Central Jersey Bancorp (CJER) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010.

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ______.

Commission file number 0-49925

Central Jersey Bancorp

(Exact name of registrant as specified in its charter)

New Jersey	22-3757709
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1903 Highway 35, Oakhurst, New Jersey 07755

(Address of principal executive offices, including zip code)

(732) 663-4000

(Registrant’s telephone number, including area code)

(Former name, former address and formal fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 T     No £

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

proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes T     No £

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

	Large accelerated filer	£	Accelerated filer	£
	Non-accelerated filer	£	Smaller reporting company	T
(Do not check if smaller reporting company)

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

Yes £     No T.

As of October 31, 2010, there were 9,346,092 shares of the registrant’s common stock, par value $.01 per share, outstanding.

Central Jersey Bancorp

INDEX TO FORM 10-Q

		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition (unaudited)
	as of September 30, 2010 and December 31, 2009	1
	Consolidated Statements of Income (unaudited)
	for the three and nine months ended September 30, 2010 and 2009	2
	Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
	for the nine months ended September 30, 2010 and 2009	3
	Consolidated Statements of Cash Flows (unaudited)
	for the nine months ended September 30, 2010 and 2009	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis
	of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	39
Item 4.	(Removed and Reserved)	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		40
Index of Exhibits		E-1

Forward-Looking Statements

Certain information included in this quarterly report on Form 10-Q and other filings of the registrant under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as information communicated orally or in writing between the dates of such filings, contains or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results.  Among these risks, trends and uncertainties are the effect of governmental regulation on Central Jersey Bank, N.A., a nationally chartered commercial bank and wholly-owned subsidiary of the registrant, interest rate fluctuations, regional economic and other conditions, the availability of working capital, the cost of personnel and technology and the competitive markets in which Central Jersey Bank, N.A. operates.

i

In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology.  Although the registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the registrant cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither the registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements.  The registrant is under no dut y to update any of the forward-looking statements contained herein after the date of this quarterly report on Form 10-Q.

ii

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CENTRAL JERSEY BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

(dollars in thousands, except share amounts)

	September 30, 2010			December 31, 2009
ASSETS
Cash and due from banks	$	9,350		$	9,789
Federal funds sold		36,960			68,526
Cash and cash equivalents		46,310			78,315
Investment securities available-for-sale, at fair value		139,607			96,947
Investment securities held-to-maturity (fair value at September 30, 2010 and
December 31, 2009 of $29,802 and $7,462, respectively)		29,169			7,217
Federal Reserve Bank stock		1,875			1,848
Federal Home Loan Bank stock		1,196			1,820
Loans		359,961			379,087
Less: Allowance for loan losses		8,939			9,613
Loans, net		351,022			369,474
Accrued interest receivable		1,743			2,285
Other real estate owned		1,942			1,055
Premises and equipment		5,578			5,946
Bank owned life insurance		3,909			3,817
Core deposit intangible		773			1,031
FDIC deposit insurance premiums		2,274			2,684
Other assets		4,036			5,219
Total assets	$	589,434		$	577,658
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	83,785		$	80,500
Interest bearing		389,545			387,378
		473,330			467,878
Borrowings		47,151			47,575
Subordinated debentures		5,155			5,155
Accrued expenses and other liabilities		1,305			1,531
Investment securities purchased not settled		3,760			--
Total liabilities		530,701			522,139
Shareholders’ equity:
Common stock, par value $0.01 per share.  Authorized 100,000,000 shares;
9,626,790 and 9,503,423 shares issued and 9,332,445 and 9,256,975 shares
outstanding, respectively, at September 30, 2010 and December 31, 2009		96			92
Preferred stock, liquidation value $1,000 per share. Authorized 10,000,000 shares
and issued and outstanding 11,300 shares at September 30, 2010 and
December 31, 2009		11,300			11,300
Additional paid-in capital		65,944			64,981
Accumulated other comprehensive income, net of tax expense		1,503			1,022
Treasury stock – at cost, 294,345 and 246,448 shares, respectively,
at September 30, 2010 and December 31, 2009		(2,040	)		(1,806	)
Accumulated deficit		(18,070	)		(20,070	)
Total shareholders’ equity		58,733			55,519
Total liabilities and shareholders’ equity	$	589,434		$	577,658

See accompanying notes to unaudited consolidated financial statements.

1

CENTRAL JERSEY BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(dollars in thousands, except share and per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Interest and dividend income:
Interest and fees on loans	$	5,146	$	5,362	$	15,550	$	15,399
Interest on securities available-for-sale:
Taxable interest income		385		583		1,248		3,019
Non-taxable interest income		246		519		672		1,081
Interest on securities held-to-maturity		193		126		503		495
Interest on federal funds sold and due from banks		40		61		193		198
Total interest and dividend income		6,010		6,651		18,166		20,192
Interest expense:
Interest expense on deposits		1,125		1,656		3,447		5,547
Interest expense on borrowings		145		236		439		730
Interest expense on subordinated debentures		43		43		121		150
Total interest expense		1,313		1,935		4,007		6,427
Net interest income		4,697		4,716		14,159		13,765
Provision for loan losses		-		1,058		-		4,510
Net interest income after provision for loan losses		4,697		3,658		14,159		9,255
Non-interest income:
Service charges on deposit accounts		408		397		1,144		1,117
Gain on the sale of loans held-for-sale		42		7		59		64
Gain on sale of SBA loans		55		297		654		446
Income on bank owned life insurance		31		34		92		100
Gain on sale of securities available-for-sale		-		731		-		2,799
Other income		21		-		72		-
Total non-interest income		557		1,466		2,021		4,526
Non-interest expense:
Salaries and employee benefits		2,061		1,964		5,703		5,774
Net occupancy expenses		540		487		1,614		1,422
Data processing fees		259		245		773		709
FDIC insurance premiums		203		150		598		580
Core deposit intangible amortization		86		103		258		310
Goodwill impairment		-		-		-		26,957
Other operating expenses		1,157		1,119		3,368		3,310
Total non-interest expense		4,306		4,068		12,314		39,062
Income (loss) before provision for income taxes		948		1,056		3,866		(25,281	)
Income tax  expense (benefit)		284		136		1,308		(207	)
Net income (loss)		664		920		2,558		(25,074	)
Dividend on preferred stock and accrection		185		186		558		557
Net income (loss) available to common shareholders	$	479	$	734	$	2,000	$	(25,631	)
Basic earnings (loss) per common share	$	0.05	$	0.08	$	0.22	$	(2.82	)
Diluted earnings (loss) per common share	$	0.05	$	0.08	$	0.21	$	(2.82	)
Average basic common shares outstanding		9,323,345		9,140,796		9,291,116		9,082,641
Average diluted common shares outstanding		9,521,503		9,379,394		9,432,086		9,082,641

See accompanying notes to unaudited consolidated financial statements.

2

CENTRAL JERSEY BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands, except share amounts)

							Accumulated						Retained
					Additional		other						earnings/
	Common		Preferred		paid-in		comprehensive			Treasury			(accumulated
	stock		stock		capital		income			stock			deficit)			Total
Balance at December 31, 2008	$	90	$	11,300	$	64,502	$	1,925		$	(1,806	)	$	6,441		$	82,452
Comprehensive loss:
Net loss		--		--		--		--			--			(25,074	)		(25,074	)
Unrealized loss on securities
available-for-sale, net of
reclassification adjustment of
$2,799 and tax effect of ($346)		--		--		--		(535	)		--			--			(535	)
Total comprehensive loss																$	(25,609	)
Exercise of stock options – 191,983
shares, including tax benefit of $170		2		--		525		--			--			--			527
Discount – preferred stock		--		--		134		--			--			(134	)		--
Cash dividends accrued on preferred
stock		--		--		--		--			--			(422	)		(422	)
Balance at September 30, 2009	$	92	$	11,300	$	65,161	$	1,390		$	(1,806	)	$	(19,189	)	$	56,948
Balance at December 31, 2009	$	92	$	11,300	$	64,981	$	1,022		$	(1,806	)	$	(20,070	)	$	55,519
Comprehensive income:
Net income		--		--		--		--			--			2,558			2,558
Unrealized gain on securities
available-for-sale, net of tax effect of
$299		--		--		--		481			--			--			481
Total comprehensive income																$	3,039
Exercise of stock options – 177,070
shares, including tax benefit of $89		4		--		401		--			--			----			405
Intercompany reclassification related to
stock option exercises		--		--		427		--			--			--			427
Purchase of 47,897 shares outstanding
stock; placed in treasury		--		--		--		--			(234	)		--			(234	)
Discount – preferred stock		--		--		135		--			--			(135	)		--
Cash dividends accrued on preferred
stock		--		--		--		--			--			(423	)		(423	)
Balance at September 30, 2010	$	96	$	11,300	$	65,944	$	1,503		$	(2,040	)	$	(18,070	)	$	58,733

See accompanying notes to unaudited consolidated financial statements.

3

CENTRAL JERSEY BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

	Nine months ended
	September 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	2,558		$	(25,074	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment charge		--			26,957
Earnings on cash surrender value of life insurance		(92	)		(100	)
Deferred tax expense (benefit)		234			(346	)
Provision for loan losses		--			8,677
Depreciation and amortization		589			551
Net premium amortization on held-to-maturity securities		340			79
Net (discount accretion) premium amortization on available-for-sale securities		(92	)		328
Core deposit intangible amortization		258			310
Gain on sale of securities available-for-sale		--			(2,799	)
Gain on the sale of SBA loans and loans held-for-sale		(713	)		(510	)
Originations of loans held-for-sale		(5,237	)		(11,030	)
Proceeds from the sale of loans held-for-sale		5,296			11,940
Decrease in accrued interest receivable		542			27
Decrease (increase) in other assets		2,383			(447	)
Decrease in accrued expenses and other liabilities		(500	)		(6	)
Net cash provided by operating activities		5,566			8,557
Cash flows from investing activities:
Maturities and paydowns on investment securities held-to-maturity		9,112			4,768
Maturities and paydowns on investment securities available-for-sale		58,938			4,650
Proceeds from sale of investment securities available-for-sale		--			170,526
Purchase of investment securities available-for-sale		(96,991	)		(126,596	)
Purchase of investment securities held-to-maturity		(31,404	)		--
Net decrease (increase) in loans		18,219			(23,949	)
Purchases of premises and equipment		(221	)		(311	)
Net cash used in investment activities		(42,347	)		29,088
Cash flows from financing activities:
Proceeds from stock options exercised		405			527
Net increase in non-interest bearing deposits		3,285			5,276
Net increase in interest bearing deposits		2,167			35,736
Net increase in other borrowings		9,632			9,956
Net decrease in Federal Home Loan Bank advances		(10,000	)		(27,500	)
Repayment of Federal Home Loan Bank advances		(56	)		(54	)
Cash dividend paid on preferred stock		(423	)		(362	)
Purchase of outstanding stock; placed in treasury		(234	)		--
Net cash provided by financing activities		4,776			23,579
(Decrease) increase in cash and cash equivalents		(32,005	)		61,224
Cash and cash equivalents at beginning of period		78,315			9,767
Cash and cash equivalents at end of period	$	46,310		$	70,991
Supplementary cash flow information:
Interest paid	$	4,006		$	6,427
Investment securities purchased not settled	$	3,760		$	--
Income taxes paid	$	1,154		$	1,149
Loans receivable transferred to other real estate owned	$	500		$	--

See accompanying notes to unaudited consolidated financial statements.

4

Central Jersey Bancorp and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

The accompanying consolidated financial statements include the accounts of Central Jersey Bancorp and its wholly-owned bank subsidiary, Central Jersey Bank, N.A., which are sometimes collectively referred to herein as the “Company.”  All significant inter-company accounts and transactions have been eliminated in consolidation.  The interim unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

The interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations that may be expected for all of 2010.

Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Central Jersey Bancorp’s annual report on Form 10-K for the year ended December 31, 2009.

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2010, for items that should potentially be recognized or disclosed in the accompanying interim unaudited consolidated financial statements and has determined that no such items were required to be recognized or disclosed.

Reclassifications

Certain reclassifications have been made to the prior period amounts to conform to the current period presentation.  These reclassifications had no effect on results of operations.

Note 2.  Restrictions on Cash and Amounts Due From Banks

Central Jersey Bank, N.A. is required to maintain average balances on hand or with the Federal Reserve Bank of New York. At September 30, 2010 and December 31, 2009, these reserve balances amounted to $435,000 and $276,000, respectively.

Note 3.  Earnings Per Common Share

The following tables reconcile shares outstanding for basic and diluted earnings per common share for the three and nine months ended September 30, 2010 and 2009:

5

	Three months ended September 30, 2010
(amounts in thousands, except for per share data)	Income (numerator)		Average shares (denominator)		Per share amount
Basic earnings per common share
Net income available to common shareholders	$	479		9,323	$	0.05
Effect of dilutive securities:
Stock options		--		199		--
Diluted earnings per common share
Net income available to common shareholders, plus
assumed exercise of options and warrants	$	479		9,522	$	0.05

	Nine months ended September 30, 2010
(amounts in thousands, except for per share data)	Income (numerator)		Average shares (denominator)		Per share amount
Basic earnings per common share
Net income available to common shareholders	$	2,000		9,291	$	0.22
Effect of dilutive securities:
Stock options		--		141		--
Diluted earnings per common share
Net income available to common shareholders, plus
assumed exercise of options and warrants	$	2,000		9,432	$	0.21

Basic and diluted net income per common share for the three and nine months ended September 30, 2010 were calculated by dividing the net income available to common shareholders (which is equal to net income less dividends on preferred stock) of $479,000 and $2.0 million, respectively, by the weighted average number of shares outstanding of 9,323,345 and 9,291,116, respectively (as to the basic net income per common share determination), and 9,521,503 and 9,432,086, respectively (as to the diluted net income per common share determination). For the three and nine months ended September 30, 2010, 243,255 antidilutive stock options were excluded from the earnings per common share calculation.

	Three months ended September 30, 2009
(amounts in thousands, except for per share data)	Income (numerator)		Average shares (denominator)		Per share amount
Basic earnings per common share
Net income available to common shareholders	$	734		9,141	$	0.08
Effect of dilutive securities:
Stock options and warrants		--		238		--
Diluted earnings per common share
Net income available to common shareholders, plus
assumed exercise of options and warrants	$	734		9,379	$	0.08

6

	Nine months ended September 30, 2009
(amounts in thousands, except for per share data)	Loss (numerator)			Average shares (denominator)		Per share amount
Basic loss per common share
Net loss available to common shareholders	$	(25,631	)		9,083	$	(2.82	)
Effect of dilutive securities:
Stock options and warrants		--			--		--
Diluted loss per common share
Net loss available to common shareholders, plus
assumed exercise of options and warrants	$	(25,631	)		9,083	$	(2.82	)

Basic and diluted net income (loss) per common share for the three and nine months ended September 30, 2009 was calculated by dividing the net income (loss) available to common shareholders of $734,000 and $25.6 million, respectively, by the weighted average number of common shares outstanding of 9,140,796 and 9,082,641, respectively (as to the basic net income per common share determination), and 9,379,394 and 9,320,549, respectively (as to the diluted net income per common share determination). Antidilutive stock options for both the three and nine months ended September 30, 2009 was 243,255 antidilutive stock options were excluded from the earnings per common share calculation.  In accordance with FASB ASC Topic 260, “Earnings per Share,” due to the Compa ny reporting a net loss for the nine months ended September 30, 2009, including potential common shares in the denominator of a diluted per-share computation would have resulted in an antidilutive per-share amount.

Stock Based Compensation

Stock compensation accounting guidance, FASB ASC Topic 718, “Compensation—Stock Compensation,” requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share based compensation arrangements, including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over an employee’s service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Sholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

There were no new employee or director stock option grants during the three or nine months ended September 30, 2010 and 2009.

7

Stock Appreciation Rights

On January 31, 2006, the Company granted, 173,644 stock appreciation rights (“SARS”) (98,398 were granted to employees and 75,246 were granted to directors), each with an exercise price of $9.40, under its 2005 Equity Incentive Plan.  These SARS can only be settled in cash.  As of February 1, 2010, all SARS were fully vested, as they vested over a four year period and are to expire February 1, 2016.  The fair value of all SARS granted is estimated on a quarterly basis using the Black-Scholes option pricing model.  Depending on the fair value of the stock each quarter, the Company may record a share based payment expense related to the granting of the SARS.    For the three and nine months ended September 30, 2010, $110,000 and $389,000, respectively, in accrued exp ense related to the granting of SARS in 2006 was reversed.

Stock Option Plans

In 2000, the Company established its Employee and Director Stock Option Plan (the “Plan”).  The Plan currently provides for the granting of stock options to purchase in aggregate up to 1,263,197 shares of the Company’s common stock, subject to adjustment for certain dilutive events such as stock distributions.  During the nine months ended September 30, 2010, no options were granted under the Plan.  As a result of the January 1, 2005 combination with Allaire Community Bank, all outstanding options granted under the Plan became fully vested.  Due to the pending merger with Kearny Financial Corp. (“Kearny”), the Company does not anticipate granting any additional stock options under the Plan or any of the Allaire Community Bank stock option plans assumed by the Company .

At the effective time of the pending merger with Kearny, each stock option granted by the Company under the Company’s stock option plans shall be canceled in exchange for, if applicable, a cash payment equal to the positive difference between $7.50 and the exercise or base price of such stock option, multiplied by the number of shares that may be purchased pursuant to such stock option.

A summary of the status of the Company’s stock options as of and for the nine months ended September 30, 2010 is presented below:

	As of and for the nine months ended September 30, 2010
	Shares		Weighted average exercise price
Outstanding at beginning of year		1,023,442	$	5.29
Granted		--		--
Forfeited		--		--
Exercised		177,070		3.09
Outstanding at period end		846,372	$	5.46
Options exercisable at period end		846,372	$	5.46
Weighted average fair value of
options granted				n/a

8

Note 4.  Loans Receivable, Net

Loans receivable, net at September 30, 2010 and December 31, 2009, consisted of the following (in thousands):

	September 30,		December 31,
Loan Type	2010		2009
Real estate loans – commercial	$	227,377	$	229,295
Home equity and second mortgages		62,338		65,116
Commercial and industrial loans		37,707		46,160
Construction loans		27,389		33,673
1-4 family real estate loans		3,615		2,876
Consumer loans		1,096		1,475
Total loans		359,522		378,595
Net deferred costs		439		492
Less:  allowance for loan losses		8,939		9,613
Loans receivable, net	$	351,022	$	369,474

A substantial portion of the Company’s loans are secured by real estate and made to borrowers located in New Jersey, primarily in Monmouth and Ocean Counties.  Accordingly, as with most financial institutions in the Company’s market area, the ultimate collectibility of a substantial portion of the Company’s loan portfolio is susceptible to changes in market conditions in the market area.

Activity in the allowance for loan losses (sometimes referred to herein as “ALL”) for the nine months ended September 30, 2010 is summarized as follows (dollars in thousands):

	Nine months ended September 30, 2010
Balance, beginning of year	$	9,613
Provision charged to expense		--
Charge-offs		(730	)
Recoveries		56
Balance, end of period	$	8,939
Ratio of ALL to total loans		2.48	%

Impaired Loans

When necessary, the Company performs individual loan reviews in accordance with FASB ASC Topic 310, “Receivables,” to determine whether any individually reviewed loans are impaired and, if impaired, measures a valuation allowance allocation in accordance with FASB ASC Topic 310.  A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms.  The Company considers loans on non-accrual status or risk rated “8” or higher as impaired and automatically subject to a FASB ASC Topic 310 review.  In addition, any other loan that management considers possibly impaired due to deteriorating conditions or for any other reasons, is, at managemen t’s discretion, subject to a FASB ASC Topic 310 review.

At September 30, 2010, the Company had impaired loans totaling $18.5 million, as compared to $23.2 million at December 31, 2009.  The decrease in impaired loans was due primarily to the charge-off of $730,000 in impaired loans during the nine months ended September 30, 2010 and the migration one

9

construction loan, with a balance of $3.5 million, to the general reserve pool as a result of obtaining additional collateral and a material principal pay down.  The impaired loans, which were charged-off, were considered permanently impaired and were evaluated and charged-off in accordance with FASB ASC Topic 310.  At September 30, 2010, specific reserves for impaired loans totaled $3.3 million, as compared to $4.1 million at December 31, 2009.

The Company’s policy for interest income recognition on non-accrual loans is to recognize income on currently performing restructured loans under the accrual method.  The Company recognizes income on non-accrual loans under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company.  If these factors do not exist, the Company does not recognize income.  There was no income recognized on non-accrual loans during the three or nine months ended September 30, 2010.  Total cash collected on non-accrual loans during the three and nine months ended September 30, 2010 was $84,000 and $169,000, respectively, as compared to $44,000 and $189,000, respectively, for the same periods in 2009, al l of which was credited to the principal balances outstanding.

If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $113,000 and $302,000, respectively, for the three and nine months ended September 30, 2010, as compared to $109,000 and $361,000, respectively, for the same periods in 2009.  At September 30, 2010, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status.

Impaired loans as of September 30, 2010 and December 31, 2009 are summarized as follows (dollars in thousands):

	September 30, 2010		December 31, 2009
Balance of impaired loans with no allowance allocation	$	4,667	$	4,035
Balance of impaired loans with an allocated allowance		13,815		19,140
Total recorded investment in impaired loans	$	18,482	$	23,175
Amount of the allowance allocated to impaired loans	$	3,342	$	4,085
Average balance of impaired loans	$	20,672	$	21,538

10

Note 5.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of investment securities held-to-maturity and securities available-for-sale at September 30, 2010 and December 31, 2009 are as follows (in thousands):

	September 30, 2010
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
Investment securities held-to-maturity:
Obligations of U.S. Government
sponsored agencies	$	19,503	$	254	$	--	$	19,757
Mortgage-backed securities of U.S. Government
sponsored agencies		9,666		379		--		10,045
Total	$	29,169	$	633	$	--	$	29,802
Investment securities available-for-sale:
Obligations of U.S. Government
sponsored agencies	$	18,804	$	617	$	--	$	19,421
Municipal obligations		95,653		330		2		95,981
Mortgage-backed securities of U.S. Government
sponsored agencies		21,479		1,434		--		22,913
Other debt securities		1,292		--		--		1,292
Total	$	137,228	$	2,381	$	2	$	139,607

	December 31, 2009
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
Investment securities held-to-maturity:
Mortgage-backed securities of U.S. Government
sponsored agencies	$	7,217	$	245	$	--	$	7,462
Total	$	7,217	$	245	$	--	$	7,462
Investment securities available-for-sale:
Obligations of U.S. Government
sponsored agencies	$	14,996	$	140	$	8	$	15,128
Municipal obligations		48,222		130		71		48,281
Mortgage-backed securities of U.S. Government
sponsored agencies		29,198		1,432		--		30,630
Other debt securities		2,908		--		--		2,908
Total	$	95,324	$	1,702	$	79	$	96,947

The available for sale securities are reported at fair value with unrealized gains or losses included in equity, net of taxes.  Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or, in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair values. See Note 12, Fair Value Measurements, for these additional disclosures.

11

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

	Amortized		Fair
	cost		value
Investment securities held-to-maturity:
Due in one year or less	$	336	$	340
Due after one year through fifth year		15,803		16,002
Due after fifth year through tenth year		1,659		1,771
Due after tenth year		11,371		11,689
Total	$	29,169	$	29,802
Investment securities available-for-sale:
Due in one year or less	$	84,363	$	84,408
Due after one year through fifth year		20,373		20,549
Due after fifth year through tenth year		17,702		18,668
Due after tenth year		14,790		15,982
Total	$	137,228	$	139,607

FASB issued accounting guidance related to the recognition and presentation of other-than-temporary impairment, which the Company adopted effective June 30, 2009 (“Pending Content” of FASB ASC Topic 320-10).  This accounting guidance amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairment losses on debt and equity securities.  The guidance replaced the “intent and ability” indication in former guidance by specifying that if (a) a company does not have the intent to sell a debt security prior to recovery and, (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss.

When an entity does not intend to sell a debt security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment will be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

During the nine months ended September 30, 2010, there were no sales of investment securities available-for-sale, as compared to sales generating $170.5 million in proceeds during the nine months ended September 30, 2009, which resulted in $2.6 million in gains on investment securities available-for-sale during such period.

At September 30, 2010 and December 31, 2009, there were $98.3 million and $76.5 million, respectively, of investment securities pledged as collateral for short term borrowings, to secure public funds or for any other purposes required by law.

Gross unrealized losses on investment securities available-for-sale and their fair values, aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009, were as follows (in thousands):

12

	September 30, 2010
	Less than 12 months				12 months or more				Total
Investment securities	Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value
Municipal obligations	$	2	$	12,145	$	--	$	--	$	2	$	12,145
Total	$	2	$	12,145	$	--	$	--	$	2	$	12,145

	December 31, 2009
	Less than 12 months				12 months or more				Total
Investment securities	Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value
Municipal obligations	$	71	$	7,652	$	--	$	--	$	71	$	7,652
Obligations of U.S. Government
sponsored agencies		8		4,992		--		--		8		4,992
Total	$	79	$	12,644	$	--	$	--	$	79	$	12,644

Management does not believe that any of the individual unrealized losses represent an other-than-temporary impairment.  The Company does not intend to sell any of its investment securities and it is not more likely than not that the Company will be required to sell its investment securities, therefore, no other-than-temporary impairment is required.  As of September 30, 2010, there were five municipal obligations and no obligations of U.S. Government sponsored agencies in unrealized loss positions compared to 12 municipal obligations and one obligation of U.S. Government sponsored agencies in unrealized loss positions as of December 31, 2009.

Note 6.  Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expense from other non-interest expense.

The following table represents the balance of other real estate owned at September 30, 2010 and December 31, 2009 (in thousands):

	September 30, 2010		December 31, 2009
Other real estate owned	$	1,942	$	1,055

At December 31, 2009, two loans totaling $1.1 million were transferred to other real estate owned and recorded at their initial fair value less cost to sell, impacting the Company’s provision for loan losses by $245,000.  During the nine month ended September 30, 2010, there was no decline in the fair value of the properties from December 31, 2009, and, therefore, no related charges to the carrying balance were required.  The other real estate owned balance increased for the nine months ended September 30, 2010, due to the addition of one property totaling $500,000 which was recorded at its initial fair value less cost to sell.  Additionally, $412,000 was paid to obtain a first lien position on one of the properties, which was offset by a $25,000 principal pay down.

13

Note 7.  Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk

In the ordinary course of business to meet the financial needs of the Company’s customers, the Company is party to financial instruments with off-balance sheet risk.  These financial instruments include unused lines of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements.  The contract or notional amounts of these instruments express the extent of involvement the Company has in each category of financial instruments.

The Company’s exposure to credit loss from nonperformance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  The contract or notional amount of financial instruments which represent credit risk at September 30, 2010 and December 31, 2009 is as follows (in thousands):

	September 30, 2010		December 31, 2009
Standby letters of credit	$	1,208	$	2,140
Outstanding loan and credit line commitments	$	56,260	$	67,122

Standby letters of credit are conditional commitments issued by the Company which guarantee performance by a customer to a third party.  The credit risk and underwriting procedures involved in issuing letters of credit are essentially the same as those involved in extending loan facilities to customers.  All of Central Jersey Bank, N.A.’s outstanding standby letters of credit are performance standby letters within the scope of FASB ASC Topic 952, “Franchisors.”  These are irrevocable undertakings by Central Jersey Bank, N.A., as guarantor, to make payments in the event a specified third party fails to perform under a non-financial contractual obligation.  Most of Central Jersey Bank, N.A.’s performance standby letter s of credit arise in connection with lending relationships and have terms of one year or less.  The maximum potential future payments Central Jersey Bank, N.A. could be required to make equals the face amount of the letters of credit shown above.  Central Jersey Bank, N.A.’s liability for performance standby letters of credit was immaterial at September 30, 2010 and December 31, 2009.

Outstanding loan commitments represent the unused portion of loan commitments available to individuals and companies as long as there is no violation of any condition established in the contract.  Outstanding loan commitments generally have a fixed expiration date of one year or less, except for home equity loan commitments which generally have an expiration date of up to 15 years.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if any, upon extension of credit is based upon management’s credit evaluation of the customer.  Various types of collateral may be held, including property and marketable securities.  The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.

14

Note 8.  Deposits

The major types of deposits at September 30, 2010 and December 31, 2009 were as follows (in thousands):

	September 30,		December 31,
Deposit Type	2010		2009
Demand deposits, non-interest bearing	$	83,785	$	80,500
Savings, N.O.W. and money market accounts		215,014		226,729
Certificates of deposit of less than $100		65,921		72,089
Certificates of deposit of $100 or more		108,610		88,560
Total	$	473,330	$	467,878

Note 9.  Borrowings

Borrowed funds at September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):

	September 30, 2010		December 31, 2009
Borrowings	$	47,151	$	47,575

Borrowings typically include wholesale borrowing arrangements as well as arrangements with deposit customers of Central Jersey Bank, N.A. to sweep funds into short-term borrowings.  At September 30, 2010, borrowings included $36.0 million in bank sweep funds, $5.0 million in Federal Home Loan Bank of New York (“FHLBNY”)callable advances and $6.1 million in FHLBNY fixed rate advances.  At December 31, 2009, borrowings included $26.4 million in bank sweep funds, $15.0 million in FHLBNYcallable advances and $6.2 million in FHLBNY fixed rate advances. At September 30, 2010 and December 31, 2009, Central Jersey Bank, N.A. had unused lines of credit with the FHLBNY of $59.2 million and $2 6.2 million, respectively.

At September 30, 2010, Central Jersey Bank, N.A. had the following outstanding FHLBNY callable advances (in thousands):

Date	Amount		Rate			Term	Call Feature
						7 year non-call
2/01/2008	$	5,000		2.903	%	3 years	One Time

At September 30, 2010, Central Jersey Bank, N.A. had the following outstanding FHLBNY fixed rate advances (in thousands):

Date	Amount		Rate			Term	Maturity
2/01/2008	$	5,000		2.380	%	5 years	2/01/2013
5/28/2008		1,078		4.940	%	13 years	5/28/2021
	$	6,078		2.871	%

15

Note 10.  Subordinated Debentures

In March 2004, MCBK Capital Trust I, a special purpose business trust of Central Jersey Bancorp, issued an aggregate of $5.0 million of trust preferred securities to ALESCO Preferred Funding III, a pooled investment vehicle.  Sandler O’Neill & Partners, L.P. acted as placement agent in connection with the offering of the trust preferred securities.  The securities issued by MCBK Capital Trust I are fully guaranteed by Central Jersey Bancorp with respect to distributions and amounts payable upon liquidation, redemption or repayment.  These securities have a floating interest rate equal to the three-month LIBOR plus 285 basis points, which resets quarterly.  The securities mature on April 7, 2034 and may be called at par by Central Jersey Bancorp any time after April 7, 2009.  T hese securities were placed in a private transaction exempt from registration under the Securities Act of 1933, as amended.

The entire proceeds to MCBK Capital Trust I from the sale of the trust preferred securities were used by MCBK Capital Trust I in order to purchase $5.1 million of subordinated debentures from Central Jersey Bancorp.  The subordinated debentures bear a variable interest rate equal to LIBOR plus 285 basis points.  Although the subordinated debentures are treated as debt of Central Jersey Bancorp, they currently qualify as Tier I Capital investments, subject to the 25% limitation under risk-based capital guidelines of the Federal Reserve.  The portion of the trust preferred securities that exceeds this limitation qualifies as Tier II Capital of Central Jersey Bancorp.  At September 30, 2010, $5.0 million of the trust preferred securities qualified for treatment as Tier I Capital.  Central Jersey Bancorp is using the proceeds it received from the subordinated debentures to support the general balance sheet growth of Central Jersey Bancorp and to maintain Central Jersey Bank, N.A.’s required regulatory capital ratios.

On March 1, 2005, the Federal Reserve adopted a final rule that allows the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier I Capital of bank holding companies, subject to stricter quantitative limits and qualitative standards.  Under the final rules, trust preferred securities and other restricted core capital elements are limited to 25% of all core capital elements.  Amounts of restricted core capital elements in excess of these limits may be included in Tier II Capital.  At September 30, 2010, the only restricted core capital element owned by Central Jersey Bancorp is trust preferred securities.  Central Jersey Bancorp believes that its trust preferred issues qualify as Tier I Capital.  However, in the event that the trust pr eferred issues do not qualify as Tier I Capital, Central Jersey Bank, N.A. would remain well capitalized.

Note 11.  Income Tax Expense (Benefit)

The Company recorded an income tax expense of $284,000 on income before taxes of $948,000 for the three months ended September 30, 2010, resulting in an effective tax rate of 29.96%.  The Company recorded an income tax expense of $136,000 on income before taxes of $1.1 million for the three months ended September 30, 2009 resulting in an effective tax rate was 12.88%.  The increase in income tax expense and effective tax rate is due to a lower amount of federal tax-free interest income derived from municipal bond and note obligations.  In addition, $110,000 and $324,000, respectively, in merger-related expenses were incurred during the three and nine months ended September 30, 2010 in connection with the pending merger with Kearny.  These expenses were non-deductible for tax purposes and had an i ncremental tax impact of $6,000 and $110,000, respectively, for the three and nine months ended September 30, 2010.

The Company recorded an income tax expense of $1.3 million on income before taxes of $3.9 million for the nine months ended September 30, 2010, resulting in an effective tax rate of 33.84%.  The Company recorded an income tax benefit of ($207,000) on a loss before taxes of $25.3 million for the nine months ended September 30, 2009.  Excluding the impact of the goodwill impairment charge, which is non tax-deductible, the Company’s effective tax benefit rate was (12.35%) for the nine months ended September 30, 2009.  The 2009 income tax benefit was due to the utilization of capital tax loss carry-forwards which resulted from the 2007 balance sheet restructuring initiative. As a result of the restructuring, a deferred tax

16

valuation allowance was established against deferred tax assets generated from the capital tax loss carry-forwards.  Since $772,000 of the $2.8 million in gains from the sale of available-for-sale investment securities recorded during the nine months ended September 30, 2009 were realized in CJB Investment Company, a wholly-owned subsidiary of Central Jersey Bank, N.A., these gains are considered capital gains and are permitted to be offset against the remaining capital tax loss carry-forwards.  The federal income tax benefit was primarily the result of the reversal of the deferred tax valuation allowance which totaled approximately $262,000.

Note 12.  Fair Value Measurements

The Company applies the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for financial assets and financial liabilities.  FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements.

Financial assets and financial liabilities recorded at fair value in the Consolidated Statements of Financial Condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Under the guidance, fair value measurements are not adjusted for transaction costs.  FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The three level s of the fair value hierarchy under FASB ASC Topic 820 are described below.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amount the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period ends and have not been re-evaluated or updated for purposes of the consolidated financial statements included elsewhere herein subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

Basis of Fair Value Measurement

Level I Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level II Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability; and

Level III Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.  These valuation methodologies were applied to all of the Company's financial assets and financial liabilities carried at fair value.

In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty

17

credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.

Investment securities available-for-sale – Investment securities classified as available-for-sale are reported at fair value utilizing Level II inputs.  For these investment securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Department of the Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the investment security’s terms and conditions, among other things.

Servicing rights – The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income.  The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

The following tables summarize financial assets measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	At September 30, 2010
	Level I		Level II		Level III		Total fair value
Investment securities available-for-sale:
Obligations of U.S. Government sponsored
agencies	$	--	$	19,421	$	--	$	19,421
Municipal obligations		--		95,981		--		95,981
Mortgage-backed securities of U.S.
Government sponsored agencies		--		22,913		--		22,913
Other securities		--		1,292		--		1,292
Total assets measured fair value on a
recurring basis	$	--	$	139,607	$	--	$	139,607

	At December 31, 2009
	Level I		Level II		Level III		Total fair value
Investment securities available-for-sale:
Obligations of U.S. Government sponsored
agencies	$	--	$	15,128	$	--	$	15,128
Municipal obligations		--		48,281		--		48,821
Mortgage-backed securities of U.S.
Government sponsored agencies		--		30,630		--		30,630
Other securities		--		2,908		--		2,908
Total assets measured fair value on a
recurring basis	$	--	$	96,947	$	--	$	96,947

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

18

Impaired loans - Loans that Central Jersey Bank, N.A. has measured impairment generally based on fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included at Level III fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other Real Estate Owned – Real estate owned is adjusted to fair value less estimated selling costs upon transfer of the loans to real estate owned.  Subsequently, real estate owned assets are carried at the lower of carrying value or fair value.  Fair value is based upon independent market prices, appraised values of collateral or management’s estimation of the value of the collateral.  These assets are included as Level III fair values.

The following tables summarize financial assets measured at fair value on a nonrecurring basis at September 30, 2010 and December 31, 2009, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	At September 30, 2010
	Level I		Level II		Level III		Total fair value
Impaired loans	$	--	$	--	$	12,564	$	12,564
Other real estate owned		--		--		500		500
Servicing rights		--		--		405		405
Total assets measured fair value on a
nonrecurring basis	$	--	$	--	$	13,469	$	13,469

	At December 31, 2009
	Level I		Level II		Level III		Total fair value
Impaired loans	$	--	$	--	$	15,055	$	15,055
Other real estate owned		--		--		1,055		1,055
Servicing rights		--		--		289		289
Total assets measured fair value on a
nonrecurring basis	$	--	$	--	$	16,399	$	16,399

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the Consolidated Statements of Financial Condition for cash and short-term instruments approximate those assets’ fair values.

Investment Securities

The fair value of investment securities available-for-sale (carried at fair value) and held-to-maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level I), or matrix pricing (Level II), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific investment securities but rather by relying on the investment securities’ relationship to other benchmark quoted prices. For certain investment securities which are not traded in active markets or are

19

subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or nontransferability, and such adjustments are generally based on available market evidence (Level III).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level III investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level III investments.

Loans Receivable (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the dates of the Consolidated Statements of Financial Condition that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Loans Held for Sale (Carried at Lower of Cost or Fair Value)

The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices.  If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Servicing Rights (Carried at Lower of Cost or Fair Value)

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income.  The valuation incorporates assumptions that market participants would use in estimating future net servicing income.  The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness.

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates the fair value of such interest receivable and interest payable.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings (Carried at Cost)

Fair values of FHLBNY advances are estimated using a discounted cash flow analysis, based on quoted prices for new FHLBNY advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

Subordinated Debt (Carried at Cost)

The fair value of subordinated debentures is estimated by discounting the estimated future cash flows, using market discount rates of financial instruments with similar characteristics, terms and remaining maturity.

20

Off-Balance Sheet Financial Instruments (Disclosed at Notional Amounts)

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.

Limitations

Fair value estimates were made at September 30, 2010 and December 31, 2009, based upon pertinent market data and relevant information on each financial instrument.  These estimates do not include any premium or discount that could result from an offer to sell the Company’s entire holdings of a particular financial instrument or category thereof at one time. Since no market exists for a substantial portion of the Company’s financial instruments, fair value estimates were necessarily based on judgments with respect to future loss experience, current economic conditions, risk assessments of various financial instruments involving a myriad of individual borrowers, and other factors.  Given the subjective nature of these estimates, the uncertainties surrounding them and other matters of significant judgment t hat must be applied, these fair value estimations cannot be calculated with precision.  Modifications in such assumptions could meaningfully alter these estimates.  Since these fair value approximations were made solely for the financial instruments included in the Consolidated Statements of Financial Condition at September 30, 2010 and December 31, 2009, no attempt was made to estimate the value of anticipated future business or the value of non-financial statement assets or liabilities.  Furthermore, certain tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates.

The estimated fair values of the Company’s financial instruments were as follows at September 30, 2010 and December 31, 2009 (dollars in thousands):

	September 30, 2010				December 31, 2009
	Carrying amount		Fair value		Carrying amount		Fair value
Financial Assets:
Cash and cash equivalents	$	46,310	$	46,310	$	78,315	$	78,315
Investment securities available-for-sale		139,607		139,607		96,947		96,947
Investment securities held-to-maturity		29,169		29,802		7,217		7,462
Loans, net		351,022		350,007		369,474		377,183
Servicing rights		405		405		289		289
Restricted stock		3,153		3,153		3,750		3,750
Accrued interest receivable		1,743		1,743		2,285		2,285
Financial Liabilities:
Deposits		473,330		466,254		467,878		452,193
Borrowings		47,151		47,886		47,575		48,655
Accrued interest payable		163		163		231		231
Subordinated debentures		5,155		1,804		5,155		1,804

Note 13.  New Accounting Standards

FASB ASU 2010-20

In July 2010, the FASB issued Accounting Standards Update No. 2010-20 which requires new disclosures that provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  This update requires that an entity provide disclosures on a disaggregated basis.  This update defines the two levels of disaggregation as

21

portfolio segment and class of financing receivable.  A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses.  Classes of financing receivables generally are a disaggregation of a portfolio segment.  This update also requires an entity to disclose credit quality indicators, past due information, and modifications of its financing receivables.  Enhanced disclosure requirements are effective for interim and annual reporting periods ending on or after December 15, 2010. The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

FASB ASU 2010-06

In February 2010, the FASB issued guidance now codified as ASU 2010-06Topic 820, “Fair Value Measurements and Disclosures.”  This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurements as set forth in Codification Subtopic 820-10.  The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting.  Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

· A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

· In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

· For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

· A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  Early adoption is permitted.   The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.  See Note 12, Fair Value Measurements, for these additional disclosures.

Note 14.  Proposed Merger

On May 25, 2010, Central Jersey Bancorp, Central Jersey Bank, N.A., Kearny and Kearny Federal Savings Bank entered into a Merger Agreement (the “Merger Agreement”) pursuant to which Central Jersey Bancorp will merge with a wholly-owned subsidiary of Kearny.  Immediately thereafter, Central Jersey Bank, N.A. will merge with and into Kearny Bank, and Central Jersey Bank, N.A. will operate as a division of Kearny Bank for at least 18 months after the closing.  The Merger Agreement was approved by the shareholders of Central Jersey Bancorp at a special meeting of the shareholders held on September 14, 2010.  Regulatory approval for the merger was obtained from the Office of Thrift Supervision on October 20, 2010.  Pursuant to the terms of the Merger Agreement, Central Jersey Bancorp share holders will receive $7.50 in cash for each share of Central Jersey Bancorp common stock held by them.  In addition, each option to acquire Central Jersey Bancorp common stock will be cancelled in exchange for a cash payment equal to the positive difference, if any, between $7.50 and the exercise price of the option.  It is expected that the merger will be completed in the fourth calendar quarter of 2010.

22

Item 2.            Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis is intended to provide information about the Company’s financial condition as of September 30, 2010 and results of operations for the three and nine months ended September 30, 2010, and 2009.  The following information should be read in conjunction with the Company’s unaudited consolidated financial statements for the three and nine months ended September 30, 2010 and 2009, including the related notes thereto, contained elsewhere in this document.

Critical Accounting Policies

“Management's Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures found elsewhere in this quarterly report on Form 10-Q, are based upon the Company's unaudited consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these unaudited consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  Note 1 to Central Jersey Bancorp’s audited consolidated financial statements for the year ended December 31, 2009, included with Central Jersey Bancorp’s annual report on Form 10-K for the year ended December 31, 2009, contains a summary of the Company's significant accounting policies.  Mana gement believes the Company's policy with respect to the methodology for the determination of the allowance for loan losses and the impairment of investment securities requires management to make difficult and subjective judgments that often require assumptions or estimates about uncertain matters.  Changes in these judgments, assumptions or estimates could materially impact results of operations.  This critical policy and its application are periodically reviewed with Central Jersey Bancorp’s Audit Committee and its Board of Directors.

Additional critical accounting policies relate to judgments about other asset impairments, including core deposit intangible, investment securities, servicing rights and deferred tax assets.

Other intangible assets are specifically identified intangible assets created from a business combination. Core deposit intangibles represent the value of checking, savings and other acquired, low cost deposits. Core deposit intangibles are amortized over the lesser of the estimated lives of deposit accounts or ten years on an accelerated basis.  Decreases in deposit lives may result in increased amortization and/or an impairment charge.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks with original maturities of three months or less and overnight federal funds sold.  Federal funds sold are generally sold for one-day periods.

FASB ASC Topic 320, “Investments-Debt and Equity Securities,” requires that investment securities be categorized as “held to maturity,” “trading securities” or “available-for-sale,” based on management’s intent as to the ultimate disposition of each security.  FASB ASC Topic 320 allows debt securities to be classified as “held to maturity” and reported in consolidated financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity.   When an entity does not intend to sell a debt security, and it is more likely than not that the entity will not have to sell the debt security before recovery of its cost basis, it wil l recognize the credit component of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income.  Such securities are stated at cost, adjusted for amortization of premiums and accretion of discounts over the estimated remaining lives of the investment securities utilizing the level-yield method.Central Jersey Bank, N.A. does not currently use or maintain a trading account.  Investment securities not classified as “held to maturity” are classified as “available-for-sale.”  These securities are reported at fair

23

value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity.  Investment securities available-for-sale include investment securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes.  Investment securities available-for-sale are carried at estimated fair value.  Gains and losses on sales of investment securities are based on the specific identification method and are accounted for on a trade date basis.

On a quarterly basis, Central Jersey Bank, N.A. evaluates investment securities for other-than-temporary impairment.  For individual investment securities classified as either available-for-sale or held-to-maturity, a determination is made as to whether a decline in fair value below the amortized cost basis is other than temporary.  When an entity does not intend to sell a debt security, and it is more likely than not that the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of the debt security in earnings and the remaining portion in other comprehensive income.  For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncred it portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.   After evaluation, as of September 30, 2010, Central Jersey Bank, N.A. noted no other-than-temporary impairment issues.

Loans are stated at unpaid principal balances, less unearned income and deferred loan fees and costs.  Interest on loans is credited to operations based upon the principal amount outstanding.  Loan origination and commitment fees and certain direct loan origination costs are deferred, and the net amount is amortized over the estimated life of the loan as an adjustment to the loan’s yield using the level-yield method.

A loan is considered impaired when, based on current information and events, it is probable that Central Jersey Bank, N.A. will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans are measured based on the present value of expected future cash flows, at the loan’s observable market price, or the fair value of the underlying collateral, if the loan is collateral dependent.  Conforming residential mortgage loans, home equity and second mortgages and loans to individuals, are excluded from the definition of impaired loans as they are characterized as smaller balance, homogeneous loans and are collectively evaluated.

The accrual of income on loans, including impaired loans, is generally discontinued when a loan becomes more than 90 days delinquent as to principal or interest or when other circumstances indicate that collection is questionable, unless the loan is well secured and in the process of collection.  Income on non-accrual loans, including impaired loans, is recognized only in the period in which it is collected, and only if management determines that the loan principal is fully collectible.  Loans are returned to an accrual status when a loan is brought current as to principal and interest and reasons for doubtful collection no longer exist.

A loan is considered past due when a payment has not been received in accordance with the contractual terms.  Generally, commercial loans are placed on non-accrual status when they are 90 days past due unless they are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal and interest is in doubt.  Commercial loans are generally written down after an analysis is completed which indicates that collectibility of the full principal balance is in doubt.  Consumer loans are generally written down after they become 120 days past due.  Mortgage loans are not generally placed on a non-accrual status unless the value of the real estate has deteriorated to the point that a potential loss of principa l or interest exists.  Subsequent payments are credited to income only if collection of principal is not in doubt.  If principal and interest payments are brought contractually current and future collectibility is reasonably assured, loans are returned to accrual status.  Mortgage loans are generally written down when the value of the underlying collateral does not cover the outstanding principal balance.  Loan origination and commitment fees less certain costs are deferred and the net amount amortized as an adjustment to the related loan’s yield.  Loans held-for-sale are

24

recorded at the lower of aggregate cost or fair value.

The ALL is based upon the Interagency Policy Statement on the Allowance for Loan and Lease Losses issued jointly by the federal banking agencies on December 13, 2006 (OCC Bulletin 2006-47) and management’s evaluation of the adequacy of the allowance, including an assessment of:  (a) known and inherent risks in the loan portfolio; (b) the size and composition of the loan portfolio; (c) actual loan loss experience; (d) the level of delinquencies; (e) the individual loans for which full collectibility may not be assured; (f) the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans; and (g) the current economic and market conditions.  Although management uses the best information available, the level of the ALL remains an estimate that is subject to significan t judgment and short-term change.  Various regulatory agencies, as an integral part of their examination process, periodically review Central Jersey Bank, N.A.’s ALL.  Such agencies may require Central Jersey Bank, N.A. to make additional provisions for loan losses based upon information available to them at the time of their examination.  Furthermore, the majority of Central Jersey Bank, N.A.’s loans are secured by real estate in the state of New Jersey.  Accordingly, the collectibility of a substantial portion of the carrying value of Central Jersey Bank, N.A.’s loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the central New Jersey area experience an adverse economic climate.  Future adjustments to the ALL may be necessary due to economic, operating, regulatory and other conditions beyond Central Jersey Bank, N.A.’s control.  Management b elieves that the ALL is adequate as of September 30, 2010.

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other non-interest expenses.

Income taxes are accounted for under the asset and liability method.  Current income taxes are provided for based upon amounts estimated to be currently payable, for both federal and state income taxes.  Deferred federal and state tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial statement and tax basis of existing assets and liabilities.  Deferred tax assets are recognized for future deductible temporary differences and tax loss carry forwards if their realization is “more-likely-than-not.”  The effect of a change in the tax rate on deferred taxes is recognized in the period of the enactment date.

Comprehensive income is segregated into net income and other comprehensive income.  Other comprehensive income includes items previously recorded directly to equity, such as unrealized gains and losses on securities available-for-sale.  Comprehensive income is presented in the Consolidated Statements of Changes in Shareholders’ Equity.

Central Jersey Bank, N.A.’s operations are solely in the financial services industry and include traditional banking and other financial services.  Central Jersey Bank, N.A. operates primarily in the geographical region of central New Jersey.  Management makes operating decisions and assesses performance based on an ongoing review of Central Jersey Bank, N.A.’s consolidated financial results.  Therefore, Central Jersey Bancorp has a single operating segment for financial reporting purposes.

Central Jersey Bank, N.A. originates SBA loans and typically sells the U.S. Government guaranteed portion of the outstanding loan balance to investors, with servicing retained.  Servicing rights fees, which are usually based on a percentage of the outstanding principal balance of the loan, are recorded for servicing functions.  Central Jersey Bank, N.A. accounts for its transfers and servicing of financial assets in accordance with FASB ASC Topic 860, “Transfers and Servicing.”  Central Jersey Bank, N.A. records servicing rights based on the fair values at the date of sale.

25

The determination of whether deferred tax assets will be realizable is predicated on estimates of future taxable income.  Such estimates are subject to management’s judgment.  A valuation reserve is established when management is unable to conclude that it is more likely than not that it will realize deferred tax assets based on the nature and timing of these items.

Overview

Central Jersey Bancorp, the parent company of Central Jersey Bank, N.A., reported net income and net income available to common shareholders of $664,000 and $479,000, respectively, for the three months ended September 30, 2010, as compared to net income and net income available to common shareholders of $920,000 and $734,000, respectively, for the same period in 2009.  For the nine months ended September 30, 2010, Central Jersey Bancorp reported net income and net income available to common shareholders of $2.6 million and $2.0 million, respectively, as compared to a net loss and a net loss available to common shareholders of $25.1 million and $25.6 million, respectively, for the same period in 2009.

The net income available to common shareholders figures take into account $141,000 and $423,000, respectively, in preferred stock dividends paid to the U.S.  Department of the Treasury as part of the Capital Purchase Program (“CPP”) for the three and nine months ended September 30, 2010 and 2009, and $45,000 in related preferred stock discount accretion for each of the three months ended September 30, 2010 and 2009 and $135,000 in related preferred stock discount accretion for each of the nine months ended September 30, 2010 and 2009.  The comparative decrease in net income for the three months ended September 30, 2010 is primarily attributable to lower than anticipated interest income resulting from lower than anticipated average loan balances and the redeployment of cash generated from the amortization and maturity of investment securities at lower than anticipated yields coupled with increased operational expenses due to merger related expenses. The comparative increase in net income for the nine months ended September 30, 2010 is primarily attributable to the one-time goodwill impairment charge of $27.0 million recorded during the nine months ended September 30, 2009.  Additionally, there was no loan loss provision recorded for the three and nine months ended September 30, 2010, as compared to $1.1 million and $4.5 million, respectively, for the same periods in 2009.  There was no required provision for loan losses primarily due to a $19.1 million decrease in gross loan balances from December 31, 2009 and improved asset quality trends.  Basic and diluted earnings per common share were both $0.05 for the three months ended September 30, 2010.   Basic and diluted earnings per common share were $0.22 and $0.21, respectively, for the nine months ended September 3 0, 2010.   Basic and diluted income (loss) per common share was $0.08 and ($2.91), respectively, for the three and nine months ended September 30, 2009.

Total assets of $589.4 million at September 30, 2010 were comprised primarily of $351.0 million in net loans, $168.8 million in investment securities and $46.3 million in cash and cash equivalents, as compared to total assets of $577.7 million at December 31, 2009, which primarily consisted of $369.5 million in net loans, $104.2 million in investment securities and $78.3 million in cash and cash equivalents.  Total assets at September 30, 2010 were funded primarily through deposits totaling $473.3 million and borrowings totaling $47.2 million, as compared to $467.9 million and $47.6 million, respectively, at December 31, 2009.

Results of Operations

General

Central Jersey Bancorp’s principal source of revenue is derived from its bank subsidiary’s net interest income, which is the difference between interest income on earning assets and interest expense on deposits and borrowed funds.  Interest-earning assets consist principally of loans, investment securities and federal funds sold, while the sources used to fund such assets consist primarily of deposits and borrowings.  Central Jersey Bancorp’s net income is also affected by its bank subsidiary’s provision for loan losses, non-interest income and non-interest expenses.  Non-interest income consists primarily of service charges and fees and

26

the gain on sale of securities available-for-sale.  Non-interest expenses consist primarily of salaries and employee benefits, occupancy costs, data processing fees and other operating related expenses.

For the Three Months Ended September 30, 2010 and 2009

Net Interest Income

Net interest income was $4.7 million for each of the three months ended September 30, 2010 and 2009  Net interest income for the three months ended September 30, 2010 and 2009 was comprised primarily of $5.2 million and $5.4 million, respectively, in interest and fees on loans, $824,000 and $1.2 million, respectively, in interest on investment securities and $40,000 and $61,000, respectively, in interest income on federal funds sold and due from banks, less interest expense on deposits of $1.1 million and $1.7 million, respectively, interest expense on borrowed funds of $145,000 and $236,000, respectively, and interest expense on subordinated debentures of $43,000.

For the three months ended September 30, 2010, the average yield on interest-earning assets was 4.05%, as compared to 5.87% for the same period in 2009.  The average cost of deposits and interest-bearing liabilities for the three months ended September 30, 2010 was 1.17%, as compared to an average cost of 2.66% for the same period in 2009.  The decrease in the average yield on interest-earning assets for the three months ended September 30, 2010 was primarily due to decreasing average loan balances and lower reinvestment yields on cash flows derived from maturing and amortizing investment securities.  The decrease in the average cost of deposits and interest-bearing liabilities for the three months ended September 30, 2010 was primarily due to across-the-board reductions in deposit rates, which were reflec tive of the local banking market.  The average net interest margin for the three months ended September 30, 2010 was 3.34%, as compared to 3.38% for the same period in 2009.

Provision for Loan Losses

For the three months ended September 30, 2010, there was no provision for loan losses, as compared to $1.1 million recorded for the same period in 2009.  There was no required provision for loan losses due primarily to improved asset quality and decreasing loan portfolio balances.  The recorded provision for loan losses for the three months ended September 30, 2009 was due to the credit deterioration of certain commercial loans as a result of the rapid decline of general economic conditions.

Non-Interest Income

Non-interest income, which consists of service charges on deposit accounts, income from bank owned life insurance, gains on the sale of investment securities available-for-sale, and other income, was $557,000 for the three months ended September 30, 2010, as compared to $1.5 million for the same period in 2009.  Of this amount, there were gains from the sale of SBA loans totaling $55,000 for the three months ended September 30, 2010, as compared to $297,000 in gains for the same period in 2009.  There were no gains on the sale of securities available-for-sale during the three months ended September 30, 2010, as compared to the $731,000 gain for the same period in 2009.

Non-Interest Expense

Non-interest expense was $4.3 million for the three months ended September 30, 2010, as compared to $4.1 million for the same period in 2009.  Non-interest expense generally includes costs associated with employee salaries and benefits, occupancy expenses, data processing fees, FDIC insurance premiums, core deposit intangible amortization and other operating expenses.  In addition, $110,000 in merger-related expenses incurred in connection with the pending merger with Kearny were included in non-interest expense for the three months ended September 30, 2010.

27

The table below presents non-interest expense, by major category, for the three months ended September 30, 2010 and 2009 (in thousands):

	Three months ended September 30,
Non-Interest Expense	2010		2009
Salaries and employee benefits	$	2,061	$	1,964
Net occupancy expenses		540		487
Outside service fees		273		223
Data processing fees		259		245
Premises and equipment depreciation		220		262
FDIC deposit insurance premiums		203		150
Legal fees		150		239
Core deposit intangible amortization		86		103
Audit and tax fees		81		25
Advertising and marketing expenses		54		49
Printing, stationery and supplies		31		28
Other professional services		16		10
Other operating expenses		332		283
Total	$	4,306	$	4,068

Income Tax Expense

The Company recorded an income tax expense of $284,000 on income before taxes of $948,000 for the three months ended September 30, 2010, resulting in an effective tax rate of 26.2% for such three month period.  The Company recorded an income tax expense of $136,000 on income before taxes of $1.1 million for the three months ended September 30, 2009, resulting in an effective tax rate of 12.9% for such three month period.  The increase in income tax expense and effective tax rate is due to a lower amount of federal tax-free interest income derived from municipal bond and note obligations.  In addition, $110,000 in merger-related expenses incurred during the three months ended September 30, 2010 in connection with the pending merger with Kearny are non-deductible for tax purposes, resulting in an incremental tax impact of $6,000.

For the Nine months Ended September 30, 2010 and 2009

Net Interest Income

Net interest income was $14.2 million for the nine months ended September 30, 2010, an increase of $394,000 over the $13.8 million earned for the same period in 2009.  Net interest income for the nine months ended September 30, 2010 and 2009 was comprised primarily of $15.6 million and $15.4 million, respectively, in interest and fees on loans, $2.4 million and $4.6 million, respectively, in interest on investment securities and $193,000 and $198,000, respectively, in interest income on federal funds sold and due from banks, less interest expense on deposits of $3.5 million and $5.6 million, respectively, interest expense on borrowed funds of $439,000 and $730,000, respectively, and interest expense on subordinated debentures of $121,000 and $150,000, respectively.

For the nine months ended September 30, 2010, the average yield on interest-earning assets was 3.34%, as compared to 4.98% for the same period in 2009.  The average cost of deposits and interest-bearing liabilities for the nine months ended September 30, 2010 was 0.89%, as compared to an average cost of 1.90% for the same period in 2009.  The decrease in the average yield on interest-earning assets for the nine months ended September 30, 2010 was primarily due to decreasing average loan balances and lower reinvestment yields on cash flows derived from maturing and amortizing investment securities.  The decrease in the average cost of deposits and interest-bearing liabilities for the nine months ended September 30, 2010 was primarily due

28

to across-the-board reductions in deposit rates, which were reflective of the local banking market.  The average net interest margin for the nine months ended September 30, 2010 was 3.44%, as compared to 3.35% for the same period in 2009.

Provision for Loan Losses

For the nine months ended September 30, 2010, there was no provision for loan losses, as compared to $4.5 million recorded for the same period in 2009.  There was no required provision for loan losses due primarily to improved asset quality and decreasing loan portfolio balances.  The recorded provision for loan losses for the nine months ended September 30, 2009 was due to the credit deterioration of certain commercial loans as a result of the rapid decline of general economic conditions.

Non-Interest Income

Non-interest income, which consists of service charges on deposit accounts, income from bank owned life insurance, gains on the sale of investment securities available-for-sale, and other income, was $2.0 million for the nine months ended September 30, 2010, as compared to $4.5 million for the same period in 2009.  Of this amount, there were gains from the sale of SBA loans totaling $654,000 for the nine months ended September 30, 2010, as compared to $446,000 for the same period in 2009.  There were no gains on the sale of securities available-for-sale during the nine months ended September 30, 2010, as compared to $2.8 million in gains for the same period in 2009.

Non-Interest Expense

Non-interest expense was $12.3 million for the nine months ended September 30, 2010, as compared to $39.1 million for the same period in 2009.  This significant decrease in non-interest expense is attributable to the one time goodwill impairment charge of $27.0 million recorded during the second quarter of 2009.  Non-interest expense generally includes costs associated with employee salaries and benefits, occupancy expenses, data processing fees, FDIC insurance premiums, core deposit intangible amortization and other operating expenses. In addition, $324,000 in merger-related expenses incurred in connection with the pending merger with Kearny were included in non-interest expense for the nine months ended September 30, 2010.  Further, for the same nine month period, $389,000 in accrued expense related to t he granting of stock appreciation rights in 2006 was reversed.

29

The table below presents non-interest expense, excluding the $27.0 million non-cash goodwill impairment charge, by major category, for the nine months ended September 30, 2010 and 2009 (in thousands):

	Nine months ended September 30,
Non-Interest Expense	2010		2009
Salaries and employee benefits	$	5,703	$	5,774
Net occupancy expenses		1,614		1,422
Outside service fees		789		603
Data processing fees		773		709
FDIC deposit insurance premiums		598		580
Premises and equipment depreciation		580		540
Legal fees		357		429
Other professional services		209		87
Core deposit intangible amortization		259		310
Advertising and marketing expenses		183		166
Printing, stationery and supplies		115		140
Audit and tax fees		156		228
Other operating expenses		978		1,117
Total	$	12,314	$	12,105

Income Tax Expense (Benefit)

The Company recorded an income tax expense of $1.3 million on income before taxes of $3.9 million for the nine months ended September 30, 2010, resulting in an effective tax rate of 33.8% for such nine month period.  The Company recorded an income tax benefit of ($207,000) on a loss before taxes of $25.3 million for such nine month period.  Excluding the impact of the goodwill impairment charge, which is non tax-deductible, the Company’s effective tax benefit rate was (12.4%) for the nine months ended September 30, 2009.  The 2009 income tax benefit was due to the utilization of capital tax loss carry-forwards which resulted from the 2007 balance sheet restructuring initiative. As a result of the restructuring, a deferred tax valuation allowance was established against deferred tax assets generated f rom the capital tax loss carry-forwards.  Since $1.1 million of the $1.8 million in gains from the sale of available-for-sale investment securities recorded during the nine months ended June 30, 2009 were realized in CJB Investment Company, a wholly-owned subsidiary of Central Jersey Bank, N.A., these gains are considered capital gains and are permitted to be offset against the remaining capital tax loss carry-forwards.  The federal income tax benefit was primarily the result of the reversal of the deferred tax valuation allowance which totaled approximately $369,000. In addition, $324,000 in merger-related expenses incurred during the nine months ended September 30, 2010 in connection with the pending merger with Kearny are non-deductible for tax purposes, resulting in an incremental tax impact of $110,000.

Financial Condition

Cash and Cash Equivalents

Cash and cash equivalents were $46.3 million at September 30, 2010, a decrease of $32.0 million from the December 31, 2009 total of $78.3 million.The decrease in liquidity is due primarily to the timing of cash flows related to Central Jersey Bank, N.A.’s business activities and the purchase of investment securities during the three and nine months ended September 30, 2010.

30

Investment Portfolio

Investment securities totaled $168.8 million at September 30, 2010, an increase of $64.6 million, or 62.0%, over the December 31, 2009 total of $104.2 million.  The increase was primarily due to the purchase of $25.9 million of government-sponsored agency securities held-to-maturity, $5.5 million of mortgage-backed securities held-to-maturity, $15.0 million of government-sponsored agency securities available-for-sale, and $85.8 million of municipal bond and note obligations.  These purchases were partly offset by maturities and calls of $15.9 million of government-sponsored agency securities, $39.9 million of municipal bond and note obligations and principal paydowns of $12.5 million.  In addition, at September 30, 2010, the net change of the unrealized gain on available-for-sale securities increased by $7 55,000 from $1.6 million on December 31, 2009 to $2.4 million on September 30, 2010.

Loan Portfolio

Loans, net of the allowance for loan losses, totaled $351.0 million at September 30, 2010, a decrease of $18.5 million, or 4.9%, from the $369.5 million balance at December 31, 2009.  Gross loans totaled $360.0 million at September 30, 2010, a decrease of $19.1 million, or 5.1%, from the $379.1 million balance at December 31, 2009.  The decrease in loan balances was due primarily to principal pay downs of commercial real estate loans, consumer home equity loans and lines of credit during the period.  Organic balance sheet growth remains challenging as incremental loan volume is somewhat constrained by lack of demand caused by overall sluggish economic activity.

Loan portfolio composition remained fairly consistent at September 30, 2010, with gross commercial loans totaling $292.5 million, or 81.4%, of total gross loans outstanding at September 30, 2010, as compared to $309.1 million, or 81.5%, at December 31, 2009.

Criticized/classified assets as of September 30, 2010 and December 31, 2009 are summarized as follows (in thousands):

	2010		2009
Special Mention	$	13,501	$	11,770
Substandard		21,327		23,306
Doubtful		132		5,052
Loss		--		109
Total criticized/classified assets	$	34,960	$	40,237

The total balance of criticized/classified assets at September 30, 2010 and December 31, 2009 totaled $34.9 million and $40.2 million, respectively. The $5.3 million decrease was representative of the changes in the risk profile of the loan portfolio.  Loans which were risk rated “special mention” totaled $13.5 million at September 30, 2010, an increase of $1.7 million from the $11.8 million total at December 31, 2009.  Loans which were risk rated “substandard” totaled $21.3 million at September 30, 2010, a decrease of $2.0 million from the $23.3 million total at December 31, 2009.  Loans which were risk rated “doubtful” totaled $132,000 at September 30, 2010, a $4.9 million decrease from the $5.0 million total at December 31, 2009. There were no loans risk rated “ loss” at September 30, 2010, compared to $109,000 at December 31, 2009.  A majority of the risk rating changes occurred in the commercial mortgage loan portfolio.

Non-Performing Loans

A loan is considered to be non-performing if it (1) is on a non-accrual basis, (2) is past due 90 days or more and still accruing interest, or (3) has been renegotiated to provide a reduction or deferral of interest or principal because of a weakening in the financial position of the borrower.  A loan, which is past due

31

90 days or more and still accruing interest, remains on accrual status only where it is both adequately secured as to principal and is in the process of collection.  Central Jersey Bank, N.A. had non-performing loans totaling $9.1 million and $8.6 at September 30, 2010 and December 31, 2009, respectively.  Additionally, Central Jersey Bank, N.A. had $1.9 million and $1.1 million in other real estate owned (sometimes referred to herein as “OREO”) properties as of September 30, 2010 and December 31, 2009, respectively.  At September 30, 2010, there were no commitments to lend additional funds to borrowers whose loans are on non-accrual.

Central Jersey Bancorp’s policy for interest income recognition on non-accrual loans is to recognize income on currently performing restructured loans under the accrual method.  The Company recognizes income on non-accrual loans under the accrual basis when the principal payments on the loans become current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company.  If these factors do not exist, the Company does not recognize income.  There was no income recognized on non-accrual loans during the three or nine months ended September 30, 2010.  Total cash collected on non-accrual loans during the three and nine months ended September 30, 2010 was $84,000 and $169,000, respectively, as compared to $44,000 and $189,000, respectively, for the same periods in 2009, all of which was credited to the principal balances outstanding.

If the non-accrual loans had performed in accordance with their original terms, interest income would have increased by $113,000 and $302,000, respectively, for the three and nine months ended September 30, 2010, as compared to $109,000 and $361,000, respectively, for the same periods in 2009.  At September 30, 2010, there were no commitments to lend additional funds to borrowers whose loans were on non-accrual status.

Impaired Loans

When necessary, Central Jersey Bank, N.A. performs individual loan reviews in accordance with FASB ASC Topic 310 to determine whether any individually reviewed loans are impaired and, if impaired, measures a valuation allowance allocation in accordance with FASB ASC Topic 310.  A loan is recognized as impaired when it is probable that principal and/or interest are not collectible in accordance with the loan’s contractual terms.  The Company considers loans on non-accrual status or risk rated “8” or higher as impaired and automatically subject to a FASB ASC Topic 310 review.  In addition, any other loan that management considers possibly impaired due to deteriorating conditions or for any other reasons, is, at management’s discretion, subject to a FASB ASC Topic 310 review.

At September 30, 2010, the Company had impaired loans totaling $18.5 million, as compared to $23.2 million at December 31, 2009.  The decrease in impaired loans was due primarily to the charge-off of $730,000 in impaired loans during the nine months ended September 30, 2010 and the migration of one construction loan, with a balance of $3.5 million, to the general reserve pool as a result of obtaining additional collateral and a material principal pay down.  The impaired loans that were charged-off were considered permanently impaired and were evaluated and charged-off in accordance with FASB ASC Topic 310.  At September 30, 2010, specific reserves for impaired loans totaled $3.3 million, as compared to $4.1 million at December 31, 2009.

32

Central Jersey Bank, N.A.

Troubled Asset and Delinquency Trends

(in thousands)													Change 12/31/09-9/30/10						Change 6/30/10-9/30/10
CATEGORY	12/31/2009			3/31/2010			6/30/2010			9/30/2010			$			%			$			%
30-89 Day	$	6,912		$	7,008		$	3,857		$	2,347		$	(4,565	)		-66.04	%	$	(1,510	)		-39.15	%
90 Days +	$	775		$	-		$	-		$	-		$	(775	)		-100.00	%	$	-			0.00	%
Total Delinquencies	$	7,687		$	7,008		$	3,857		$	2,347		$	(5,340	)		-69.47	%	$	(1,510	)		-39.15	%
																			$	-
Non-Accrual Loans (includes one TDR)	$	7,868		$	8,088		$	8,704		$	9,114		$	1,246			15.84	%	$	410			4.71	%
Non-Performing Loans (90+; Non-Accrual)	$	8,643		$	8,088		$	8,704		$	9,114		$	471			5.45	%	$	410			4.71	%
OREO	$	1,055		$	1,055		$	1,071		$	1,942		$	887			84.08	%	$	871			81.33	%
Total Non-Performing Loans and OREO	$	9,698		$	9,143		$	9,775		$	11,056		$	1,358			14.00	%	$	1,913			19.57	%
Total Delinquencies, Non-Accrual and OREO	$	16,610		$	16,151		$	13,632		$	13,403		$	(3,207	)		-19.31	%	$	(229	)		-1.68	%
Criticized Loans (Special Mention)	$	11,770		$	8,213		$	12,403		$	13,501		$	1,731			14.71	%	$	1,098			8.85	%
Classified Loans	$	28,467		$	24,366		$	20,729		$	21,460		$	(7,007	)		-24.61	%	$	731			3.53	%
Total Criticized/Classified Loans	$	40,237		$	32,579		$	33,132		$	34,961		$	(5,276	)		-13.11	%	$	1,829			5.52	%
ALL	$	9,613		$	9,300		$	8,934		$	8,939		$	(674	)		-7.01	%	$	5			0.06	%
Total Loans	$	379,087		$	370,530		$	362,455		$	359,960		$	(19,127	)		-5.05	%	$	(2,495	)		-0.69	%
Total Assets	$	577,658		$	571,295		$	576,846		$	589,434		$	11,776			2.04	%	$	12,588			2.18	%
Tier 1 Capital (bank) *	$	45,801		$	56,508		$	58,500		$	58,997		$	13,196			28.81	%	$	497			0.85	%
Net $ Recoveries (Charge-offs) (quarter)	$	(769	)	$	(313	)	$	(365	)	$	5		$	774			-100.65	%	$	370			-101.37	%
Total Delinquencies / Total Loans		2.03	%		1.89	%		1.06	%		0.65	%
Total Non-Accrual Loans / Total Loans		2.08	%		2.18	%		2.40	%		2.53	%
Total Delinquencies + NA Loans / Total Loans		4.10	%		4.07	%		3.47	%		3.18	%
ALL / Total Loans		2.54	%		2.51	%		2.46	%		2.48	%
ALL / Non-Performing Loans		111.2	%		115.0	%		102.6	%		98.1	%
ALL / Non-Performing Loans and OREO		99.1	%		101.7	%		91.4	%		80.9	%
Non-Performing Loans / Total Loans		2.3	%		2.2	%		2.4	%		2.5	%
Non-Performing Loans and OREO / Total Assets		1.7	%		1.6	%		1.7	%		1.9	%
Criticized Loans/ Total Loans		3.1	%		2.2	%		3.4	%		3.8	%
Classified Loans/ Total Loans		7.5	%		6.6	%		5.7	%		6.0	%
Criticized + Classified Loans / Total Loans		10.6	%		8.8	%		9.1	%		9.7	%
Criticized Loans / Tier 1 Capital + ALL		21.2	%		12.5	%		18.4	%		19.9	%
Classified Loans / Tier 1 Capital + ALL		51.4	%		37.0	%		30.7	%		31.6	%
Criticized + Classified Loans / Tier 1 Capital + ALL		72.6	%		49.5	%		49.1	%		51.5	%
Net $ Recoveries (Charge-off's) / Total Loans		-0.20	%		-0.08	%		-0.10	%		0.00	%

* $11.3 million of CPP capital is included in Tier 1 Capital at the bank level beginning with the three-months ended March 31, 2010.

Asset Quality

· Delinquencies, which totaled $2.4 million at September 30, 2010, decreased by $1.5 million, or 39.2%, on a linked quarter basis, from the $3.9 million total reported at June 30, 2010.  The decrease was due primarily to two-related $1.7 million commercial loans which were formerly delinquent and brought current by quarter end.  Delinquencies have decreased from the December 31, 2009 total of $7.7 million by $5.3 million at September 30, 2010, or 69.5%.  From the recorded highpoint of $13.2 million at September 30, 2009, total delinquencies have decreased by $10.8 million, or 82.2%, as of September 30, 2010.

· Non-accrual loans increased by $410,000, or 4.7%, on a linked quarter basis, from $8.7 million at June 30, 2010 to $9.1 million at September 30, 2010.  The increase was primarily due to the addition of seven loans totaling $1.1 million to non-accrual status, which were partly offset by one loan totaling $500,000 which was transferred from non-accrual to OREO.  Non-accrual loans have increased from the December 31, 2009 total of $7.9 million by $1.2 million at September 30, 2010, or 15.8%.

33

· The aggregate of total delinquencies, non-accrual loans, and OREO decreased by $229,000, or 1.7%, on a linked quarter basis, from $13.6 million at June 30, 2010 to $13.4 million at September 30, 2010.  The aggregate of total delinquencies, non-accrual loans, and OREO decreased by $3.2 million, or 19.3%, from $16.6 million at December 31, 2009.  From the highpoint of $21.6 million at September 30, 2009, the aggregate of total delinquencies, non-accrual loans, and OREO have decreased by $8.2 million, or 38.1%, as of September 30, 2010.

· Total criticized/classified loans increased by $1.8 million, or 5.5%, on a linked quarter basis, from $33.1 million at June 30, 2010 to $34.9 million at September 30, 2010.  The increase was due primarily to two large credits, which were downgraded from “5’ to “6”.  Total criticized/classified loans decreased by $5.3 million, or 13.1%, from $40.2 million at December 31, 2009 to $34.9 million at September 30, 2010.  From the highpoint of $41.9 million at September 30, 2009, total criticized/classified loans have decreased by $6.9 million, or 16.6%, as of September 30, 2010.

Allowance for Loan Losses and Related Provision for Loan Loss

The allowance for loan losses, which began the year 2010 at $9.6 million, or 2.54% of total loans, decreased to $8.9 million at September 30, 2010, or 2.48% of total loans.  The $674,000 decrease is due primarily to loan charge-offs totaling $730,000, which were partially mitigated by recoveries totaling $56,000.

Activity in the ALL for the nine months ended September 30, 2010 is summarized as follows (dollars in thousands):

	Nine months ended September 30, 2010
Balance, beginning of year	$	9,613
Provision charged to expense		--
Charge-offs		(730	)
Recoveries		56
Balance, end of period	$	8,939
Ratio of ALL to total loans		2.48	%

For the nine months ended September 30, 2010, there was no provision for loan losses, as compared to $4.5 million for the same period in 2009.  There was no required provision for loan losses due primarily to improved asset quality and decreasing loan portfolio balances.  The recorded provision for loan losses for the nine months ended September 30, 2009 was due to the credit deterioration of certain commercial loans as a result of the rapid decline of general economic conditions.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expense from other non-interest expense.

34

The following table represents the balance of OREO at September 30, 2010 and December 31, 2009 (in thousands):

	September 30, 2010		December 31, 2009
Other real estate owned	$	1,942	$	1,055

At December 31, 2009, two loans totaling $1.1 million were transferred to OREO and recorded at their initial fair value less cost to sell, impacting the Company’s provision for loan losses by $245,000.  For the nine months ended September 30, 2010, there was no decline in the fair value of the properties from December 31, 2009, and, therefore, no related charges to the carrying balance were required.  The OREO balance increased for the nine months ended September 30, 2010, due to the addition of one property totaling $500,000 which was recorded at its initial fair value less cost to sell.  Additionally, $412,000 was paid to obtain a first lien position on one of the properties, which was offset by a $25,000 principal pay down.

Commitments and Conditional Obligations

In the ordinary course of business to meet the financial needs of the Company’s customers, the Company is party to financial instruments with off-balance sheet risk.  These financial instruments include unused lines of credit and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements.  The contract or notional amounts of these instruments express the extent of involvement the Company has in each category of financial instruments.

The Company’s exposure to credit loss from nonperformance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  The contract or notional amount of financial instruments which represent credit risk at September 30, 2010 and December 31, 2009 is as follows (in thousands):

	September 30, 2010		December 31, 2009
Standby letters of credit	$	1,208	$	2,140
Outstanding loan and credit line commitments	$	56,260	$	67,122

Standby letters of credit are conditional commitments issued by the Company which guarantee performance by a customer to a third party.  The credit risk and underwriting procedures involved in issuing letters of credit are essentially the same as that involved in extending loan facilities to customers.  All of Central Jersey Bank, N.A.’s outstanding standby letters of credit are performance standby letters within the scope of FASB ASC Topic 952.  These are irrevocable undertakings by Central Jersey Bank, N.A., as guarantor, to make payments in the event a specified third party fails to perform under a non-financial contractual obligation.  Most of Central Jersey Bank, N.A.’s performance standby letters of credit arise in connection with lending relationships and have terms of one year or less.  The maximum potential future payments Central Jersey Bank, N.A. could be required to make equals the face amount of the letters of credit shown above.  Central Jersey Bank, N.A.’s liability for performance standby letters of credit was immaterial at September 30, 2010 and December 31, 2009.

Outstanding loan commitments represent the unused portion of loan commitments available to individuals and companies as long as there is no violation of any condition established in the contract.  Outstanding loan commitments generally have a fixed expiration date of one year or less, except for home equity loan commitments which generally have an expiration date of up to 15 years.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if any, upon

35

extension of credit is based upon management’s credit evaluation of the customer.  Various types of collateral may be held, including property and marketable securities.  The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.

Deposits

One of Central Jersey Bank, N.A.’s primary strategies is the accumulation and retention of core deposits.  Core deposits are defined as all deposits with the exception of certificates of deposits in excess of $100,000.  Deposits, at September 30, 2010, totaled $473.3 million, a decrease of $5.4 million, or 1.1%, from the December 31, 2009 total of $467.9 million.  The decrease in deposit balances was reflective of decreases in public fund deposits.

Borrowings

Borrowings typically include wholesale borrowing arrangements as well as arrangements with deposit customers of Central Jersey Bank, N.A. to sweep funds into short-term borrowings.  At September 30, 2010, borrowings included $36.0 million in bank sweep funds, $5.0 million in FHLBNYcallable advances and $6.1 million in FHLBNY fixed rate advances.  At December 31, 2009, borrowings included $26.4 million in bank sweep funds, $15.0 million in FHLBNYcallable advances and $6.2 million in FHLBNY fixed rate advances. At September 30, 2010 and December 31, 2009, Central Jersey Bank, N.A. had unused lines of credit with the FHLBNY of $59.2 million and $26.2 million, respectively.

Liquidity and Capital Resources

Liquidity defines the ability of Central Jersey Bank, N.A. to generate funds to support asset growth, meet deposit withdrawals, maintain reserve requirements and otherwise operate on an ongoing basis.  An important component of a bank’s asset and liability management structure is the level of liquidity, which are net liquid assets available to meet the needs of its customers and regulatory requirements.  The liquidity needs of Central Jersey Bank, N.A. have been primarily met by cash on hand, loan and investment amortizations and borrowings.  Central Jersey Bank, N.A. invests funds not needed for operations (excess liquidity) primarily in daily federal funds sold.  During the nine months ended September 30, 2010, Central Jersey Bank, N.A. continued to maintain a large secondary source of li quidity known as investment securities available-for-sale.  The fair value of that portfolio was $139.6 million at September 30, 2010 and $96.9 million at December 31, 2009.

It has been Central Jersey Bank, N.A.’s experience that its core deposit base (which is defined as transaction accounts and term deposits of less than $100,000) is primarily relationship-driven.  Non-core deposits (which are defined as term deposits of $100,000 or greater) are much more interest rate sensitive.  In any event, adequate sources of reasonably priced on-balance sheet funds, such as overnight federal funds sold, due from banks and short-term investments maturing in less than one year, must be continually accessible for contingency purposes.  This is accomplished primarily by the daily monitoring of certain accounts for sufficient balances to meet future loan commitments, as well as measuring Central Jersey Bank, N.A.’s liquidity position on a monthly basis.

Supplemental sources of liquidity include large certificates of deposit, wholesale and retail repurchase agreements, and lines of credit with correspondent banks.  Correspondent banks, which are typically referred to as “banker’s banks,” offer essential services such as cash letter processing, investment services, loan participation support, wire transfer operations and other traditional banking services.  Brokered deposits, which are deposits obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker, may be utilized as supplemental sources of liquidity in accordance with Central Jersey Bank, N.A.’s balance sheet management policy.  Contingent liquidity sources may include off-balance sheet funds, such as advances from both the FHLBNY and the Federal Reserve Bank, and federal funds purchase lines with “upstream” correspondents.  An additional source of liquidity is made

36

available by curtailing loan activity and instead using the available cash to fund short-term investments such as overnight federal funds sold or other approved investments maturing in less than one year.  In addition, future expansion of Central Jersey Bank, N.A.’s retail banking network is expected to create additional sources of liquidity from new deposit customer relationships.  Available liquidity and borrowing capacity is reviewed by management on a monthly basis and totaled $184.5 million at September 30, 2010.

Central Jersey Bank, N.A. is subject to various regulatory capital requirements administered by federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Central Jersey Bank, N.A.’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Central Jersey Bank, N.A. must meet specific capital guidelines that involve quantitative measures of Central Jersey Bank, N.A.’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  Central Jersey Bank, N.A.’s capital amounts and classification are also subject to qualitative j udgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require Central Jersey Bank, N.A. to maintain minimum amounts and ratios (set forth in the following table) of Total Capital and Tier 1 Capital to risk weighted assets and of Tier 1 Capital to average assets (leverage ratio).  As of September 30, 2010, Central Jersey Bancorp and Central Jersey Bank, N.A. met all capital adequacy requirements to which they were subject.

The following is a summary of Central Jersey Bank, N.A.’s and Central Jersey Bancorp’s actual capital ratios as of September 30, 2010 and December 31, 2009, compared to the minimum capital adequacy requirements and the requirements for classification as a “well-capitalized” institution:

	Tier I Capital to Average Assets Ratio (Leverage Ratio)						Tier I Capital to Risk Weighted Asset Ratio						Total Capital to Risk Weighted Asset Ratio
	September 30,			December 31,			September 30,			December 31,			September 30,			December 31,
Actual Ratios	2010			2009			2010			2009			2010			2009
Central Jersey Bancorp		9.94	%		9.68	%		12.19	%		12.50	%		13.45	%		13.76	%
Central Jersey Bank, N.A.		10.15	%		7.89	%		12.46	%		10.19	%		13.72	%		14.00	%
Required Regulatory Ratios
“Adequately capitalized”
institution (under federal
regulations)		4.00	%		4.00	%		4.00	%		4.00	%		8.00	%		8.00	%
“Well capitalized”
institution (under federal
regulations)		5.00	%		5.00	%		6.00	%		6.00	%		10.00	%		10.00	%

37

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Central Jersey Bancorp is a smaller reporting company and is therefore not required to provide the information required by this item.

Item 4.  Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company's management, including its President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, who concluded that the Company's disclosure controls and procedures are effective.  The Company's Internal Auditorsalso participated in this evaluation.  There has been no change in the Company's internal controls during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including its President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, to allow timely decisions regarding required disclosure.

38

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Central Jersey Bancorp is a smaller reporting company and is therefore not required to provide the information required by this item.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

On May 25, 2010, Central Jersey Bancorp, Central Jersey Bank, N.A., Kearny and Kearny Federal Savings Bank entered into the Merger Agreement pursuant to which Central Jersey Bancorp will merge with a wholly-owned subsidiary of Kearny.  Immediately thereafter, Central Jersey Bank, N.A. will merge with and into Kearny Bank, and Central Jersey Bank, N.A. will operate as a division of Kearny Bank for at least 18 months after the closing.  The Merger Agreement was approved by the shareholders of Central Jersey Bancorp at a special meeting held on September 14, 2010.  Regulatory approval for the merger was obtained from the Office of Thrift Supervision on October 20, 2010.Pursuant to the terms of the Merger Agreement, Central Jersey Bancorp shareholders will receive $7.50 in cash for each share of Central Jersey Bancorp common stock held by them.  In addition, each option to acquire Central Jersey Bancorp common stock will be cancelled in exchange for a cash payment equal to the positive difference, if any, between $7.50 and the exercise price of the option.  It is expected that the merger will be completed in the fourth calendar quarter of 2010.

Item 6. Exhibits

See Index of Exhibits commencing on page E-1.

39

SIGNATURES

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

	Central Jersey Bancorp
	Registrant
Date:      November 19, 2010	/s/ James S. Vaccaro
	James S. Vaccaro
	Chairman, President and
	Chief Executive Officer
	(Principal Executive Officer)
Date:      November 19, 2010	/s/ Anthony Giordano, III
	Anthony Giordano, III
	Senior Executive Vice President, Chief Financial
	Officer, Treasurer and Assistant Secretary
	(Principal Financial and Accounting Officer)

40

INDEX OF EXHIBITS

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Acquisition, dated as of September 30, 2004, by and between the Registrant and Allaire Community Bank (“Allaire”):  Upon the request of the Securities and Exchange Commission (the “SEC”), the Registrant agrees to furnish a copy of Exhibit A – Voting Agreement of Allaire Stockholders and Voting Agreement of the Registrant’s Shareholders; Exhibit B – Allaire Affiliate Agreement, Exhibit C – Opinion of Giordano, Halleran & Ciesla, P.C., as counsel to the Registrant, and Exhibit D – Opinion of Frieri Conroy & Lombardo, LLC, as counsel to Allaire, and the following Schedules:  Schedule 1.10(a) – Composition of the Registrant’s Board of Directors; Schedule 1.10(b) – Composition of Allaire and Monmouth Community Bank Board s of Directors; Schedule 1.10(c) - Executive Officers of the Registrant, Allaire and Monmouth Community Bank; Schedule 3.02(a) – Stock Options (Allaire); Schedule 3.02(b) – Subsidiaries (Allaire); Schedule 3.08 – Absence of Changes or Events (Allaire); Schedule 3.09 – Loan Portfolio (Allaire); Schedule 3.10 – Legal Proceedings (Allaire); Schedule 3.11 – Tax Information (Allaire); Schedule 3.12(a) – Employee Benefit Plans (Allaire); Schedule 3.12(b) – Defined Benefit Plans (Allaire); Schedule 3.12(h) – Payments or Obligations (Allaire); Schedule 3.12(m) – Grantor or “Rabbi” Trusts (Allaire); Schedule 3.12(n) – Retirement Benefits (Allaire); Schedule 3.13(c) – Buildings and Structures (Allaire); Schedule 3.14(a) – Real Estate (Allaire); Schedule 3.14(b) – Leases (Allaire); Schedule 3.16(a) – Material Contracts (Allaire); Schedule 3.16(c) – Certain Other Contracts (Allaire); Schedule 3.16(d) – Effec t on Contracts and Consents (Allaire); Schedule 3.18 – Registration Obligations (Allaire); Schedule 3.20 – Insurance (Allaire); Schedule 3.21(b) – Benefit or Compensation Plans (Allaire); Schedule 3.21(d) – Labor Relations (Allaire); Schedule 3.22 – Compliance with Applicable Laws (Allaire); Schedule 3.23 – Transactions with Management (Allaire); Schedule 3.25 – Deposits (Allaire); Schedule 4.02(a) – Stock Options (Registrant); Schedule 4.02(b) – Subsidiaries (Registrant); Schedule 4.08 – Absence of Changes or Events (Registrant); Schedule 4.09 – Loan Portfolio (Registrant); Schedule 4.10 – Legal Proceedings (Registrant); Schedule 4.11 – Tax Information (Registrant); Schedule 4.12(a) – Employee Benefit Plans (Registrant); Schedule 4.12(b) – Defined Benefit Plans (Registrant); Schedule 4.12(g) – Payments or Obligations (Registrant); Schedule 4.12(l) – Grantor or “Rabbi” Trusts (Registrant); Schedu le 4.12(m) – Retirement Benefits (Registrant); Schedule 4.13(c) – Buildings and Structures; (Registrant) Schedule 4.14(a) and 4.14(b) – Real Estate and Leases (Registrant); Schedule 4.16(a) – Material Contracts (Registrant); Schedule 4.16(c) – Certain Other Contracts (Registrant); Schedule 4.16(d) – Effect on Contracts and Consents (Registrant); Schedule 4.18 – Registration Obligations (Registrant); Schedule 4.20 – Insurance (Registrant); Schedule 4.21(b) – Benefit or Compensation Plans (Registrant); Schedule 4.21(d) – Labor Relations (Registrant); Schedule 4.22 – Compliance with Applicable Laws (Registrant); Schedule 4.23 – Transactions with Management (Registrant); Schedule 4.25 – Deposits (Registrant); Schedule 6.18(a) – Notice of Deadlines (Allaire); and Schedule 6.18(b) – Notice of Deadlines (Registrant) (Incorporated by reference to Exhibit 2.2 to the Registrant’s Quarterly Report on Form 10-QSB for the quar ter ended September 30, 2004).
2.2	Agreement and Plan of Merger, dated as of May 26, 2009, between OceanFirst Financial Corp. and the Registrant (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, dated May 26, 2009 and filed with the SEC

E-1

	on May 27, 2009).
2.3	Agreement and Plan of Merger, dated as of May 25, 2010, among Kearny Financial Corp. (“Kearny”), Kearny Federal Savings Bank (“Kearny Bank”), the Registrant and Central Jersey Bank, N.A. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, dated May 25, 2010 and filed with the SEC on May 27, 2010).
3.1	Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
3.3	By-laws of the Registrant, as amended and restated on January 1, 2005 (Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with the SEC on March 31, 2005).
4.1	Specimen certificate representing the Registrant’s common stock, par value $0.01 per share (Incorporated by reference to Exhibit 4 to Amendment No. 1 to the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-87352), effective July 23, 2002).
4.2	Warrant to Purchase Common Stock, dated December 23, 2008 (Incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.1	Registrant’s Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form SB-2 (Registration No. 333-87352), effective July 23, 2002).
10.2	Indenture between Registrant and Wilmington Trust Company, dated March 25, 2004 (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed with the SEC on March 30, 2004).
10.3	Amended and Restated Declaration of Trust of MCBK Capital Trust I, dated March 25, 2004 (Incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed with the SEC on March 30, 2004).
10.4	Guarantee Agreement by Registrant and Wilmington Trust Company, dated March 25, 2004 (Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed with the SEC on March 30, 2004).
10.5	Amended and Restated Change of Control Agreement, dated December 23, 2008, by and between James S. Vaccaro and the Registrant (Incorporated by reference to Exhibit

E-2

	10.8 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.6	Amended and Restated Change of Control Agreement, dated December 23, 2008, by and between Robert S. Vuono and the Registrant (Incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.7	Second Amended and Restated Change of Control Agreement, dated March 29, 2010, by and between Anthony Giordano, III and the Registrant (Incorporated by reference to Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 and filed with the SEC on March 30, 2010).
10.8	Senior Executive Officer Agreement, dated December 19, 2008, by and between James S. Vaccaro and the Registrant (Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.9	Senior Executive Officer Agreement, dated December 19, 2008, by and between Robert S. Vuono and the Registrant (Incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.10	Senior Executive Officer Agreement, dated December 19, 2008, by and between Anthony Giordano, III and the Registrant (Incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.11	Registrant’s 2005 Equity Incentive Plan (Incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and filed with the SEC on May 16, 2005).
10.12	Letter Agreement, dated December 23, 2008, including the Securities Purchase Agreement – Standard Terms attached thereto, by and between the U.S. Department of Treasury and the Registrant (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated December 23, 2008 and filed with the SEC on December 31, 2008).
10.13	Addendum to the Change of Control Agreement, dated May 25, 2010, by and among James S. Vaccaro, Kearny and Kearny Bank.
10.14	Addendum to the Change of Control Agreement, dated May 25, 2010, by and among Robert S. Vuono, Kearny and Kearny Bank.
10.15	Addendum to the Change of Control Agreement, dated May 25, 2010, by and among Anthony Giordano, III, Kearny and Kearny Bank.
31.1	Section 302 Certification of Chief Executive Officer.
31.2	Section 302 Certification of Chief Financial Officer.

E-3

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

E-4