approximate fair value of $12,067 in 2010 and $11,983 in 2009)		12,262		12,262
Investment securities available-for-sale		31,506		34,215
Loans receivable		208,856		206,768
Less: Allowance for loan losses		3,186		3,111
Net loans receivable		205,670		203,657
Premises and equipment, net		5,496		5,592
Bank owned life insurance		7,830		7,756
Accrued interest receivable		1,085		1,127
Prepaid expenses		1,407		1,440
Other assets		2,609		2,409
Total assets	$	312,752	$	330,110
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits-demand	$	58,657	$	59,288
Interest bearing deposits-NOW, money market and savings		157,235		169,510
Certificates of deposit, under $100,000		23,425		26,041
Certificates of deposit, $100,000 and over		22,110		24,286
Total deposits		261,427		279,125
Federal Home Loan Bank advances		11,000		11,000
Other liabilities		1,778		1,785
Total Liabilities		274,205		291,910
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, 5,197,196 shares in 2010 and 5,179,773 in 2009		37,449		37,334
Retained earnings		331		182
Accumulated other comprehensive income		767		684
Total stockholders’ equity		38,547		38,200
Total liabilities and stockholders’ equity	$	312,752	$	330,110

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
	2010		2009
INTEREST INCOME
Loans, including fees	$	2,805	$	2,888
Investment securities		476		563
Federal funds sold		—		2
Interest bearing deposits with other banks		28		11
Total interest income		3,309		3,464
INTEREST EXPENSE
Deposits		550		790
Federal Home Loan Bank advances		91		91
Total interest expense		641		881
Net interest income		2,668		2,583
Provision for loan losses		75		450
Net interest income after provision for loan losses		2,593		2,133
NON-INTEREST INCOME
Service fees on deposit accounts		79		71
Gains on sales of mortgage loans, net		187		285
Bank owned life insurance		75		645
Other income		81		70
Total non-interest income		422		1,071
NON-INTEREST EXPENSE
Salaries and employee benefits		1,366		1,480
Occupancy expense		435		508
Advertising and business promotion		43		41
Stationery and supplies		40		65
Data processing		127		120
FDIC insurance		110		58
Other operating expense		329		394
Total non-interest expense		2,450		2,666
Income before provision for taxes		565		538
Provision (benefit) for income taxes		155		(81	)
Net income		410		619
Dividends on preferred stock and accretion		—		93
Net income available to common stockholders	$	410	$	526
Earnings per share:
Basic	$	0.08	$	0.10
Diluted	$	0.08	$	0.10

See accompanying notes to unaudited consolidated financial statements

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SOMERSET HILLS BANCORP
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

	CommonStockNumber of Shares		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income		Comprehensive Income		Total Stockholders’ Equity
Balance January 1, 2010		5,179,773	$	37,334	$	182		$	684	$	—	$	38,200
Exercise of common stock options		17,423		106		—			—		—		106
Stock based compensation				9		—			—		—		9
Net income for the period				—		410			—		410		410
Cash dividend paid common				—		(261	)		—		—		(261	)
Other comprehensive income, net of taxes				—		—			83		83		83
Total comprehensive income										$	493
Balance March 31, 2010		5,197,196	$	37,449	$	331		$	767			$	38,547

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,
	2010			2009
OPERATING ACTIVITIES:
Net income	$	410		$	619
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		135			165
Provision for loan losses		75			450
Stock-based compensation		9			6
Mortgage loans originated for sale		(27,054	)		(44,028	)
Proceeds from mortgage loan sales		30,453			44,226
Gain on sale of mortgage loans		(187	)		(285	)
Decrease in accrued interest receivable		42			109
(Increase) decrease in bank owned life insurance		(74	)		937
Increase in other assets		(167	)		(280	)
(Decrease) increase in other liabilities		(50	)		363
Net cash provided by operating activities		3,592			2,282
INVESTING ACTIVITIES:
Purchases of investment securities available-for-sale		(2,916	)		—
Maturity and payments of investment securities available-for-sale		5,732			3,888
Net (increase) decrease in loans receivable		(2,088	)		3,256
Purchases of premises and equipment		(20	)		(8	)
Net cash provided by investing activities		708			7,136
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposit and savings accounts		(12,906	)		8,420
Net (decrease) increase in certificates of deposit		(4,792	)		1
Net proceeds from sale of common stock, options and warrants		106			205
Net proceeds from sale of preferred stock		—			7,191
Cash dividends paid		(261	)		(289	)
Net cash (used in) provided by financing activities		(17,853	)		15,528
Net increase in cash and cash equivalents		13,553			24,946
Cash and cash equivalents at beginning of period		56,292			21,479
Cash and cash equivalents at end of period	$	42,739		$	46,425
Supplemental information:
Cash paid during the year for:
Interest	$	658		$	887
Income taxes	$	328		$	80

See accompanying notes to unaudited consolidated financial statements

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SOMERSET HILLS BANCORP AND SUBSIDIARIES

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, 2010, 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 any 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 accounting principles generally accepted in the United States of America 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, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. 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, 2009.

The current dividend payments are being made out of income earned during the period. On April 28, 2010, the Board of Directors of the Company declared a quarterly cash dividend of $0.05 per share and a 5% stock dividend, each payable May 28, 2010 to shareholders of record as of May 17, 2010. 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.

These financial statements consider events that occurred through the filing of this quarterly report.

b)Net Income Per Common Share

Basic net income per share of common stock is calculated by dividing net income applicable to common stockholders 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):

	Three Months Ended, March 31, 2010						Three Months Ended, March 31, 2009
	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings per share:
Net income	$	410		—		—	$	619			—		—
Less: dividends and accretion of preferred stock		N/A		—		—		(93	)		—		—
Net income applicable to common stockholders	$	410		5,195	$	0.08	$	526			5,180	$	0.10
Effect of dilutive securities:
Options/warrants		—		38				—			1
Diluted earnings per share:
Net income applicable to common stockholders and assumed conversions	$	410		5,233	$	0.08	$	526			5,181	$	0.10

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c)Comprehensive Income

          The components of other comprehensive income for the three months ended March 31, 2010 and 2009 are as follows (in thousands):

	Three Months Ended March 31
	2010		2009
Net income	$	410	$	619
Change in unrealized holding gains on available for sale securities		83		168
Net unrealized gains		83		168
Other comprehensive income	$	493	$	787

d)Stock-Based Compensation

Stock Options:

The Company accounts for stock options using the modified prospective transition method. For accounting purposes, the Company recognizes expense for shares of common stock awarded over the vesting period at the fair market value of the shares 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, 2009		299,456		$	7.52
Granted		20,000			7.90
Exercised		(17,423	)		6.07
Forfeited		(7,805	)		10.38
Outstanding at March 31, 2010		294,228		$	7.55		4.6 Years	$	334
Exercisable as of March 31, 2010		242,507		$	7.43		3.6 Years	$	307

The total stock-based compensation expense for the first three months of 2010 and 2009 was approximately $9 thousand and $6 thousand, respectively. The total intrinsic value of common stock options exercised for the first three months of 2010 was approximately $27 thousand. There were no stock options exercised for the first three months of 2009.

The per share weighted-average fair values of stock options granted during 2010 and 2009 was $1.65 and $0.87, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions for 2010 and 2009: expected dividend yield of 2.53% and 3.43%, stock price volatility of 22.48% and 20.60%, risk-free interest rate of 3.12% and 2.49% and expected lives of 7 years.

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 equity incentive plans 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, 2010, 1,692 shares were vested. For the three-month period ended March 31, 2010, the Company recognized $2 thousand of compensation expense related to the shares awarded. As of March 31, 2010 there was approximately $9 thousand of unrecognized compensation costs related to non-vested restricted stock plan shares. These costs are expected to be recognized over a period of approximately 1.5 years. The fair value of non-vested stock awards at March 31, 2010 was $12 thousand.

A summary of the status of the Company’s nonvested plan shares as of March 31, 2010 and changes during the quarter is as follows:

For the Three Months Ended March 31, 2010
	Shares		Weighted Average Grant Date Share Value
Non-vested at beginning of period		1,497		$	12.14
Granted		—			—
Forfeited		—			—
Vested		—			—
Non-vested at end of period		1,497		$	12.14

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e)Recent Accounting Pronouncements

In January, 2010, the Financial Accounting Standards Board (“FASB”) amended existing guidance to improve disclosure requirements related to fair value measurements. New disclosures are required for significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. In addition, the FASB clarified guidance related to disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The impact of adoption on January 1, 2010 was not material as it required only disclosures which are included in the Fair Value footnote.

In June 2009, the FASB amended existing guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This amended guidance addresses (1) practices that are not consistent with the intent and key requirements of the original guidance and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. The impact of adoption on January 1, 2010 was not material.

In June 2009, the FASB amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity. The new approach focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. The impact of adoption on January 1, 2010 was not material.

In December 2007, the FASB enhanced existing guidance for the use of the acquisition method of accounting (formerly the purchase method) for all business combinations, for an acquirer to be identified for each business combination and for intangible assets to be identified and recognized separately from goodwill. An entity in a business combination is required to recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. Additionally, there were changes in requirements for recognizing assets acquired and liabilities assumed arising from contingencies and recognizing and measuring contingent consideration. Disclosure requirements for business combinations were also enhanced. The impact of adoption on January 1, 2009 was not material. In April 2009, the FASB issued amended clarifying guidance to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The impact of adoption on January 1, 2009 was not material. In January 2010, the FASB issued amended clarifying guidance addressing implementation issues related to the changes in ownership provisions. The impact of adoption on January 1, 2010 was not material.

Newly Issued But Not Yet Effective Accounting Guidance.

In January 2010, the FASB amended existing guidance related to fair value measurements requiring new disclosures for activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The impact of adoption is expected to be immaterial.

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, 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, 2010 (in thousands):

	The Bank and The Bancorp		Sullivan Financial Services, Inc.			Eliminating entries			Consolidated
Interest income	$	3,288	$	31		$	(10	)	$	3,309
Interest expense		641		10			(10	)		641
Provision for loan losses		75		—			—			75
Non-interest income		267		187			(32	)		422
Non-interest expense including income taxes		2,412		225			(32	)		2,605
Net income (loss)		427		(17	)		—			410
Total assets	$	312,056	$	3,695		$	(2,999	)	$	312,752

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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, 2009 (in thousands)

	The Bank and The Bancorp		Sullivan Financial Services, Inc.		Eliminating Entries			Consolidated
Interest income	$	3,678	$	71	$	(285	)	$	3,464
Interest expense		881		26		(26	)		881
Provision for loan losses		450		—		—			450
Non-interest income		818		285		(32	)		1,071
Non-interest expense including income taxes		2,332		285		(32	)		2,585
Net income (loss)		833		45		(259	)		619
Total assets	$	316,197	$	4,404	$	(4,183	)	$	316,418

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).

Assets Measured on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below at March 31, 2010 and December 31, 2009 (in thousands):

	Fair Value Measurements at March 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		$	—		$	3,508		$	—
Mortgage Backed Securities - Residential			—			23,077			—
Collateralized Mortgage Obligations			—			4,921			—

	Fair Value Measurements at December 31, 2009 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		$	—		$	5,502		$	—
Mortgage Backed Securities - Residential			—			23,292			—
Collateralized Mortgage Obligations			—			5,421			—

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Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below at March 31, 2010 and December 31, 2009 (in thousands):

	Fair Value Measurements at March 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		$ —		$ —		$ 1,481
	Fair Value Measurements at December 31, 2009 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		$ —		$ —		$ 1,220

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 carrying amount of $1.5 million with a valuation allowance of $346 thousand as of March 31, 2010, and had a carrying amount of $1.5 million with a valuation allowance of $261 thousand as of December 31, 2009. Specific reserves for impaired loans increased by $85 thousand during the first quarter of 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 March 31, 2010 are outlined below. For cash and due from banks and interest bearing deposits at other banks, the recorded book value of approximately $5.2 million and $37.5 million approximates fair value at March 31, 2010.

The recorded value of loans held for sale is approximately $2.1 million at March 31, 2010 and approximates their fair value. No impairment charges were recognized on loans held for sale for the period ending March 31, 2010.

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 fair value of investment securities are estimated based on the financial statements of consolidated balance sheets. See also note 4 Securities below.

	March 31, 2010				December 31, 2009
	Carrying amount		Estimated Fair value		Carrying amount		Estimated Fair value
Investment securities – held to maturity	$	12,262	$	12,067	$	12,262	$	11,983
Investment securities- available for sale	$	31,506	$	31,506	$	34,215	$	34,215
Loans, including deferred costs	$	208,856	$	209,717	$	206,768	$	207,839

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.

	March 31, 2010				December 31, 2009
	Carrying amount		Estimated Fair value		Carrying amount		Estimated Fair value
Time deposits	$	45,535	$	46,194	$	50,327	$	51,050

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 Bank borrowings maturities.

	March 31, 2010				December 31, 2009
	Carrying amount		Estimated Fair value		Carrying amount		Estimated Fair value
Federal Home Loan Bank borrowings	$	11,000	$	12,341	$	11,000	$	11,539

The fair value of commitments to extend credit is estimated based on the amount of unamortized deferred loan commitment fees. The fair value

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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.

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, 2010 (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held to Maturity
Obligations of US States and Political Subdivisions	$	10,748	$	176	$	(96	)	$	10,828
Corporate debt securities		1,514		—		(275	)		1,239
Total held to maturity	$	12,262	$	176	$	(371	)	$	12,067
Available for Sale
U.S. Government Sponsored Agency Securities	$	3,500	$	8	$	—		$	3,508
Mortgage Backed Securities - Residential		22,027		1,052		(2	)		23,077
Collaterized Mortgage Obligations		4,817		114		(10	)		4,921
Total available-for-sale	$	30,344	$	1,174	$	(12	)	$	31,506

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

	Amortized Cost		Estimated Fair Value
Held to Maturity
Due in one year or less	$	—	$	—
Due in one to five years		582		616
Due in five years to ten years		1,633		1,584
Due after ten years		10,047		9,867
	$	12,262	$	12,067
Available for Sale
Due in one year or less	$	—	$	—
Due in one year to five years		3,724		3,767
Due in five years to ten years		5,383		5,377
Due after ten years		21,237		22,362
	$	30,344	$	31,506

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, 2010 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	$	603	$	4	$	1,519	$	92	$	2,122	$	96
Corporate debt securities		—		—		1,239		275		1,239		275
Total	$	603	$	4	$	2,758	$	367	$	3,361	$	371

	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
Mortgage Backed Securities	$	1,399	$	2	$	—	$	—	$	1,399	$	2
Collateralized Mortgage Obligations		367		10		—		—		367		10
Total	$	1,766	$	12	$	—	$	—	$	1,766	$	12

At March 31, 2010, there were $2.8 million in securities held to maturity with gross unrealized losses that had been in a continuous unrealized loss

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position for twelve or more months. Additionally, management does not consider any impairment in the value of its securities to be other than temporary in nature. Impairment that exists within the Company’s investment portfolios is due primarily to discount rate fluctuations related to specific asset classes. The Company expects to hold these securities until maturity at which time the Company expects to receive the fully amortized cost.

Securities with an amortized cost of $762 thousand were pledged to secure public funds on deposit at March 31, 2010.

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

RESULTS OF OPERATIONS

Three Months ended March 31, 2010 and March 31, 2009

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, 2009 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 is 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 15 and 17 of this Form 10-Q for the provision and allowance for loan losses.

RESULTS OF OPERATIONS

Overview

For the three months ended March 31, 2010 net income available to common stockholders was $410 thousand, or $0.08 per diluted share, compared to $526 thousand, or $0.10 per diluted share, for the same period in 2009. Results for the three-month period ended March 31, 2010 benefitted from a $375 thousand decrease in the provision for loan losses over the prior year period, while the prior year quarter benefitted from $568 thousand in tax-free proceeds from a bank-owned life insurance policy, partially offset by a one-time $183 thousand expense for retirement liability related to the death of our founding Chief Financial Officer, Gerard Riker.

Net income available to common and diluted earnings per share for three-month period ending March 31, 2009 reflect accretion and dividends totaling $93 thousand related to $7.4 million of preferred stock and warrants issued on January 16, 2009 to the U.S. Treasury under the Capital Purchase Program. During the second quarter of 2009, the Company repurchased all of the preferred stock and warrants issued to Treasury, and therefore these securities had no impact on the 2010 first quarter.

At March 31, 2010, total assets were $312.8 million, a decrease of $17.3 million from total assets of $330.1 million at year-end 2009. The decrease was primarily due to a $13.6 million decrease in cash and cash equivalents and a $2.7 million decrease in investment securities available for sale.

Net Interest Income

Net interest income, on a fully taxable equivalent basis, for the 2010 first quarter totaled $2.7 million, an increase of $86,000, or 3.2%, from $2.6 million in the year ago quarter. The increase in net interest income was due to higher average interest-earning assets, which increased by 1.9% to $289.1 million in the first quarter of 2010 from $283.9 million in the first quarter of 2009, coupled with a 5 basis-point widening of the net interest margin to 3.82% in the current quarter from 3.77% in the prior year quarter. The rates earned on our interest-earnings assets and the rates paid on our interest-bearing liabilities both declined due to a declining interest rate environment; however, an improved deposit mix was the primary driver of the increase in net interest margin. Our cost of interest-bearing liabilities declined by 49 basis points (and our cost of deposits declined to 0.87% in the current quarter from 1.29% in the prior year quarter), reflecting strong growth in average core deposits, which represented 82% of average deposits for the first quarter of 2010, versus 77% in the prior year period. The yield on interest-earning assets declined by 31 basis points, despite a significant increase in the level of low-earning overnight investments. Management currently projects a widening of the net interest margin for the remainder of 2010 as higher cost time deposits continue to reprice and the Bank’s excess liquidity is deployed in higher earning assets.

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, 2010 and 2009. 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 adjustment to yields.

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Comparative Average
Balance Sheets
Three Months Ended March 31,

				2010								2009
	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	$	35,427		$	28		0.32	%	$	18,168		$	11		0.24	%
Loans		205,928			2,776		5.47	%		210,581			2,818		5.43	%
Loans held for sale		2,077			29		5.70	%		5,253			70		5.45	%
Investment securities		44,822			522		4.72	%		47,194			661		5.30	%
Restricted stock		880			12		5.75	%		871			4		2.01	%
Fed funds sold		—			—		—	%		1,794			2		0.35	%
Total interest earning assets	$	289,133		$	3,367		4.72	%	$	283,861		$	3,521		5.03	%
Non-interest earning assets		22,401								22,813
Allowance for loan losses		(3,159	)							(2,642	)
Total Assets	$	308,374							$	304,032
Liabilities and Equity
Interest bearing demand deposits	$	126,341		$	236		0.76	%	$	116,914		$	254		0.88	%
Savings		6,393			5		0.30	%		6,066			5		0.31	%
Money Market		24,909			28		0.46	%		19,226			25		0.53	%
Certificates of deposits		47,340			280		2.40	%		57,756			506		3.55	%
FHLB advances/ other borrowings		11,000			91		3.37	%		11,000			91		3.37	%
Total interest bearing liabilities		215,984			641		1.20	%		210,962			881		1.69	%
Non-Interest Bearing Liabilities:
Non-interest bearing deposits		52,203								48,189
Other liabilities		1,357								1,164
Total Liabilities		269,544								260,315
Stockholders’ Equity		38,830								43,717
Total Liabilities and Stockholders’ Equity	$	308,374							$	304,032
Net Interest Income				$	2,726							$	2,640
Net Interest Spread							3.52	%							3.34	%
Net Interest Margin							3.82	%							3.77	%

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

For the first quarter of 2010, the provision for loan losses was $75,000, a $375,000 decrease from the $450,000 recorded in the first quarter of 2009. The relatively high level of loan loss provisioning during last year’s first quarter was due to an increase in the general loss factors utilized in management’s estimate of credit losses inherent in the loan portfolio combined with deterioration or impairment of specific credits, consistent with the precipitous downturn in the economy at that time. As we head into 2010, there appear to be initial signs that credit quality is stabilizing, while the Company’s asset quality metrics, such as nonaccrual loan and charge-off ratios, continue to be among the soundest relative to its competitive peer groups. Notwithstanding these recent positive indications and trends, management believes there continues to be heightened risks in certain segments of the loan portfolio due to the current weak operating environment. Management reviews the adequacy of its allowance on an ongoing basis 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 decreased by $649,000 to $422,000 in the first quarter of 2010 from $1.1 million in the first quarter a year ago. The change is largely due to $568,000 in proceeds received in 2009 on a bank-owned life insurance policy, while there was no similar payment in 2010. In addition, gains on sales of loans at the Bank’s residential mortgage lending subsidiary, Sullivan Financial Services, Inc., declined $98,000 in the current first quarter compared to the prior year. Mortgage revenue was down consistent with the industry trend of lower re-financing activity. Service fees on deposit accounts increased by 11.3% to $79,000 in the first quarter of 2010 from the prior year quarter.

Non-Interest Expense

Non-interest expenses were $2.5 million in the first quarter of 2010, a decrease of $216 thousand versus $2.7 million in the first quarter of 2009.

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Salary and employee benefits were down $114,000 due primarily to a $183,000 charge to settle a retirement plan liability in 2009, which did not recur in 2010, and partially offset by an increase in salary expense, bonus accruals and health benefit costs. FDIC insurance assessments increased by $52,000 reflecting higher regular assessment rates, additional FDIC insurance premiums under the Transaction Account Guarantee Program, and a higher deposit base. Controllable expenses (i.e., all expenses other than the 2009 nonrecurring retirement plan charge and FDIC assessments) declined by $85 thousand, or 3.5%, to $2.3 million in the current quarter from $2.4 million one year ago, reflecting continued expense control in areas including, but not limited to, occupancy and outside consultants.

Income Taxes

The Company recorded a provision for income taxes of $155 thousand in the first quarter 2010 versus a tax benefit of $81 thousand in the first quarter 2009. The tax benefit recorded in 2009 was due to a large proportion of non-taxable income including a nonrecurring $568 thousand death benefit payment on bank owned life insurance. The effective tax rate for the quarter ended March 31, 2010 was 27.4%.

FINANCIAL CONDITION

March 31, 2010 as compared to December 31, 2009

Total assets as of March 31, 2010 decreased to $312.8 million from $330.1 million at December 31, 2009. The largest components of the decrease were cash and cash equivalents (down $13.6 million), loans held for sale (down $3.2 million) and investment securities available for sale (down $2.7 million), partially offset by a $2.1 increase in loans receivable. The decline in cash reflects largely seasonal factors associated with our level of deposits, which spiked up at year-end. The decline in loans held for sale, which consist of mortgage loans originated by our mortgage banking subsidiary, was also related to seasonal factors as well as an industry-wide reduction in mortgage re-financing activity. Our portfolio of investment securities available for sale declined as the prolonged period of lower interest rates has resulted in continued pay-downs of mortgage-backed securities and calls of certain agency obligations. Over the course of 2009 and into 2010, 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.

Total loans at March 31, 2010 increased $2.1 million to $208.9 million from $206.8 million at year-end 2009. The changes in and composition of the loan portfolio, by category, as of March 31, 2010 compared to December 31, 2009 is as follows: Commercial loans decreased $2.1 million to $38.0 million, construction, land and land development loans decreased by $0.1 million to $7.4 million, commercial mortgage loans increased $1.9 million to $102.0 million; home equity loans decreased by $1.7 million to $44.8 million; residential mortgage loans increased by $4.3 million to $15.9 million; and other consumer loans decreased by $98 thousand to $658 thousand. During the first three months of 2010, the Bank’s loan portfolio was impacted by the continued trend of deleveraging and/or refinancing strategies employed by many of the Bank’s borrowers, which in turn has led to paydowns or repayments of the Bank’s loans. With regard to new loan originations, the Bank has made a strategic decision to hold, on limited basis, in its loan portfolio residential mortgages that meet high credit quality standards that were closed by Sullivan Financial, the Bank’s mortgage banking subsidiary. The demand for commercial credit that met the Bank’s underwriting standards continues to be below historical standards and was predominantly for credit secured by commercial real estate.

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

	March 31, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
	(Dollars In Thousands)
Commercial:	$	37,970		18.2	%	$	40,102		19.4	%
Real Estate:
Construction, land and land development		7,404		3.5	%		7,540		3.7	%
Commercial mortgages		101,984		48.9	%		100,118		48.4	%
Residential mortgages		15,921		7.6	%		11,656		5.6	%
Consumer:
Home Equity		44,796		21.5	%		46,481		22.5	%
Other consumer		658		0.3	%		756		0.4	%
Gross loans		208,733		100.0	%		206,653		100.0	%
Net deferred costs		123					115
Total loans		208,856					206,768
Less: Allowance for loan losses		3,186					3,111
Net Loans	$	205,670				$	203,657

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. Real estate loans consist of (i) construction, land and land development loans, which include loans secured by first liens on commercial or residential properties to finance the construction or renovation of such properties (ii) commercial mortgages, which include loans secured by first liens on completed commercial properties to purchase or refinance such properties and (iii) residential mortgages, which 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.

Securities available for sale decreased $2.7 million, or 7.9%, from $34.2 million at year-end 2009 to $31.5 million at March 31, 2009. Securities held to maturity remained constant at $12.3 million from December 31, 2009 to March 31, 2010. The Company purchased $2.9 million in new securities during the first three months of 2010 and $5.7 million in securities matured, were called or were prepaid. There was $767 thousand in recorded net unrealized gains, net of taxes, in the available for sale portfolio and $19 thousand in net amortization expenses during the first three months of 2010.

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Total deposits decreased $17.7 million to $261.4 million as of March 31, 2010 from $279.1 million as of December 31, 2009. Core deposits (i.e., all deposits other than time deposits) declined $12.9 million, largely due to seasonal factors that impact our commercial customers, while time deposits decreased by $4.8 million, as higher rate promotional time deposits issued in 2008 continue to roll off. Commencing in the third quarter of 2008, as the economy started to slow, Management adopted a strategy of remaining highly liquid and seeking to attract customer relationships by capitalizing on customer dissatisfaction with current banking relationships. As the economy has stabilized, Management has started to unwind this strategy, and the change in our deposit portfolio reflects this unwinding. The percentage of core deposits to total deposits increased to 83% at March 31, 2010 from 82% at year-end 2009. Time deposits decreased $1.3 million. Management continues to monitor the Bank’s deposit portfolio through its Investment and Asset/Liability Committee.

ASSET QUALITY

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

	March 31, 2010			December 31, 2009
Non-accrual loans	$	374		$	256
Loans past due 90 days and still accruing		—			—
Total non-performing loans	$	374		$	256
OREO		—			—
Total non-performing assets	$	374		$	256
Troubled debt restructured loans	$	393		$	394
Non-accrual loans to total loans		0.18	%		0.12	%
Non-performing assets to total assets		0.12	%		0.08	%
Allowance for loan losses as a % of non-performing loans		852	%		1,215	%
Allowance for loan losses to total loans		1.53	%		1.50	%

Loans delinquent 30-89 days were $182,000 at March 31, 2010, down from $759,000 at December 31, 2009.

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, 2010, the allowance for loan losses was $3.2 million, up $75 thousand from year-end 2009. There were no net charge-offs for the quarter ended March 31, 2010, while there were $646 thousand of net charge-offs for the first quarter of 2009. The allowance for loan losses as a percentage of loans receivable was 1.53% at March 31, 2010 and 1.50% at December 31, 2009.

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, 2010 and 2009 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 March 31, 2010, we estimated that a gradual (often referred to as “ramped”) 200 basis-point increase in the general level of interest rates will increase our net interest income by 2.7%, while a ramped 200 basis-point decrease in interest rates will decrease net interest income by 1.3%. As of March 31, 2009, our model predicted that a 200 basis point gradual increase in general interest rates would increase net interest income by 2.1%, while a 200 basis point decrease would decrease net interest income by 1.1%.

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 March 31, 2010, was -0.61% with a rate shock of up 200 basis points, and -0.86% with a rate shock of down 200 basis points. At March 31, 2009, the variances were -1.33% assuming an up 200 basis points rate shock and -0.51% assuming a down 200 basis points rate shock.

LIQUIDITY MANAGEMENT AND CAPITAL RATIOS

At March 31, 2010, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’

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withdrawal requirements, and other operational and customer credit needs could be satisfied.

At March 31, 2010, liquid assets (cash and due from banks, interest bearing deposits at other banks, federal funds sold, and investment securities available for sale) were approximately $74.2 million, which represents 23.7% of total assets and 27.3% 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 $78.2 million (subject to available qualified collateral, with current borrowings of $11.0 million outstanding at March 31, 2010). In addition, during April 2009, the Bank established a credit facility (with an approximate borrowing capacity based on pledged collateral as of March 31, 2010 of $11.4 million) with the Federal Reserve Bank of New York for direct discount window borrowings. In addition, the Bank has in place additional borrowing capacity of $17.0 million through correspondent banks. At March 31, 2010 outstanding commitments for the Bank to extend credit were $79.1 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 $38.5 million at March 31, 2010. Activity in stockholders’ equity consisted of an increase in retained earnings of $149 thousand which represents net income of $410 thousand earned during the first three months of 2010 offset by a cash dividend payment of $261 thousand. Common stock increased by $115 thousand from the exercise of stock options for the first three months of 2010. Accumulated comprehensive income increased by $83 thousand resulting from a net change in unrealized gain on securities available for sale.

At March 31, 2010 the Bank exceeded each of the regulatory capital requirements applicable to it. The table below presents the capital ratios at March 31, 2010, for the Bank, as well as the minimum regulatory requirements.

	Amount		Ratio			Amount		Minimum Ratio
The Bank:
Leverage Capital	$	31,992		10.38	%	$	12,324	4	%
Tier 1-Risk Based	$	31,992		13.27	%	$	9,642	4	%
Total Risk-Based	$	35,007		14.52	%	$	19,284	8	%

The Company’s tangible common equity ratio was 12.33% as of March 31, 2010 and 12.06% as of March 31, 2009.

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.

Item 3.	Defaults Upon Senior Securities
Not applicable
Item 4.	(Removed and Reserved)
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

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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 12, 2010	By:/s/ William S. Burns
	WILLIAM S. BURNS
	Chief Financial Officer

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