Bancorp of New Jersey, Inc.
Annual Report 2010

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To Our Shareholders and Friends: It is with pleasure that we present this, our fifth annual report which highlights Bancorp of New Jersey, Inc.’s and Bank of New Jersey’s record setting results and our operations over our first 55 months. We have done well during what many consider to be a difficult time. Specifically we have: Further added to our record-breaking initial capital of $43.6 million to total year end capital of $50.1 million; Grown total year-end assets to $370.3 million. An increase of $50.7 million or approximately 16% over 2009 totals; Increased deposits over 2009 by $51.3 million or 19.2%; Grew total loans over last year-end to $ 302.1 million. An increase of $38.2 million or 14.5%; Have continued monthly profit each and every month since August, 2006. While reserving $3.7 million in the allowance for loan losses; Income for 2010 exceeded $2.1 million after tax and represents an increase from 2009 of $894 thousand or over 71%; We have audited risky loans and investments which results in clear profits without any government assistance; In addition to the $0.30 per share special dividend paid in January 2010 we paid an additional special dividend of $0.33 per share in December 2010, indicative of our fine performance and the likelihood that it will continue; We expect to open two more branch offices (totaling eight) within the next few months. 2011 is expected to be another challenging year and we will thrive as we have in the past by paying attention to our customers and following the same conservative, steady attitude which got us to where we are. Thanks to our shareholders, directors and our fine staff. A happy, healthy and profitable 2011 to all. Albert F. Buzzetti Chairman Michael Lesler President and Vice Chairman TABLE OF CONTENTS PAGE Forward-Looking Statements ..................................................................................................... 3 Consolidated Balance Sheets ..................................................................................................... 4 Consolidated Statements of Income ........................................................................................... 5 Consolidated Statements of Stockholders’ Equity and Comprehensive Income ........................ 6 Consolidated Statements of Cash Flows .................................................................................... 7 Notes to Consolidated Financial Statements .............................................................................. 8 Report of Independent Registered Public Account Firm ......................................................... 40 Management’s Discussion and Analysis of Financial Condition and Results of Operations ... 41 Business ................................................................................................................................... 64 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities................................................................................ 75 Directors and Executive Officers ............................................................................................. 77 2 FORWARD-LOOKING STATEMENTS This document contains forward-looking statements, in addition to historical information. Forward looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” and variations of such words and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The U.S. Private Securities Litigation Reform Act of 1995 provides a safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference. You should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of Bancorp of New Jersey, Inc. and its subsidiary and could cause those results to differ materially from those expressed in the forward-looking statements contained or incorporated by reference in this document. These factors include, but are not limited, to the following: Current economic crisis affecting the financial industry; Volatility in interest rates and shape of the yield curve; Increased credit risk and risks associated with the real estate market; Operating, legal and regulatory risk; Economic, political and competitive forces affecting the Company’s business; and That management’s analysis of these risks and factors could be incorrect, and/or that the strategies developed to address them could be unsuccessful. Bancorp of New Jersey, Inc., referred to as “we” or the “Company,” cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, all of which change over time, and we assume no duty to update forward-looking statements, except as may be required by applicable law or regulation except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. We caution readers not to place undue reliance on any forward-looking statements. These statements speak only as of the date made, and we advise readers that various factors, including those described above, could affect our financial performance and could cause actual results or circumstances for future periods to differ materially from those anticipated or projected. 3 CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 (Dollars in thousands, except share data) Assets Cash and due from banks Interest bearing deposits in banks Federal funds sold Total cash and cash equivalents Securities available for sale Securities held to maturity (fair value approximates $3,724 and $4,297 at December 31, 2010 and 2009 respectively) Restricted investment in bank stock, at cost Loans Deferred loan fees and costs, net Allowance for loan losses Net loans Premises and equipment, net Accrued interest receivable Other real estate owned Other assets Total assets Liabilities and Stockholders’ Equity Deposits : Noninterest-bearing demand deposits Interest bearing deposits: Savings, money market and time deposits Time deposits of $100 or more Total deposits Accrued expenses and other liabilities Total liabilities Commitments and contingencies 2010 2009 $ 605 22,134 465 23,204 $ 576 17,055 467 18,098 27,923 21,111 3,728 491 302,103 – (3,749) 298,354 9,927 1,285 1,938 3,405 $370,255 4,296 419 263,931 13 (2,792) 261,152 10,214 1,173 – 3,145 $319,608 $ 33,244 $ 36,687 97,730 187,447 318,421 1,696 320,117 85,161 145,295 267,143 2,930 270,073 Stockholders’ equity : Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 5,206,932 shares at December 31, 2010; and December 31, 2009 Retained Earnings Accumulated other comprehensive (loss) income Total stockholders’ equity Total liabilities and stockholders’ equity 49,390 49,096 807 (59) 50,138 $370,255 373 66 49,535 $319,608 See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2010 and 2009 (Dollars in thousands, except per share data) See accompanying notes to consolidated financial statements. 5 20102009Interest income: Loans, including fees16,233$ 14,630$ Securities727 779 Interest-earning deposits in banks39 75 Federal funds sold12 7 Total interest income17,011 15,491 Interest expense: Savings and money markets170 251 Time deposits4,166 5,681 Total interest expense4,336 5,932 Net interest income12,675 9,559 Provision for loan losses1,335 424 Net interest income after provision for loan losses11,340 9,135 Non interest income Fees and service charges on deposit accounts185 173 Fees earned from mortgage referrals21 10 Gains on sales of securities127 -Total non interest income333 183 Non interest expense Salaries and employee benefits3,946 3,785 Occupancy and equipment expense1,487 1,397 FDIC and state assessments524 545 Professional fees380 275 Data processing463 411 Other real estate owned related expenses387 - Other operating expenses863 770 Total non interest expenses8,050 7,183 Income before income taxes3,623 2,135 Income tax expense1,472 878 Net income2,151$ 1,257$ Earnings per share: Basic0.41$ 0.25$ Diluted0.41$ 0.25$ CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 2010 and 2009 (Dollars in Thousands) 6 AccumulatedOtherCommonRetainedComprehensiveStockEarnings(Loss) IncomeTotalBalance at January 1, 200947,133$ 678$ 53$ 47,864$ Exercise of warrants (139,651 shares)1,524 1,524 Exercise of stock options (2,000 shares)23 23 Recognition of stock option expense416 416 Dividends on common stock(1,562) (1,562) Comprehensive Income:Net income1,257 1,257 Unrealized losses on securities available for sale13 13 Total comprehensive income1,270 Balance at December 31, 200949,096 373 66 49,535 Recognition of stock option expense294 294 Dividends on common stock(1,717) (1,717) Comprehensive Income:Net income2,151 2,151 Unrealized losses on securities available for sale(125) (125) Total comprehensive income2,026 Balance at December 31, 201049,390$ 807$ (59)$ 50,138$ CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2010 and 2009 (In Thousands) 7 20102009Cash Flows from operating activities: Net Income2,151$ 1,257$ Adjustments to reconcile net income to net cash provided by Operating activities: Provision for loan losses1,335 424 Deferred tax benefit(444) (283) Depreciation and amortization430 425 Recognition of stock option expense294 416 Gains on sale of securities(127) - Changes in operating assets and liabilities: Increase in accrued interest receivable(112) (326) Decrease (increase) in other assets265 (1,005) (Decrease) increase in other liabilities328 (13) Net cash provided by operating activities4,120 895 Cash flows from investing activities: Purchases of securities available for sale(38,074) (34,005) Purchases of securities held to maturity(3,728) (4,296) Proceeds from maturities of securities held to maturity4,296- Proceeds from called or matured securities available for sale25,01430,642 Proceeds from sales of securities available for sale6,169- Purchase of restricted investment in bank stock(72) (73) Net increase in loans(40,475) (29,021) Purchases of premises and equipment(143) (355) Net cash used by operating activities(47,013) (37,108) Cash flows from investing activities: Net increase in deposits51,27813,137 Net increase (decrease) in short term borrowings-(853) Proceeds from exercise of stock options-23 Cash dividends paid(3,279) - Proceeds from exercise of warrants-1,524Net cash provided by financing activities47,99913,831Increase (decrease) in cash and cash equivalents5,106 (22,382) Cash and cash equivalents at beginning of year18,098 40,480 Cash and cash equivalents at end of year23,204$ 18,098$ Supplemental information: Cash paid during the year for: Interest4,270$ 6,099$ Taxes2,544$ 930$ Supplemental disclosure of non-cash investing and financing transactions: Loans transferred to other real estate owned1,938$ -See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Summary of Significant Accounting Policies Basis of Financial Statement Presentation The accompanying consolidated financial statements include the accounts of Bancorp of New Jersey, Inc. (the “Company”), and its direct wholly-owned subsidiary, Bank of New Jersey (the “Bank”) and the Bank’s wholly-owned subsidiary, BONJ-New York Corp. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company was incorporated under the laws of the State of New Jersey to serve as a holding company for the Bank and to acquire all the capital stock of the Bank. The Company’s class of common stock has no par value and the Bank’s class of common stock had a par value of $10 per share. As a result of the holding company reorganization, amounts previously recognized as additional paid in capital on the Bank’s financial statements were reclassified into common stock in the Company’s consolidated financial statements. Certain amounts in the prior period’s financial statements have been reclassified to conform to the December 31, 2010 presentation. These reclassifications did not have an impact on income. Nature of Operations The Company’s primary business is ownership and supervision of the Bank. The Bank commenced operations as of May 10, 2006. The Company, through the Bank, conducts a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non- profit organizations, and governmental units. The Bank makes commercial loans, consumer loans, and both residential and commercial real estate loans. In addition, the Bank provides other customer services and makes investments in securities, as permitted by law. Since opening in May, 2006, the Bank has established five branch offices in addition to its main office. The Bank expects to continue to seek additional strategically located branch locations within Bergen County. Particular emphasis will be placed on presenting an alternative banking culture in communities which are dominated by non-local competitors and where no community banking approach exists or in locations which the Company perceives to be economically emerging. During the second quarter of 2009, the Bank formed BONJ-New York Corporation. The New York subsidiary will be engaged in the business of acquiring, managing and administering portions of Bank of New Jersey’s investment and loan portofolios. Use of Estimates Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of the deferred tax asset, the determination of other-than-temporary impairment on securities, and the potential impairment of restricted stock. While management uses available information to recognize estimated losses on loans, future additions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. These agencies may require the Bank to recognize additions to the allowance based on their judgements of information available to them at the time of their examination. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period indicated. Actual results could differ significantly from those estimates 8 Subsequent Events The Company has evaluated subsequent events in preparing the December 31, 2010 Consolidated Financial Statements. Management believes there were no events that occurred after December 31, 2010, but before the financial statement was available to be issued that would require disclosure. Significant Group of Concentration of Credit Risk Bancorp of New Jersey, Inc.’s activities are, primarily, with customers located within Bergen County, New Jersey. The Company does not have any significant concentration to any one industry or customers within its primary service area. Note 3 describes the types of lending the Company engages in. Although the Company actively manages the diversification of the loan portfolio, a substantial portion of the debtors’ ability to honor their contracts is dependent on the strength of the local economy. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest bearing deposits in banks, and federal funds sold, which are generally sold for one-day periods. Interest-bearing deposits in banks Interest bearing deposits in banks are carried at cost. Regulators The Bank is subject to federal and New Jersey statutes aplicable to banks chartered under the New Jersey banking laws. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC). Accordingly, the Bank is subject to regulation, supervision, and examination by the New Jersey State Department of Banking and Insurance and the FDIC. The Company is subject to regulation, supervision and examination by the Federal Reserve Bank of New York. Securities Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments in debt securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities, nor as held to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains and losses, net of deferred income taxes, reported in the accumulated other comprehensive income component of stockholders’ equity. The Bank held no trading securities at December 31, 2010 and 2009. Discounts and premiums are accreted/amortized to income by use of the level-yield method. Gain or loss on sales of securities available for sale is based on the specific identification method. FASB recently issued accounting guidance related to the recognition and presentation of other-than- temporary impairment, which the Bank adopted effective June 30, 2009 (“Pending Content” of FASB ASC 320-1). This recent accounting guidance amends the recognition guidance for other- than-temporary impairments of debt securities and expands the financial statement discloures for other-than-temporary impairment losses on debt and equity securities. The recent guidance replaced the “intent and ability” indication in current guidance by specifying that (a) if a company does not have the intent to sell a debt security prior to recovery and, (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than- temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other- than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. 9 Prior to the adoption of the recent accounting guidance on June 30, 2009, management considered, in determining whether other-than-temporary impairment exists (1) the length of time and the extent to which the fair value has been less than amortized costs, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain the investment in the issuer for a period of time sufficient to allow for any ancitipated recovery in fair value. Premises and Equipment Premises and equipment are stated at historical cost, less accumulated depreciation and amortization. Depreciation of fixed assets is accumulated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the related lease. The estimated lives of our premises and equipment range from 3 years for computer related equipment to 30 years for building costs associated with newly constructed buildings. Maintenance and repairs are charged to expense in the year incurred. 10 Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Company is generally amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method. The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, commercial construction and lease financing. Consumer loans consist of the following classes: residential mortgage loans, home equity loans and other consumer loans. For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Interest The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for its unfunded loan unfunded lending commitments represents management’s estimate of losses inherent in commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for credit losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 180 days past due on a contractual basis, earlier in the event of Bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses. The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include: 1. Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. 11 2. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans. 3. Nature and volume of the portfolio and terms of loans. 4. Experience, ability, and depth of lending management and staff. 5. Volume and severity of past due, classified and nonaccrual loans as well as and other loan modifications. 6. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors. 7. Existence and effect of any concentrations of credit and changes in the level of such concentrations. 8. Effect of external factors, such as competition and legal and regulatory requirements. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial loans, commercial real estate loans and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured by real estate, estimated fair values are determined primarily through third- party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are restored to 12 accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loan not classified are rated pass. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. Other Real Estate Owned Other real estate owned consists of real estate acquired by foreclosure and is initially recorded at fair value, less estimated selling costs. Subsequent to foreclosure, revenues are included in Non-interest income and expenses from operations and lower of cost or market changes in the valuation are included in Non-interest expenses. Stock-Based Compensation ASC Topic 718 Compensation-Stock Compensation addresses the accounting for share-based payment transactions in which an enterprise receives employee service in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Guidance requires an entity to recognize the grant- date fair value of stock options and other equity-based compensation issued to employees within the income statement using a fair-value-based method, eliminating the intrinsic value method of accounting previously permissible. The Company accounts for stock options under the recognition and measurement principles of ASC Topic 718. As a result of adopting ASC Topic 718, the Company recorded compensation expense of $294,000 and $416,000 during 2010 and 2009, respectively. At December 31, 2010, the Company had unrecognized compensation expense amounting to approximately $298,000 related to un-vested options. The unrecognized expense will be recognized over the remaining vesting terms. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted ASC Topic 790, Income Taxes. As required by ASC Topic 790, Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. Corporate tax returns for the years 2006 through 2010 remain open to examination by taxing authorities. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Bank applied ASC Topic 790 to all tax positions for which the statute of limitations remained open. As a result of the adoption of ASC Topic 790, there was no material effect on 13 the Company’s consolidated financial position or results of operations and no adjustment to retained earnings. The Company recognizes interest and penalties on income taxes as a component of income tax. Earnings Per Share Basic earnings per share excludes dilution and represents the effect of earnings upon the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the effect of earnings upon weighted average shares including the potential dilution that could occur if securities or contracts to issue common stock were converted or exercised, utilizing the treasury stock method. Comprehensive Income Comprehensive income consists of net income or loss for the current period and income, expenses, or gains and losses not included in the income statement and which are reported directly as a separate component of equity. The Company includes the required disclosures in the statement of stockholders’ equity. Advertising The Company expenses advertising costs as incurred. Advertising expenses totaled $51 thousand and $71 thousand for 2010 and 2009, respectively. Transfer of Financial Assets Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Restricted Investment in Bank Stock Restricted stock, is comprised of stock in the Federal Home Loan Bank of New York and Atlantic Central Bankers’ Bank. Federal law requires a member institution of the Federal Home Loan Bank to hold stock according to a predetermined formula. All restricted stock is recorded at cost as of December 31, 2010 and 2009. Restricted investment in bank stocks which represent required investments in the common stock of correspondent banks, is carried at cost and consists of the common stock of the Federal Home Loan Bank (FHLB) of $391 thousand and $319 thousand and Atlantic Central Bankers Bank (ACBB) of $100 thousand and $100 thousand, as of December 31, 2010 and 2009, respectively. Management evaluates the restricted stock for impairment in accordance with ASC Topic 942, Financial Services Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative or regulatory changes on institutions and, accordingly, on the customer base of the FHLB, and (4) the liquidity position of the FHLB. Management believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2010. Restrictions on Cash and Amounts Due From Banks The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2010 and 2009, these reserve balances amounted to $786 thousand and $629 thousand, respectively, and are reflected in interest bearing deposits in banks. 14 NOTE 2. Securities A summary of securities held to maturity and securities available for sale at December 31, 2010 and December 31, 2009 is as follows (in thousands): December 31, 2010 Securities Held to Maturity: Obligations of states and Political subdivisions Securities Available for Sale: U.S. Treasury obligations Government Sponsored Enterprise obligations Total securities available for sale Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 3,728 $ - $ (4) $ 3,724 9,029 11 (16) 9,024 18,994 28,023 110 121 (205) (221) 18,899 27,923 Total securities $ 31,751 $ 121 $ (225) $ 31,647 December 31, 2009 Securities Held to Maturity: Obligations of states and Political subdivisions Securities Available for Sale: U.S. Treasury obligations Government Sponsored Enterprise obligations Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 4,296 $ 1 $ - $ 4,297 2,005 - (5) 2,000 19,000 21,005 127 127 (16) (21) 19,111 21,111 Total securities $25,301 $ 128 $ (21) $25,408 Securities with an amortized cost and a fair value of $2.0 million, were pledged to secure public funds on deposit at December 31, 2010 and December 31, 2009. During 2010, the Company sold three securities from its available for sale portfolio and recognized gains of approximately $127 thousand from the transactions. During 2009, the Company did not sell any securities from its available for sale or held to maturity portfolios. U. S. Treasury and Government Sponsored Enterprise obligations. The unrealized losses on two investment in U. S. Treasury obligations and five Government Sponsored Enterprise obligations were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intended to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2010. All of the investments with unrealized losses at December 31, 2010 were in a loss position for less than twelve months. Obligations of states and Political subdivisions. The unrealized losses on one investment in Obligation of states and Political subdivisions was caused by interest rate increases. The contractual term of that investment does not permit the issuer to settle the security at a price less than the 15 amortized cost basis of the investment. Because the Company does not intended to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2010. This investment with an unrealized loss at December 31, 2010 was in a loss position for less than twelve months. The unrealized losses, categorized by the length of time of continuous loss position, and the fair value of related securities available for sale are as follows (in thousands): 16 FairUnrealizedFairUnrealizedFairUnrealizedDecember 31, 2010ValueLossesValueLossesValueLossesU.S. Treasury obligations6,007$ 16$ $ -$ -6,007$ 16$ Government Sponsored Enterprise obligations9,788 205 - -9,788 205 Total securities available for sale15,795$ 221$ $ -$ -15,795$ 221$ FairUnrealizedFairUnrealizedFairUnrealizedDecember 31, 2009ValueLossesValueLossesValueLossesU.S. Treasury obligations2,000$ 5$ $ -$ -2,000$ 5$ Government Sponsored Enterprise obligations5,984 16 - -5,984 16 Total securities available for sale7,984$ 21$ $ -$ -7,984$ 21$ The unrealized losses, categorized by the length of time of continuous loss position, and the fair value of relatedsecurities held to maturing are as follows (in thousands):FairUnrealizedFairUnrealizedFairUnrealizedDecember 31, 2010ValueLossesValueLossesValueLossesObligations of states and political subdivisions2,396$ 4$ $ -$ -2,396$ 4$ Total securities available for sale2,396$ 4$ $ -$ -2,396$ 4$ At December 31, 2009, the Company held no securities held to maturity with unrealized losses.Less than 12 MonthsMore than 12 MonthsTotalLess than 12 MonthsMore than 12 MonthsTotalLess than 12 MonthsMore than 12 MonthsTotal The following table sets forth as of December 31, 2010, the maturity distribution of the Company’s held to maturity and available for sale portfolios (in thousands): 2010 NOTE 3. Loans and Allowance for Loan Losses Loans at December 31, 2010 and 2009, respectively, are summarized as follows (in thousands): Commercial real estate Residential mortgages Commercial Home Equity Consumer December 31, 2010 $142,198 52,407 46,073 60,378 1,047 $302,103 2009 $121,504 55,527 36,036 49,969 895 $263,931 The Bank grants commercial, mortgage and installment loans to those New Jersey residents and businesses within its local trading area. Its borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority of the Bank’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank’s control; the Bank is therefore subject to risk of loss. The Bank believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. The activity in the allowance for loan losses is as follows (in thousands): Years ended December 31, 2010 2009 Balance at beginning of year $2,792 $2,371 Provision charged to expense Loans charged off Recoveries 1,335 (379) 1 424 (4) 1 Balance at end of year $3,749 $2,792 17 AmortizedFairAmortizedFairCostValueCostValueWithin 1 year3,728$ 3,724$ 999$ 999$ 1 to 5 years - -19,024$ 19,080$ Over 5 years - -8,000$ 7,844$ 3,728$ 3,724$ 28,023$ 27,923$ Securities Held to MaturitySecurities Available for Sale 18 Allowance for loan losses and recorded investment in financing receivables for the year ended December 31, 2010 (in thousands):Commercial real estateResidential mortgagesCommercialHome equityConsumerUnallocatedTotalAllowance for loan losses:Ending balance1,962$ 366$ 627$ 358$ 22$ 414$ 3,749$ Ending balance:Individually evaluated for impairment255 8 - 25 - - 288 Ending balance:Collectively evaluated for impairment1,707 358 627 333 22 414 3,461 Loan receivables:Ending balance142,198$ 52,407$ 46,073$ 60,378$ 1,047$ -$ 302,103$ Individually evaluated for impairment1,580 1,087 - 25 - - 2,692 Ending balance:Collectively evaluated for impairment140,618 51,320 46,073 60,353 1,047 - 299,411 The performance and credit quality of the loan porfolio is also monitored by the analyzing the age of the loansreceivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2010 (in thousands):30-59 Days Past Due60-89 Days Past DueGreater than 90 DaysTotal Past DueCurrentTotal Loans ReceivablesCommercial real estate-$ -$ 1,580$ 1,580$ 140,618$ 142,198$ Residential mortgages- - 554 554 51,853 52,407 Commercial- 405 - 405 45,668 46,073 Credit Lines- - 25 25 60,353 60,378 Consumer - - - - 1,047 1,047 Total-$ 405$ 2,159$ 2,564$ 299,539$ 302,103$ Age Analysis of Past Due Loans ReceivablesAs of December 31, 2010 The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Bank’s internal risk rating system as of December 31, 2010 (in thousands): As of December 31, 2010, the Bank had seven impaired loans totaling approximately $2.7 million, of which four loans totaling approximately $1.4 million had specific reserves of $288 thousand and three loans totaling approximately $1.3 million had no specific reserve. The Bank recognized income of $18 thousand on these loans in 2010. If interest had been accrued, such income would have been approximately $142 thousand. At December 31, 2010, the Bank had three residential mortgage loans that met the definition of a troubled debt restructuring (“TDR”) loan. TDRs are loans where modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or other actions to maximize collection. At December 31, 2010 the TDR loans had an aggregate outstanding balance of $1.3 million with specific reserves of approximately $8 thousand. Two of the TDRs, with an aggregate outstanding balance at December 31, 2010 of $843 thousand and a specific reserve of $8 thousand are included in the Bank’s impaired loan total. During the third quarter, two loans reported as impaired in the previous quarter, which approximated $213 thousand, and which were fully reserved, were charged off. A third loan, a single family residential loan with a net value of approximately $1.9 million, was foreclosed on and placed in other real estate owned. This event caused a charge-off of approximately $160 thousand during the year. A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310- 10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include non-performing commercial real estate loans and residential real estate loans but can also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The following table presents the Company’s impaired loans at December 31, 2010 and 2009 (in thousands): Average impaired loans for 2010 and 2009 were $3.5 million and $2.9 million, respectively. 19 Commercial real estateResidential mortgagesCommercialHome equityConsumer TotalPass136,451$ 50,881$ 45,748$ 60,353$ 1,047$ 294,480$ Special Mention4,942 1,526 325 - - 6,793 Substandard805 - - - - 805 Doubtful- - - 25 - 25 Total142,198$ 52,407$ 46,073$ 60,378$ 1,047$ 302,103$ 20102009Impaired loans without a valuation allowance1,329$ 1,181$ Impaired loans with a valuation allowance1,363 2,777 2,692 3,958 Valuation allowance related to impaired loans288 99 Total non-accrual loans2,159$ 3,859$ Total loans past due ninety days or more still accruing$ -$ - The Company’s policy for interest income recognition on non-accrual loans is to recognize income on currently performing restructured loans under the accrual method. The Company recognizes income on non-accrual loans under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company does not recognize income. There was $18 thousand of income recognized in 2010 on loans that were on non-accrual status. There was $69 thousand of income recognized in 2009 on loans that were on non-accrual status. Interest income that would have been recorded had the loans been on accrual status amounted to approximately $142 thousand and approximately $261 thousand for 2010 and 2009, respectively. NOTE 4. Premises and Equipment At December 31, premises and equipment consists of the following (in thousands): Depreciation expense amounted to $430 thousand and $425 thousand for the years ended December 31, 2010 and 2009, respectively. 20 The following table provides information in regards to impaired loans by portfolio class at December 31, 2010 (in thousands):Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income RecognizedImpaired loans with specific reserves:Commercial real estate550$ 805$ 255$ 805$ -$ Residential mortgage525 533 8 320 - Home equity- 25 25 5 1 Total impaired loans with specific reserves1,075 1,363 288 1,130 1 Impaired loans with no specific reserves:Commercial real estate775 775 - 465 - Residential mortgage554 554 - 359 17 Home equity- - - - - Total impaired loans with no specific reserves1,329 1,329 - 824 17 Total impaired loans2,404$ 2,692$ 288$ 1,954$ 18$ 20102009Land4,828$ 4,828$ Buildings and improvements 5,115 5,076 Furniture and Fixtures551 551 Equipment881 777 11,375 11,232 Less accumulated depreciation andamortization1,448 1,018 Total premises and equipment, net9,927$ 10,214$ NOTE 5. Deposits At December 31, 2010 and 2009, respectively, a summary of the maturity of time deposits (which includes certificates of deposit and individual retirement account (IRA) certificates) is as follows (in thousands): NOTE 6. Short Term Borrowings At December 31, 2010, the Bank had no borrowed funds outstanding. We have a $12 million overnight line of credit facility available with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. Additionally, we are a member of the Federal Home Loan Bank of New York (FHLBNY) . The FHLBNY relationship could provide additional sources of liquidity, if required. We believe that our current sources of funds provide adequate liquidity for our current cash flow needs. At December 31, 2009, the Bank had no borrowed bunds outstanding. 21 20102009Three months or less64,933$ 66,514$ Over three months through twelve months114,537 87,466 Over 1 year through 2 years22,228 15,896 Over 2 years through 3 years5,520 812 Over 3 years through 4 years8,565 2,439 Over 4 years through 5 years12,455 6,957 Over 5 years - -228,238$ 180,084$ NOTE 7. Income Taxes Income tax expense from operations for the years ended December 31 is as follows (in thousands): Current tax expense: Federal State Deferred income tax benefit: Federal State 2010 2009 $ 1,465 451 (309) (135) $ 894 267 (219) (64) Income tax expense $ 1,472 $ 878 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows (in thousands): The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. During 2010 and 2009, the Company sustained continued profitability, continued to pay taxes, and recognized deferred tax benefits. Based upon these and other factors, management believes it is more likely than not that the Company will realize the benefits of these remaining deferred tax assets. The net deferred tax asset is included in other assets on the consolidated balance sheet. 22 20102009Deferred tax assets: Start up expenses363$ 398$ Allowance for loan losses1,497 1,025 Accrued expenses165 97 Stock Compensation plans371 277 Unrealized losses on AFS securities41 -Total gross deferred tax assets2,437 1,797 Deferred tax Liabilities: Deferred loan costs(72)(68) Prepaid expenses(52)(47) Unrealized gains on AFS securities -(40) Other(165)(21)Total gross deferred tax liabilities(291)(176) Net deferred tax asset2,146$ 1,621$ Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income taxes as a result of the following (in thousands): Computed “expected” tax expense Increase(decrease) in taxes resulting from: State taxes, net of federal income tax expense Tax exempt income Stock-based compensation Meals and entertainment Other 2010 2009 $ 1,232 209 (8) 20 4 15 $ 1,472 $ 726 134 (20) 34 3 1 $ 878 The Company is subject to income taxes in the U.S. and various states. Tax regulations are subject to interpretation of the related tax laws and regulations and require significant judgment to apply. Corporate tax returns for the years 2006 through 2010 remain open to examination by taxing authorities. NOTE 8. Leases The Bank leases banking facilities under operating leases which expire at various dates through December 31, 2026. These leases do contain certain options to renew the leases. Rental expense amounted to $578,000 and $514,000 respectively, annually, for the years ended December 31, 2010 and December 31, 2009. The following is a schedule of future minimum lease payments (exclusive of payments for maintenance, insurance, taxes and any other costs associated with offices) for operating leases with initial or remaining terms in excess of one year from December 31, 2010 (in thousands): 23 2011526$ 2012532 2013540 2014464 2015341 Thereafter2,955 5,358$ Year ending December 31: NOTE 9. Related-party Transactions The Bank has made, and expects to continue to make, loans in the future to our directors and executive officers and their family members, and to firms, corporations, and other entities in which they and their family members maintain interests. All such loans require the prior approval of our board of directors. None of such loans at December 31, 2010 and 2009, respectively, were nonaccrual, past due, restructured or potential problems, and all of such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company or the Bank and did not involve more than the normal risk of collectibility or present other unfavorable features. The following table represents a summary of related-party loans during 2010 and 2009 (in thousands): Outstanding loans at beginning of the year New Loans Repayments Outstanding loans at end of the year 2010 2009 $27,190 15,481 (7,921) $34,750 $17,635 12,995 (3,440) $27,190 Two of our directors have acted as the Bank’s counsel on several loan closings. During 2010 and 2009 the total cost of such work has been reimbursed by the respective loan customers and totals $182,000 and $108,000, respectively. Additionally, these directors have acted as legal counsel to the Bank on several matters. The total amount paid for legal fees, for non-loan related matters was approximately $11,000 in 2010 and approximately $19,000 in 2009. The Company’s or the Bank’s commercial insurance policy, as well as other policies, has been placed with various insurance carriers by an insurance agency of which one of our directors is the president. Gross insurance premiums paid to carriers through this agency was approximately $110,000 and $104,000 in 2010 and 2009, respectively. One of our directors provided appraisal services on several loan closings. Although certain of these payments are reimbursed by our customer, the total amount paid for appraisal services during 2010 and 2009 was approximately $6,000 and $22,000, respectively. One of the company’s directors is a principal in a company that the Bank rents office space from. The total amount paid for rent to this company for 2010 was $1,200. There was no rent paid in 2009. Our disinterested directors have reviewed all transactions and relationships with directors and the businesses in which they maintain interests, have determined that each is on arm’s-length terms, and have approved each such transaction and relationship. 24 NOTE 10. Earnings Per Share The Company’s calculation of earnings per share in accordance with ASC Topic 260, Earnings per Share, is as follows: Non-qualified options to purchase 414,668 shares of common stock at a weighted average price of $11.50; and incentive stock options to purchase 90,000 shares of common stock at a weighted average price of $11.50 were not included in the computation of diluted earnings per share for the year ended December 31, 2010, because they were anti-dilutive. Incentive stock options to purchase 97,900 shares of common stock at a weighted average price of $9.09 were included in the computation of diluted earnings per share for the year ended December 31, 2010. Stock options for 601,168 shares of common stock were not considered in computing diluted earnings per common share for the year ended December 31, 2009, because they were anti-dilutive as exercise price exceeded average market price. 25 (In Thousands, except per share data)20102009 Net income applicble to common stock2,151$ 1,257$ Weighted average number of common shares outstanding - basic5,207 5,112 Basic earnings per share0.41$ 0.25$ Net income applicble to common stock2,151$ 1,257$ Weighted average number of common shares outstanding - diluted Weighted average number of common shares outstanding5,207 5,112 Effect of dilutive warrants14 - Weighted average number of common shares outstanding - diluted5,221 5,112 Diluted earnings per share0.41$ 0.25$ For the Year EndedDecemer 31, NOTE 11. Comprehensive Income ASC Topic 220, Comprehensive Income, requires the reporting of comprehensive income, which includes net income as well as certain other items, which result in changes to equity during the period. Total comprehensive income is presented for the years ended December 31, 2010 and 2009 (in thousands) as follows: NOTE 12. Stockholders’ Equity and Dividend Restrictions Under its initial stock offering which closed in 2005, the Bank sold 4,798,594 shares of common stock at $9.09 per share. The stock offering resulted in net proceeds of $42,684,000. For every five shares of common stock purchased in the offering, one warrant to purchase one additional share of the Bank’s common stock was issued, exercisable at any time through May 10, 2009. Prior to their expiration, the Company extended the expiration date of the warrants to September 15, 2009. 959,720 warrants were issued to purchase common stock at $10.91 per share. Between 2006 and 2009, there were 321,882 warrants exercised for total proceeds of $3,501,000. At December 31, 2009, there were no outstanding warrants. There were 637,838 warrants forfeited during 2009. During 2009, a director of the Company exercised stock options to purchase 2,000 shares of common stock at $11.50 per share for total proceeds of $23,000. During the fourth quarter of 2010, the Company declared a cash dividend of $0.33 per share. The cash dividend was paid on December 20, 2010 to all shareholders as of record date November 12, 2010. The cash dividend was paid from the retained earnings of the Company. Under applicable New Jersey law, the Company is permitted to pay dividends on its capital stock if, following the payment of the dividend, it is able to pay its debts as they become due in the usual course of business, or its total assets are greater than its total liabilities. Further, it is the policy of the Federal Reserve Bank that bank holding companies should pay dividends only out of current earnings and only if future retained earnings would be consistent with the holding company’s capital, asset quality and financial condition. Under the New Jersey Banking Act of 1948, as amended, the Bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The FDIC prohibits payment of cash dividends if, as a result, the Bank would be undercapitalized. The Bank is in compliance with all regulatory requirements related to cash dividends. 26 Comprehensive Income20102009Net income2,151$ 1,257$ Urealized holding gains (losses) on securities available forsale, net of taxes of $(132) and $4 for 2010 and 2009, respectively(202) 13 Reclassification adjustment for gain on sale of securities, net oftax expense of $(50) and $0 for 2010 and 2009, respectively77 - Total comprehensive income2,026$ 1,270$ NOTE 13. Benefit Plans 2006 Stock Option Plan During 2006, the Bank’s stockholders approved the 2006 Stock Option Plan. At the time of the holding company reorganization, the 2006 Stock Option Plan was assumed by the Company. The plan allows directors and employees of the Company to purchase up to 239,984 shares of the Company’s common stock. The option price per share is the market value of the Bank’s stock on the date of grant. At December 31, 2010 and 2009, incentive stock options to purchase 210,900 shares have been issued to employees of the Bank. During 2006, the Bank awarded 119,900 Incentive Stock Options (ISO) which vested over a 2 year period and ISO options which vested over a 3 year period. The per share weighted-average fair values of stock options granted during 2006, which vested over a 2 year period and a 3 year period, were $1.26 and $2.17, respectively, on the date of grant using the Black Scholes option-pricing model. The options which vested over a 2 year period used the following assumptions in determining the grant date fair value of the 2006 option grants: expected dividend yields of 0.00%, risk-free interest rates of 4.77%, expected volatility of 16.00%; and average expected lives of 2 years. The options which vested over a 3 year period used the following assumptions used in determining the grant date fair value of the 2006 option grants: expected dividend yields of 0.00%, risk-free interest rates of 4.77%, expected volatility of 22.00%; and average expected lives of 3.5 years. During 2007, the Company awarded 91,000 Incentive Stock Options (ISO) which vest over a 5 year period. The per share weighted average fair values of ISO stock options granted during 2007 were $3.07 on the date of the grant using the Black Scholes option-pricing model. These options used the following assumptions in determining the grant date fair value of the 2007 option grants: expected dividend yield of 0.00%, risk-free interest rate of 3.28%, expected volatility of 21.69%, and average expected lives of 5.15 years. 27 A summary of stock option activity under the 2006 Stock Option Plan during 2010 and 2009 is presented below: Number of Shares Weighted Average Exercise price per share Average Intrinsic Value (1) Outstanding at December 31, 2008 188,900 $10.24 $139,786 Granted Forfeited Exercised – (400) – $11.50 Outstanding at December 31, 2009 188,500 $10.24 Granted Forfeited Exercised – ( 600) – $11.50 Outstanding at December 31, 2010 187,900 $10.24 – – – – $156,810 Exercisable at December 31, 2010 153,017 $ 9.96 $211,464 (1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2010. This amount changes based on the changes in the market value in the Company’s stock. Information pertaining to options outstanding under the 2006 Stock Option Plan at December 31, 2010 is as follows: Range of Exercise Prices $9.09 $11.50 Number Of Shares Outstanding Weighted Average Remaining Contractual life (years) Weighted Average Exercise Price 97,900 90,000 187,900 5.83 6.92 $ 9.09 $11.50 Under the 2006 Stock Option Plan, there were a total of 34,883 unvested options at December 31, 2010, and approximately $113,000 remains to be recognized in expense over the next two years. There were no options related to the 2006 Stock Option Plan granted or exercised during 2010 or 2009, respectively. 28 2007 Director Plan During 2007, the Bank’s stockholders approved the 2007 Non-Qualified Stock Option Plan for Directors. At the time of the holding company reorganization, the 2007 Non-Qualified Stock Option Plan was assumed by the Company. This plan provides for 480,000 options to purchase shares of the Company’s common stock to be issued to non-employee directors of the Company. At December 31, 2010 and 2009, non-qualified options to purchase 414,668 shares of the Company’s stock were issued to non-employee directors of the Company. During 2007, the Company awarded Non-Qualified Stock Options (NQO) to its Non-Employee Board members which vest over a 34 month period and NQO options which vest over a 5 year period. The per share weighted average fair values of NQO stock options granted during 2007, which vested over a 34 month period and a 5 year period, were $2.26 and $3.03, respectively, on the date of the grant using the Black Scholes option-pricing model. The options which vest over a 34 month period used the following assumptions in determining the grant date fair value of the 2007 option grants: expected dividend yield of 0.00%, risk-free interest rate of 4.05%, expected volatility of 14.33%, and average expected lives of 4.01 years. The options which vest over a 5 year period used the following assumptions in determining the grant date fair value of the 2007 option grants: expected dividend yield of 0.00%, risk-free interest rate of 3.28%, expected volatility of 21.69%, and average expected lives of 5.03 years. A summary of the stock option activity during 2010 and 2009 is as follows: Weighted Average Exercise price per share Number of Shares Average Intrinsic Value (1) Weighted Average Remaining Contractual life (years) Outstanding at December 31, 2008 416,668 $11.50 $ – 8.81 Granted Forfeited Exercised – – (2,000) – – $11.50 Outstanding at December 31, 2009 414,668 $11.50 $ – 7.81 Granted Forfeited Exercised – – – – – – Outstanding at December 31, 2010 414,668 $11.50 $ – 6.81 Exercisable at December 31, 2010 357,173 (1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had they exercised their options on December 31, 2010 and 2009, respectively. This amount changes based on the changes in the market value in the Company’s stock. Under the 2007 Directors Stock Option Plan, there were a total of 57,495 unvested options at December 31, 2010, and approximately $186,000 remains to be recognized in expense over the next two years. During 2010 and 2009, respectively, no Director Options were granted. 29 NOTE 13. Benefit Plans (continued) Weighted Average Assuptions for options granted The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 2007 Stock Option Plan 2006 Stock Option Plan Dividend yield Expected life Expected volatility Risk-free interest rate 0.00% 0.00% 4.50 years 2.44 years 17.72% 3.70% 17.75% 4.77% There were no options granted during 2010 and 2009, respectively. The dividend yield assumpton is based on the Company’s expectation of dividend payouts. The expected life is based upon historical and expected exercise experience. The expected volatility is based on historical volatiltiy of a peer group over a similar period. The risk-free interest rates for periods within the contractual life of the awards is based upon the U.S. Treasury yield curve in effect at the time of the grant. Defined Contribution Plan The Company currently offers a 401(k) profit sharing plan covering all full-time employees, wherein employees can invest up to 15% of their pretax earnings, up to the legal limit. The Company matches a percentage of employee contributions at the board’s discretion. The Company made a matching contribution of approximately $49,845 and $43,000 during 2010 and 2009, respectively. 30 NOTE 14. Regulatory Capital Requirements The Company and the Bank are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-wieghted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2010 and 2009, management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank’s capital classification. The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008, respectively, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution (dollars in thousands): The Company’s capital amounts and ratios are similar to those of the Bank. 31 AmountRatioAmountRatioAmountRatioDecember 31, 2010:Leverage (Tier 1) Capital$50,197 13.85%$14,495 4.00%$18,119 5.00%Risk-based capital:Tier 1$50,197 16.79%$11,956 4.00%$17,934 6.00%Total$53,944 18.04%$23,912 8.00%$29,889 10.00%December 31, 2009:Leverage (Tier 1) Capital$49,469 15.10%$13,102 4.00%$16,377 5.00%Risk-based capital:Tier 1$49,469 19.13%$10,342 4.00%$15,513 6.00%Total$52,261 20.21%$20,685 8.00%$25,856 10.00%FDIC requirementsMinimum CapitalFor ClassificationBank actualAdequacyAs Well Capitalized NOTE 15. Financial Instruments with Off-Balance Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets. The Bank uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet loans. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Outstanding available loan commitments, primarily for commercial real estate, construction, and land development loans at December 31, 2010 totaled $45.9 million compared to $35.1 million at December 31, 2009. Most of the Bank’s lending activity is with customers located in Bergen County, New Jersey. At December 31, 2010 and 2009, the Bank had outstanding letters of credit to customers totaling $730,000 and $488,000, respectively, whereby the Bank guarantees performance to a third party. These letters of credit generally have fixed expiration dates of one year or less. The fair value of these letters of credits is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. At December 31, 2010 and 2009, such amounts were deemed not material. NOTE 16. Financial Information of Parent Company The parent company, Bancorp of New Jersey, Inc, was incorporated during November, 2006. The holding company reorganization with Bank of New Jersey was consummated on July 31, 2007. The following information represents the parent only Balance Sheets as of December 31, 2010 and 2009, respectively, and the Statements of Income for the twelve months ended December 31, 2010 and December 31, 2009 and should be read in conjunction with the notes to the consolidated financial statements. Balance Sheet (in thousands) December 31, 2010 2009 Assets: Investment in subsidiary, net Dividends receivable from Bank of New Jersey Total assets $ 50,138 – $ 50,138 $ 49,535 1,562 $ 51,097 Liabilities and stockholders’ equity: Dividends payable to shareholders Total liabilities $ – $ 1,562 – 1,562 Stockholders’ equity: Total liabillities and stockholders’ equity 50,138 $ 50,138 49,535 $ 51,097 32 Statement of Income For the years ended December 31, 2010 and December 31, 2009 (in thousands) Equity in undistributed earnings of subsidiary bank 2010 2009 $ 2,151 $ 1,257 Net income $ 2,151 $ 1,257 Statement of Cash Flow For the years ended December 31, 2010 and December 31, 2009 (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of the subsidiary bank Decrease (increase) in other assets, net (Decrease) increase in other liabilities, net Net cash provided by operating activities Cash flows from investing activities: Capital contributed to subsidiary bank Cash dividend received from subsidiary bank Net cash used in financing activities Cash flows from financing activities: Proceeds from exercise of warrants Proceeds from issuance of common stock Cash dividends paid Net cash provided by financing Activities 2010 2009 $ 2,151 $ 1,257 (2,151) 1,562 (1,562) – (1,257) (1,562) 1,562 – – 3,279 3,279 (1,547) – (1,547) – – (3,279) (3,279) 1,524 23 – 1,547 Net change in cash for the period – – Net cash at beginning of year – – Net cash at end of year $ – $ – 33 NOTE 17. Fair Value Measurement and Fair Value of Financial Instruments The Company adopted the guidance on fair value measurement now codified as FASB ASC Topic 820, “Fair Value Measurement and Disclosures”, on January 1, 2008. Under ASC Topic 820, fair value measurements are not adjusted for transaction costs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period end and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end. The fair value measurement hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported with little or no market activity). An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2010 are as follows (in thousands): 34 (Level I)(Level 2)(Level 3)QuotedPrices inActiveSignificantDecember 31, Markets forOtherSignificantDescription2010IdenticalObservableUnobservableAssetsInputsInputsSecurities available for sale:U.S. Treasury obligations9,024$ 9,024$ -$ -$ Government Sponsored Enterprise obligations18,899 - 18,899 - Total securities available for sale27,923$ 9,024$ 18,899$ -$ For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2010 are as follows (in thousands): For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2009 are as follows (in thousands): For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2009 are as follows (in thousands): 35 (Level I)(Level 2)(Level 3)QuotedPrices inActiveSignificantDecember 31, Markets forOtherSignificantDescription2010IdenticalObservableUnobservableAssetsInputsInputsImpaired loans1,075$ $ -$ -1,075$ Other real estate owned1,938 $ - -1,938 Total impaired loans andother real estate owned3,013$ $ -$ -3,013$ The following table presents a reconciliation of the other real estate owned measured at fair value on a non-recurring basis using significant observable inputs (Level 3) for the year ended December 31, 2010(in thousands):2010Beginning balance, January 1-$ Total additions1,938 Ending balance, December 31, 20101,938$ (Level I)(Level 2)(Level 3)QuotedPrices inActiveSignificantDecember 31, Markets forOtherSignificantDescription2009IdenticalObservableUnobservableAssetsInputsInputsSecurities available for sale:U.S. Treasury obligations2,000$ 2,000$ -$ -$ Government Sponsored Enterprise obligations19,111 - 19,111 - Total securities available for sale21,111$ 2,000$ 19,111$ -$ (Level I)(Level 2)(Level 3)QuotedPrices inActiveSignificantDecember 31, Markets forOtherSignificantDescription2009IdenticalObservableUnobservableAssetsInputsInputsImpaired loans2,678$ $ -$ -2,678$ The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s finanical instruments at December 31, 2010 and 2009: Cash and Cash Equivalents (Carried at cost) The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair values. Securities The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining market prices on nationally recognized securities exchanges (level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquiditiy and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments. Restricted Investment in Bank Stock (Carried at Cost) The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities. Loans Receivable (Carried at Cost) The fair value of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and the interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Impaired loans Impaired loans are those that are accounted for under ASC Sub-topic 310-40, Troubled Debt Restructurings by Creditors, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally deteremined based upon independent third- party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Accrued Interest Receivable and Payable (Carried at Cost) The carrying amount of accrued interest receivable and accrued interest payable approximates fair value. 36 Other real estate owned Other real estate owned assets are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Subsequently, other real estate owned assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. These assets are included as Level 3 fair values. Deposits (Carried at Cost) The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities of time deposits. Fair value estimates and assumptions are set forth below for the Company’s financial instruments at December 31, 2010 and 2009 (in thousands): 2010 2009 Carrying amount Estimated Fair Value Carrying amount Estimated Fair Value Financial assets: Cash and cash equivalents Securities available for sale Securities held to maturity Restricted investment in bank stock Net loans Accrued interest receivable $ 23,204 27,923 3,728 491 298,354 1,285 $ 23,204 27,923 3,724 491 301,922 1,285 $ 18,098 21,111 4,296 419 261,152 1,173 $ 18,098 21,111 4,297 419 261,329 1,173 Financial liabilities: Deposits Accrued interest payable Limitation 318,421 438 313,888 438 267,143 372 268,101 372 The preceding fair value estimates were made at December 31, 2010 and 2009 based on pertinent market data and relevant information on the financial instrument. These estimates do not include any premium or discount that could result from an offer to sell at one time the Company’s entire holdings of a particular financial instrument or category thereof. Since no market exists for a substantial portion of the Company’s financial instruments, fair value estimates were necessarily based on judgments regarding future expected loss experience, current economic conditions, risk assessment of various financial instruments, and other factors. Given the innately subjective nature of these estimates, the uncertainties surrounding them and the matter of significant judgment that must be applied, these fair value estimates cannot be calculated with precision. Modifications in such assumptions could meaningfully alter these estimates. Since these fair value approximations were made solely for on- and off-balance-sheet financial instruments at December 31, 2010 and 2009, no attempt was made to estimate the value of anticipated future business. Furthermore, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates. 37 NOTE 18. Quarterly Financial Data (unaudited) The following represents summarized unaudited quarterly financial data of the Company. Three Months Ended (in thousands, except per share data) 38 December. 31September. 31June. 31March. 312010Interest income4,449$ 4,310$ 4,206$ 4,046$ Interest expense1,099 1,105 1,087 1,045 Net interest income3,350 3,205 3,119 3,001 Provision for loan losses250 431 384 270 Other expense, net2,149 1,862 1,840 1,866 Provision for federal and state income taxes382 368 371 351 Net income569$ 544$ 524$ 514$ Earnings per share: Basic0.11$ 0.10$ 0.10$ 0.10$ Diluted0.11$ 0.10$ 0.10$ 0.10$ 2009Interest income4,031$ 4,052$ 3,810$ 3,598$ Interest expense1,320 1,398 1,489 1,729 Net interest income2,711 2,654 2,321 1,869 Provision for loan losses145 74 144 61 Other expense, net1,834 1,718 1,850 1,598 Provision (benefit) for federal and state income taxes297 351 136 94 Net income435$ 515$ 191$ 116$ Earnings per share: Basic0.08$ 0.10$ 0.04$ 0.03$ Diluted0.08$ 0.10$ 0.04$ 0.03$ NOTE 19. Recent Accounting Pronouncements This section provides a summary description of recent accounting standards that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future. In July 2010, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance under “FASB Accounting Standards Codification” (“ASC”) Topic 310, “Receivables,” amending prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the allowance for loan and lease losses (the “allowance”). The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring. The new authoritative guidance amends only the disclosure requirements for loans and leases and the allowance. The Company adopted the period end disclosure provisions of the new ASC 310 in the reporting period ending December 31, 2010. Adoption of the new guidance did not have an impact on the Company’s consolidated financial statements. The disclosures related to activity that occurs within the allowance will be effective for reporting periods beginning after December 15, 2010, and will not have any impact on the Company’s consolidated financial statements. New disclosure requirements under ASC Topic 310 related to troubled debt restructurings that would have been effective for the Company as of December 31, 2010 have been delayed. The delay is intended to allow the FASB time to complete deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance, which will affect the Company’s disclosures related to loans, is anticipated to be effective for periods ending after June 15, 2011. FASB ASC, Sub-topic 310-30, “Loans and Debt Securities Acquired With Deteriorated Credit Quality” was amended to clarify the modifications of loans that are accounted for within a pool under sub-topic 310-30 do not result in the removal of those loans from the pool even if the modifications would otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for loans under the scope of sub-topic 310-30 that are not accounted for within pools. Loans accounted for individually under Sub-topic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC Sub-topic 310-40 “Troubled Debt Restructurings by Creditors.” The new authoritative accounting guidance under sub-topic 310-30 became effective in the third quarter of 2010 and did not have an impact on the Company’s consolidated financial statements. FASB ASC 820, sub-topic 820-10, “Improving Disclosures about Fair Value Measurements” was amended to require: (1) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, and (2) in the reconciliation for fair value measurements using significant unobservable inputs, separate information about purchases, sales, issuances and settlements. The amendment is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010. These amendments did not affect the Company’s disclosures regarding fair value measurements in 2010 and is not anticipated to materially affect fair value-related disclosures beginning in the first quarter 2011. Transfers and Servicing: ASC 860 Transfers and Servicing improves 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. The adoption of ASC 860, effective January 1, 2010, had no significant impact on the Company’s financial condition and results of operations in the current year. 39 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Bancorp of New Jersey, Inc. We have audited the consolidated balance sheets of Bancorp of New Jersey, Inc. and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bancorp of New Jersey, Inc. and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ ParenteBeard LLC ParenteBeard LLC Philadelphia, Pennsylvania March 31, 2011 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s consolidated financial statements and the notes thereto included in Part II, Item 8 of this report. When necessary, reclassifications have been made to prior years’ data throughout the following discussion and analysis for purposes of comparability. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to numerous assumptions, risks and uncertainties, all of which can change over time, and could cause actual results to differ materially from those projected in the forward-looking statements. We assume no duty to update forward-looking statements, except as may be required by applicable law or regulation. Important factors that might cause such a difference include, but are not limited to, those discussed in this section, and also include the current economic crisis affecting the financial industry; volatility in interest rates and shape of the yield curve; increased credit risk and risks associated with the real estate market; operating, legal, and regulatory risk; economic, political, and competitive forces affecting the Company’s line of business; and the risk that management’s analysis of these risks and forces could be incorrect, and/or that the strategies developed to address them could be unsuccessful as well as a variety of other matters, most, if not all of which, are beyond the Company’s control. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of the report. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after such date, except as may be required by applicable law or regulation. OVERVIEW AND STRATEGY Our bank charter was approved in April 2006 and the Bank opened for business on May 10, 2006. On July 31, 2007, the Company became the bank holding company of the Bank pursuant to a plan of acquisition that was approved by the boards of directors of the Company and the Bank and adopted by the shareholders of the Bank at a special meeting held July 19, 2007. On June 3, 2008, the Company’s common stock was listed on a national stock exchange. We currently operate a 6 branch network and have received FDIC and NJDOBI approval to open our seventh location. Our main office is located at 1365 Palisade Avenue, Fort Lee, NJ 07024 and our current five additional offices are located at 204 Main Street, Fort Lee, NJ 07024, 401 Hackensack Avenue, Hackensack, NJ 07601, 458 West Street, Fort Lee, NJ 07024, 320 Haworth Avenue, Haworth, NJ 07641 and 4 Park Street, Harrington Park, NJ 07640. Our seventh location will be located at 104 Grand Avenue, Englewood, NJ 07631 and is expected to open during the summer of 2011. We conduct a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non-profit organizations, and governmental units. We make commercial loans, consumer loans, and both residential and commercial real estate loans. In addition, we provide other customer services and make investments in securities, as permitted by law. We have sought to offer an alternative, community-oriented style of banking in an area, which is presently dominated by larger, statewide and national financial institutions. Our focus remains on establishing and retaining customer relationships by offering a broad range of traditional financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals and individuals in the local market. As a locally operated community bank, we believe we provide superior customer service that is highly personalized, efficient and responsive to local needs. To better serve our customers and expand our market reach, we provide for the delivery of certain financial products and services to local customers and a broader market through the use of mail, telephone, internet, and electronic banking. We endeavor to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service. Our specific objectives are: To provide local businesses, professionals, and individuals with banking services responsive to and determined by the local market; Direct access to Bank management by members of the community, whether during or after business hours; To attract deposits and loans by competitive pricing; and To provide a reasonable return to shareholders on capital invested. 41 Critical Accounting Policies and Judgments Our financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 “Summary of Significant Accounting Policies” in the Notes to the Financial Statements. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. Allowance for Loan Losses The allowance for loan losses (“ALLL”) represents our best estimate of losses known and inherent in our loan portfolio that are both probable and reasonable to estimate. In determining the amount of the ALLL, we consider the losses inherent in our loan portfolio and changes in the nature and volume of our loan activities, along with general economic and real estate market conditions. We utilize a segmented approach which identifies: (1) impaired loans for which specific reserves are established; (2) classified loans for which a higher allowance is established; and (3) performing loans for which a general valuation allowance is established. We maintain a loan review system which provides for a systematic review of the loan portfolios and the early identification of impaired loans. The review of residential real estate and home equity consumer loans, as well as other more complex loans, is triggered by identified evaluation factors, including delinquency status, size of loan, type of collateral and the financial condition of the borrower. All commercial loans are evaluated individually for impairment. Specific loan loss allowances are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management’s judgment. Although specific and general loan loss allowances are established in accordance with management’s best estimates, actual losses are dependent upon future events, and as such, further provisions for loan losses may be necessary in order to increase the level of the allowance for loan losses. For example, our evaluation of the allowance includes consideration of current economic conditions, and a change in economic conditions could reduce the ability of borrowers to make timely repayments of their loans. This could result in increased delinquencies and increased non-performing loans, and thus a need to make increased provisions to the allowance for loan losses. Any such increase in provisions would result in a reduction to our earnings. A change in economic conditions could also adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require increased provisions to the allowance for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could result in the need for additional provisions. At December 31, 2010 and 2009, respectively, we consider the ALLL of $3,749 and $2,792 thousand adequate to absorb probable losses inherent in the loan portfolio. For further discussion, see “Provision for Loan Losses”, “Loan Portfolio”, “Loan Quality”, and “Allowance for Loan Losses” sections below in this discussion and analysis, as well as Note 1-Summary of Significant Accounting Policies and Note 3-Loans and Allowance for Loan Losses in the Notes to Financial Statements included in Part II, Item 8 of this annual report. Deferred Tax Assets and Valuation Allowance Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the period in which the deferred tax asset or liability is expected to be settled or realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. 42 Impairment of Assets Loans are considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent. The fair value of collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral-dependent. At December 31, 2010 and 2009, the bank had seven impaired loans. All of these loans have been measured for impairment using various measurement methods, including fair value of collateral. Periodically, we may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In any such instance, we would consider many factors including the severity and duration of the impairment, our intent to sell a debt security prior to recovery and/or whether it is more likely than not we will have to sell the debt security prior to recovery. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses). The unrealized losses on two investments in U. S. Treasury obligations and five Government Sponsored Enterprise obligations were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intended to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than- temporarily impaired at December 31, 2010. All of the investments with unrealized losses at December 31, 2010 were in a loss position for less than twelve months. At December 31, 2010 and 2009, respectively, we did not have any other-than-temporary impaired securities. 43 RESULTS OF OPERATIONS - 2010 versus 2009 The Company’s results of operations depend primarily on its net interest income, which is the difference between the interest earned on its interest-earning assets and the interest paid on and funds borrowed to support those assets, primarily deposits. Net interest margin is the net interest income expressed as a percentage of average interest earning assets. Net income is also affected by the amount of non-interest income and non-interest expenses, the provision for loan losses and income tax expense. NET INCOME For the year ended December 31, 2010, net income increased by $894 thousand, to $2,151 thousand from $1,257 thousand for the year ended December 31, 2009. The increase in net income for the year ended December 31, 2010 compared to 2009 was driven by an increase in the Bank’s net interest income. The increase in net interest income is reflective of management’s focus on earning assets and disciplined pricing which resulted in an increase in our net interest margin. The increase in net interest income, which was primarily due to our increased net interest margin, more than offset the increased total other expenses. On a per share basis, basic and diluted earnings per share for the year ended December 31, 2010 were $0.41 as compared to basic and diluted earnings per share of $0.25 for the year ended December 31, 2009. Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the average volumes of interest-earning assets and interest bearing liabilities and yield earned or the interest paid on them. For the year ended December 31, 2010, net interest income increased by $3.1 million, or 32.6%, to $12.7 million from $9.6 million for the year ended December 31, 2009. This increase in net interest income was primarily the result of a decrease in the cost of interest bearing liabilities, which decreased by 85 basis points for 2010 as compared to 2009, and an increase in loans of $38.2 million, or 14.4%. Total loans reached $302.1 million at December 31, 2010 from $263.9 million at December 31, 2009. Average Balance Sheets We commenced banking operations on May 10, 2006. The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2010, 2009 and 2008, respectively, and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense, on a tax-equivalent basis, by the average balance of assets or liabilities, respectively, for the periods shown. For taxable equivalent adjustment for 2010 and 2009 was $0 and $1 thousand, respectively. Securities available for sale are reflected in the following table at amortized cost. Non-accrual loans are included in the average loan balance. Amounts have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 41% in 2010, 2009 and 2008, respectively. 44 45 For the years ended December 31,(dollars in thousands)201020092008AverageAverageAverageAverageAverageAverageBalanceInterestYield/CostBalanceInterestYield/CostBalanceInterestYield/CostASSETS :Interest-Earning Assets:Loans$279,500 $16,233 5.81 %$251,695 $14,630 5.81 %$209,498 $12,977 6.19 %Securities30,7197272.3726,8007782.9017,1477084.13Federal Funds Sold3,577120.345,36970.1524,185725 3.00 Interest-earning cash accounts*18,324390.2123,062750.339,091450.49Total Interest-earning Assets332,12017,011 5.12 %306,92615,491 5.05 %259,92114,455 5.56 %Non-interest earning Assets16,14613,84212,074Allowance for Loan Losses-3,269-2,547-2,135TOTAL ASSETS$344,997 $318,221 $269,860 LIABILITIES AND STOCKHOLDERS’ EQUITYInterest-Bearing Liabilities :Demand Deposits$8,558 $23 0.27 %$6,312 $11 0.18 %$5,632 $63 1.12 %Savings Deposits4,753 18 0.383,593 12 0.33,016 8 0.26Money Market Deposits39,279 129 0.3346,757 228 0.4953,831 1,189 2.21Time Deposits207,723 4,166 2.01178,749 5,681 3.18133,266 6,273 4.71Short Term Borrowings – – – – – –378 11 2.91Total Interest-Bearing Liabilities260,3134,336 1.67 %235,4115,932 2.52 %196,1237,544 3.85 %Non-Interest Bearing Liabilities:Demand Deposits32,11332,27125,361Other Liabilities1,7991,4951,541Total Non-Interest Bearing Liabilities33,91233,76626,902Stockholders’ Equity50,77249,04446,835$344,997 $318,221 $269,860 Net Interest Income(Tax Equivalent Basis) $12,673 $9,554 $6,911 Tax Equivalent BasisAdjustment250Net Interest Income$12,675 $9,559 $6,911 Net Interest Rate Spread3.45%2.53%1.71%Net Interest Margin3.82%3.11%2.66%1.281.31.33TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITYRatio of Interest-Earning Assets to Interest-Bearing Liabilities Rate/Volume Analysis The following table presents, by category, the major factors that contributed to the changes in net interest income on a tax equivalent basis for the years ended December 31, 2010 and 2009, respectively (in thousands): 46 Year ended December 31,Year ended December 31,2010 versus 20092009 versus 2008Increase (Decrease)Increase (Decrease)Due to Change in AverageDue to Change in AverageVolumeRateNetVolumeRateNetInterest income:Loans 1,603$ -$ 1,603$ 2,378$ (725)$ 1,653$ Securities204 (255) (51) 149 (79) 70 Federal funds sold(1) 5 4 (323) (394) (717) Interest bearing deposits in banks(13) (23) (36) 38 (8) 30 Total interest income 1,793 (273) 1,520 2,242 (1,206) 1,036 Interest expense:Demand deposits5 7 12 9 (61) (52) Savings deposits4 2 6 2 2 4 Money market deposits(33) (66) (99) (139) (822) (961) Time deposits745 (2,260) (1,515) 1,786 (2,378) (592) Short-term borrowings- - - (6) (6) (12) Total interest expense721 (2,317) (1,596) 1,652 (3,265) (1,613) Change in net interest income1,072$ 2,044$ 3,116$ 590$ 2,059$ 2,649$ PROVISION FOR LOAN LOSSES The provision for loan losses represents our determination of the amount necessary to bring our allowance for loan losses to the level that we consider adequate to absorb probable losses inherent in our loan portfolio. See “Allowance For Loan Losses” for additional information about our allowance for loan losses and our methodology for determining the amount of the allowance. For the year ended December 31, 2010, the Company’s provision for loan losses was $1.3 million, an increase of $911,000 from the provision of $424,000 for the year ended December 31, 2009. The increased provision is the result of the application of our allowance for loan losses methodology, and contributing factors such as the increase in the Bank’s loan portfolio of approximately $37.2 million, as well as an increase in the Bank’s non-performing assets. Non-performing assets consist of non-accruing loans, restructured loans and foreclosed assets. At December 31, 2010, the Bank had non-performing assets of $5.1 million as compared to $4.0 million at December 31, 2009. NON-INTEREST INCOME Non-interest income, which consists primarily of service fees received from deposit accounts and gains on the sales of securities, for the year ended December 31, 2010, was $333,000, an increase of $150,000 from the $183,000 received during the year ended December 31, 2009. The increase in non-interest income was primarily due to an increase in gains on the sales of securities of $127,000. NON-INTEREST EXPENSES Non-interest expenses for the year ended December 31, 2010 amounted to $8.1 million, an increase of $867,000 or 12.1% over the $7,183,000 for the year ended December 31, 2009. This increase was due in most part to increases in other real estate owned related expenses, salaries and employee benefits and professional fees which increased $387,000, $161,000 and $105,000, respectively, for the year ended December 31, 2010, as compared to one year ago. The increase in other real estate owned related expenses was the result of the Bank’s foreclosure of a residential property that had previously been reported as impaired, and the costs to get the property into a saleable condition. Salaries and employee benefits increased in part due to the opening and operating of the Harrington Park branch in the second quarter of 2009, and therefore not included for the full year of 2009. INCOME TAX EXPENSE The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2010 and 2009 was $1.5 million and $878,000, respectively. The increase in income tax expense during 2010 resulted from the increased pre-tax income in 2010. The effective tax rate for 2010 was 40.6% compared to 41.1% for 2009. 47 FINANCIAL CONDITION Total consolidated assets increased $50.6 million, or 15.8%, from $319.6 million at December 31, 2009 to $370.3 million at December 31, 2010. Total loans increased from $263.9 million at December 31, 2009 to $302.1 million at December 31, 2010, an increase of $38.2 million or 14.5%. Total deposits increased from $267.1 million on December 31, 2009 to $318.4 million at December 31, 2010, an increase of $51.3 million, or 19.2%. LOANS Our loan portfolio is the primary component of our assets. Total loans, which exclude net deferred fees and costs and the allowance for loan losses, increased by 14.5% from $263.9 million at December 31, 2009, to $302.1 million at December 31, 2010. This growth in the loan portfolio continues to be primarily attributable to recommendations and referrals from members of our board of directors, our shareholders, our executive officers, and selective marketing by our management and staff. We believe that we will continue to have opportunities for loan growth within the Bergen County market of northern New Jersey, due in part, to future consolidation of banking institutions within our market, which we expect to see as a result of increased regulatory standards, market pressures, and the overall economy. We believe that it is not cost-efficient for large institutions, many of which are headquartered out of state, to provide the level of personal service to small business borrowers that these customers seek and that we intend to provide. Our loan portfolio consists of commercial loans, real estate loans, consumer loans and credit lines. Commercial loans are made for the purpose of providing working capital, financing the purchase of equipment or inventory, as well as for other business purposes. Real estate loans consist of loans secured by commercial or residential real property and loans for the construction of commercial or residential property. Consumer loans including credit lines, are made for the purpose of financing the purchase of consumer goods, home improvements, and other personal needs, and are generally secured by the personal property being owned or being purchased. Our loans are primarily to businesses and individuals located in Bergen County, New Jersey. We have not made loans to borrowers outside of the United States. We have not made any sub-prime loans. Commercial lending activities are focused primarily on lending to small business borrowers. We believe that our strategy of customer service, competitive rate structures, and selective marketing have enabled us to gain market entry to local loans. Furthermore, we believe that bank mergers and lending restrictions at larger financial institutions with which we compete have also contributed to the success of our efforts to attract borrowers. Additionally, during this current economic climate, our capital position and safety has also become important to potential borrowers. 48 The following table sets forth the classification of the Company’s loans by major category as of December 31, 2010, 2009, 2008, 2007 and 2006, respectively (in thousands): The following table sets forth the maturity of fixed and adjustable rate loans as of December 31, 2010 (in thousands): LOAN QUALITY As mentioned above, our principal assets are our loans. Inherent in the lending function is the risk of the borrower’s inability to repay a loan under its existing terms. Risk elements include non-accrual loans, past due and restructured loans, potential problem loans, loan concentrations, and other real estate owned. Non-performing assets include loans that are not accruing interest (non-accrual loans) as a result of principal or interest being in default for a period of 90 days or more and accruing loans that are 90 days past due, restructured loans and foreclosed assets. When a loan is classified as non-accrual, interest accruals discontinue and all past due interest, including interest applicable to prior years, is reversed and charged against current income. Until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of such payments of interest. We attempt to minimize overall credit risk through loan diversification and our loan underwriting and approval procedures. Due diligence begins at the time we begin to discuss the origination of a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source and timing of the repayment of the loan, and other factors are analyzed before a loan is submitted for approval. Loans made are also subject to periodic audit and review. 49 20102009200820072006Real Estate194,605$ 177,031$ 158,950$ 123,979$ 50,786$ Commercial46,073 36,036 33,205 26,642 13,716 Credit Lines60,378 49,969 41,186 31,566 14,582 Consumer1,047 895 1,505 1,273 1,554 Total Loans302,103$ 263,931$ 234,846$ 183,460$ 80,638$ December 31,Within1 to 5After 5One YearYearsYearsTotalLoans with Fixed Rate Commercial35,909$ 3,244$ 3,260$ 42,413$ Real Estate35,507 19,058 133,938 188,503 Credit Lines714 1,018 7,545 9,277 Consumer348 699 -1,047 Loans with Adjustable Rate Commercial3,463$ 197$ $ -3,660$ Real Estate3,385 1,124 1,5936,102 Credit Lines51,101 - -51,101 Consumer - - - - At December 31, 2010, the Bank had six non-accrual loans totaling approximately $2.2 million, of which three loans totaling $830 thousand had specific reserves of $280 thousand and three loans totaling approximately $1.3 million had no specific reserves. The Bank recognized income of $18 thousand on these loans in 2010. If interest had been accrued, such income would have been approximately $142 thousand. These loans were considered impaired at December 31, 2010, and were evaluated in accordance with ASC Sub-topic 310-40, Troubled Debt Restructurings by Creditors. After evaluation, specific reserves of $280 thousand were deemed necessary at December 31, 2010. At December 31, 2009, there were seven non-accruing loans totaling approximately $4.0 million. The Bank recognized income of $69 thousand on these loans in 2009. If interest had been accrued, such interest would have been approximately $261 thousand. These loans were considered impaired at December 31, 2009, and were evaluated in accordance with ASC Sub-topic 310-40. After evaluation, a specific reserve of $99 thousand was deemed necessary. At December 31, 2008, 2007 and 2006, respectively, the Bank had no non-accruing loans. At December 31, 2010, the bank had three residential mortgage loans that met the definition of a troubled debt restructuring (“TDR”) loan. TDRs are loans where modifications could include a reduction in the interest rate of the loan, payment extensions, forgiveness of principal or other actions to maximize collection. At December 31, 2010, TDR loans had an aggregate outstanding balance of $1.3 million with specific reserves of approximately $8 thousand. Two of the TDRs, with an aggregate outstanding balance at December 31, 2010 of $843 thousand and a specific reserve of $8 thousand are included in the Bank’s impaired loan totals. During the third quarter of 2010, two loans reported as impaired in the previous quarter, which approximated $213 thousand, and which were fully reserved, were charged off. A third loan, a single family residential loan with a net value of approximately $1.9 million, was foreclosed on and placed in other real estate owned. This event caused a charge-off of approximately $160 thousand during the period. At December 31, 2009, 2008, 2007 and 2006, respectively, there were no TDRs or loans past due more than 90 days and still accruing interest. The Bank maintains an external independent loan review auditor. The loan review auditor performs periodic examinations of a sample of commercial loans after the Bank has extended credit. This review process is intended to identify adverse developments in individual credits, regardless of payment history. The loan review auditor also monitors the integrity of our credit risk rating system. The loan review auditor reports directly to the audit committee of our board of directors and provides the audit committee with reports on asset quality. The loan review audit reports may be presented to our board of directors by the audit committee for review, as appropriate. ALLOWANCE FOR LOAN LOSSES The ALLL represents a critical accounting policy. The allowance is a reserve established through charges to earnings in the form of a provision for loan losses. We maintain an ALLL which we believe is adequate to absorb probable losses inherent in the loan portfolio. While we apply the methodology discussed below in connection with the establishment of our ALLL, it is subject to critical judgments on the part of management. Loan losses are charged directly to the allowance when they are judged to be uncollectable and any recovery is credited to the allowance. Risks within the loan portfolio are analyzed on a continuous basis by our officers, by external independent loan review function, and by our audit committee. A risk system, consisting of multiple grading categories, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are realized in the periods in which they become known. Additions to the allowance are made by provisions charged to earnings and the allowance is reduced by net-charge-offs, which are loans judged to be uncollectible, less any recoveries on loans previously charged off. Although management attempts to maintain the allowance at an adequate level, future additions to the allowance may be required due to the growth of our loan portfolio, changes in asset quality, changes in market conditions and other factors. Additionally, various regulatory agencies, primarily the FDIC, periodically review our ALLL. These agencies may require additional provisions based upon their judgment about information available to them at the time of their examination. Although management uses what it believes to be the best information available, the level of the ALLL remains an estimate which is subject to significant judgment and short term change. 50 We commenced banking operations in May, 2006, and our ALLL totaled $3,749,000, $2,792,000 and $2,371,000 respectively, at December 31, 2010, 2009, and 2008. The growth of the allowance is primarily due to the growth and composition of the loan portfolio. The following is an analysis summary of the allowance for loan losses for the periods indicated (dollars in thousands): * Less than 0.01% 51 20102009200820072006Balance, January 1$2,792 $2,371 $1,912 $866 $ - Charge-offs: Residential mortgages (160) - - - - Consumer Loans(219) (4) - - - Recoveries: Consumer loans11 - - - Net charge-offs (378) (3) - - - Provision charged to expense1,335424459 1,046 866Balance, December 31$3,749 $2,792 $2,371 $1,912 $866 Ratio of net charge-offs to average Outstanding0.14%*N/AN/AN/A The following table sets forth, for each of the Company’s major lending areas, the amount and percentage of the Company’s allowance for loan losses attributable to such category, and the percentage of total loans represented by such category, as of the periods indicated : Allocation of the Allowance for Loan Losses by Category As of December 31, (dollars in thousands) 2010 % of ALLL Amount $2,178 780 358 22 58.09% 20.81% 9.55% 0.59% Balance applicable to: Real Estate Commercial Credit Lines Consumer Sub-total Unallocated Reserves 3,338 411 89.04% 10.96% % of Total Loans 65.25% 23.37% 10.72% 0.66% 100.00% 2009 % of ALLL 72.78% 7.63% 8.92% 0.61% Amount $2,032 213 249 17 2,511 281 89.94% 10.06% % of Total Loans 80.92% 8.48% 9.92% 0.68% 100.00% TOTAL $3,749 100.00% $2,792 100.00% The provision for loan losses represents our determination of the amount necessary to bring the ALLL to a level that we consider adequate to reflect the risk of probable losses inherent in our loan portfolio as of the balance sheet date. We evaluate the adequacy of the ALLL by performing periodic, systematic reviews of the loan portfolio. While allocations are made to specific loans and pools of loans, the total allowance is available for any loan losses. Although the ALLL is our best estimate of the inherent loan losses as of the balance sheet date, the process of determining the adequacy of the ALLL is judgmental and subject to changes in external conditions. Accordingly, existing levels of the ALLL may ultimately prove inadequate to absorb actual loan losses. However, we have determined, and believe, that the ALLL is at a level adequate to absorb the probable loan losses in our loan portfolio as of the balance sheet dates. 52 200820072006% of% of% of% of Total% ofTotal% ofTotalAmountALLLLoansAmount ALLLLoansAmount ALLLLoansBalance applicable to:Real Estate$1,774 74.82%78.85%$1,373 71.81%67.23%$653 75.41%62.98%Commercial24410.29%10.84%24112.61%14.75%9210.62%17.01%Credit Lines2058.65%9.11%1527.95%15.34%778.89%18.08%Consumer271.14%1.20%50.26%2.68%20.23%1.93%Sub-total2,25094.90%100.00%1,77192.63%100.00%82495.15%100.00%Unallocated Reserves1215.10%1417.37%424.85%TOTAL$2,371 100.00%$1,912 100.00%$866 100.00% INVESTMENT SECURITIES In addition to our loan portfolio, we maintain an investment portfolio which is available to fund increased loan demand or deposit withdrawals and other liquidity needs, and which provides an additional source of interest income. During 2010 and 2009, the portfolio was composed of U.S. Treasury Securities, obligations of U.S. Government Agencies and obligations of states and political subdivisions. Securities are classified as held to maturity, referred to as “HTM,” trading, or available for sale, referred to as “AFS,” at the time of purchase. Securities are classified as HTM if management intends and we have the ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts. Securities which are bought and held principally for the purpose of selling them in the near term are classified as trading securities, which are carried at market value. Realized gains and losses, as well as gains and losses from marking trading securities to market value, are included in trading revenue. Securities not classified as HTM or trading securities are classified as AFS and are stated at fair value. Unrealized gains and losses on AFS securities are excluded from results of operations, and are reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity. Securities classified as AFS include securities that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase regulatory capital, or other similar requirements. At December 31, 2010, total securities aggregated $31,651,000, of which $27,923,000 were classified as AFS and $3,728,000 were classified as HTM. The Bank had no securities classified as trading. The following table sets forth the carrying value of the Company’s security portfolio as of the December 31, 2010, 2009, and 2008, respectively (in thousands): 53 AmortizedFairAmortizedFairAmortizedFairCostValueCostValueCostValueAvailable for saleU.S. Agency Obligations18,994$ 18,899$ 19,000$ 19,111$ 17,641$ 17,731$ U.S. Treasury obligations9,029 9,024 2,005 2,000 - - Total available for sale28,023 27,923 21,005 21,111 17,641 17,731 Held to MaturityObligations of states andpolitical subdivisioins3,728 3,724 4,296 4,297 - - Total held to maturity3,728 3,724 4,296 4,297 - - Total Investment Securities31,751$ 31,647$ 25,301$ 25,408$ 17,641$ 17,731$ 201020092008 The following tables set forth as of December 31, 2010 and December 31, 2009, the maturity distribution of the Company’s debt investment portfolio: 54 WeightedAmortizedFairAmortizedFairAverageCostValueCostValueYield (1)Within 1 yearObligations of states and political subdivisions $ 3,728 $ 3,724 $ - $ - 0.80%U.S. Treasury obligations - - 999 999 0.22%U.S. Agency obligations - - - - 3,728 3,724 999 999 0.68%1 to 5 yearsU.S. Treasury obligations - - 8,031 8,026 1.42%U.S. Agency obligations - - 10,993 11,054 2.58% - - 19,024 19,080 2.09%5-10 yearsU.S. Agency obligations - - 8,000 7,844 3.08%Total$3,728 $3,724 $28,023 $27,923 1.83%WeightedAmortizedFairAmortizedFairAverageCostValueCostValueYield (1)Within 1 yearObligations of states and political subdivisions $ 4,296 $ 4,297 $ - $ - 2.00%1 to 5 yearsU.S. Treasury obligations - - 2,005 2,000 2.32%U.S. Agency obligations - - 17,000 17,115 2.43% - - 19,005 19,115 2.42%5-10 yearsU.S. Agency obligations - - 2,000 1,996 3.25%Total$4,296 $4,297 $21,005 $21,111 2.42%(1) Yields have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 41% in 2010 and 2009.(in thousands)Securities Held to MaturitySecurities Available for SaleSecurities Held to MaturitySecurities Available for SaleMaturity of Debt Investment SecuritiesDecember 31, 2010(in thousands)Maturity of Debt Investment SecuritiesDecember 31, 2009 During 2010, the Company sold three securities from its AFS portfolio and recognized gains of $127,000 from the transactions. DEPOSITS Deposits are our primary source of funds. We experienced a growth of $51.3 million, or 19.2%, in deposits from $267.1 million at December 31, 2009 to $318.4 million at December 31, 2010. This increase is primarily attributable to an increase in our time deposit accounts which we believe reflects our competitive rate structure and the public perception of our safety and soundness. During this interest rate environment, our attractive time deposit products have allowed the Bank to increase its overall deposits while still being able to reduce its overall cost of deposits and thereby increasing its net interest income. The increase is also attributable to the continued referrals of our board of directors, stockholders, management, and staff. The Company has no foreign deposits, nor are there any material concentrations of deposits. 55 The following table sets forth the actual amount of various types of deposits for each of the periods indicated: December 31, (dollars in thousands) 2010 2009 2008 Amount $ 33,244 50,827 6,112 228,238 $318,421 Average Yield/Rate – 0.33% 0.46% 1.82% Amount $ 36,687 45,899 4,473 180,084 $267,143 Average Yield/Rate – 0.45% 0.30% 3.18% Average Yield/Rate – 2.11% 0.26% 4.39% Amount $ 28,187 57,645 2,644 165,530 $254,006 Non-interest Bearing Demand Interest Bearing Demand Savings Time Deposits The Company does not actively solicit short-term deposits of $100,000 or more because of the liquidity risks posed by such deposits. The following table summarizes the maturity of time deposits of denominations of $100,000 or more as of December 31, 2010 (in thousands): Three months or less Over three months through six months Over six months through twelve months Over one year through three years Over three years Total $ 52,970 41,074 50,307 23,814 19,282 $ 187,447 RETURN ON EQUITY AND ASSETS The following table summarizes our return on assets, or net income divided by average total assets, return on equity, or net income divided by average equity, equity to assets ratio, or average equity divided by average total assets and dividend payout ratio, or dividends declared per share divided by net income per share. Selected Financial Ratios: Return on Average Assets (ROA) Return on Average Equity (ROE) Equity to Total Assets at Year-End Dividend Payout Ratio At or for the year ended December 31, 2010 0.62% 4.24% 13.54% 79.87% 2009 0.40% 2.56% 15.50% 124.24% 2008 0.20% 1.13% 16.24% N/A LIQUIDITY Our liquidity is a measure of our ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, if warranted, we would be able to borrow funds. 56 Our total deposits equaled $318,421,000 and $267,143,000, respectively, at December 31, 2010 and 2009. The growth in funds provided by deposit inflows during this period coupled with our cash position at the end of 2010 has been sufficient to provide for our loan demand. Through the investment portfolio, we have generally sought to obtain a safe, yet slightly higher yield than would have been available to us as a net seller of overnight federal funds, while still maintaining liquidity. Through our investment portfolio, we also attempt to manage our maturity gap by seeking maturities of investments which coincide as closely as possible with maturities of deposits. Securities available for sale would also be available to provide liquidity for anticipated loan demand and liquidity needs. Although we were a net seller of federal funds at December 31, 2010, we have a $12 million overnight line of credit facility available with First Tennessee Bank and a $10 million overnight line of credit with Atlantic Central Bankers Bank for the purchase of federal funds in the event that temporary liquidity needs arise. At December 31, 2010, the Bank had no borrowed funds outstanding. We are an approved member of the Federal Home Loan Bank of New York, or “FHLBNY.” The FHLBNY relationship could provide additional sources of liquidity, if required. We believe that our current sources of funds provide adequate liquidity for our current cash flow needs. INTEREST RATE SENSITIVITY ANALYSIS We manage our assets and liabilities with the objectives of evaluating the interest-rate risk included in certain balance sheet accounts; determining the level of risk appropriate given our business focus, operating environment, capital and liquidity requirements; establishing prudent asset concentration guidelines; and managing risk consistent with guidelines approved by our board of directors. We seek to reduce the vulnerability of our operations to changes in interest rates and to manage the ratio of interest-rate sensitive assets to interest-rate sensitive liabilities within specified maturities or re- pricing dates. Our actions in this regard are taken under the guidance of the asset/liability committee of our board of directors, or “ALCO.” ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates. One of the monitoring tools used by ALCO is an analysis of the extent to which assets and liabilities are interest rate sensitive and measures our interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising rates, a negative gap may result in the yield on assets increasing at a slower rate than the increase in the cost of interest-bearing liabilities, resulting in a decrease in net interest income. Conversely, during a period of falling interest rates, an institution with a negative gap would experience a re-pricing of its assets at a slower rate than its interest- bearing liabilities which, consequently, may result in its net interest income growing. 57 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at the periods indicated which we anticipated, based upon certain assumptions, will re-price or mature in each of the future time periods presented. Except as noted, the amount of assets and liabilities which re-price or mature during a particular period were determined in accordance with the earlier of the term to re-pricing or the contractual terms of the asset or liability. Because we have no interest bearing liabilities with a maturity greater than five years, we believe that a static gap for the over five year time period reflects an accurate assessment of interest rate risk. Our loan maturity assumptions are based upon actual maturities within the loan portfolio. Equity securities have been included in “Other Assets” as they are not interest rate sensitive. At December 31, 2010, we were within the target gap range established by ALCO. Cumulative Rate Sensitive Balance Sheet December 31, 2010 (in thousands) (Rate Sensitive Assets to Rate Sensitive Liabilities) 58 0-30-60-10-5AllMonthsMonthsYearYearsOthersTOTALSecurities, excluding equity securities2,4002,4004,72723,8077,84431,651Loans: Commercial37,84038,38241,07744,1671,90646,073 Real Estate29,37638,59252,243133,68460,921194,605 Credit Lines52,56652,56652,90053,9226,45660,378 Consumer1411633561,047 -1,047Federal Funds Sold and Interest Bearing Deposits - in Banks22,59822,59822,59822,59822,598Other Assets13,90313,903TOTAL ASSETS144,921154,701173,901279,22591,030370,255Transaction / DemandAccounts9,4719,4719,4719,4719,471Money Market41,35641,35641,35641,35641,356Savings Time Deposits6,1126,1126,1126,1126,112Tiume Deposits64,933114,959179,470228,238228,238Other Liabilities34,94034,940Equity50,13850,138TOTAL LIABILITIES ANDEQUITY121,872171,898236,409285,17785,078370,255Dollar Gap23,049(17,197)(62,508) (5,952) Gap / Total Assets6.23%-4.64%-16.88%-1.61%Tartet Gap Range +/- 35.00% +/- 30.00% +/-25.00% +/-25.00%RSA / RSL118.91%90.00%73.56%97.91% MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Thus, we actively monitor and manage our interest rate risk exposure. Our profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact our earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. We monitor the impact of changing interest rates on our net interest income using several tools. One measure of our exposure to differential changes in interest rates between assets and liabilities is shown in our “Cumulative Rate Sensitive Balance Sheet” under the “Interest Rate Sensitivity Analysis” caption in this discussion and analysis. In the future, we may use additional analyses, including periodic “shock analysis” to evaluate the effect of interest rates upon our operations and our financial condition and to manage our exposure to interest rate risk. Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income and capital, while structuring our asset-liability structure to obtain the maximum yield-cost spread on that structure. We rely primarily on our asset-liability structure to control interest rate risk. We continually evaluate interest rate risk management opportunities. During 2010, we believed that available hedging instruments were not cost-effective, and therefore, focused our efforts on increasing our yield-cost spread through retail growth opportunities. 59 The following table discloses our financial instruments that are sensitive to change in interest rates, categorized by expected maturity at December 31, 2010. Market risk sensitive instruments are generally defined as on- and off- balance sheet financial instruments. Expected Maturity/Principal Repayment December 31, 2010 (Dollars in thousands) Avg. Int. Rate 2011 2012 2013 2014 2015 There- After Total Fair Value 5.81% $146,577 $20,677 $18,968 $25,683 $20,915 $69,283 $302,103 $305,671 2.37% $ 4,727 $ 2,014 $ 2,083 $ 3,990 $10,993 $ 7,844 $ 31,651 $ 31,647 0.34% $ 465 0.21% $ 22,134 – – – – – – – – – – – – – – – – – – – – – – – – – – $ 465 $ 465 $ 22,134 $ 22,134 $ 9,471 $ 9,471 $ 6,112 $ 6,112 $ 41,356 $ 41,356 $228,238 $229,291 Interest Rate Sensitive Assets: Loans………. Securities net of equity securities….. Fed Funds Sold………………. Interest-earning Cash………………. Interest Rate Sensitive Liabilities : Demand Deposits……. 0.27% $ 9,471 Savings Deposits……. Money Market Deposits……. 0.38% $ 6,112 0.33% $ 41,356 Time Deposits……. 2.01% $179,470 $ 22,228 $ 5,520 $8,565 $ 12,455 The Bank had no borrowed funds at December 31, 2010. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The maturity of certain types of assets and liabilities may fluctuate in advance of changes in market rates, while maturity of other types of assets and liabilities may lag behind changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from the maturities assumed in calculating this table. 60 CAPITAL A significant measure of the strength of a financial institution is its capital base. Our federal regulators have classified and defined our capital into the following components: (1) Tier 1 Capital, which includes tangible shareholders’ equity for common stock and qualifying preferred stock, and (2) Tier 2 Capital, which includes a portion of the allowance for loan losses, certain qualifying long-term debt, and preferred stock which does not qualify for Tier 1 Capital. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require certain capital as a percent of our assets and certain off-balance sheet items, adjusted for predefined credit risk factors, referred to as “risk-adjusted assets.” We are required to maintain, at a minimum, Tier 1 Capital as a percentage of risk-adjusted assets of 4.0% and combined Tier 1 and Tier 2 Capital, or “Total Capital,” as a percentage of risk-adjusted assets of 8.0%. In addition to the risk-based guidelines, our regulators require that an institution which meets the regulator’s highest performance and operation standards maintain a minimum leverage ratio (Tier 1 Capital as a percentage of tangible assets) of 3.0%. For those institutions with higher levels of risk or that are experiencing or anticipating significant growth, the minimum leverage ratio will be evaluated through the ongoing regulatory examination process. We are currently required to maintain a leverage ratio of 4.0%. The following table summarizes the Bank’s risk-based capital and leverage ratios at December 31, 2010, as well as regulatory capital category definitions: Risk-Based Capital : Tier 1 Capital Ratio Total Capital Ratio Leverage Ratio December 31, 2010 16.79% 18.04% 13.85% Minimum Requirements to be “Adequately Capitalized” Minimum Requirements to be “Well Capitalized” 4.00% 8.00% 4.00% 6.00% 10.00% 5.00% The capital levels detailed above represent the continued effect of our successful stock subscription, in combination with the profitability experienced during 2010 and 2009, respectively. As we continue to employ our capital and continue to grow our operations, we expect that our capital ratios will decrease, but that we will remain a “well-capitalized” institution. The Bank’s capital ratios as presented in the table above are similar to those of the Company. 61 CONTRACTUAL OBLIGATIONS As of December 31, 2010, the Company had the following contractual obligations as provided in the table below (in thousands): Contractual Obligations Minimum annual rental under non-cancelable operating leases Remaining contractual maturities of time deposits................... Total Contractual Obligations Payment due by Period Less than 1 year 1 to 3 years 4 to 5 years After 5 years Total Amounts Committed $ 538 $ 1,098 $ 832 $3,040 $ 5,508 179,470 $180,008 27,748 $28,846 21,020 $21,852 – $3,040 228,238 $233,746 Additionally, the Bank had certain commitments to extend credit to customers. A summary of commitments to extend credit at December 31, 2010 is provided as follows (in thousands): Commercial real estate, construction, and land development secured by land……………… Home equity loans……………………………….. Standby letters of credit and other.………………… $ 24,327 21,535 730 $ 46.592 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank’s commitments to extend credit and letters of credit constitute financial instruments with off-balance sheet risk. See Note 15 of the notes to consolidated financial statements included in this report for additional discussion of “Off- Balance Sheet” items. 62 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements of the Company and notes thereto, included in Part II, Item 8 of this annual report, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of the assets and liabilities of the Bank are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. RECENTLY ISSUED ACCOUNTING STANDARDS Refer to Note 20 of the Notes to Consolidated Financial Statements for discussion of recently issued accounting standards. 63 BUSINESS General The Company is a one-bank holding company incorporated under the laws of the State of New Jersey in November, 2006 to serve as a holding company for Bank of New Jersey, referred to as the “Bank.” (Unless the context otherwise requires, all references to the “Company” in this annual report shall be deemed to refer also to the Bank). The Company was organized at the direction of the board of directors of the Bank for the purpose of acquiring all of the capital stock of the Bank. On July 31, 2007, the Company became the bank holding company of the Bank pursuant to a plan of acquisition that was approved by the boards of directors of the Company and the Bank and adopted by the stockholders of the Bank at a special meeting held July 19, 2007. Pursuant to the plan of acquisition, the holding company reorganization was affected through a contribution of all of the outstanding shares of Bank’s class of common stock to the Company in a one-to-one exchange for shares of the Company’s class of common stock. Upon consummation of the reorganization, the Bank became a wholly-owned subsidiary of the Company and all of the former shareholders of the Bank became shareholders of the Company. The Company did not engage in any operations, other than organizational activities, or issue any shares of its class of common stock prior to consummation of the holding company reorganization. The only significant activities of the Company are the ownership and supervision of the Bank. 64 During the second quarter of 2009, the Bank formed BONJ-New York Corp. The New York subsidiary will be engaged in the business of acquiring, managing and administering portions of Bank of New Jersey’s investment and loan portfolios. The Bank is a commercial bank formed under the laws of the State of New Jersey on May 10, 2006. The Bank operates from its main office at 1365 Palisade Avenue, Fort Lee, New Jersey, 07024, and its additional five branch offices located at 204 Main Street, Fort Lee, New Jersey, 07024, 401 Hackensack Avenue, Hackensack, New Jersey, 07601, 458 West Street, Fort Lee, New Jersey, 07024, 320 Haworth Avenue, Haworth, New Jersey, 07641, and 4 Park Street, Harrington Park, New Jersey, 07640. A seventh location at 104 Grand Avenue, Englewood, NJ 07631 has received approval from the New Jersey Department of Banking and Insurance, “NJDOBI” and the Federal Deposit Insurance Corporation, “FDIC”. The branch is expected to open in 2011 upon construction of the building. All branch locations are in Bergen County, New Jersey. The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System, referred to as the “FRB.” The Bank is supervised and regulated by the FDIC and the NJDOBI. The Bank’s deposits are insured by the FDIC up to applicable limits. The operation of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC, and the NJDOBI. The principal executive offices of the Bank are located at 1365 Palisade Avenue, Fort Lee, NJ, 07024 and the telephone number is (201) 944-8600. Business of the Company The Company’s primary business is ownership and supervision of the Bank. The Company, through the Bank, conducts a traditional commercial banking business, accepting deposits from the general public, including individuals, businesses, non-profit organizations, and governmental units. The Bank makes commercial loans, consumer loans, and both residential and commercial real estate loans. In addition, the Bank provides other customer services and makes investments in securities, as permitted by law. The Bank continues to offer an alternative, community-oriented style of banking in an area, which is presently dominated by larger, statewide and national institutions. Our goal remains to establish and retain customer relationships by offering a broad range of traditional financial services and products, competitively-priced and delivered in a responsive manner to small businesses, professionals, and individuals in the local market. As a locally owned and operated community bank, the Bank seeks to provide superior customer service that is highly personalized, efficient, and responsive to local needs. To better serve our customers and expand our market reach, we provide for the delivery of certain financial products and services to local customers and to a broader market through the use of mail, telephone, and internet banking. The Bank strives to deliver these products and services with the care and professionalism expected of a community bank and with a special dedication to personalized customer service. The specific objectives of the Bank are: To provide local businesses, professionals, and individuals with banking services responsive to and determined by the local market; Direct access to Bank management by members of the community, whether during or after business hours; To attract deposits and loans by competitive pricing; and To provide a reasonable return to shareholders on capital invested. Market Area The principal market for deposit gathering and lending activities lies within Bergen County in New Jersey. The market is dominated by offices of large statewide and interstate banking institutions. The market area has a relatively large affluent base for our services and a diversified mix of commercial businesses and residential neighborhoods. In order to meet the demands of this market, the Company operates its main office in Fort Lee, New Jersey and five additional branch offices, two in Fort Lee, one in Hackensack, one in Haworth, and one in Harrington Park, all in Bergen County, New Jersey. 65 Extended Hours The Bank provides convenient full-service banking from 7:00 am to 7:00 pm weekdays and 9:00 am to 1:00 pm on Saturday in all offices except West Street which offers full service banking from 8:00 am to 6:00 pm weekdays and Saturday 9:00 am to 1:00 pm; Hackensack, which offers full service banking from 8:00 am to 6:00 pm weekdays but no Saturdays and Harrington Park and Haworth, which offer full service banking from 8:00 am to 6:00 pm weekdays and 9:00 am to 1:00 pm on Saturdays. Competition The banking business remains highly competitive and increasingly more regulated. The profitability of the Company depends upon the Bank’s ability to compete in its market area. The Bank continues to face considerable competition in its market area for deposits and loans from other depository institutions. The Bank faces competition in attracting and retaining deposit and loan customers, and with respect to the terms and conditions it offers on its deposit and loan products. Many of its competitors have greater financial resources, broader geographic markets, and greater name recognition, and are able to provide more services and finance wide-ranging advertising campaigns. The Bank competes with local, regional, and national commercial banks, savings banks, and savings and loan associations. The Bank also competes with money market mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other securities. Concentration The Company is not dependent for deposits or exposed by loan concentrations to a single customer or a small group of customers the loss of any one or more of which would have a material adverse effect upon the financial condition of the Company. As a community bank however, our market area is concentrated in Bergen County, New Jersey, and 84.4% of our loan portfolio was collateralized by real estate, primarily in our market area, as of December 31, 2010. Employees At December 31, 2010, the Company employed forty-one full-time equivalent employees. None of these employees is covered by a collective bargaining agreement. The Company believes its relations with employees to be good. 66 Supervision and Regulation General The Company and the Bank are each extensively regulated under both federal and state law. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and condition the Company’s ability to repurchase stock or to receive dividends from the Bank. The Company and the Bank are also subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”), respectively. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of the Company and the Bank. This supervisory framework could materially impact the conduct and profitability of the Company’s and Bank’s activities. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Proposals to change the laws and regulations governing the banking industry are frequently raised at both the state and federal level. The likelihood and timing of any changes in these laws and regulations, and the impact such changes may have on the Company and the Bank, are difficult to ascertain. A change in applicable laws and regulations, or in the manner such laws or regulations are interpreted by regulatory agencies or courts, may have a material effect on our business, operations and earnings. Bank Holding Company Act The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and is subject to regulation and supervision by the FRB. The BHCA requires the Company to secure the prior approval of the FRB before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of, any bank or thrift, or merges or consolidates with another bank or thrift holding company. Further, under the BHCA, the activities of the Company and any nonbank subsidiary are limited to those activities which the FRB determines to be so closely related to banking as to be a proper incident thereto, and prior approval of the FRB may be required before engaging in certain activities. In making such determinations, the FRB is required to weigh the expected benefits to the public such as greater convenience, increased competition and gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. The BHCA was substantially amended by the Gramm-Leach-Bliley Act (“GLBA”), which among other things permits a “financial holding company” to engage in a broader range of non-banking activities, and to engage on less restrictive terms in certain activities that were previously permitted. These expanded activities include securities underwriting and dealing, insurance underwriting and sales, and merchant banking activities. To become a financial holding company, the Company and the Bank must be “well capitalized” and “well managed” (as defined by federal law), and have at least a “satisfactory” Community Reinvestment Act (“CRA”) rating. GLBA also imposes certain privacy requirements on all financial institutions and their treatment of consumer information. At this time, the Company has not elected to become a financial holding company, as we do not engage in any non-banking activities which would require us to be a financial holding company. There are a number of restrictions imposed on the Company and the Bank by law and regulatory policy that are designed to minimize potential loss to the depositors of the Bank and the FDIC insurance funds in the event the Bank should become insolvent. For example, FRB policy requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. While the authority of the FRB to invoke this so-called “source of strength doctrine” has been called into question, the FRB maintains that it has the authority to apply the doctrine when circumstances warrant. The FRB also has the authority under the BHCA to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Any capital loan by the Company to the Bank is subordinate in right of payment to deposits and certain other indebtedness of the Bank. In addition, in the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. 67 The Federal Deposit Insurance Act (“FDIA”) provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as a subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC will have priority in payment ahead of unsecured, nondeposit creditors, including the Company, with respect to any extensions of credit they have made to such insured depository institution. Supervision and Regulation of the Bank The operations and investments of the Bank are also limited by federal and state statutes and regulations. The Bank is subject to the supervision and regulation by the New Jersey Department of Banking and Insurance and the FDIC. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be originated, and limits on the type of other activities in which the Bank may engage and the investments it may make. Under the GLBA, the Bank may engage in expanded activities (such as insurance sales and securities underwriting) through the formation of a “financial subsidiary.” In order to be eligible to establish or acquire a financial subsidiary, the Bank must be “well capitalized” and “well managed” and may not have less than a “satisfactory” CRA rating. At this time, the Bank does not engage in any activity which would require it to maintain a financial subsidiary. The Bank is also subject to federal laws that limit the amount of transactions between the Bank and its nonbank affiliates, including the Company. Under these provisions, transactions (such as a loan or investment) by the Bank with any nonbank affiliate are generally limited to 10% of the Bank’s capital and surplus for all covered transactions with such affiliate or 20% of capital and surplus for all covered transactions with all affiliates. Any extensions of credit, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also prohibited from purchasing any “low quality” assets from an affiliate. Securities and Exchange Commission The Company is also under the jurisdiction of the Securities and Exchange Commission (“SEC”) for matters relating to the offering and sale of its securities and is subject to the SEC’s rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitations, and insider-trading regulations. Monetary Policy The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the FRB have a significant effect upon the operating results of commercial banks such as the Bank. The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. Deposit Insurance The deposits of the Bank are insured up to applicable limits per insured depositor by the FDIC. As an FDIC-insured bank, the Bank is also subject to FDIC insurance assessments. Beginning in 2007, the FDIC adopted a revised risk-based assessment system to determine the assessment rates to be paid by insured institutions. Under a final rulemaking announced by the FDIC on March 4, 2009, and depending on the institution’s risk category, assessment rates range from 12 to 45 basis points. Institutions in the lowest risk category are charged a rate between 12 and 16 basis points; these rates increase to 22, 32 and 45 basis points, respectively, for the remaining three risk categories. These rates may be offset in the future by any dividends declared by the FDIC if the deposit reserve ratio increases above a certain amount. Given the state of the current economic environment, it is unlikely that the FDIC will lower these assessment rates, and such rates may in fact increase. Because FDIC deposit insurance premiums are “risk-based,” higher premiums would be charged to banks that have lower capital ratios or higher risk profiles. Consequently, a decrease in the Bank’s capital ratios, or a negative evaluation by the FDIC, as the Bank’s primary federal banking regulator, may also increase the Bank’s net funding costs and reduce its net income. On February 27, 2009, the FDIC adopted an interim rule that imposed a 20 basis point emergency special assessment on all insured depository institutions on June 30, 2009. The special assessment was collected on September 30, 2009, at the same time that the risk-based assessments for the second quarter of 2010 were collected. The interim rule also permitted the FDIC to impose an emergency special assessment of up to 10 basis points on all insured depository institutions whenever, after June 30, 2009, the FDIC estimated that the fund reserve ratio could fall to a level that the FDIC believed would adversely affect public confidence or to a level close to zero or negative at the end of a calendar quarter. 68 On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. This special assessment was collected on September 30, 2009. On November 12, 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three basis point increase in assessment rates effective on January 1, 2011. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law. The Dodd-Frank Act changed the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the depository institution’s average total consolidated assets less average tangible equity, eliminating the ceiling on the size of the DIF and increasing the floor of the size of the DIF. The Dodd- Frank Act established a minimum designated reserve ratio (DRR) of 1.35 percent of the estimated insured deposits, mandates the FDIC adopt a restoration plan should the fund balance fall below 1.35 percent, and provides dividends to the industry should the fund balance exceed 1.50 percent. On February 7, 2011, the Board of Directors of the FDIC approved a final rule on Assessments, Dividend Assessment Base and Large Bank Pricing (the Final Rule). The Final Rule implements the changes to the deposit insurance assessment system as mandated by the Dodd-Frank Act. The Final Rule is effective April 1, 2011. The Final Rule changed the assessment base for insured depository institutions from adjusted domestic deposits to the average consolidated total assets during an assessment period less average tangible equity capital during that assessment period. Tangible equity is defined in the Final Rule as Tier 1 Capital and shall be calculated monthly, unless, like the Bank, the insured depository institution has less than $1 billion in assets, then the insured depository institution will calculate the Tier 1 Capital on an end of quarter basis. Parents or holding companies of other insured depository institutions are required to report separately from their subsidiary depository institutions. The Final Rule retains the unsecured debt adjustment, which lowers an insured depository institution’s assessment rate for any unsecured debt on its balance sheet. In general, the unsecured debt adjustment in the Final Rule will be measured to the new assessment base and will be increased by 40 basis points. The Final Rule also contains a brokered deposit adjustment for assessments. The Final Rule provides an exemption to the brokered deposit adjustment to financial institutions that are “well capitalized” and have composite CAMEL ratings of 1 or 2. The Final Rule also creates a new rate schedule that intends to provide more predictable assessment rates to financial institutions. The revenue under the new rate schedule will be approximately the same. Moreover, it indefinitely suspends the requirement that it pay dividends from the insurance fund when it reaches 1.5 percent of insured deposits, to increase the probability that the fund reserve ratio will reach a sufficient level to withstand a future crisis. In lieu of the dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve ratio exceeds 2 percent and 2.5 percent. The Dodd-Frank Act makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program (TLGP) under which, for a fee, noninterest-bearing transaction accounts would receive unlimited insurance coverage until June 30, 2010, subsequently extended to December 31, 2010. The TLGP also included a debt component under which certain senior unsecured debt issued by institutions and their holding companies between October 13, 2008 and October 31, 2009 would be guaranteed by the FDIC through June 30, 2012, or in some cases, December 31, 2012. The Bank opted to participate in the unlimited noninterest-bearing transaction account coverage and opted not to participate in the unsecured debt guarantee program. 69 In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and, during the four quarters ended June 30, 2010, averaged 1.04 basis points of assessable deposits. The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed the Federal Deposit Insurance Corporation. Dividend Restrictions Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (1) it would be unable to pay its debts as they become due in the usual course of business or (2) its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank holding companies should pay dividends only out of current earnings and only if future retained earnings would be consistent with the Company’s capital, asset quality and financial condition. Since it has no significant independent sources of income, the ability of the Company to pay dividends is dependent on its ability to receive dividends from the Bank. Under the New Jersey Banking Act of 1948, as amended (the “Banking Act”), a bank may declare and pay cash dividends only if, after payment of the dividend, the capital stock of the bank will be unimpaired and either the bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the bank’s surplus. The FDIC prohibits payment of cash dividends if, as a result, the institution would be undercapitalized or the Bank is in default with respect to any assessment due to the FDIC. These restrictions would not materially influence the Company or the Bank’s ability to pay dividends at this time. Capital Adequacy Guidelines The FRB and the FDIC have promulgated substantially similar risk-based capital guidelines applicable to banking organizations which they supervise. These guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off balance sheet exposures, and to minimize disincentives for holding liquid assets. Under those guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Bank assets are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weighting will apply. Those computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property, which carry a 50% risk-weighting. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weighting, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weighting. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% risk-weighting. Transaction- related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year), have a 50% risk- weighting. Short-term commercial letters of credit have a 20% risk-weighting, and certain short-term unconditionally cancelable commitments have a 0% risk weighting. The minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital is required to be “Tier 1 Capital,” consisting of shareholders’ equity and qualifying preferred stock, less certain goodwill items and other intangible assets. The remainder, or “Tier 2 Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) qualifying subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 Capital. Total capital is the sum of Tier 1 Capital and Tier 2 Capital less reciprocal holdings of other banking organization’s capital instruments, investments in unconsolidated subsidiaries, and any other deductions as determined by the FDIC. At December 31, 2010, the Bank’s Tier 1 and Total Capital ratios were 16.79% and 18.04%, respectively. 70 In addition, the FRB and FDIC have established minimum leverage ratio requirements for banking organizations they supervise. For banks and bank holding companies that meet certain specified criteria, including having the highest regulatory rating and not experiencing significant growth or expansion, these requirements provide for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets equal to 3%. Other banks and bank holding companies generally are required to maintain a leverage ratio of 4-5%. At December 31, 2010, the Company’s, and the Bank’s, leverage ratio were 13.85% and 13.85%, respectively. As an additional means to identify problems in the financial management of depository institutions, the FDIA requires federal bank regulatory agencies to establish certain non-capital safety and soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and management, asset quality, interest rate exposure and executive compensation. The agencies are authorized to take action against institutions that failed to meet such standards. Prompt Corrective Action In addition to the required minimum capital levels described above, Federal law establishes a system of “prompt corrective actions” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized. Under the rules, an institution will be deemed “well capitalized” or better if its leverage ratio exceeds 5%, its Tier 1 risk based capital ratio exceeds 6%, and if the Total risk based capital ratio exceeds 10%. An institution will be deemed to be “adequately capitalized” or better if it exceeds the minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the minimum capital requirements; “significantly undercapitalized” if it has a total risk based capital ratio that is less than 6%, a Tier 1 risk based capital ratio that is less than 3%, or a leverage ratio that is less than 3%, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%. The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including: increased reporting burdens and regulatory monitoring; a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business; obligations to raise additional capital; restrictions on transactions with affiliates; and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership. As of December 31, 2010, the Bank was classified as “well capitalized.” This classification is primarily for the purpose of applying the federal prompt corrective action provisions and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of the Bank. Community Reinvestment Act The CRA requires that banks meet the credit needs of all of their assessment area (as established for these purposes in accordance with applicable regulations based principally on the location of branch offices), including those of low income areas and borrowers. The CRA also requires that the FDIC assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the community they serve. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve” or “unsatisfactory”. The Bank’s record in meeting the requirements of the CRA is made publicly available and is taken into consideration in connection with any applications with Federal regulators to engage in certain activities, including approval of a branch or other deposit facility, mergers and acquisitions, office relocations, or expansions into non-banking activities. As of December 31, 2010, the bank maintains a “satisfactory” CRA rating. 71 USA Patriot Act Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. Under the USA PATRIOT Act, financial institutions must establish anti-money laundering programs meeting the minimum standards specified by the Act and implementing regulations. The USA PATRIOT Act also requires the Federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions. The Bank has implemented the required internal controls to ensure proper compliance with the USA PATRIOT Act. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as the Company, with equity or debt securities registered under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Among other things, Sarbanes-Oxley and its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The requirements are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. The Company and its Board of Directors have, as appropriate, adopted or modified the Company’s policies and practices in order to comply with these regulatory requirements and to enhance the Company’s corporate governance practices. Pursuant to Sarbanes-Oxley, the Company has adopted a Code of Conduct and Ethics applicable to its Board, executives and employees. This Code of Conduct can be found on the Company’s website at www.bonj.net. Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape. The Dodd-Frank Act creates the Bureau of Consumer Financial Protection (Bureau), which will be an independent bureau within the Federal Reserve System with broad authority to regulate the consumer finance industry including regulated financial institutions such as the Bank and non banks and others who are involved in the consumer finance industry. The Bureau will have exclusive authority through rulemaking, orders, policy statements, guidance and enforcement actions to administer and enforce federal consumer finance laws, to oversee non federally regulated entities, and to impose its own regulations and pursue enforcement actions when it determines that a practice is unfair, deceptive or abusive (UDA). The federal consumer finance laws are currently interpreted, administered and enforced by different federal agencies, including the Federal Deposit Insurance Corporation (FDIC), the current federal regulator of the Bank. The Treasury Secretary has determined July 21, 2011 as the date when all of the functions and responsibilities of the Bureau are transferred to it. While the Bureau has the exclusive power to interpret, administer and enforce federal consumer finance laws and UDA, the Dodd-Frank Act provides that the FDIC will continue to have examination and enforcement powers over the Bank relating to the matters within the jurisdiction of the Bureau because it has less than $10 Billion in assets. The Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws. The Dodd-Frank Act also: Applies the same leverage and risk-based capital requirements to most bank holding companies (BHCs) that apply to insured depository institutions; Requires the FDIC to make its capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contractions; Requires BHCs and banks to be both well-capitalized and well-managed in order to acquire banks located outside their home state and requires any BHC electing to be treated as a financial holding company to be both well- managed and well-capitalized; 72 Changes the assessment base for federal deposit insurance from the amount of insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminates the ceiling on the size of the DIF and increases the floor of the size of the DIF; Makes permanent the $250,000 limit for federal deposit insurance and increases the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provides unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions; Eliminates all remaining restrictions on interstate banking by authorizing national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location; and Repeals the federal prohibitions on the payment of interest on demand deposits, effective July 21, 2011, thereby permitting depository institutions to pay interest on business transaction and other accounts. Many of the provisions of the Dodd-Frank Act will require the federal banking agencies to promulgate hundreds of regulations to implement its provisions. While designed primarily to reform the financial regulatory system, the Dodd Frank Act also contains a number of corporate governance provisions that will affect public companies. The Dodd Frank Act requires the SEC to adopt rules which may affect the Bank’s executive compensation policies and disclosure. It also exempts smaller issuers such as the Bank from the requirement, originally enacted under Section 404(b) of the Sarbanes-Oxley Act of 2002, that the Bank’s independent auditor also attest to and report on management’s assessment of internal control over financial reporting. The Bank continues to review the Dodd-Frank Act to determine its impact on the Bank. The Dodd-Frank Act could require the Bank to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise adversely affect the Bank’s business, financial condition, results of operations or cash flow. It could also require the Bank to change certain of its business practices, adversely affect its ability to pursue business opportunities the Bank might otherwise consider engaging in, cause business disruptions and/or have other impacts that are as of yet unknown to the Bank. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional expenses, any of which could have an adverse effect on the Bank’s business, financial condition, results of operations, or cash flow. Basel III In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity. Although Base III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Company and the Bank. For banks in the United States, among the most significant provisions of Basel III concerning capital are the following: A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period. A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period. A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase-in period. An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice. Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone. Deduction from common equity of deferred tax assets that depend on future profitability to be realized. Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities. 73 For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required. The Basel III provisions on liquidity include complex criteria establishing the LCR and NSFR. Although Basel II is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks. Federal Home Loan Bank Membership The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”). Each member of the FHLBNY is required to maintain a minimum investment in capital stock of the FHLBNY. The Board of Directors of the FHLBNY can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase our investment in the FHLBNY depends entirely upon the occurrence of a future event, potential payments to the FHLBNY is not determinable. Additionally, in the event that the Bank fails, the right of the FHLBNY to seek repayment of funds loaned to the Bank shall take priority (a “super lien”) over all other creditors. Other Laws and Regulations The Company and the Bank are subject to a variety of laws and regulations which are not limited to banking organizations. For example, in lending to commercial and consumer borrowers, and in owning and operating its own property, the Bank is subject to regulations and potential liabilities under state and federal environmental laws. We are heavily regulated by regulatory agencies at the federal and state levels. As a result of the recent financial crisis and economic downturn, we, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us and the financial services industry in general. Several recent regulatory initiatives were adopted that may have future impacts on our business and financial results. For instance, on September 24, 2010 the Board of Governors of the Federal Reserve System issued a final rule to regulate the compensation of mortgage loan originators and prohibits compensation to a mortgage loan originator that is based on the loan’s terms or conditions, except for the amount of credit extended. The final rule is effective April 1, 2011. In addition, the federal banking agencies released a final rule on July 28, 2010 to implement the requirement s of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 for the federal registration of mortgage loan originators (the Rule) Under the Rule, the bank and employees of a bank who engage in the business of loan originations must, among other things, register with the National Mortgage Licensing System and Registry. The registration with the NMLS must be completed within 180 days of January 31, 2011. Future Legislation and Regulation In light of current conditions in the U.S. and global financial markets and the U.S. and global economy, regulators have increased their focus on the regulation of the financial services industry. Proposals that could substantially intensify the regulation of the financial services industry have been and are expected to continue to be introduced in the U.S. Congress, in state legislatures and from applicable regulatory authorities. These proposals may change banking statutes and regulation and our operating environment in substantial and unpredictable ways. If enacted, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of these proposals will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, results of operations or financial condition. 74 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information The principal market in which the Company’s Common Stock is traded is the NYSE Amex LLC exchange, formerly the American Stock Exchange. The Company’s Common Stock trades under the symbol “BKJ”. The following table sets forth the high and low sales prices for our common stock for each of the indicated periods. Year Ended December 31, 2010 Fourth quarter Third quarter Second quarter First quarter Year Ended December 31, 2009 Fourth quarter Third quarter Second quarter First quarter High Low $12.63 13.64 13.63 16.33 $10.97 11.50 10.90 11.25 $ 10.00 10.65 10.76 9.31 $ 8.49 9.25 9.25 8.52 Holders As of March 18, 2011, there were approximately 1,350 shareholders of our common stock, which includes an estimate of shares held in street name. Dividends In December, 2009, the Company declared a special $0.30 cash dividend per share to shareholders of record as of January 4, 2010. The cash dividend was paid on January 15, 2010. In October, 2010, the Company declared a special $0.33 cash dividend per share to shareholders of record as of November 12, 2010. The cash dividend was paid on December 20, 2010. The cash dividends paid have been non-recurring dividends. The decision to pay, as well as the timing and amount of any future dividends to be paid by the Company will be determined by our board of directors, giving consideration to our earnings, capital needs, financial condition, and other relevant factors. Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, it would be unable to pay its debts as they become due in the usual course of business, or its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank holding companies should pay dividends only out of current earnings and only if future retained earnings would be consistent with the holding company’s capital, asset quality and financial condition. Under the New Jersey Banking Act of 1948, as amended, the Bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The FDIC prohibits payment of cash dividends if, as a result, the Bank would be undercapitalized. 75 Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes our equity compensation plan information as of December 31, 2010. Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of shares of common stock remaining available for future issuance under equity compensation plans 187,900 $10.26 30,084 414,668 $11.50 43,334 Plan Category Equity Compensation Plans approved by security holders: 2006 Stock Option Plan 2007 Non-Qualified Stock Option Plan for Directors Equity compensation plans not approved by security holders - - - Total 602,568 $11.11 64,018 76 BANCORP OF NEW JERSEY, INC. Directors and Executive Officers Board of Directors Albert F. Buzzetti Chairman of the Board and CEO, Bank of New Jersey Michael Bello President, Michael Bello Insurance Agency John K. Daily President and COO C.A. Shea & Co. Josephine Mauro Realtor and Owner, Mauro Realty Company Michael Lesler President and COO, Bank of New Jersey Joel P. Paritz, CPA President, Paritz & Company, P.A. Jay Blau President, Imperial Sales & Sourcing, Inc. Anthony M. Lo Conte President and CEO, Anthony L and S, LLC Christopher M. Shaari, MD Physician Albert L. Buzzetti, Esq. Managing Partner, A. Buzzetti and Associates, LLC Carmelo Luppino, Jr. Real Estate Developer Anthony Siniscalchi, CPA Partner, A. Uzzo & Co., CPAs, P.C. Gerald A. Calabrese, Jr. President, Century 21 Calabrese Realty Rosario Luppino Real Estate Developer Mark Sokolich, Esq. Managing Partner, Sokolich & Macri Stephen Crevani President, Aniero Concrete Howard Mann President, Carolace Industries Diane M. Spinner Executive Vice President and Chief Administrative Officer, Bank of New Jersey Executive Officers Albert F. Buzzetti Chairman of the Board and Chief Executive Officer Michael Lesler President and Chief Operating Officer Leo J. Faresich Executive Vice President and Chief Lending Officer Diane M. Spinner Executive Vice President and Chief Administrative Officer 77 Leo J. Faresich Executive Vice President Chief Lending Officer Ronald M. Urtiaga Senior Vice President Commercial Lending Rosemarie Yaverian Vice President Branch Manager Allison Peterson Vice President Branch Manager Larysa Goryelova Vice President Branch Manager BANK OF NEW JERSEY Officers Albert F. Buzzetti Chairman and Chief Executive Officer Michael Lesler President and Vice Chairman Diane M. Spinner Executive Vice President and Chief Administrative Officer Richard A. Capone Senior Vice President Controller Stephanie A. Caggiano Senior Vice President Consumer Lending Anna Maria Alberga Vice President Branch Manager Sunita Pereira Vice President Branch Manager Kimberley Tapken Assistant Vice President Lending Paul A. Meyer Senior Vice President Commercial Lending Kory Buczynski Vice President Branch Manager Jakia Sultana Assistant Vice President Branch Manager Connie Caltabellatta Corporate Secretary Independent Auditors ParenteBeard LLC 1200 Atwater Drive STE Malvern, PA 19355 Regulatory Counsel Pepper Hamilton LLP STE 400 – 301 Carnegie Center Princeton, NJ 08543-5276 Common Stock Data Common Stock is traded on The NYSE-Amex Exchange Under the symbol: BKJ Registrar and Transfer Agent American Stock Transfer and Trust Co. 59 Maiden Lane New York, NY 10038 78

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