UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

(Mark One)

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2011

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                to                .

Commission file number:  001-34089

Bancorp of New Jersey, Inc.

(Exact name of Registrant as specified in its charter)

New Jersey	20-8444387
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification)

1365 Palisade Avenue, Fort Lee, NJ	07024
(Address of principal executive offices)	(Zip Code)

201-944-8600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Name of each exchange on which registered
Common stock	NYSE Amex, LLC

Securities registered pursuant to Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES o NO x

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements  incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NO x

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of June 30, 2011 was approximately $33,873,000 based on the last sale price as of such date.

The number of shares outstanding of the registrant’s common stock, no par value, outstanding as of March 19, 2012 was 5,206,932.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission in connection with its 2012 Annual Meeting of Shareholders to be held May 23, 2012, are incorporated by reference in Part III of this annual report on Form 10-K.

TABLE OF CONTENTS

		PAGE
PART I
Item 1	Business	1
Item 1A	Risk Factors	12
Item 1B	Unresolved Staff Comments	12
Item 2	Properties	13
Item 3	Legal Proceedings	13
Item 4	Mine Safety Disclosures	13
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6	Selected Financial Data	15
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	37
Item 8	Financial Statements and Supplementary Data	38
Item 9	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	78
Item 9A	Controls and Procedures	78
Item 9B	Other Information	79
PART III
Item 10	Directors, Executive Officers and Corporate Governance	80
Item 11	Executive Compensation	80
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
Item 13	Certain Relationships and Related Transactions, and Director Independence	80
Item 14	Principal Accountant Fees and Services	80
PART IV
Item 15	Exhibits, Financial Statement Schedules	81

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PART I

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, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide 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 subsidiaries 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 conditions affecting the financial industry;

·Changes in interest rates and shape of the yield curve;

·Credit risk associated with our lending activities;

·Risks relating to our market area, significant real estate collateral and the real estate market;

·Operating, legal and regulatory risk;

·Fiscal and monetary policy;

·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, and 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.

ITEM 1.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.

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During the second quarter of 2009, the Bank formed BONJ-New York Corp.  The New York subsidiary is 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 six 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, and 104 Grand Avenue, Englewood, NJ 07631.  An eighth location at 354 Palisade Avenue, Cliffside Park, NJ 07010 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 2012 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 six additional branch offices, two in Fort Lee, one in Hackensack, one in Haworth, one in Harrington Park, and one in Englewood, all in Bergen County, New Jersey.

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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 9:00 am to 5:00 pm weekdays but no Saturdays and Harrington Park and Haworth, which offers 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 84.0% of our loan portfolio was collateralized by real estate, primarily in our market area, as of December 31, 2011.

Employees

At December 31, 2011, the Company employed fifty-one full-time equivalent employees.  None of these employees are covered by a collective bargaining agreement.  The Company believes its relations with employees to be good.

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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 is also subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (“FRB”) and the Bank is also subject to comprehensive examination and supervision by the New Jersey Department of Banking and Insurance (“NJDOBI”) and the Federal Deposit Insurance Corporation (“FDIC”).  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.

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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.

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 NJDOBI 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.  The Dodd-Frank Act imposed additional requirements on transactions with affiliates, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.  These additional requirements became effective on July 21, 2011.

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 Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006.  Under the FDIC’s risk-based assessment system in effect through March 31, 2011, insured institutions were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors.  An institution’s assessment rate depended upon the category to which it is assigned, and certain potential adjustments established by FDIC regulations, with less risky institutions paying lower assessments.

No institution may pay a dividend if in default of the federal deposit insurance assessment.

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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 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 deposit insurance fund (“DIF”) and increasing the floor on 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 to adopt a restoration plan should the DRR fall below 1.35 percent, and provides dividends to the industry should the DRR 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 became 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 us, 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.  CAMEL ratings are confidential ratings used by the federal and state regulators for assessing the soundness of financial institutions.  These ratings range from 1 to 5, with a rating of 1 being the highest rating.

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 made permanent the $250,000 limit for federal deposit insurance and increased 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 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 December 31, 2011, averaged 1 basis point of assessable deposits.

The FDIC has authority to increase insurance assessments.  A significant increase in insurance assessments would likely have an adverse effect on our operating expenses and results of operations.  Management cannot predict what insurance assessment rates will be in the future.

Deposit insurance may be terminated by the FDIC 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 FDIC.

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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 Dodd-Frank Act requires the Federal Reserve Board to apply consolidated capital requirements to a bank holding company that are no less stringent than those currently applied to depository institutions.  Under these standards, trust preferred securities are excluded from Tier I capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets.  The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

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, 2011, the Bank’s Tier 1 and Total Capital ratios were 14.01% and 15.23%, respectively.

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

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equal to 3%.  Other banks and bank holding companies generally are required to maintain a leverage ratio of 4-5%. At December 31, 2011, the Company’s, and the Bank’s, leverage ratio were 11.37% and 11.37%, 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, 2011, 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, 2011, the bank maintains a “satisfactory” CRA rating.

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

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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 Act became law 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 is an independent bureau within the Federal Reserve System with broad authority to regulate the consumer finance industry including regulated financial institutions such as us, and non-banks and others who are involved in the consumer finance industry.  The Bureau has 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 were previously interpreted, administered and enforced by different federal agencies, including the FDIC, our current federal regulator.  On July 21, 2011 all of the functions and responsibilities of the Bureau were 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 continues to have examination and enforcement powers over us 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. On June 14, 2011 the federal banking agencies published a final rule regarding minimum leverage and risk-based capital requirements for certain banks and for bank holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act. For a more detailed description of the minimum capital requirements see “Regulation and Supervision — Capital Requirements”;

·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;

·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;

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·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 Regulation Q, 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.

·Enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.  These requirements became effective on July 21, 2011.

·Expands insider transaction limitations through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors. These requirements became effective on July 21, 2011.

·Strengthens the previous limits on a depository institution’s credit exposure to one borrower which limited a depository institution’s ability to extend credit to one person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act expanded the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions.

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 with securities registered under the Exchange Act.  The Dodd-Frank Act requires the Securities and Exchange Commission to adopt rules which may affect our executive compensation policies and disclosure.  It also exempts smaller issuers, such as us, from the requirement, originally enacted under Section 404(b) of the Sarbanes-Oxley Act of 2002, that our independent auditor also attest to and report on management’s assessment of internal control over financial reporting.

Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years.  Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear.  The Dodd-Frank Act could require us to make material expenditures, in particular personnel training costs and additional compliance expenses, or otherwise adversely affect our business, financial condition, results of operations or cash flow. It could also require us to change certain of our business practices, adversely affect our ability to pursue business opportunities that we might otherwise consider pursuing, cause business disruptions and/or have other impacts that are as of yet unknown to us.  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 our business, financial condition, results of operations, or cash flow.

Basel III Proposed Changes in Capital Requirements.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (‘‘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 more capital, with a greater emphasis on common equity.  Implementation is presently scheduled to be phased in between 2013 and 2019, although it is possible that implementation may be delayed as a result of multiple factors including the current condition of the banking industry within the U.S. and abroad.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1 (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a “capital conservation buffer” of 2.5%; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at

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least 8.0% plus the capital conservation buffer and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented.  The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

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 was effective April 1, 2011.  In addition, the federal banking agencies released a final rule on July 28, 2010 to implement the requirements 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 deadline for registration with the NMLS was July 29, 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.

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ITEM 1A.RISK FACTORS

As a smaller reporting company, the Company is not required to provide the information otherwise required by this Item.

ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2.PROPERTIES

The Company, currently, conducts its business through its main office located at 1365 Palisade Avenue, Fort Lee, New Jersey, and its six additional branches.  The following table sets forth certain information regarding the Company’s properties as of the date of this report.

	Leased	Date of Lease
Location	or Owned	Expiration
1365 Palisade Avenue	Owned	N/A
Fort Lee, NJ
204 Main Street	Leased	March, 2015
Fort Lee, NJ
401 Hackensack Avenue	Leased	August, 2020
Hackensack, NJ 07601
458 West Street	Leased	December, 2025
Fort Lee, NJ 07024
320 Haworth Avenue	Owned	N/A
Haworth, NJ 07641
4 Park Street	Leased	January, 2014
Harrington Park, NJ, 07640
104 Grand Avenue	Leased	January, 2017
Englewood, NJ 07631

An eighth location is expected to open during 2012.  It will be a leased facility located at 354 Palisade Avenue, Cliffside Park, NJ.  The lease commenced in January, 2012.  All regulatory approvals have been obtained.

ITEM 3.LEGAL PROCEEDINGS

The Company and the Bank are subject to routine litigation during the normal course of business.  Accordingly, the Company and the Bank may periodically be parties to or otherwise involved in legal proceedings, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the Bank’s business.  Management does not believe that there are any proceedings pending against the Company or the Bank or contemplated by governmental authorities, which, if determined adversely, would have a material effect on the business, financial position or results of operations of the Company or the Bank.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.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.

	High		Low
Year Ended December 31, 2011
Fourth quarter	$	11.00	$	8.35
Third quarter	9.97		7.44
Second quarter	10.46		8.99
First quarter	11.35		9.50
Year Ended December 31, 2010
Fourth quarter	$	12.63	$	10.00
Third quarter	13.64		10.65
Second quarter	13.63		10.76
First quarter	16.33		9.31

Holders

As of March 18, 2012 there were approximately 1,350 shareholders of our common stock, which includes an estimate of shareholders who hold their shares in street name.

Dividends

In September, 2011, the Company declared a special $0.40 cash dividend per share to shareholders of record as of October 17, 2011.  The cash dividend was paid on December 14, 2011.  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 declared during 2011 and 2010 were non-recurring dividends.

In February 2012, the Company announced an intention to pay a quarterly cash dividend and declared an initial quarterly dividend of $0.06 per share, payable on March 31, 2012 to shareholders of record at the close of business on February 29, 2012. While future dividends will be subject to approval by the board of directors, the Company is initially targeting an aggregate annual dividend payout of $0.24 per share, with future quarterly payments in June, September and December 2012.  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 the board of directors, giving consideration to the Company’s earnings, capital needs, financial condition, and other relevant factors.

A.

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.

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Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes our equity compensation plan information as of December 31, 2011:

Plan Category	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
Equity Compensation Plans approved by security holders:
2006 Stock Option Plan	187,900	$	10.26	30,084
2007 Non-Qualified Stock Option Plan for Directors	414,668	$	11.50	43,334
2011 Equity Incentive Plan	0	N/A		250,000
Equity compensation plans not approved by security holders	—	—		—
Total	602,568	$	11.11	323,418

ITEM 6.SELECTED FINANCIAL DATA

As a smaller reporting company, the Company is not required to provide the information otherwise required by this Item.

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ITEM 7.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 current economic conditions affecting the financial industry; changes in interest rates and shape of the yield curve; credit risk associated with our lending activities; risks relating to our market area, significant real estate collateral and the real estate market; operating, legal and regulatory risk; fiscal and monetary policy; 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, 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 the American Stock Exchange, now NYSE Amex LLC.  We currently operate a seven branch network and have received FDIC and NJDOBI approval to open our eighth location.  Our main office is located at 1365 Palisade Avenue, Fort Lee, NJ 07024 and our current six 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, 4 Park Street, Harrington Park, NJ 07640, and 104 Grand Avenue, Englewood, NJ 07631.  Our eighth location will be located at 354 Palisade Avenue, Cliffside Park, NJ 07010 and is expected to open during the first quarter of 2012.

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, that is 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

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To provide a reasonable return to shareholders on capital invested.

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 Consolidated Financial Statements included in Item 8 of this report.  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.  Financial assets and liabilities required to be recorded at, or adjusted to reflect, fair value require the use of estimates, assumptions, and judgments.  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 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 the general valuation allowance for the respective loan type is deemed to be inadequate; 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 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. Specific reserves are established for impaired loans based on a review of such information and/or appraisals of the underlying collateral. General reserves 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 reserves 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 maintain the allowance for loan losses at an adequate level.  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 additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is 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. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could require additional provisions for loan losses.

At December 31, 2011 and 2010, respectively, we consider the ALLL of $4.5 million and $3.7 million 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

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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.

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, which is discounted from the appraised value to estimate the selling price and costs, is used if a loan is collateral-dependent.  At December 31, 2011 and 2010, the bank had twelve and seven impaired loans, respectively.  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).  Unrealized losses at December 31, 2011 consisted of losses on three investments in government sponsored enterprise obligations which 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, 2011.  All of the investments with unrealized losses at December 31, 2011 were in a loss position for less than twelve months.  At December 31, 2011 and 2010, respectively, we did not have any other-than-temporarily impaired securities.

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RESULTS OF OPERATIONS -  2011 versus 2010

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 interest-bearing liabilities, primarily deposits, which support our assets.  Net interest margin is 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, 2011, net income increased by $1.1 million, to $3.3 million from $2.2 million for the year ended December 31, 2010.  The increase in net income for the year ended December 31, 2011 compared to 2010 was driven by an increase in the Bank’s net interest income.  The increase in net interest income is reflective of the growth in interest-earning assets as well as management’s focus on disciplined pricing of the deposit portfolio.  The increase in net interest income more than offset the increases in non-interest expenses and income tax expense.

On a per share basis, basic and diluted earnings per share for the year ended December 31, 2011 were $0.64 as compared to basic and diluted earnings per share of $0.41 for the year ended December 31, 2010.

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 the yield earned or the interest paid on them.  For the year ended December 31, 2011, net interest income increased by $2.4 million, or 19.3%, to $15.1 million from $12.7 million for the year ended December 31, 2010.  This increase in net interest income was primarily the result of an increase in loans of $63.1 million, or 20.9% at December 31, 2011 as compared to the same date one year ago, as well as a decrease in the cost of interest bearing liabilities, which decreased by 18 basis points for 2011 as compared to 2010.  Total loans reached $365.2 million at December 31, 2011 from $302.1 million at December 31, 2010.

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2011, 2010 and 2009, 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.  The taxable equivalent adjustment for 2011 and 2010 was $3 and $2 thousand, respectively.  Securities available for sale are reflected in the following table at amortized cost.  Nonaccrual loans are included in the average loan balance.  Amounts have been computed on a fully tax-equivalent  basis, assuming a blended tax rate of 40% in 2011, and 41% in 2010 and 2009, respectively.

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For the years ended December 31,

(dollars in thousands)

	2011								2010								2009
									Average						Average		Average						Average
									Balance			Interest			Yield/Cost		Balance			Interest			Yield/Cost
ASSETS:
Interest-Earning Assets:
Loans	$	337,932		$	18,903		5.59	%	$	279,500		$	16,233		5.81	%	$	251,695		$	14,630		5.81	%
Securities	42,600			912			2.14		30,719			729			2.37		26,800			783			2.92
Federal Funds Sold	2,260			6			0.27		3,577			12			0.34		5,369			8			0.15
Interest-earning cash accounts*	20,483			43			0.21		18,324			39			0.21		23,062			75			0.33
Total Interest-earning Assets	403,275			19,864			4.93	%	332,120			17,013			5.12	%	306,926			15,496			5.05	%
Non-interest earning Assets	16,706								16,146								13,842
Allowance for Loan Losses	(4,421		)						(3,269		)						(2,547		)
	$	415,560							$	344,997							$	318,221
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Interest-Bearmomg Liabilities:
Demand Deposits	$	9,741		$	27		0.28	%	$	8,558		$	23		0.27	%	$	6,312		$	11		0.17	%
Savings Deposits	7,011			29			0.41		4,753			18			0.38		3,593			12			0.33
Money Market Deposits	53,885			173			0.32		39,279			129			0.33		46,757			228			0.49
Time Deposits	248,529			4,513			1.82		207,723			4,166			2.01		178,749			5,681			3.18
Short Term Borrowings	222			3			1.35		—			—			—		—			—			—
Total Interest Bearing Liabilities	319,388			4,745			1.49	%	260,313			4,336			1.67	%	235,411			5,932			2.52	%
Non-Interest Bearing Liabilities:
Demand Deposits	42,274								32,113								32,271
Other Liabilities	2,332								1,799								1,495
Total Non-Interest Bearing Liabilities	44,606								33,912								33,766
Stockholders’ Equity	51,566								50,772								49,044
LIABILITIES AND STOCKHOLDERS’ EQUITY:	$	415,560							$	344,997							$	318,221
Net Interest Income (Tax Equivalent Basis)				$	15,119							$	12,677							$	9,564
Tax Equivalent Basis adjustment				(3		)						(2		)						(5		)
Net Interest Income				$	15,116							$	12,675							$	9,559
Net Interest Rate Spread							3.44	%							3.45	%							2.53	%
Net Interest Margin							3.75	%							3.82	%							3.12	%
Ratio of Interest-Earning Assets to Interest-Bearing Liabilities									1.28								1.30

*  Interest-earning cash accounts includes funds held at the FRB as the FRB began paying interest on deposits during the fourth quarter of 2008

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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, 2011 and 2010, respectively (in thousands):

	Year ended December 31,									Year ended December 31,
	2011 compared with 2010									2010 versus 2009
	Increase (Decrease)									Increase (Decrease)
	Due to Change in Average									Due to Change in Average
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans	$	3,261		$	(591	)	$	2,670		$	1,603		$	—		$	1,603
Securities	247			(65		)	182			204			(255		)	(51		)
Federal funds sold	(4		)	(2		)	(6		)	(1		)	5			4
Interest bearing deposits in banks	4			—			4			(13		)	(23		)	(36		)
Total interest income	3,508			(658		)	2,850			1,793			(273		)	1,520
Interest expense:
Demand deposits	3			1			4			5			7			12
Savings deposits	9			2			11			4			2			6
Money market deposits	48			(4		)	44			(33		)	(66		)	(99		)
Time deposits	669			(322		)	347			745			(2,260		)	(1,515		)
Short-term borrowings	3			—			3			—			—			—
Total interest expense	732			(323		)	409			721			(2,317		)	(1,596		)
Change in net interest income	$	2,776		$	(335	)	$	2,441		$	1,072		$	2,044		$	3,116

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, 2011, the Company’s provision for loan losses was $1.2 million, a decrease of $152,000 from the provision of $1.3 million for the year ended December 31, 2010.  The decreased provision reflects the overall credit quality of the loan portfolio and the stabilization of nonperforming loans.

NON-INTEREST INCOME

Non-interest income, which consists primarily of service fees received from deposit accounts, gains on the sales of securities, and the net loss on the sale of the other real estate owned (“OREO”) property, for the year ended December 31, 2011, was $4 thousand, a decrease of $329 thousand from the $333 thousand received during the year ended December 31, 2010.  The decrease in non-interest income was primarily due to the loss on the sale of OREO property in 2011 of $203 thousand compared to no such loss in 2010, and the gain on the sales of securities of $127 thousand in 2010, and no corresponding gains in 2011.

NON-INTEREST EXPENSES

Non-interest expenses for the year ended December 31, 2011 amounted to $8.4 million, an increase of $341 thousand or 4.2% over the $8.1 million for the year ended December 31, 2010.  This increase was due in most part to increases in salaries and employee benefits, other operating expenses, data processing fees, and occupancy and equipment expense of $410 thousand, $164 thousand, $103 thousand, and $90 thousand, respectively, offset somewhat by a decrease in OREO related expenses of 387 thousand in 2011.  Salaries and employee benefits,

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occupancy and equipment expenses, and data processing expenses increased in part due to the opening and operating of the Englewood branch in the third quarter of 2011.  The decrease in OREO 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 in 2010 and the sale of that property in 2011.

INCOME TAX EXPENSE

The income tax provision, which includes both federal and state taxes, for the years ended December 31, 2011 and 2010 was $2.2 million and $1.5 million, respectively.  The increase in income tax expense during 2011 resulted from the increased pre-tax income in 2011.  The effective tax rate for 2011 was 40.1% compared to 40.6% for 2010.  The income tax provision 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.

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FINANCIAL CONDITION

Total consolidated assets increased $99.5 million, or 26.9%, from $370.3 million at December 31, 2010 to $469.8 million at December 31, 2011.  Total loans increased from $302.1 million at December 31, 2010 to $365.2 million at December 31, 2011, an increase of $63.1 million or 20.9%.  Total deposits increased from $318.4 million on December 31, 2010 to $416.2 million at December 31, 2011, an increase of $97.8 million, or 30.7%.

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 20.9% from $302.1 million at December 31, 2010, to $365.2 million at December 31, 2011.  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.

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The following table sets forth the classification of the Company’s loans by major category as of December 31, 2011, 2010, 2009, 2008 and 2007, respectively (in thousands):

	December 31,
	2011		2010		2009		2008		2007
Real Estate	$	238,782	$	194,605	$	177,031	$	158,950	$	123,979
Commercial	57,464		46,073		36,036		33,205		26,642
Credit Lines	67,895		60,378		49,969		41,186		31,566
Consumer	1,019		1,047		895		1,505		1,273
Total Loans	$	365,160	$	302,103	$	263,931	$	234,846	$	183,460

The following table sets forth the maturity of fixed and adjustable rate loans as of December 31, 2011 (in thousands):

	Within		1 to 5		After 5
	One Year		Years		Years		Total
Loans with Fixed Rate
Commercial	$	17,944	$	3,659	$	1,416	$	23,019
Real Estate	15,050		17,844		185,960		218,854
Credit Lines	475		5,049		7,689		13,213
Consumer	287		728		4		1,019
Loans with Adjustable Rate
Commercial	$	34,445	$	—	$	—	$	34,445
Real Estate	15,434		2,924		1,570		19,928
Credit Lines	142		—		54,540		54,682
Consumer	—		—		—		—

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 nonaccrual 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 (nonaccrual 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, troubled debt restructuring loans and foreclosed assets.  When a loan is classified as nonaccrual, interest accruals discontinue and all current year past due interest is reversed against loan interest income and any interest applicable to prior years, is reversed against the allowance for loan losses.  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.  In the case of modified loans that meet the definition of a troubled debt restructuring loan (“TDR”), loan payments are applied as contractually agreed to in the TDR modification (ASC 310-40).

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.

As of December 31, 2011 the Bank had eleven nonaccrual loans totaling approximately $6.2 million, of which five loans totaling approximately $1.8 million had specific reserves of $327 thousand and six loans totaling

24

approximately $4.4 million had no specific reserve.  If interest had been accrued on these nonaccrual loans, the interest income would have been approximately $310 thousand for the year ended December 31, 2011.  Within its nonaccrual loans at December 31, 2011, the Bank had three mortgage loans, two residential and one commercial mortgage that met the definition of a TDR. At December 31, 2011, one of these residential TDR loans had an outstanding balance of $490 thousand and a specific reserve of $12 thousand and was not performing in accordance with its modified terms.  The second residential loan classified as a TDR had an outstanding balance of $310 thousand and a specific reserve of $105 thousand and was performing in accordance with its modified terms.  The commercial mortgage had an outstanding balance of $398 thousand had no specific reserve and was also performing in accordance with its modified terms.  At December 31, 2011 there were no loans past due more than 90 days and still accruing interest.

At December 31, 2010, the Bank had six nonaccrual 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, 2010, the Bank had three residential mortgage loans that met the definition of a TDR.  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 were included in the Bank’s impaired loan totals.  During the third quarter of 2010, two loans reported as impaired and fully reserved at June 30, 2010, which approximated $213 thousand, were charged off.  A third loan, a single family residential loan with a net value of approximately $1.9 million, was foreclosed, resulting in a charge-off of approximately $160 thousand during the period, and a transfer of the balance to other real estate owned.  At December 31, 2010, 2009, 2008 and 2007, respectively, there were no TDRs or loans past due more than 90 days and still accruing interest.  At December 31, 2009 and 2008, the Bank had nonaccrual loans totaling $4.0 million and $2.0 million, respectively.  The Bank had no loans classified as nonaccrual at December 31, 2007.

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 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.  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 reserves 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 maintain the allowance for loan losses at an adequate level. For example, our evaluation of the allowance includes

25

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 additional provisions for loan losses. Any provision reduces our net income. While the allowance is increased by the provision for loan losses, it is 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. A change in economic conditions could adversely affect the value of properties collateralizing real estate loans, resulting in increased charges against the allowance and reduced recoveries, and require additional provisions for loan losses. Furthermore, a change in the composition, or growth, of our loan portfolio could require additional provisions for loan losses.

Our ALLL totaled $4.4 million, $3.7 million and $2.8 million respectively, at December 31, 2011, 2010, and 2009.  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):

	2011			2010			2009			2008		2007
Balance, January 1	$	3,749		$	2,792		$	2,371		$	1,912	$	866
Charge-offs:
Residential mortgages	(43		)	(160		)	—			—		—
Consumer loans	—			(219		)	(4		)	—		—
Credit lines	(25		)	—			—			—		—
Commercial real estate	(394		)	—			—			—		—
Recoveries:
Commercial real estate	2			—			—			—		—
Consumer loans	2			1			1			—		—
Net charge-offs	(458		)	(378		)	(3		)	—		—
Provision charged to expense	1,183			1,335			424			459		1,046
Balance, December 31	$	4,474		$	3,749		$	2,792		$	2,371	$	1,912
Ratio of net charge-offs to average loans Outstanding	0.14		%	0.14		%	*			N/A		N/A

*      Less than 0.01%

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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)

	2011						2010
					% of						% of
			% of		Total				% of		Total
	Amount		ALLL		Loans		Amount		ALLL		Loans
Balance applicable to:
Real Estate	$	2,878	64.33	%	65.39	%	$	2,328	62.10	%	65.25	%
Commercial	827		18.48	%	15.74	%	627		16.72	%	23.37	%
Credit Lines	368		8.23	%	18.59	%	358		9.55	%	10.72	%
Consumer	21		0.47	%	0.28	%	22		0.59	%	0.66	%
Sub-total	4,094		91.51	%	100.00	%	3,335		88.96	%	100.00	%
Unallocated Reserves	380		8.49	%			414		11.04	%
TOTAL	$	4,474	100.00	%			$	3,749	100.00	%

	2009						2008						2007
					% of						% of						% of
			% of		Total				% of		Total				% of		Total
	Amount		ALLL		Loans		Amount		ALLL		Loans		Amount		ALLL		Loans
Balance applicable to:
Real Estate	$	2,032	72.78	%	80.92	%	$	1,774	74.82	%	78.85	%	$	1,373	71.81	%	67.23	%
Commercial	213		7.63	%	8.48	%	244		10.29	%	10.84	%	241		12.61	%	14.75	%
Credit Lines	247		8.92	%	9.92	%	205		8.65	%	9.11	%	152		7.95	%	15.34	%
Consumer	17		0.61	%	0.68	%	27		1.14	%	1.20	%	5		0.26	%	2.68	%
Sub-total	2,509		89.94	%	100.00	%	2,250		94.90	%	100.00	%	1,771		92.63	%	100.00	%
Unallocated Reserves	281		10.06	%			121		5.10	%			141		7.37	%
TOTAL	$	2,790	100.00	%			$	2,371	100.00	%			$	1,912	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 provide for 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.

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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 2011 and 2010, 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, 2011, total securities aggregated $61.4 million, of which $56.6 million were classified as AFS and $4.8 million 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, 2011, 2010, and 2009, respectively (in thousands):

	2011				2010				2009
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value
Available for sale
Government Sponsored Enterprise obligations	$	45,069	$	45,321	$	18,994	$	18,899	$	19,000	$	19,111
U.S. Treasury obligations	11,079		11,324		9,029		9,024		2,005		2,000
Total available for sale	56,148		56,645		28,023		27,923		21,005		21,111
Held to Maturity
Obligations of states and political subdivisions	4,787		4,787		3,728		3,724		4,296		4,297
Total held to maturity	4,787		4,787		3,728		3,724		4,296		4,297
Total Investment Securities	$	60,935	$	61,432	$	31,751	$	31,647	$	25,301	$	25,408

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The following tables set forth as of December 31, 2011 and December 31, 2010, the maturity distribution of the Company’s debt investment portfolio (in thousands):

Maturity of Debt Investment Securities

December 31, 2011

	Securities Held to Maturity				Securities Available for Sale				Weighted
	Amortized		Fair		Amortized		Fair		Average
	Cost		Value		Cost		Value		Yield (1)
Within 1 year
Obligations of states and political subdivisions	$	4,787	$	4,787	$	—	$	—	1.08	%
U.S. Treasury obligations	—		—		2,002		2,006		0.57	%
Government Sponsored Enterprise obligations	—		—		—		—
	4,787		4,787		2,002		2,006		0.93	%
1 to 5 years
U.S. Treasury obligations	—		—		6,015		6,248		1.70	%
Government Sponsored Enterprise obligations	—		—		14,017		14,210		1.85	%
	—		—		20,032		20,458		1.80	%
5-10 years
U.S. Treasury obligations	—		—		3,062		3,071		1.43	%
Government Sponsored Enterprise obligations	—		—		31,052		31,110		2.26	%
	—		—		34,114		34,181		2.19	%
Total	$	4,787	$	4,787	$	56,148	$	56,645	1.92	%

Maturity of Debt Investment Securities

December 31, 2010

	Securities Held to Maturity				Securities Available for Sale				Weighted
	Amortized		Fair		Amortized		Fair		Average
	Cost		Value		Cost		Value		Yield (1)
Within 1 year
Obligations of states and political subdivisions	$	3,728	$	3,724	$	—	$	—	0.80	%
U.S. Treasury obligations	—		—		999		999		0.22	%
Government Sponsored Enterprise obligations	—		—		—		—
	3,728		3,724		999		999		0.68	%
1 to 5 years
U.S. Treasury obligations	—		—		8,031		8,026		1.42	%
Government Sponsored Enterprise obligations	—		—		10,993		11,054		2.58	%
	—		—		19,024		19,080		2.09	%
5-10 years
Government Sponsored Enterprise obligations	—		—		8,000		7,844		3.08	%
Total	$	3,728	$	3,724	$	28,023	$	27,923	1.83	%

(1)  Yields have been computed on a fully tax-equivalent basis, assuming a blended tax rate of 41% in 2011 and 2010.

During 2011, the Company had no sales from its AFS portfolio.  During 2010, the Company sold three securities from its AFS portfolio and recognized gains of $127,000 from the transactions.

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DEPOSITS

Deposits are our primary source of funds.  We experienced a growth of $97.7 million, or 30.7%, in deposits from $318.4 million at December 31, 2010 to $416.2 million at December 31, 2011.  This increase consists of increases in time deposits, interest-bearing demand accounts, noninterest-bearing demand accounts, and savings accounts which increased $52.9 million, $26.5 million, $16.3 million and $2.0 million, respectively.  We believe the overall increase in deposits reflects our competitive but disciplined rate structure and the public perception of our safety and soundness.  During this interest rate environment, our deposit products have allowed the Bank to increase its overall deposits while still being able to reduce its overall cost of deposits.  The increase is also attributable to the continued referrals of our board of directors, stockholders, management, and staff.

The following table sets forth the actual amount of various types of deposits for each of the periods indicated:

December 31,

(dollars in thousands)

	2011				2010				2009
			Average				Average				Average
	Amount		Yield/Rate		Amount		Yield/Rate		Amount		Yield/Rate
Non-interest Bearing Demand	$	49,585			$	33,244	—		$	36,687	—
Interest Bearing Demand	77,330		0.36	%	50,827		0.33	%	45,899		0.45	%
Savings	8,126		0.51	%	6,112		0.46	%	4,473		0.30	%
Time Deposits	281,122		1.82	%	228,238		1.82	%	180,084		3.18	%
	$	416,163			$	318,421			$	267,143

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, 2011 (in thousands):

Three months or less	$	48,864
Over three months through 6 months	37,777
Over six months through twelve months	51,754
Over one year through three years	40,523
Over three years	56,286
	$	235,204

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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.

	At or for the year ended December 31,
Selected Fiancial Ratios:	2011		2010		2009
Return on Average Assets (ROA)	0.80	%	0.62	%	0.40	%
Return on Average Equity (ROE)	6.44	%	4.24	%	2.56	%
Equity to Total Assets at Year-End	11.05	%	13.54	%	15.50	%
Dividend Payout Ratio	62.70	%	79.87	%	124.24	%

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.

Our total deposits equaled $416.2 million and $318.4 million, respectively, at December 31, 2011 and 2010.  The growth in funds provided by deposit inflows during this period coupled with our cash position at the end of 2011 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, 2011, 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, 2011, 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.

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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.

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, 2011, we were within the target gap range established by ALCO.

Cumulative Rate Sensitive Balance Sheet

December 31, 2011

(in thousands)

	0-3		0-6		0-1		0-5		All
	Months		Months		Year		Years		Others		TOTAL
Securities, excluding equity securities	$	4,913	$	6,566	$	6,794	$	27,252	$	34,180	$	61,432
Loans:
Commercial	50,749		51,423		52,975