UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2013
For the quarterly period ended March 31, 2014
or

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

For the transition period from _____ to _____
For the transition period from _____ to _____

Commission file Number:  000-32891

1ST CONSTITUTION BANCORP
(Exact Name of Registrant as Specified in Its Charter)


New Jersey 22-3665653
(State of Other Jurisdiction
of Incorporation or Organization)
 (I.R.S. Employer Identification No.)


2650 Route 130, P.O. Box 634, Cranbury, NJ 08512
(Address of Principal Executive Offices) (Zip Code)


 (609) 655-4500 
(Issuer’s Telephone Number, Including Area Code)


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x       No  o¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x       No  o¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an 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 filero¨Accelerated filero¨
Non-accelerated filer
(Do not check if a smaller reporting company)
o¨Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o¨  Nox
 
As of November 12, 2013,May 7, 2014, there were 5,988,8677,084,725 shares of the registrant’s common stock, no par value, outstanding.
 


 
 

 
 
 
FORM 10-Q
 
INDEX

 
  Page
PART I.FINANCIAL INFORMATION 
   
1
   
  
  
 1
   
  
  
 2
   
  
  
 3
   
  
  
 4
   
  
  
 5
   
 6
   
 
 38
   
5655
   
5655
   
PART II.OTHER INFORMATION 
   
57
   
58
   
59


PART I. FINANCIAL INFORMATION

 
  September 30, 2013  December 31, 2012 
ASSETS      
CASH AND DUE FROM BANKS $123,803,713  $14,033,501 
         
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS  11,425   11,420 
         
Total cash and cash equivalents  123,815,138   14,044,921 
         
INVESTMENT SECURITIES:        
Available for sale, at fair value  101,557,211   109,840,965 
Held to maturity (fair value of $152,186,281 and $121,839,363 at
September 30, 2013, and December 31, 2012, respectively)
  150,572,922   116,027,900 
         
Total securities  252,130,133   225,868,865 
         
LOANS HELD FOR SALE  14,535,681   35,960,262 
         
LOANS  362,549,473   521,814,110 
Less- Allowance for loan losses  (6,820,180)   (7,151,212)
         
Net loans  355,729,293   514,662,898 
         
PREMISES AND EQUIPMENT, net  10,172,487   10,630,295 
         
ACCRUED INTEREST RECEIVABLE  2,143,535   2,872,099 
         
BANK-OWNED LIFE INSURANCE  15,374,712   15,026,506 
         
OTHER REAL ESTATE OWNED  2,808,554   8,332,601 
         
OTHER ASSETS  13,459,319   13,569,935 
         
Total assets $790,168,852  $840,968,382 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
LIABILITIES:        
Deposits        
Non-interest bearing $147,179,144  $152,334,759 
Interest bearing  539,764,810   555,354,716 
         
Total deposits  686,943,954   707,689,475 
         
BORROWINGS  10,000,000   42,400,000 
REDEEMABLE SUBORDINATED DEBENTURES  18,557,000   18,557,000 
ACCRUED INTEREST PAYABLE  787,927   1,057,779 
ACCRUED EXPENSES AND OTHER LIABILITIES  6,727,851   6,210,596 
         
Total liabilities  723,016,732   775,914,850 
         
COMMITMENTS AND CONTINGENCIES        
         
SHAREHOLDERS’ EQUITY:        
Preferred stock, no par value; 5,000,000 shares authorized; none issued        
Common stock, no par value, 30,000,000 shares authorized; 6,008,223 and
5,985,275 shares issued and 5,988,867 and 5,977,924 shares
outstanding as of September 30, 2013 and December 31, 2012
respectively
  49,395,322   48,716,032 
Retained earnings  19,999,881   15,594,293 
Treasury Stock, at cost, 19,356 shares 7,351 shares at September 30, 2013 and
December 31, 2012, respectively
  (177,537)   (61,086)
Accumulated other comprehensive (loss) income  (2,065,546)   804,293 
         
Total shareholders’ equity  67,152,120   65,053,532 
         
Total liabilities and shareholders’ equity $790,168,852  $840,968,382 
(Unaudited)

See
  March 31, 2014  December 31, 2013 
ASSETS      
CASH AND DUE FROM BANKS $108,819,056  $69,267,345 
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS  100,000   11,426 
Total cash and cash equivalents  108,919,056   69,278,771 
INVESTMENT SECURITIES:        
Available for sale, at fair value  117,630,716   99,198,807 
Held to maturity (fair value of $155,795,659 and $153,629,773 at
March 31, 2014 and December 31, 2013, respectively)
  152,734,559   152,816,815 
Total investment securities  270,365,275   252,015,622 
LOANS HELD FOR SALE  3,253,009   10,923,689 
LOANS  531,405,382   373,336,082 
Less- Allowance for loan losses  (7,030,842)  (7,038,571)
Net loans  524,374,540   366,297,511 
PREMISES AND EQUIPMENT, net  12,370,225   10,043,505 
ACCRUED INTEREST RECEIVABLE  2,943,400   2,542,602 
BANK-OWNED LIFE INSURANCE  20,783,304   16,183,574 
OTHER REAL ESTATE OWNED  2,136,341   2,136,341 
GOODWILL AND INTANGIBLE ASSETS  13,673,821   4,889,575 
OTHER ASSETS  8,271,642   8,013,897 
Total assets $967,090,613  $742,325,087 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
LIABILITIES:        
Deposits        
Non-interest bearing $166,747,113  $121,891,752 
Interest bearing  672,251,094   516,660,278 
Total deposits  838,998,207   638,552,030 
BORROWINGS  20,978,549   10,000,000 
REDEEMABLE SUBORDINATED DEBENTURES  18,557,000   18,557,000 
ACCRUED INTEREST PAYABLE  937,278   883,212 
ACCRUED EXPENSES AND OTHER LIABILITIES  6,355,156   5,974,531 
Total liabilities  885,826,190   673,966,773 
COMMITMENTS AND CONTINGENCIES        
SHAREHOLDERS’ EQUITY:        
Preferred stock, no par value; 5,000,000 shares authorized, none issued  -   - 
Common Stock, no par value; 30,000,000 shares authorized;
7,084,725  and 6,033,683 shares issued and 7,063,996 and  6,016,845 shares outstanding
as of March 31,2014 and December 31, 2013, respectively
  60,825,466   49,403,450 
Retained earnings  22,016,093   21,374,381 
Treasury Stock, 20,729 shares and 16,838 shares at March 31, 2014
and December 31, 2013, respectively
  (211,727)  (171,883)
Accumulated other comprehensive (loss)  (1,365,409  (2,247,634)
Total shareholders’ equity  81,264,423   68,358,314 
Total liabilities and shareholders’ equity $967,090,613  $742,325,087 

The accompanying notes to consolidatedare an integral part of these financial statements.
 
 
(unaudited)(Unaudited)
  Three Months Ended March 31, 
  2014  2013 
INTEREST INCOME:      
Loans, including fees $6,238,439  $5,972,195 
Securities:        
Taxable  1,121,584   937,085 
Tax-exempt  580,981   512,878 
Federal funds sold and short-term investments  55,291   49,680 
Total interest income  7,996,295   7,471,838 
     
INTEREST EXPENSE:      
Deposits  898,731   956,336 
Borrowings  115,578   103,273 
Redeemable subordinated debentures  85,107   87,873 
Total interest expense  1,099,416   1,147,482 
Net interest income  6,896,879   6,324,356 
PROVISION FOR LOAN LOSSES  499,998   - 
Net interest income after provision for loan losses  6,396,881   6,324,356 
  
NON-INTEREST INCOME:        
Service charges on deposit accounts  219,116   223,066 
Gain on sales of loans  739,581   731,709 
Income on Bank-owned life insurance  129,151   112,608 
Other income  549,134   541,180 
Total other income  1,636,982   1,608,563 
  
NON-INTEREST EXPENSES: 
Salaries and employee benefits  3,587,905   3,352,863 
Occupancy expense  826,195   677,806 
Data processing expenses  316,049   301,382 
FDIC insurance expense  150,000   19,687 
Other real estate owned expenses  41,432   545,505 
Merger-related expenses  1,422,723   - 
Other operating expenses  1,001,721   1,185,725 
Total other expenses  7,346,025   6,082,968 
         
Income before income taxes  687,838   1,849,951 
INCOME TAXES  46,126   524,633 
Net income $641,712  $1,325,318 
         
NET INCOME PER COMMON SHARE:        
Basic  $0.09  $0.22 
Diluted  $0.09  $0.22 
         
WEIGHTED AVERAGE SHARES        
OUTSTANDING        
Basic  $6,756,782  $5,895,763 
Diluted  $6,942,943  $6,034,779 

  Three months ended September 30,  Nine months ended September 30, 
INTEREST INCOME 2013  2012  2013  2012 
Loans, including fees $5,701,804  $6,966,886  $17,319,258  $19,700,449 
Securities                
Taxable  980,004   1,103,011   2,818,800   3,430,770 
Tax-exempt  575,301   409,774   1,633,799   1,241,568 
Federal funds sold and short-term investments  81,745   6,975   221,087   55,315 
Total interest income  7,338,854   8,486,646   21,992,944   24,428,102 
                 
INTEREST EXPENSE                
Deposits  842,372   1,026,154   2,668,306   3,291,676 
Borrowings  103,122   119,223   310,649   340,784 
Redeemable subordinated debentures  88,338   96,867   263,982   292,759 
Total interest expense  1,033,832   1,242,244   3,242,937   3,925,219 
                 
Net interest income  6,305,022   7,244,402   18,750,007   20,502,883 
PROVISION FOR LOAN LOSSES  539,998   499,998   776,664   1,649,994 
Net interest income after provision for loan losses  5,765,024   6,744,404   17,973,343   18,852,889 
                 
NON-INTEREST INCOME                
Service charges on deposit accounts  231,169   243,443   675,839   702,671 
Gain on sales of loans  641,966   509,138   1,852,821   1,472,502 
Income on bank-owned life insurance  115,840   112,276   348,206   337,374 
Other income  627,573   451,870   1,796,104   1,157,311 
Total non-interest income  1,616,548   1,316,727   4,672,970   3,669,858 
                 
NON-INTEREST EXPENSE                
Salaries and employee benefits  3,060,143   3,061,065   9,458,247   9,156,318 
Occupancy expense  629,922   523,126   1,930,227   1,860,446 
Data processing expenses  273,272   257,990   868,960   774,110 
FDIC insurance expenses  111,562   139,694   146,249   426,960 
Other operating expenses  1,178,584   2,201,299   4,095,068   4,951,831 
                 
Total non-interest expenses  5,253,483   6,183,174   16,498,751   17,169,665 
       Income before income taxes  2,128,089   1,877,957   6,147,562   5,353,082 
                 
INCOME TAXES  604,851   523,038   1,741,974   1,533,323 
Net income $1,523,238  $1,354,919  $4,405,588  $3,819,759 
                 
                 
NET INCOME PER SHARE                
Basic $0.25  $0.25  $0.74  $0.71 
Diluted $0.25  $0.25  $0.72  $0.70 

SeeThe accompanying notes to consolidatedare an integral part of these financial statements.

 
(unaudited)(Unaudited)

  
Three months ended
 September 30,
  
Nine months ended
September 30,
 
  2013  2012  2013  2012 
                 
NET INCOME $1,523,238  $1,354,919  $4,405,588  $3,819,759 
                 
Other comprehensive (loss) income, net of tax:                
                 
Unrealized holding  gains (losses) on securities
      available for sale
  (35,468)   430,698   (2,947,683)   468,628 
                 
Pension liability  37,960   1,925   77,844   5,777 
                 
Other comprehensive (loss) income  2,492   432,623   (2,869,839)   474,405 
                 
Comprehensive income $1,525,730  $1,787,542  $1,535,749  $4,294,164 
  Three months ended March 31, 
  2014  2013 
Net Income $641,712  $1,325,318 
         
Other comprehensive income (loss)  :        
         
Unrealized holding  gains (losses) on securities available for sale  1,215,201   (781,959)
Tax effect  (370,936)  348,924 
Net of tax amount  844,265   (433,035)
         
         
Pension liability  63,266   3,220 
Tax effect  (25,306)  (1,295)
Net of tax amount  37,960   1,925 
         
Total other comprehensive income (loss)  882,225   (431,110)
         
Comprehensive income $1,523,937  $894,208 

The accompanying notes are an integral part of these financial statements.
 
 
 

 
 
3

1st Constitution Bancorp and Subsidiaries
For the Three Months Ended March 31, 2014 and 2013
(Unaudited)

  
Common
Stock
 
  
Retained
Earnings
 
  
Treasury
Stock
 
  
Accumulated
Other
Comprehensive
(Loss) Income
 
  
Total
Shareholders’
Equity
 
 
Balance, January 1, 2013 $48,716,032  $15,594,293  $(61,086) $804,293  $65,053,532 
Issuance of vested  shares under employee benefit
program (9,307 shares)
  187,383               187,383 
Share-based compensation  25,187               25,187 
Treasury stock purchased (5,224 shares)          (47,230)      (47,230)
Net Income for the three month ended
March 31, 2013
      1,325,318           1,325,318 
 Other comprehensive (loss)              (431,110)  (431,110)
Balance, March 31, 2013 $48,928,602  $16,919,611  $(108,316) $373,183  $66,113,080 
                     
Balance, January 1, 2014 $49,403,450  $21,374,381  $(171,883) $(2,247,634) $68,358,314 
Issuance of  vested shares under employee  benefit
program (31,800 shares)
  224,173               224,173 
Share-based compensation  37,143               37,143 
Treasury stock purchased (3,891 shares)          (39,844)      (39,844)
Acquisition of Rumson Fair Haven Bank (1,019,242 shares)  11,160,700               11,160,700 
Net income for the three months ended
March 31, 2014
      641,712           641,712 
Other comprehensive income              882,225   882,225 
                     
Balance March 31, 2014 $60,825,466  $22,016,093  $(211,727) $(1,365,409) $81,264,423 
The accompanying notes are an integral part of these financial statements.

4

1st Constitution Bancorp and Subsidiaries
(Unaudited)
  Three Months Ended March 31, 
  2014  2013 
OPERATING ACTIVITIES:       
Net income  $641,712  $1,325,318 
Adjustments to reconcile net income to net cash provided by operating activities-        
Provision for loan losses   499,998   - 
Provision for loss on other real estate owned  -   662,918 
Depreciation and amortization   487,771   270,912 
Net amortization of premiums and discounts on securities   240,729   314,201 
Gains on sales of other real estate owned  -   (308,010)
Gains on sales of loans held for sale  (739,581)  (731,709)
Originations of loans held for sale   (15,191,079)  (44,012,744)
Proceeds from sales of loans held for sale   23,601,340   49,987,702 
Income on Bank – owned life insurance   (129,151)  (112,608)
Share-based compensation expense  37,143   170,114 
Decrease in accrued interest receivable   195,814   458,333 
Decrease in other assets  231,587   531,820 
Decrease in accrued interest payable   (93,308)  (47,298)
Decrease in accrued expenses and other liabilities   (233,905)  (255,455)
Net cash  provided by operating activities  9,549,070   8,253,494 
INVESTING ACTIVITIES:        
Purchases of securities -         
Available for sale   -   (12,761,368)
Held to maturity   (4,178,849)  - 
Proceeds from maturities and prepayments of securities -         
Available for sale   12,660,541   5,417,275 
Held to maturity   4,167,587   10,241,275 
Net (increase) decrease in loans   (15,056,113  103,647,874 
Capital expenditures   (20,793)  (68,309)
Net cash received in the acquisition  21,375,071   - 
Proceeds from sales of other real estate owned  -   1,683,830 
Net cash provided by  investing activities   18,947,444   108,160,577 
FINANCING ACTIVITIES:         
Issuance of vested shares  224,173   187,383 
Purchase of Treasury Stock  (39,844)  (47,230)
Net increase in demand, savings and time deposits   10,959,442   3,240,282 
Net increase (decrease) in borrowings  -   (32,400,000
         
Net cash provided by (used in) financing activities   11,143,771   (29,019,565)
Increase in cash and cash equivalents   39,640,285   87,394,506 
CASH AND CASH EQUIVALENTS         
AT BEGINNING OF PERIOD  69,278,771   14,044,921 
CASH AND CASH EQUIVALENTS         
AT END OF PERIOD $108,919,056   101,439,427 
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION        
Cash paid during the period for -         
Interest  $1,219,917  $1,194,780 
Income taxes   192,223   750,000 
Non-cash investing activities        
Real estate acquired in full satisfaction of loans in foreclosure $-  $2,001,025 
Acquisition of Rumson Fair Haven Bank        
  Noncash assets acquired:        
Investment securities available for sale $30,024,458     
Loans  143,714,377     
Accrued interest receivable  596,612     
Premises and equipment, net  2,551,939     
Goodwill  7,698,427     
Core deposit intangible  1,188,836     
Bank-owned life insurance  4,470,579     
Other assets  885,576     
   191,130,804     
         
Liabilities assumed:        
Deposits  189,490,005     
Borrowings  11,030,000     
Other liabilities  825,170     
   201,345,175     
         
Common stock issued as consideration $11,160,700     
 
The accompanying notes are an integral part of these financial statements.
 

Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 30, 2013 and 2012
(unaudited)


  
 
 
Common
Stock
  
 
 
Retained
Earnings
  
 
 
Treasury
Stock
  
Accumulated
Other
Comprehensive
(Loss) Income
  
 
Total
Shareholders’
Equity
 
                     
BALANCE, January 1, 2012 $40,847,929  $13,070,606  $(10,222) $1,091,462  $54,999,775 
                     
Exercise of stock options and issuance of vested shares
    under employee benefit programs
  442,918       13,843       456,761 
                     
Share-based compensation  73,965               73,965 
                     
Treasury stock purchased          (80,344)      (80,344)
                     
Net income for the nine months ended September 30, 2012      3,819,759           3,819,759 
                     
Other comprehensive income              474,405   474,405 
                     
Balance, September 30, 2012 $41,364,812  $16,890,365  $(76,723) $1,565,867  $59,744,321 
                     
Balance, January 1, 2013 $48,716,032  $15,594,293  $(61,086) $804,293  $65,053,532 
                     
Exercise of stock options, net, and issuance of vested
      shares under employee benefit programs
  603,342               603,342 
                     
Share-based compensation  75,948               75,948 
                     
Treasury stock purchased          (116,451)      (116,451)
                     
Net Income for the nine months
     ended September 30, 2013
      4,405,588           4,405,588 
                     
Other comprehensive (loss)              (2,869,839)   (2,869,839)
                     
Balance, September 30, 2013 $49,395,322  $19,999,881  $(177,537) $(2,065,546)  $67,152,120 
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(unaudited)

  Nine Months Ended September 30, 
  2013  2012 
OPERATING ACTIVITIES:       
Net income  $4,405,588  $3,819,759 
Adjustments to reconcile net income         
to net cash provided by operating activities-         
Provision for loan losses   776,664   1,649,994 
Provision for loss on other real estate owned  662,918   1,195,288 
Depreciation and amortization   805,823   884,595 
Net amortization of premiums and discounts on securities   868,639   1,109,664 
Gains on sales of other real estate owned  (292,170)  - 
Gains on sales of loans held for sale  (1,852,821)  (1,472,502)
Originations of loans held for sale   (114,126,927)  (128,302,763)
Proceeds from sales of loans held for sale   137,972,505   126,526,811 
Income on Bank–owned life insurance   (348,206)  (337,374)
Share-based compensation expense  380,471   336,898 
Decrease (increase) in accrued interest receivable  728,564   318,198 
Decrease (increase)  in other assets   925,461   (122,026)
Decrease in accrued interest payable   (269,852)  (263,258)
Increase (decrease) in accrued expenses and other liabilities   517,255   (35,727)
         
Net cash provided by operating activities   31,153,912   5,307,557 
INVESTING ACTIVITIES:        
Purchases of securities -         
Available for sale   (16,947,137)  (31,800,023)
Held to maturity   (62,560,993)  (6,602,385)
Proceeds from maturities and prepayments of securities -         
Available for sale   20,423,187   28,843,391 
Held to maturity   27,488,848   24,829,152 
Net decrease (increase) in loans   155,845,716   (22,860,591)
Capital expenditures   (147,040)  (815,581)
Additional investment in other real estate owned  (11,500)  (144,454)
Proceeds from sales of other real estate owned  7,183,854   1,686,389 
         
Net cash provided by (used in) investing activities   131,274,935   (6,864,102)
         
FINANCING ACTIVITIES:         
Exercise of stock options and issuance of vested shares  603,342   456,761 
Purchase of Treasury Stock  (116,451)  (80,344)
Net (decrease) increase  in demand, savings and time deposits   (20,745,521  37,135,047 
Net decrease in borrowings  (32,400,000)  (37,150,000)
         
Net cash (used in) provided by financing activities   (52,658,630)  361,464 
         
Increase (decrease) in cash and cash equivalents   109,770,217   (1,195,081)
         
CASH AND CASH EQUIVALENTS         
AT BEGINNING OF PERIOD  14,044,921   15,195,259 
         
CASH AND CASH EQUIVALENTS         
AT END OF PERIOD $123,815,138  $14,000,178 
         
SUPPLEMENTAL DISCLOSURES         
OF CASH FLOW INFORMATION:         
Cash paid during the period for -         
Interest  $3,512,789  $4,188,477 
Income taxes   1,721,000   1,787,000 
Non-cash investing activities        
Real estate acquired in full satisfaction of loans in foreclosure $2,311,225  $553,762 

See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
September 30, 2013March 31, 2014 (Unaudited)

 
(1)  Summary of Significant Accounting Policies
 
The accompanying unaudited Consolidated Financial Statementsconsolidated financial statements include 1st Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1st1st Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and, 249 New York Avenue, LLC.  1stLLC, and RFHB Investment Company.  1st Constitution Capital Trust II, a subsidiary of the Company, is not included in the Company’s consolidated financial statements, as it is a variable interest entity and the Company is not the primary beneficiary.  All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation.  The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Article 8 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the year ended December 31, 2012,2013, filed with the SEC on March 22, 2013.31, 2014.
 
In the opinion of the Company, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the operating results for the interim periods have been included. The results of operations for periods of less than a year are not necessarily indicative of results for the full year.
 
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2013March 31, 2014 for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through the date these financial statements were issued.

 
(2)  Entry into a Material Definitive Agreement

On August 14, 2013, the Company and the Bank entered into an Agreement and PlanAcquisition of Merger, which was subsequently amended on September 19, 2013 by the First Amendment to Agreement and Plan of Merger (the Agreement and Plan of Merger and the First Amendment to Agreement and Plan of Merger are hereinafter referred to as the “Merger Agreement”), with Rumson-Fair Haven Bank &and Trust Company
On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company, a New Jersey state commercial bank (“RFHB”Rumson”), providing for the merger of RFHBwhich merged with and into the Bank, with the Bank as the surviving entity (the “Merger”).

Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of common stock of RFHB will be converted into the right to receive, at the election of the holder of such common stock of RFHB, (i) cash consideration of $7.50 or (ii) 0.7772 of a share of common stock of the Company, or a combination of both, subject to the payment of cash in lieu of fractional shares and customary proration and allocation procedures, if necessary, to assure that 60% of the outstanding shares of common stock of RFHB are exchanged for cash and 40% of the outstanding shares of common stock of RFHB are exchanged for shares of common stock of the Company.  In addition, each outstanding option to acquire shares of common stock of RFHB will be terminated and converted to the right to receive cash and equal to the product of (i) the aggregate number of shares of common stock of RFHB underlying such outstanding option multiplied by (ii) the excess, if any, of $7.50 over the per share exercise price of such outstanding option.  Stock awards will be converted into shares of common stock of the Company.  Each outstanding share of common stock of the Company will remain outstanding and unaffected by the Merger.

Under New Jersey banking law, shareholders of RFHB can elect to dissent from the Merger.  Any shareholder electing to dissent shall be entitled to a cash payment for such shares only to the extent permitted by and in accordance with New Jersey Banking law.

entity. The Merger Agreement contains typical representations, warranties, and covenants ofmerger agreement among the Company, the Bank and RFHB, including, among others, covenantsRumson (the “Merger Agreement”) provided that require, during the period betweenshareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the executioneffective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash, subject to proration as described in the Merger Agreement, and consummationso that 60% of the Merger, (i) RFHB to use commercially reasonable efforts to conductaggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019,242 shares of its businesscommon stock and paid $14.8 million in cash in the ordinary coursetransaction.
The merger was accounted for under the acquisition method of accounting and consistent with past banking practiceaccordingly, assets acquired, liabilities assumed and prudent banking practice;consideration exchanged were recorded at preliminary estimated fair values as of the acquisition date. Rumson’s results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.
The assets acquired and (ii) RFHB to not,liabilities assumed in the merger were recorded at their estimated fair values based on management’s best estimates using information available at the date of the merger, including the use of a third party valuation specialist. The fair values are preliminary estimates and subject to certain exceptions generally relatedadjustment for up to one year after the Board’s evaluationclosing date of the merger. The following table summarizes the estimated fair value of the acquired assets and exercise of its fiduciary duties, (a) solicit  proposals relating to alternative business combination transactions or (b) enter into discussions or negotiations or provide confidential information in connection with any proposals for alternative business combination transactions.liabilities.
 
Accounting Standards Codification (“ASC”) Topic 805-10 provides that if the initial accounting for a business combination is incomplete by the end of Contentsthe reporting period in which the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete.  During the measurement period, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.  During the measurement period, the acquirer also shall recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.  The measurement period may not exceed one year from the acquisition date.  As of March 31, 2014, independent appraisals of branch office real estate and leases had not been completed and the fair value of these assets and liabilities had not been determined.
Loans and leases acquired in the Rumson acquisition were recorded at fair value and subsequently accounted for in accordance with ASC Topic 310, and there was no carryover of Rumson’s allowance for loan losses. The fair values of loans acquired from Rumson were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.
At the acquisition date, the Company recorded $141.1 million of loans without evidence of credit quality deterioration and $2.6 million of loans with evidence of credit quality deterioration. The following table summarizes the composition of the loans acquired and recorded at fair value.
  At February 7, 2014 
 
($ in thousands)
 
 
Loans
acquired with
no credit
quality
deterioration
  
Loans
acquired with
credit
quality
deterioration
  Total 
          
Commercial         
     Construction $11,920   -  $11,920 
     Commercial Real Estate  62,398   1,832   64,230 
     Commercial Business  18,086   368   18,454 
Residential Real Estate  32,743   180   32,923 
Consumer  15,953   234   16,187 
Total $141,100  $2,614  $143,714 
7


The Merger Agreementfollowing is a summary of the loans acquired with evidence of deteriorated credit quality in the Rumson acquisition as of the closing date.
 
($ in thousands)
 
Acquired
Credit
Impaired
Loans
 
    
Contractually required principal and interest at acquisition $4,451 
Contractual cash flows not expected to be collected (non-accretable
difference)
  1,543 
     
Expected cash flows at acquisition  2,908 
Interest component of expected cash flows (accretable difference)  294 
     
Fair value of acquired loans $2,614 
The core deposit intangible totaled $1.2 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.
The following table presents the projected amortization of the core deposits intangible for each period presented :
   ($ in thousands) 
2014 $216 
2015  195 
2016  173 
2017  151 
2018  130 
Thereafter  324 
     
  $1,189 

The fair values of deposit liabilities with no stated maturities, such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
Direct costs related to the acquisition were expensed as incurred. During the three months ended March 31, 2014, the Company incurred $1.4 million of merger and acquisition integration-related expenses, which have been separately stated in the Company’s Consolidated Statements of Income.
Supplemental Pro Forma Financial Information
The following table presents financial information regarding the former Rumson operations included in our Consolidated Statements of Income from the date of the acquisition (i.e., February 7, 2014) through March 31, 2014 under the column “Actual from acquisition date to March 31, 2014.”  In addition, the table provides certain termination rightsunaudited condensed pro forma financial information assuming that the Rumson acquisition had been completed as of January 1, 2013. In the table below, merger-related expenses of $1.7 million were excluded from pro forma non-interest expenses for the Company,three months ended March 31, 2014.  Income taxes were also adjusted to exclude income tax benefits of $462,000 related to the Bankmerger expenses for the three months ended March 31, 2014.
The table below has been prepared for comparative purposes only and RFHB, and further provides that upon terminationis not necessarily indicative of the Merger Agreement under certain circumstances, RFHB will be obligated to payactual results that would have been attained had the Company a termination fee of $1,000,000 and out of pocket expenses incurred by the Company and the Bank in connection with the Merger of up to $275,000; provided, however, that the sumacquisition occurred as of the termination fee and such out-of-pocket expenses shall not exceed $1,275,000.

Completionbeginning of the Mergerperiods presented, nor is subject to customary closing conditions, including (i) receiptit indicative of future results. Furthermore, the unaudited pro forma financial information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the requisite approvalintegration and consolidation of the shareholders of RFHB, (ii) receipt of regulatory approvals, (iii) the absence of any law or order prohibiting the closing and (iv) and the effectiveness of the registration statement to be filed by the Company with respect to the common stock to be issued in the Merger.  In addition, each party’s obligation to consummate the merger is subjectRumson’s operations. The pro forma financial information reflects adjustments related to certain purchase accounting fair value adjustments; amortization of core deposit and other conditions, including the accuracy of the representationsintangibles; and warranties of the other party and compliance of the other party with its covenants in all material respects.related income tax effects.
 
8

             
   
Actual from
acquisition date
 to
March 31, 2014
   
Pro Forma for the
 three months
ended
March 31, 2014
   
Pro Forma for
the three months
 ended
March 31, 2013
 
  (in thousands, except per share amounts) 
             
             
Net interest income  $1,076    $7,696    $8,007  
Non-interest income   41     1,686     1,898  
Non-interest expenses   473     7,145     7,432  
Income taxes  240   623   756 
Net income   399     1,614     1,717  
Earnings per share – Fully diluted       $0.22    $0.24  
(3)  Net Income Per Common Share
 
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during each period.
 
Diluted net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential common stock warrants, common stock options and unvested restricted stock awards (as defined below), using the treasury stock method. All share information has been adjusted for the effect of a 5% common stock dividend declared December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.

The following tables illustrate the reconciliation of the numerators and denominators of the basic and diluted earnings per common share (EPS) calculations.  Dilutive securities in the tables below exclude common stock options and warrants with exercise prices that exceed the average market price of the Company’s common stock during the periods presented.  Inclusion of these common stock options and warrants would be anti-dilutive to the diluted earnings per common share calculation. 

   Three Months Ended September 30, 2013 
  
 
Net
Income
  
Weighted-
average
shares
  
 
Per share
Amount
 
Basic earnings per common share:         
Net income $1,523,238  5,991,480  $0.25 
           
Effect of dilutive securities:            
 Stock options and unvested stock awards      155,182     
             
Diluted EPS:            
 Net income plus assumed conversion $1,523,238   6,146,662  $0.25 

  
Three Months Ended March 31,
2014
 
  
Net 
Income
  
Weighted-
average
shares
  
Per share
amount
 
Basic earnings per common share:         
Net income $641,712   6,756,782  $0.09 
Effect of dilutive securities:            
Stock options, warrants and unvested restricted stock awards      186,161     
Diluted EPS:            
Net income plus assumed conversion $641,712   6,942,943  $0.09 


  Three Months Ended September 30, 2012 
  
 
Net
Income
  
Weighted-
average
shares
  
 
Per share
Amount
 
Basic earnings per common share:         
Net income $1,354,919     5,378,854  $0.25 
             
Effect of dilutive securities:            
Stock options and unvested stock awards      130,019     
             
Diluted EPS:            
 Net income plus assumed conversion $1,354,919   5,508,873  $0.25 
  
Three Months Ended March 31,
2013
 
  
Net 
Income
  
Weighted-
average
shares
  
Per share
amount
 
Basic earnings per common share:         
Net income $1,325,318   5,895,763  $0.22 
Effect of Dilutive Securities:            
Stock options, warrants and unvested restricted stock awards      139,016     
Diluted EPS:            
                   Net income plus assumed conversions $1,325,318   6,034,779  $0.22 
 
 
   Nine Months Ended September 30, 2013 
  
 
Net
Income
  
Weighted-
average
shares
  
 
Per share
Amount
 
Basic earnings per share:         
Net income $4,405,588  5,960,294  $0.74 
             
Effect of dilutive securities:            
Stock options and unvested stock awards      128,539     
             
Diluted EPS:            
      Net income plus assumed conversion $4,405,588   6,088,833  $0.72 
 For the three months ended March 31, 2014 and 2013, 87,296 and 30,500 options, respectively, were anti-dilutive and were not included in the computation of diluted earnings per common shares.


  Nine Months Ended September 30, 2012 
  
 
Net
Income
  
Weighted-
average
shares
  
 
Per share
Amount
 
Basic earnings per common share:         
Net income $3,819,759  5,360,395  $0.71 
             
Effect of dilutive securities:            
Stock options and unvested stock awards      96,107     
             
Diluted EPS:            
      Net income plus assumed conversion $3,819,759   5,456,502  $0.70 

8


(4)           Investment Securities
 
 Amortized cost, gross unrealized gains and losses, and the estimated fair value by security type are as follows:

     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
September 30, 2013:  Cost  Gains  Losses  Value 
             
Available for sale            
             
U. S. Treasury securities and            
    obligations of U.S. Government            
    sponsored corporations (“GSE”) and agencies $22,382,475  $33,857  $(789,667)  $21,626,665 
Residential collateralized
    mortgage obligations – GSE
  4,031,094   165,347   -   4,196,441 
Residential collateralized
     mortgage obligations – non-GSE
  3,001,533   70,080   (18,950)   3,052,663 
Residential mortgage
     backed securities – GSE
  32,795,415   1,002,198   (458,845)   33,338,768 
Obligations of State and                
    Political subdivisions  22,231,752   174,056   (2,660,209)   19,745,599 
Trust preferred debt securities – single issuer  2,468,135   -   (429,935)   2,038,200 
Corporate Debt Securities  16,267,927   280,241   (27,393)   16,520,775 
Restricted stock  1,013,100   -   -   1,013,100 
Mutual fund  25,000   -   -   25,000 
                 
  $104,216,431  $1,725,779  $(4,384,999)  $101,557,211 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
March 31, 2014 Cost  Gains  Losses  Value 
Available for sale-
            
U. S. Treasury securities and            
     obligations of U.S. Government            
     sponsored corporations (“GSE”) and agencies $11,429,804  $-  $(661,119) $10,768,685 
Residential collateralized mortgage obligations- GSE  4,382,539   112,206   (49,956)  4,444,789 
Residential collateralized mortgage obligations-
             non GSE
  3,154,429   54,710   (5,781)  3,203,358 
Residential mortgage backed securities – GSE  30,427,673   869,202   (342,213)  30,954,662 
Obligations of State and Political subdivisions  22,182,476   200,338   (1,900,821)  20,481,993 
Trust preferred debt securities – single issuer  2,469,574   -   (401,174)  2,068,400 
Corporate debt securities  43,626,642   384,940   (37,753)  43,973,829 
Restricted stock  1,710,000   -   -   1,710,000 
Mutual fund  25,000   -   -   25,000 
  $119,408,137  $1,621,396  $(3,398,817) $117,630,716 


September 30, 2013: 
Amortized
Cost
  
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
  
Carrying
Value
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
 
                   
Held to maturity                  
                   
  �� U. S. Treasury securities and                  
         obligations of U.S.
         Government sponsored
                  
         corporations (“GSE”)
         and agencies
 $1,537,229  $-  $1,537,229  $14,416  $-  $1,551,645 
    Residential collateralized
        Mortgage obligations –
        GSE
  15,701,290   -   15,701,290   578,336   -   16,279,626 
    Residential collateralized
       Mortgage obligations –
       non-GSE
  11,234,867   -   11,234,867   329,988   (1,637)  11,563,218 
    Residential mortgage
       backed  securities – GSE
  67,487,280   -   67,487,280   869,664   (268,803)  68,088,141 
    Obligations of State and                        
       political subdivisions  50,960,864   -   50,960,864   1,405,225   (1,327,248)  51,038,841 
    Trust preferred debt
       securities – pooled
  656,662   (500,944)  155,718   -   (8,311)  147,407 
    Corporate debt securities  3,495,674   -   3,495,674   21,729   -   3,517,403 
                         
  $151,073,866  $(500,944) $150,572,922  $3,219,358  $(1,605,999) $152,186,281 
9


     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
December 31, 2012:  Cost  Gains  Losses  Value 
             
Available for sale-            
U. S. Treasury securities and            
    obligations of U.S. Government            
    sponsored corporations (“GSE”) and agencies $29,384,595  $137,847  $(26,907 $29,495,535 
                 
Residential collateralized  mortgage obligations – GSE  6,349,310   283,355   -   6,632,665 
Residential collateralized   mortgage obligations –
    non-GSE
  3,811,933   119,323   (7,074)  3,924,182 
                 
Residential mortgage  backed securities – GSE  24,912,948   1,576,387   -   26,489,335 
Obligations of State and   Political subdivisions  20,793,222   375,416   (486,337)  20,682,301 
Trust preferred debt securities – single issuer  2,466,009   -   (467,643)  1,998,366 
Corporate Debt Securities  17,797,681   325,731   (23,131  18,100,281 
Restricted stock  2,493,300   -   -   2,493,300 
Mutual fund  25,000   -   -   25,000 
  $108,033,998  $2,818,059  $(1,011,092)  $109,840,965 




December 31, 2012: 
 
 
 
 
Amortized
Cost
  
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Income
  
 
 
 
 
Carrying
Value
  
 
 
 
Gross
Unrealized
Gains
  
 
 
 
Gross
Unrealized
Losses
  
 
 
 
 
Fair
Value
 
Held to maturity-                  
    Obligations of U.S.
      Government sponsored
      corporations (“GSE”)
      and agencies
 $ 3,073,957   $                     -   $         3,073,957   $         33,213   $                 -   $    3,107,170 
                         
    Residential collateralized
        mortgage obligations
        – GSE
   19,660,625   -    19,660,625   1,021,556    -   20,682,181 
                         
    Residential collateralized
     mortgage obligations-
     non – GSE
  13,387,974   -   13,387,974   796,892   (289  14,184,577 
                         
    Residential mortgage
     backed securities –
     GSE
  19,950,190   -   19,950,190   849,040   (944  20,798,286 
                         
   Obligations of State and
    Political subdivisions
   42,815,706          42,815,706    3,039,935   -   45,855,641 
                         
  Trust preferred debt
    securities – pooled
  656,662   (500,944)  155,718   -         (9,638)         146,080 
                         
  Corporate debt securities  16,983,730   -   16,983,730   84,443   (2,745)  17,065,428 
                         
  $ 116,528,844   $(500,944 )  $ 116,027,900  $ 5,825,079       $(13,616) $121,839,363 
 
10


March 31, 2014 
 
 
 
 
 
Amortized
Cost
  
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
  
 
 
 
 
 
Carrying
Value
  
 
 
 
 
Gross
Unrealized
Gains
  
 
 
 
 
Gross
Unrealized
Losses
  
 
 
 
 
 
Fair
Value
 
Held to maturity-                  
    U. S. Treasury securities and                  
         obligations of U.S. Government                        
         sponsored corporations (“GSE”)
         and agencies
 $1,512,570  $-  $1,512,570  $6,130  $-  $1,518,700 
    Residential collateralized
         mortgage obligations – GSE
  14,077,130   -   14,077,130   424,788   -   14,501,918 
    Residential collateralized mortgage
         obligations – non – GSE
  10,210,560   -   10,210,560   263,511   (247)  10,473,824 
    Residential mortgage backed
         securities – GSE
  63,465,847   -   63,465,847   1,021,862   (239,185)  64,248,524 
    Obligations of State and                        
         Political subdivisions  62,309,859   -   62,309,859   1,761,685   (765,477)  63,306,067 
    Trust preferred debt securities-pooled  656,661   (500,944)  155,717   583,269   -   738,986 
    Corporate debt securities  1,002,876      1,002,876   4,764   -   1,007,640 
  $153,235,503  $(500,944) $152,734,559  $4,066,009  $(1,004,909) $155,795,659 
    Gross Gross   
  Amortized Unrealized Unrealized Fair 
December 31, 2013 Cost Gains Losses Value 
          
Available for sale-
         
U. S. Treasury securities and         
obligations of U.S. Government         
sponsored corporations (“GSE”) and agencies  $22,386,761  $33,213  $(910,274) $21,509,700 
        Residential collateralized mortgage obligations- GSE   3,547,404   134,388   -   3,681,792 
        Residential collateralized mortgage obligations-
             non GSE
   2,782,843   52,227   (8,674)  2,826,396 
Residential mortgage backed securities - GSE   31,532,051   872,169   (438,273)  31,965,947 
Obligations of State and Political subdivisions   22,206,959   149,959   (2,710,874)  19,646,044 
        Trust preferred debt securities-single issuer   2,468,839   -   (455,739)  2,013,100 
        Corporate debt securities   16,228,474   318,590   (29,336)  16,517,728 
        Restricted stock   1,013,100   -   -   1,013,100 
        Mutual fund   25,000   -   -   25,000 
   $102,191,431  $1,560,546  $(4,553,170) $99,198,807 

11

December 31, 2013 
 
 
 
 
 
Amortized
Cost
  
Other-Than-
Temporary
Impairment
Recognized In
Accumulated
Other
Comprehensive
Loss
  
 
 
 
 
 
Carrying
Value
  
 
 
 
 
Gross
Unrealized
Gains
  
 
 
 
 
Gross
Unrealized
Losses
  
 
 
 
 
 
Fair
Value
 
Held to maturity-                  
  Obligations of U.S. Government                  
sponsored corporations (“GSE”) and agencies $1,524,860  $-  $1,524,860  $10,310  $-  $1,535,170 
    Residential collateralized
          mortgage obligations-GSE
  14,803,739   -   14,803,739   379,815   -   15,183,554 
   Residential collateralized
          mortgage obligations-non-
          GSE
  10,682,363   -   10,682,363   119,777   (27,526)  10,774,614 
   Residential mortgage backed
      securities – GSE
  65,240,620   -   65,240,620   611,062   (387,034)  65,464,648 
Obligations of State and
Political
          subdivisions
  59,400,916   -   59,400,916   1,399,938   (1,296,357)  59,504,497 
Trust preferred debt securities - pooled  656,662   (500,944)  155,718   -   (6,863)  148,855 
Corporate debt securities  1,008,599   -   1,008,599   9,836   -   1,018,435 
  $153,317,759  $(500,944) $152,816,815  $2,530,738  $(1,717,780) $153,629,773 

Restricted stock at September 30, 2013March 31, 2014 and December 31, 20122013 consisted of $998,100$1,710,000 and $2,478,300,$1,013,100, respectively, of Federal Home Loan Bank of New York stock and $15,000$65,000 of Atlantic Central Bankers Bank stock.
 
The amortized cost and estimated fair value of investment securities at September 30, 2013,March 31, 2014, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Restricted stock is included in “Available for sale-Duesale - Due in one year or less.”

 
Amortized
Cost
 
Fair
Value
  
Amortized
Cost
 
Fair
Value
 
Available for sale-   
Available for sale-
   
Due in one year or less                
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies
 $4,998,329 $5,004,300 
Residential mortgage backed securities - GSE 19,397 20,034 
U.S. Treasury securities and obligations of US Government
sponsored corporations (“GSE”) and agencies
 $- $- 
Residential mortgage backed securities-GSE 386 387 
Obligations of State and Political subdivisions 110,000 110,343  374,530 375,968 
Corporate Debt Securities 510,694 512,930  16,325,561 16,333,666 
Restricted Stock 1,013,100 1,013,100  1,710,000 1,710,000 
Mutual Fund  25,000  25,000   25,000  25,000 
 $6,676,520 $6,685,707  $18,435,477 $18,445,021 
Due after one year through five years                
U.S. Treasury securities and obligations of
US Government sponsored corporations (“GSE”) and agencies
 $6,517,816 $6,520,515 
Residential mortgage backed securities - GSE 4,431,874 4,370,765 
U.S. Treasury securities and obligations of
US Government sponsored corporations (“GSE”)and agencies
 $1,545,381 $1,523,385 
Residential collateralized mortgage obligations –non GSE 541,290 543,378 
Residential mortgage backed securities-GSE 7,007,116 6,919,178 
Obligations of State and Political subdivisions 374,281 375,833  110,000 110,231 
Corporate Debt Securities  14,671,579  14,942,705   25,195,136  25,575,393 
 $25,995,550 $26,209,818  $34,398,923 $34,671,565 
Due after five years through ten years                
U.S. Treasury securities and obligations of U.S. Government
sponsored corporations (“GSE”) and agencies
 $10,866,330 $10,101,850 
Residential collateralized mortgage obligations - GSE 134,797 144,639 
Residential mortgage backed securities - GSE 11,172,951 11,152,731 
U.S. Treasury securities and obligations of US Government sponsored
corporations (“GSE”) and agencies
 $9,884,423 $9,245,300 
Residential collateralized mortgage obligations -GSE 116,140 123,862 
Residential mortgage backed Securities - GSE 7,914,672 7,990,787 
Obligations of State and Political Subdivisions 3,167,509 3,227,127  4,871,859 4,865,849 
Corporate Debt Securities  -  -   1,020,784  1,016,250 
 $25,341,587 $24,626,347  $23,807,878 $23,242,048 
Due after ten years                
     
Residential collateralized mortgage obligations - GSE 3,896,296 4,051,802 
Residential collateralized mortgage obligations - non GSE 3,001,534 3,052,663 
Residential collateralized mortgage obligations -GSE $4,266,399 $4,320,927 
Residential collateralized mortgage obligations –non GSE 2,613,139 2,659,980 
Residential mortgage backed securities - GSE 17,171,193 17,795,238  15,505,499 16,044,310 
Obligations of State and Political subdivisions 18,579,962 16,032,296  16,826,087 15,129,945 
Trust Preferred Debt Securities - single issuer 2,468,135 2,038,200 
Corporate Debt Securities  1,085,654  1,065,140  1,085,161 1,048,520 
Trust Preferred Debt Securities  2,469,574  2,068,400 
 $46,202,774 $44,035,339  $42,765,858 $41,272,081 
            
Total $104,216,431  $101,557,211  $119,408,137  $117,630,716 
 
12

Held to maturity-
        
Due in one year or less        
U.S. Treasury securities and obligations of US Government sponsored
Corporations (“GSE”) and agencies
 $1,512,570  $1,518,700 
Obligations of State and Political subdivisions  11,197,967   11,221,464 
Corporate Debt Securities  1,002,876   1,007,640 
  $13,713,413  $13,747,804 
         
Due after one year through five years        
U.S. Treasury securities and obligations of
US Government sponsored corporations (“GSE”) and agencies
 $-  $- 
Obligations of State and Political subdivisions  11,666,066   12,082,277 
Corporate Debt Securities  -   - 
  $11,666,066  $12,082,277 
         
Due after five years through ten years        
Residential collateralized mortgage obligations – GSE $12,765  $12,781 
Residential collateralized mortgage obligations-non GSE  877,270   877,023 
Residential mortgage backed securities – GSE  21,091,526   21,375,467 
Obligations of State and Political subdivisions  19,914,474   20,643,262 
  $41,896,035  $42,908,533 
Due after ten years        
Residential collateralized mortgage obligations - GSE  14,064,365   14,489,137 
Residential collateralized mortgage obligations – non GSE  9,333,290   9,596,801 
Residential mortgage backed securities - GSE  42,374,321   42,873,057 
Obligations of State and Political subdivisions  19,531,352   19,359,064 
Trust Preferred Debt Securities - Pooled  656,661   738,986 
  $85,959,989  $87,057,045 
         
         
Total $153,235,503  $155,795,659 

 
1113

Held to maturity-        
Due in one year or less        
U.S. Treasury securities and obligations of
US Government sponsored corporations (“GSE”) and agencies
 $1,537,229  $1,551,645 
Obligations of State and Political subdivisions  1,261,544   1,273,221 
Corporate Debt Securities  3,495,674   3,517,403 
  $6,294,447  $6,342,269 
         
Due after one year through five years        
U.S. Treasury securities and obligations of
US Government sponsored corporations (“GSE”) and agencies
 $-  $- 
Obligations of State and Political subdivisions  8,937,728   9,243,927 
Corporate Debt Securities  -   - 
  $8,937,728  $9,243,927 
         
Due after five years through ten years        
Residential collateralized mortgage obligations - GSE  85,440   86,388 
Residential collateralized mortgage obligations – non-GSE  954,327   952,869 
Residential mortgage backed securities – GSE  21,772,966   21,945,961 
Obligations of State and Political subdivisions  20,751,372   21,459,490 
  $43,564,105  $44,444,708 
Due after ten years        
Residential collateralized mortgage obligations - GSE $15,615,850  $16,193,239 
Residential collateralized mortgage obligations – non-GSE  10,280,540   10,610,348 
Residential mortgage backed securities - GSE  45,714,314   46,142,180 
Obligations of State and Political subdivisions  20,010,221   19,062,203 
Trust Preferred Debt Securities - Pooled  656,662   147,407 
  $92,277,587  $92,155,377 
         
         
Total $151,073,866  $152,186,281 

Gross unrealized losses on available for sale and held to maturity securities and the estimated fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013March 31, 2014 and December 31, 2012 are2013 were as follows:

September 30, 2013  Less than 12 months  12 months or longer  Total 
 
Number
of
Securities
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
                          
U.S. Treasury securities and obligations of
        U.S. Government sponsored
        corporations and agencies
3 $11,627,065  $(789,667) $-  $-  $11,627,065  $(789,667)
                          
Residential collateralized mortgage
       obligations – non-GSE
3  952,689   (1,637)  1,094,497   (18,950)   2,047,186   (20,587)
                          
Residential mortgage backed securities
    - GSE
28  30,747,798   (727,648)  -   -   30,747,798   (727,648)
                          
Obligations of State and Political
    Subdivisions
77  24,976,580   (3,987,457)  -   -   24,976,580   (3,987,457)
                          
Trust preferred debt securities –
        single issuer
4  -   -   2,038,200   (429,935)   2,038,200   (429,935)
                          
Trust preferred debt securities –
         pooled
1  -   -   147,407   (509,255)   147,407   (509,255)
                          
Corporate Debt Securities3  2,823,855    (27,393)  -   -   2,823,855   (27,393)
                          
 Total temporarily impaired securities119 $71,127,987  $(5,533,802)  $3,280,104  $(958,140)  $74,408,091  $(6,491,942) 

12

December 31, 2012  Less than 12 months  12 months or longer  Total 
 
Number
of
Securities
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
                          
                          
U.S. Treasury securities and obligations
      of  U.S. Government sponsored
      corporations (GSE) and agencies
1 $9,842,200  $(26,907)  $-  $-  $9,842,200  $(26,907) 
                          
Residential collateralized mortgage
     obligations – non-GSE
3  1,960,237   (4,516)   156,505   (2,847)   2,116,742   (7,363) 
                          
Residential mortgage backed securities
     GSE
2  3,989,675   (944)   -   -   3,989,675   (944) 
                          
Obligations of State and Political
     Subdivisions
37  12,794,007   (486,337)   -   -   12,794,007   (486,337) 
                          
Trust preferred debt securities –
        Single issuer
4  -   -   1,998,366   (467,643)   1,998,366   (467,643) 
                          
Trust preferred debt securities –
        Pooled
1  -   -   146,080   (510,582)   146,080   (510,582) 
                          
Corporate debt securities5  3,176,328   (25,876)   -   -   3,176,328   (25,876) 
                          
Total temporarily impaired securities53 $31,762,447  $(544,580)  $2,300,951  $(981,072)  $34,063,398  $(1,525,652) 


                    
                    
March 31, 2014  Less than 12 months  12 months or longer  Total 
 
Number
of
Securities
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
U.S. Treasury securities and obligations
      of U.S. Government sponsored
          corporations and agencies
2 $10,768,685  $(661,119) $-  $-  $10,768,685  $(661,119)
                          
Residential collateralized mortgage obligations - GSE1  1,151,081   (49,956)  -   -   1,151,081   (49,956)
                          
Residential collateralized mortgage
       obligations – non-GSE
3  877,023   (247)  1,097,207   (5,781  1,974,230   (6,028)
                          
Residential mortgage backed
       securities - GSE
20  16,183,114   (454,108)  5,259,063   (127,290)  21,442,177   (581,398)
                          
Obligations of State and Political
      Subdivisions
88  14,563,695   (893,734)  13,459,681   (1,772,564  28,023,376   (2,666,298)
                          
Trust preferred debt securities –
        single issuer
4  -   -   2,068,400   (401,174)  2,068,400   (401,174)
                          
Corporate Debt Securities5  3,576,105    (1,112  1,048,520   (36,641  4,624,625   (37,753)
                          
  Total temporarily impaired securities123 $47,119,703  $(2,060,276) $22,932,871  $(2,343,450) $70,052,574  $(4,403,726)
 
 
December 31, 2013  Less than 12 months  12 months or longer  Total 
 
Number
of
Securities
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
 U.S. Treasury securities and
     obligations of U.S. Government
     sponsored corporations (GSE) and
     agencies
3  $11,507,350    $(910,274      $11,507,350   (910,274)
                          
Residential collateralized mortgage
     Obligations – non-GSE
8  5,328,485   (28,231)  1,094,754   (7,969)  6,423,239   (36,200)
                          
Residential mortgage backed securities
     GSE
38  40,504,327   (825,307)  -   -   40,504,327   (825,307)
                          
Obligations of State and Political
     Subdivisions
95  19,403,457   (2,285,759)  8,936,441-   (1,721,472)  28,339,898   (4,007,231)
                          
Trust preferred debt securities –
        single issuer
4  -   -   2,013,100   (455,739)  2,013,100   (455,739)
                          
Trust preferred debt securities –
        pooled
1  -   -   148,855   (507,807)  148,855   (507,807)
                          
Corporate debt securities1  -   -   1,056,110   (29,336)  1,056,110   (29,336)
                          
 Total temporarily impaired securities150 $76,743,619  $(4,049,571) $13,249,260  $(2,722,323) $89,992,879  $(6,771,894)
 
 
1314

 
U.S. Treasury securities and obligations of U.S. Government sponsored corporations and agencies:  The unrealized losses on investments in these securities were caused by increases in market interest rate increases.rates.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity; therefore, these investments are not considered other-than temporarily impaired.
Residential collateralized mortgage obligations and residential mortgaged-backed securities: The unrealized losses on investments in residential collateralized residential mortgage obligations and mortgage-backed securities were caused by increases in market interest rates. The contractual cash flows of these securities are guaranteed by the issuer, which are primarily government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. BecauseThe decline in fair value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell these investments and it is not likely that the Company will be required to sell these investments before a market price recovery or maturity; therefore, these investments are not considered other-than-temporarily impaired.
Obligations of State and Political Subdivisions:  The unrealized losses or investments in these securities were caused by increases in market interest rates.  It is expected that the securities would not be settled at a price less than the amortized cost of the investment.  The decline in fair value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.

Residential collateralized mortgage obligations and residential mortgaged-backedCorporate debt securities:The unrealized losses on investments in residential collateralized residential mortgage obligations and mortgage-backedcorporate debt securities were caused by increases to market interest rate increases. The contractual cash flows of these securities are guaranteed by the issuer, which are generally government or government sponsored agencies. It is expected that the securities would not be settled at a price less than the amortized costrates.  None of the investment. Because thecorporate issuers have defaulted on interest payments.   The decline in fair value is attributable to changes in interest rates and not a decline in credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.
Obligations of State and Political Subdivisions:  The unrealized losses on investments in these securities were caused by interest rate increases.  None of the issuers have defaulted on interest payments.  It is expected that the securities would not be settled at a price less than the amortized cost of the investment.  Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Corporate debt securities:   The unrealized losses on investments in corporate debt securities were caused by interest rate increases.  None of the corporate issuers have defaulted on interest payments.  Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securities – single issuer:  The investments in these securities with unrealized losses are comprised of four corporate trust preferred securities issued by two large financial institutions that mature in 2027, all of which were single-issuer securities.2027. The contractual terms of the trust preferred securities do not allow the issuer to settle the securities at a price less than the face value of the trust preferred securities, which is greater than the amortized cost of the trust preferred securities.  NoneBoth of the corporate issuers havecontinue to maintain investment grade credit ratings and neither has defaulted on interest payments.  Because theThe decline in fair value is attributable to the widening of interest rate spreads and the lack of an active trading market for these securities and, to a lesser degree, market concerns onabout the issuers’ credit quality, and because thequality. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before a market price recovery or maturity,maturity; therefore, these investments are not considered other-than-temporarily impaired.

Trust preferred debt securitysecurities – pooled:   This trust preferred debt security was issued by a two issuer pool (Preferred Term Securities XXV, Ltd. co-issued by Keefe, Bruyette and Woods, Inc. and First Tennessee (“PreTSLPRETSL XXV”),) consisting primarily of financial institution holding companies.  During 2009, the Company recognized an other-than-temporary impairment charge of $864,727, of which $363,783 was determined to be a credit loss and charged to operations and $500,944 was recognized in the other comprehensive income (loss) component of shareholders’ equity.

The primary factor used to determine the credit portion of the impairment loss to be recognized in the income statement for this security was the discounted present value of the projected cash flowsflow where that present value of cash flowsflow was less than the amortized cost basis of the security.  The present value of cash flowsflow was developed using an EITF 99-20 model that considered performing collateral ratios, the level of subordination to senior tranches of the security, credit ratings of and projected credit defaults in the underlying collateral.
 
 
1415


On a quarterly basis, management evaluates this security to determine if there is any additional other-than-temporary impairment (“OTTI”).is required.  As of September 30, 2013,March 31, 2014, our evaluation was as follows:
 
 a.We obtained the PreTSLPRETSL XXV Depository Institutions Issuer List as of September 30, 2013March 31, 2014 from the FTN Financial Corp. (“FTN”) website and reviewed the financial ratios and capital levels of each individual financial institution issuer.
 
 b.We sorted the financial institutions on the issuer list to develop three “buckets” (or categories) for further deferred/default analysis based upon the indicated “Texas Ratio.”  The Texas Ratio is calculated by dividing the institution’s Non-Performing Assets plus loans 90 days past due by the combined total of Tangible Equity plus the Allowance for Loan Losses.  The three buckets consisted of those institutions with a Texas Ratio of:
 
(1) Above 100:
(1)Above 100;
 
(2) 75 to 100:
(2)75 to 100; and
 
(3)
(3)Below 75.

 c.We then applied the following asset specific deferral/default assumptions to each of these buckets:
 
(1)
(1)Above 100 - 100% default; 0% recovery;
 
(2)
(2)75 to 100 – 100% deferred; 15% recovery at 2 years from initial date of deferral; and
 
(3) Below 75 – no deferral/default
(3)Below 75 – no deferral/default.

 d.We then ranperformed a cash flow projection to analyze the impact of future deferral/default activity by applying the following assumption on those institutions in bucket 3(3) of our analysis:

·Defaults at 75 basis points applied annually; 15% recovery with a 2-year lag from the initial date of deferral.

Our rationale for these metrics is as follows:  (1) theThe FDIC lists the number of bank failures each year from 1934 – 2008; comparing2008.  Comparing bank failures to the number of FDIC institutions produces an annual average default rate of 36 basis points; givenpoints. Given the continuing uncertain economic environment, we believe doublethe doubling of this amount, or 75 basis points, to be an appropriate measurement for defaults; and (2) Standard & Poor’s published “Global Methodology for Rating Trust Preferred/Hybrid Securities Revised” on November 21, 2008.  This analysis uses a recovery assumption of 15%, which we also deem an appropriate measurement.

Our position is that it is appropriate to apply this future default factor in our analysis as it is not realistic to assume no adverse conditions will occur over the remaining 26 year26-year stated maturity of this pooled security even though the individual institutions are currently performing according to terms.

 e.
This September 30, 2013March 31, 2014 projection of future cash flows produced a present value factor that exceeded the carrying value of the pooled trust preferred security; therefore, management concluded that no OTTIother-than-temporary impairment issues were present at September 30, 2013.March 31, 2014.
 
 
1516

 
A number of factors or combinations of factors could cause management to conclude in one or more future reporting periods that an unrealized loss that exists with respect to PreTSLPRETSL XXV constitutes an additional credit impairment.  These factors include, but are not limited to, failure to make interest payments, an increase in the severity of the unrealized loss, an increase in the continuous duration of the unrealized loss without an impairment in value or changes in market conditions and/or industry or issuer specific factors that would render management unable to forecast a full recovery in value.  In addition, the fair value of trust preferred securities could decline if the overall economy and the financial condition of the issuers continue to deteriorate and there remains limited liquidity for this security.
 
The following table sets forth information with respect to this security at September 30, 2013:March 31, 2014:

SecurityClassAmortized Cost
Fair
Value
Unrealized
(Loss) and OTTI
Percent of
 Underlying
 Collateral
Performing
Percent of
Underlying
Collateral In
Deferral (1)
Percent of
Underlying
Collateral In
Default  (1)
Expected
Deferrals and
Defaults as a
% of Remaining Performing
Collateral
Moody's
S&P /
Ratings
Excess
Subordination (2)
Class
 
Book
Value
 
Fair
Value
 
Unrealized
Gain
(Loss)
 
Percent of
 Underlying
 Collateral
Performing
 
Percent of
Underlying
Collateral In
Deferral (1)
 
Percent of
Underlying
Collateral In
Default  (1)
 
Expected
Deferrals and
Defaults as a
% of Remaining Performing
Collateral
 
Moody's
S&P /
Ratings
 
Excess
Subordination        (2)
Amount
%  of
 Current
Performing
Collateral
Amount
%  of
 Current
Performing
Collateral
 
        
PreTSL
XXV
B-1$656,662$147,407$(509,255)66.5%10.9%22.6%14.0%C/ NR$108,00021.0%B-1$155,717$738,986$583,26970.7%6.7%22.6%13.6%Ca/ NR$146,50027.0%


Notes to table above:

(1)This percentage represents the amount of specific deferrals / defaults that have occurred, plus those that are known for the following quarters to the total amount of original collateral. Fewer deferrals / defaults produce a lower percentage.

(2)"Excess subordination"subordination” amount is the additional defaults / deferrals necessary in the next reporting period to deplete the entire credit enhancement (excess interest and over-collateralization) beneath our tranche within each pool to the point that would cause a "break“break in yield"yield”. This amount assumes that all currently performing collateral continues to perform.  A break in yield means that our security would not be expected to receive all the contractual cash flows (principal and interest) by maturity.  The "percent“percent of underlying collateral performing"performing” is the ratio of the "excess“excess subordination amount"amount” to current performing collateral - a higher percentpercentage means there is more excess subordination to absorb additional defaults / deferrals, and the better our security is protected from loss.

The Company regularly reviews the composition of the investment securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs, and its overall interest rate risk profile and strategic goals.

The following table presents a cumulative roll forward of the amount of other-than-temporary impairment related to credit losses, all of which relate to PreTSLPRETSL XXV, which have been recognized in earnings for debt securities held to maturity and not intended to be sold.

(in thousands) 
Three and nine months
ended September 30,
2013
 
Three and nine months
ended September 30,
2012
  
Three months ended
March 31, 2014
 
Three months ended
March 31, 2013
 
Balance at beginning of period $364  $364  $364  $364 
Change during the period  -   -   -   - 
Balance at end of period $364  $364  $364  $364 
 
 
1617

 
(5)   Allowance for Loan Losses and Credit Quality DisclosuresDisclosure

The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit.  Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values.  Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

The following table provides an aging of the loan portfolio by loan class at September 30, 2013:March 31, 2014:
 
 
30-59
Days
  
60-89
Days
  
Greater than
90 Days
  
Total Past
Due
  Current  
Total
Loans
Receivable
  
Recorded
Investment
> 90 Days
Accruing
  
Nonaccrual
Loans
  30-59 Days  60-89 Days  
Greater
than 90
Days
  
Total Past
Due
  Current  
Total
Loans
Receivable
  
Recorded
Investment
> 90 Days
Accruing
  
Nonaccrual
Loans
 
                                                
Commercial                                                
Construction $-  $-  $995,830  $995,830  $42,237,906  $43,233,736  $-  $995,830  $459,002  $-  $-  $459,002  $62,331,447  $62,790,449  $-  $- 
Commercial Business  130,831   -   439,887   570,718   65,153,689   65,724,407   -   439,887   1,267,501   -   726,190   1,993,691   116,550,108   118,543,799       340,787 
Commercial Real Estate  875,624   -   6,052,984   6,928,608   89,548,110   96,476,718   -   6,052,982   2,690,508   241,192   5,639,123   8,570,823   169,634,524   178,205,347   -   5,554,882 
Mortgage Warehouse Lines   -   -   -   -   134,534,202   134,534,202   -   -   -   -   -   -   104,334,990   104,334,990   -   - 
                                                                
Residential Real Estate  -   970,123   164,541   1,134,664   10,521,526   11,656,190   -   164,542   538,410   -   1,315,189   1,853,599   39,921,947   41,775,546   -   1,443,499 
                                                                
Consumer                                                                
Loans to Individuals  -   -   94,898   94,898   9,752,485   9,847,383   94,898   -   79.608   -   -   79,608   24,804,917   24,884,525   -   116,641 
Other  -   -   -   -   170,940   170,940   -   -   -   -   -   -   205,515   205,515   -   - 
                                                                
Deferred Loan Fees  -   -   -   -   905,897   905,897   -   - 
Deferred Loan Costs  -   -   -   -   665,211   665,211   -   - 
                                                                
Total $1,006,455   970,123  $7,748,140  $9,724,718  $352,824,755  $362,549,473  $94,898  $7,653,241  $5,035,029  $241,192  $7,680,502  $12,956,723  $518,448,659  $531,405,382  $-  $7,455,809 
                                

As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired with evidence of deteriorated credit quality of $2,575,110 at March 31, 2014 were not classified as non-performing loans.
18

The following table provides an aging of the loan portfolio by loan class at December 31, 2012:

  
30-59
Days
  
60-89
Days
  
Greater
than 90
Days
  
Total Past
Due
  Current  
Total
Loans
Receivable
  
Recorded
Investment
> 90 Days
Accruing
  
Nonaccrual
Loans
 
                         
Commercial                        
   Construction $-  $-  $1,581,031  $1,581,031  $54,110,362  $55,691,393  $-  $1,581,031 
   Commercial Business  202,451   70,192   518,912   791,555   57,073,881   57,865,436   -   629,821 
   Commercial Real Estate  -   -   3,137,553   3,137,553   99,275,141   102,412,694   -   3,478,605 
   Mortgage Warehouse Lines   -   -   -   -   284,127,530   284,127,530   -   - 
                                 
   Residential Real Estate  320,729   34,975   -   355,704   10,541,603   10,897,307   -   134,193 
                                 
Consumer                                
   Loans to Individuals  49,243   -   139,852   189,095   9,454,290   9,643,385   84,948   - 
   Other  -   -   -   -   189,279   189,279   -   - 
                                 
Deferred Loan Fees  -   -   -   -   987,086   987,086   -   - 
                                 
Total $572,423  $105,167  $5,377,348  $6,054,938  $515,759,172  $521,814,110  $84,948  $5,878,554 
2013:
 
17

  30-59 Days  60-89 Days  Greater
than 90
Days
  Total Past Due  Current  
Total
Loans
Receivable
  
Recorded
Investment 
> 90 Days
Accruing
  Nonaccrual
Loans
 
                         
Commercial                        
   Construction $-  $-  $-  $-  $51,002,172  $51,002,172  $-  $- 
   Commercial Business  385,133   58,665   453,325   897,123   81,450,932   82,348,055   -   511,990 
   Commercial Real Estate  -   -   5,217,173   5,217,173   93,172,557   98,389,730   -   5,555,851 
   Mortgage Warehouse Lines  -   -   -   -   116,951,357   116,951,357   -   - 
                                 
   Residential Real Estate  315,615   967,099   33,494   1,316,208   12,447,970   13,764,178   -   162,012 
                                 
Consumer                                
   Loans to Individuals  -   -   -   -   9,766,114   9,766,114   -   92,103 
   Other  -   -   -   -   170,526   170,526   -   - 
                                 
Deferred Loan Costs  -   -   -   -   943,950   943,950   -   - 
                                 
Total $700,748  $1,025,764  $5,703,992  $7,430,504  $365,905,578  $373,336,082   -  $6,321,956 
                                 
 
Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements.  These elements includeand is consistent with generally accepted accounting principles (GAAP) and regulatory interagency supervisory guidance.  The allowance for loan losses methodology consists of two major components.  The first component is an estimation of losses associated with individually identified impaired loans, which follows Accounting Standards Codification (ASC) Topic 310 (formerly SFAS 114).  The second major component is an estimation of losses under ASC Topic 450 (formerly SFAS 5), which provides guidance for estimating losses on groups of loans with similar risk characteristics.  The Company’s methodology results in an allowance for loan losses which includes a specific reserve for impaired loans, an allocated reserve, and an unallocated portion.

When analyzing groups of loans under ASC 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses.  The Company consistently appliesmethodology considers the following comprehensive methodology.  During the quarterly reviewCompany’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the allowance for loan losses,loans as of the Company considers a variety ofevaluation date.  These adjustment factors, thatknown as qualitative factors, include:

 ·General economic conditions.Delinquencies and nonaccruals
 ·Trends in charge-offs.Portfolio quality
 ·Trends and levelsConcentration of delinquent loans.
·Trends and levels of non-performing loans, including loans over 90 days delinquent.credit
 ·Trends in volume and terms of loans.loans
 ·LevelsQuality of allowance for specific classified loans.collateral
 ·Credit concentrations.Policy and procedures

·Experience, ability, and depth of management
·Economic trends – national and local
·External factors – competition, legal and regulatory
19

The methodology includes the segregation of the loan portfolio into loan types with a further segregation into internal risk rating categories, such as special mention, substandard, doubtful, and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction. Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process. It is this process that produces the watch list. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans isare determined, whenever possible, and used to establish specific loan loss reserves. In general, for non-homogeneous loans not individually assessed and for homogeneous groups, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.

The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss. Loans classifiedrated as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans rated as doubtful in whole, or in part, are placed in nonaccrual status. Loans classified as a loss are considered uncollectible and are charged off against the allowance for loan losses.

The specific reserveallowance for impaired loans is established for specific loans whichthat have been identified by management as being impaired. These impaired loans are assigned a doubtful risk rating gradeconsidered to be impaired primarily because the loan hasloans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole or in part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual doubtfulimpaired loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which in turn employ their own criteria and assumptions that may include occupancy rates, rental rates, and property expenses, among others.

The second category of reserves consists of the allocated portion of the allowance. The allocated portion of the allowance is determined by taking pools of loans outstanding that have similar characteristics and applying historical loss experience for each pool. This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial and commercial real estate loans, construction loans, warehouse lines of credit and various types of loans to individuals. The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other qualitative factor which may cause future losses to deviate from historical levels.

The Company also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision. Management must make estimates using assumptions and information that is often subjective and changing rapidly.

The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.

Commercial

The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit.loans. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
20


Mortgage Warehouse Lines of Credit

The Company’s Mortgage Warehouse Unit provides revolving lines of credit that are available to licensed mortgage banking companies. The Warehouse Line of Credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest and a transaction fee are collected by the Bank at the time of repayment. Additionally, customers of the Warehouse Lines of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the loan balances.

As a separate segment of the total portfolio, the warehouse loan portfolio is analyzed as a whole for allowance for loan losses purposes.  Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008; there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in warehouse, or (iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.

 These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in the volume of loans, portfolio quality, delinquencies and nonaccruals, are also considered and may have positive or negative effects on the allocated allowance.  The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in an allocated allowance for warehouse lines of credit.

Consumer

The Company’s consumer loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are created for the various types of loans to individuals.

In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and industry historical losses. These loan groups are then internally risk rated.

The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:

 ·Consumer credit scores
 ·Internal credit risk grades
 ·Loan-to-value ratios
 ·Collateral
 ·Collection experience

The Company’s internal credit risk grades are based on the definitions currently utilized by the bankbanking regulatory agencies.  The grades assigned and their definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:

1.  Excellent - Loans that are based upon cash collateral held at the Bank and adequately margined. Loans that are based upon "blue chip" stocks listed on the major exchanges and adequately margined.

2.  Above Average - Loans to companies whose balance sheets show excellent liquidity and whose long-term debt is on well-spread schedules of repayment easily covered by cash flow.  Such companies have been consistently profitable and have diversification in their product lines or sources of revenue.  The continuation of profitable operations for the foreseeable future is likely.  Management is comprised of a mix of ages, experience, and backgrounds and management succession is in place.  Sources of raw materials are abundant, and for service companies, the source of revenue is abundant.  Future needs have been planned for.  Character and repayment ability of individuals or company principals are excellent.  Loans to individuals supported by high net worths and liquid assets.

21

3.  Good- Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin.  Such company hascompanies have established a profitable recordrecords over a number of years, and there has been growth in net worth.  Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved.  Management is well-balanced and competent in their responsibilities.  Economic environment is favorable; however, competition is strong.  The prospects for growth are good.  Loans in this category do not meet the collateral requirements of loans in categories 1 and 2 above. Loans to individuals supported by good net worths but whose supporting assets are illiquid.

3w. Watch List- Included in this category are loans evidencing problems identified by Bank management that require closer supervision.  Such problem has not developed to the point which requires a Special Mention rating.  This category also covers situations where the Bank does not have adequate current information upon which credit quality can be determined.  The account officer has the obligation to correct these deficiencies within 30 days afterfrom the time of notification.

4.  Special Mention - Loans or borrowing relationships that require more than the usual amount of attention by Bank management.  Industry conditions may be adverse or weak.  The borrower's ability to meet current payment schedules may be questionable, even though interest and principal are being paid as agreed. Heavy reliance has been placed on the collateral.  Profits, if any, are interspersed with losses.  Management is "one man"“one man” or incompetent or there is no plan for management succession.  Expectations of a loan loss are not immediate; however, if present trends continue, a loan loss could be expected.

5.  Substandard - Loans in this category possess weaknesses that jeopardize the ultimate collection of total outstandings.  These weaknesses require close supervision by Bank management.  Current financial statements are unavailable and the loan is inadequately protected by the collateral pledged.  This category will normally include loans that have been classified as substandard by the regulators.

6.  Doubtful - Loans with the same weaknesses inherent in the substandard classification and where collection or liquidation in full is highly questionable.  It is likely that the loan will not be collected in full and the Bank will suffer some loss which is not quantifiable at the time of review.

7.  Loss - Loans considered uncollectable and of such little value that their continuance as an active asset is not warranted.  Loans in this category should immediately be eliminated fromcharged off to the Bank's loan loss reserve.  Any accrued interest should immediately be backed out of income.

22

The following table provides a breakdown of the loan portfolio by credit quality indictor at March 31, 2014.
Commercial Credit Exposure - By
Internally Assigned Grade
 Construction  
Commercial
Business
  
Commercial
Real Estate
  
Mortgage
Warehouse
Lines
   
Residential
Real Estate
 
                 
Grade:                
Pass $59,340,092  $114,608,335  $145,137,802  $104,334,990   $40,141,706 
Special Mention  -   2,122,133   22,459,847   -    1,318,225 
Substandard  3,450,357   1,225,596   10,607,698   -    315,615 
Doubtful  -   587,735   -   -    - 
Total $62,790,449  $118,543,799  $178,205,347  $104,334,990   $41,775,546 
                      
Consumer Credit Exposure -
By Payment Activity
 
Loans To
Individuals
  Other              
                      
Performing $24,767,884  $205,515              
Nonperforming  116,641   -              
Total $24,884,525  $205,515              


The following table provides a breakdown of the loan portfolio by credit quality indictor at September 30,December 31, 2013.

Commercial Credit
Exposure - By
Internally Assigned Grade
 Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
Lines
 
Residential
Real Estate
  Construction  
Commercial
Business
  
Commercial
Real Estate
  
Mortgage
Warehouse
Lines
   
Residential
Real Estate
 
                           
Grade:                           
Pass $38,743,089  $63,079,908  $64,562,349  $134,534,202  $10,521,525  $47,539,033  $79,832,704  $68,620,450  $116,951,357   $12,635,067 
Special Mention  -   1,465,856   21,013,297   -   1,134,665   -   1,406,143   19,396,574   -    1,129,111 
Substandard  4,490,647   920,157   10,901,072   -   -   3,463,139   792,057   10,372,706   -    - 
Doubtful  -   258,486   -   -   -   -   258,486   -   -    - 
Loss  -   58,665   -   -      
Total $43,233,736  $65,724,407  $96,476,718  $134,534,202  $11,656,190  $51,002,172  $82,348,055  $98,389,730  $116,951,357   $13,764,178 
                                
Consumer Credit
Exposure -
By Payment Activity
 
Loans To
Individuals
 Other        
Loans To
Individuals
  Other              
                                
Performing $9,847,383  $170,940         $9,674,011  $170,526              
Nonperforming  -   -         92,103   -              
Total $9,847,383  $170,940         $9,766,114  $170,526              

20

The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2012.

Commercial Credit Exposure - By
Internally Assigned Grade
Construction 
Commercial
Business
  
Commercial
Real Estate
  
Mortgage
Warehouse
Lines
   
Residential
Real Estate
 
               
Grade:              
Pass $49,373,827  $55,498,613  $76,096,964  $284,127,530   $10,763,114 
Special Mention  -   1,019,586   19,060,621   -    134,193 
Substandard  5,777,494   1,064,799   7,255,109   -    - 
Doubtful  540,072   282,438   -   -    - 
Total $55,691,393  $57,865,436  $102,412,694  $284,127,530   $10,897,307 
                      
Consumer Credit Exposure -
 By Payment Activity
Loans to
Individuals
 Other              
                      
Performing $9,454,288  $189,279              
Nonperforming  189,097   -              
Total $9,643,385  $189,279              
Impaired Loans Disclosures

Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments.  When a loan is placed on nonaccrual status, it is also considered to be impaired.  Loans are placed on nonaccrual status when: (1) the full collection of interest or principal becomes uncertain; or (2) they are contractually past due 90 days or more as to interest or principal payments unless theythe loans are both well secured and in the process of collection.

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at September 30, 2013March 31, 2014 and December 31, 2012:2013:

Period-End Allowance for Loan Losses by Impairment Method – September 30, 2013
     Commercial  Commercial  Mortgage  Residential           Deferred  Total 
  Construction  Business  Real Estate  Warehouse  Real Estate  Consumer  Other  Unallocated  Fees    
Allowance for credit losses:                              
Ending Balance $1,208,023  $1,031,607  $3,064,248  $672,671  $141,826  $110,068  $2,051   589,686  $-  $6,820,180 
                                         
Ending Balance                                        
  Individually evaluated
     for impairment
  -   235,027   1,476,632   -   -   -   -   -   -   1,711,659 
  Collectively evaluated
      for impairment
  1,208,023   796,580   1,587,616   672,671   141,826   110,068   2,051   589,686   -   5,108,521 
                                         
Loans receivables:                                        
Ending Balance $43,233,736  $65,724,407  $96,476,718  $134,534,202  $11,656,190  $9,847,383  $170,940  $-  $905,897  $362,549,473 
  Individually evaluated
        for impairment
  1,015,112   701,035   9,646,821   -   164,542   -   -   -   -   11,527,510 
  Collectively evaluated
       for impairment
  42,218,624   65,023,372   86,829,897   134,534,202   11,491,648   9,847,383   170,940   -   905,897   351,021,963 


Period-End Allowance for Loan Losses by Impairment Method – December 31, 2012
     Commercial  Commercial  Mortgage  Residential           Deferred  Total 
  Construction  Business  Real Estate  Warehouse  Real Estate  Consumer  Other  Unallocated  Fees    
Allowance for credit losses:                              
Ending Balance $1,990,292  $972,789  $2,262,221  $1,420,638  $112,103  $102,583  $2,271  $288,315  $0  $7,151,212 
                                         
Ending Balance                                        
  Individually evaluated
     for impairment
  569,579   253,598   447,193   -   21,693   -   -   -   -   1,292,063 
  Collectively evaluated
      for impairment
  1,420,713   719,191   1,815,028   1,420,638   90,410   102,583   2,271   288,315   -   5,859,149 
                                         
Loans receivables:                                        
Ending Balance $55,691,393  $57,865,436  $102,412,694  $284,127,530  $10,897,307  $9,643,385  $189,279   -  $987,086  $521,814,110 
  Individually evaluated
        for impairment
  2,842,031   906,526   3,952,546   -   134,193   54,904   -   -   -   7,890,200 
  Collectively evaluated
       for impairment
  52,849,362   56,958,910   98,460,148   284,127,530   10,763,114   9,588,481   189,279   -   987,086   513,923,910 
 
2123

 
Period-End Allowance for Loan Losses by Impairment Method March 31,2014 
        Commercial  Mortgage  Residential           Loan  Total 
  Construction  Commercial  Real Estate  Warehouse  Real Estate  Consumer  Other  Unallocated  Costs    
Allowance for loan losses:                              
Ending Balance $1,265,430  $1,218,036  $3,135,727  $521,675  $182,005  $92,387  $1,623  $613,959  $-  $7,030,842 
                                         
Ending Balance                                        
  Individually evaluated
     for impairment
  -   73,681   1,490,169   -   15,015   -   -   -   -   1,578,865 
  Collectively evaluated
      for impairment
 $1,265,430  $1,144,355  $1,645,558  $521,675  $166,990  $92,387  $1,623  $613,959  $-  $5,451,977 
                                         
Loans receivables:                                        
Ending Balance $62,790,449  $118,543,799  $178,205,347  $104,334,990  $41,775,546  $24,884,525  $205,515  $-  $665,211  $531,405,382 
  Individually evaluated
        for impairment
  189,363   428,885   9,117,675   -   1,443,499   90,711   -   -   -   11,270,133 
   Loans acquired with
       deteriorated credit
       quality
  -   376,262   1,786,749   -   180,767   231,332   -   -   -   2,575,110 
  Collectively evaluated
       for impairment
 $62,601,086  $117,738,652  $167,300,923  $104,334,990  $40,151,280  $24,562,482  $205,515  $-  $665,211  $517,560,139 
                                         
The activity in the allowance for loan losses by loan class for the nine months ended September 30, 2013 was as follows:

  Construction  
Commercial
Business
  
Commercial
Real Estate
  
Mortgage
Warehouse
  
Residential
Real Estate
  Consumer  Other  Unallocated  Total 
Balance - December 31, 2012 $1,990,292  $972,789  $2,262,221  $1,420,638  $112,103  $102,583  $2,271  $288,315  $7,151,212 
Provision charged to operations  (218,010  (18,319  245,769   (429,900)  262   50,606   (212  369,804   - 
Loans charged off  (561,993)  (139,289)  (384,688  -   -   (50,855)  -   -   (1,136,825
Recoveries of loans charged off  -   2,000   6,895   -   -   -   -   -   8,895 
Balance - March 31, 2013 $1,210,289  $817,181  $2,130,197  $990,738  $112,365  $102,334  $2,059  $658,119  $6,023,282 
Provision charged to operations  1,872   160,164   321,659   (62,039  (19,632  (2,444)  45   (162,958)  236,667 
Loans charged off  -   -   -   -   -   -   -   -   - 
Recoveries of loans charged off  417   8,574   -   -   -   -   -   -   8,991 
Balance – June 30, 2013 $1,212,578  $985,919  $2,451,856  $928,699  $92,733  $99,890  $2,104   495,161  $6,268,940 
Provision charged to operations  (4,555  34,446   612,392   (256,028  49,093   10,178   (53)  94,525   539,998 
Loans charged off  -   (2,068  -   -   -   -   -   -   (2,068) 
Recoveries of loans charged off  -   13,310   -   -   -   -   -   -   13,310 
Balance - September 30, 2013 $1,208,023  $1,031,607  $3,064,248  $672,671  $141,826  $110,068  $2,051  $589,686  $6,820,180 
Period-End Allowance for Loan Losses by Impairment Method December 31, 2013 
        Commercial  Mortgage  Residential           Loan  Total 
  Construction  Commercial  Real Estate  Warehouse  Real Estate  Consumer  Other  Unallocated  Costs    
Allowance for loan losses:                              
Ending Balance $1,205,267  $1,271,733  $3,021,766  $584,757  $164,673  $108,849  $2,183  $679,343  $-  $7,038,571 
                                         
Ending Balance                                        
  Individually evaluated
     for impairment
  -   293,692   1,490,169   -   -   -   -   -   -   1,783,861 
  Collectively evaluated
      for impairment
 $1,205,267  $978,041  $1,531,597  $584,757  $164,673  $108,849  $2,183  $679,343  $-  $5,254,710 
                                         
Loans receivables:                                        
Ending Balance $51,002,172  $82,348,055  $98,389,730  $116,951,357  $13,764,178  $9,766,114  $170,526  $-  $943,950  $373,336,082 
  Individually evaluated
        for impairment
  19,930   776,101   9,130,605   -   162,012   92,103   -   -   -   10,180,751 
  Collectively evaluated
       for impairment
 $50,982,242  $81,571,954  $89,259,125  $116,951,357  $13,602,166  $9,674,011  $170,526  $-  $943,950  $363,155,331 
                                         
 
The activity in the allowance for loan lossesloss by loan class for the ninethree months ended September 30, 2012March 31, 2014 and 2013 was as follows:

 Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
 
Residential
Real Estate
 Consumer Other Unallocated Total  Construction 
Commercial
Business
 
Commercial
Real Estate
 
Mortgage
Warehouse
 
Residential
Real Estate
 Consumer Other Unallocated Total 
Balance - December 31, 2011 $1,054,695  $934,642  $1,597,702  $1,122,056  $91,076  $187,352  $2,377  $544,550  $5,534,450 
Balance - December 31, 2013 $1,205,267  $1,271,733  $3,021,766  $584,757  $164,673  $108,849  $2,183  $679,343  $7,038,571 
Provision charged to operations  217,501   15,757   241,180   (115,451)  148,497   22,076   6,803   63,635   599,998   60,163   454,031   113,961   (63,082)  17,332   (16,462)  (560  (65,385)  499,998 
Loans charged off  (32,650)  (144,827) - - (77,858 (6,001 - -   (261,336  -   (510,952) - - - - - -   (510,952)
Recoveries of loans charged off  3,403   5,427  -  -  -  -  -  -   8,830   -   3,225  -  -  -  -  -  -   3,225 
Balance - March 31, 2012 $1,242,949  $810,999  $1,838,882  $1,006,605  $239,573  $131,570  $3,179  $608,185  $5,881,942 
Provision charged to operations  429,656   111,410   464,946   147,278   13,631   (8,357)  (381)  (608,185)  549,998 
Loans charged off  (25,000) (20,199 - - (130,694) - - -   (175,893
Recoveries of loans charged off  -   1,191  182  -  -  -  -  -   1,373 
Balance - June 30, 2012 $1,647,605  $903,401  $2,304,010  $1,153,883  $122,510  $123,213  $2,798  $-  $6,257,420 
Provision charged to operations  208,440   33,129   86,278   102,771   (2,812  (9,942  (27)  82,161   499,998 
Loans charged off  -   -   (64,375  -   -   -   -   -   (64,375
Recoveries of loans charged off  -   -   -   -   -   -   -   -   - 
Balance - September 30, 2012 $1,856,045  $936,530  $2,325,913  $1,256,654  $119,698  $113,271  $2, 771  $82,161  $6,693,043 
Balance - March 31, 2014 $1,265,430  $1,218,037  $3,135,727  $521,675  $182,005  $92,387  $1,623  $613,958  $7,030,842 
 
 
Balance - December 31, 2012 $1,990,292  $972,789  $2,262,221  $1,420,638  $112,103  $102,583  $2,271  $288,315  $7,151,212 
Provision charged to operations  (218,010  (18,319)  245,769   (429,900)  262   50,606   (212)   369,804   - 
Loans charged off  (561,993)  (139,289)  (384,688  -   -   (50,855  -   -   (1,136,825)
Recoveries of loans charged off  -   2,000   6,895   -   -   -   -   -   8,895 
Balance - March 31, 2013 $1,210,289  $817,181  $2,130,197  $990,738  $112,365  $102,334  $2,059  $658,119  $6,023,282 
24


When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral.  In such cases, the current fair value of the collateral less selling costs is used.  If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.
22

                                                                                                                     
Impaired Loans Receivables (By Class) – September 30, 2013 
           Three months ended 
           September 30, 2013 
  
Recorded
Investment
  
 
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance:               
                
Commercial               
   Construction $1,015,112  $1,015,112  $-  $1,184,249  $4,660 
   Commercial Business  225,899   382,356   -   157,334   1,516 
   Commercial Real Estate  -   -   -   4,004,515   - 
   Mortgage Warehouse Lines  -   -   -   -   - 
 Subtotal  1,241,011   1,397,468   -   5,346,098   6,176 
Residential Real Estate  164,542   164,542   -   164,542   - 
                     
Consumer                    
   Loans to Individuals  -   -   -   -   - 
   Other  -   -   -   -   - 
  Subtotal      -   -   -   - 
 With no related allowance: $1,405,553  $1,562,010  $-  $5,510,640  $6,176 
                     
With an allowance:                    
                     
Commercial                    
   Construction $-  $-  $-  $-  $- 
   Commercial Business  475,136   475,136   235,027   566,473   3,915 
   Commercial Real Estate  9,646,821   9,646,821   1,476,632   6,184,255   61,306 
   Mortgage Warehouse Lines  -   -   -   -   - 
  Subtotal  10,121,957   10,121,957   1,711,659   6,750,728   65,221 
Residential Real Estate  -   -   -   -   - 
                     
Consumer                    
   Loans to Individuals  -   -   -   -   - 
   Other  -   -   -   -   - 
  Subtotal  -   -   -   -   - 
With an allowance:  10,121,957   10,121,957   1,711,659   6,750,728   65,221 
                     
Total:                    
Commercial  11,362,968   11,519,425   1,711,659   12,096,826   71,397 
Residential Real Estate  164,542   164,542   -   164,542   - 
Consumer  -   -   -   0   - 
  Total $11,527,510  $11,683,967  $1,711,659  $12,261,368  $71,397 

23


Impaired Loans Receivables (By Class) – September 30, 2012 
           Three months ended 
           September 30, 2012 
  
Recorded
Investment
  
 
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance:               
                
Commercial               
   Construction $-  $-  $-  $-  $- 
   Commercial Business  561,961   604,643   -   585,257   - 
   Commercial Real Estate  -   -   -   869,901   - 
   Mortgage Warehouse Lines  -   -   -   -   - 
 Subtotal  561,961   604,643   -   1,455,158   - 
Residential Real Estate  -   -   -   -   - 
                     
Consumer                    
   Loans to Individuals  54,904   54,904   -   54,904   - 
   Other  -   -   -   -   - 
  Subtotal  54,904   54,904   -   54,904   - 
 With no related allowance: $616,865  $659,547  $-  $1,510,062  $- 
                     
With an allowance:                    
                     
Commercial                    
   Construction $-  $-  $-  $-  $- 
   Commercial Business  492,285   637,112   182,148   466,487   3,809 
   Commercial Real Estate  4,368,210   4,368,210   447,193   3,725,809   7,858 
   Mortgage Warehouse Lines  -   -   -   -   - 
  Subtotal  4,860,495   5,005,322   629,341   4,192,296   11,667 
Residential Real Estate  135,963   135,963   28,566   136,781   - 
                     
Consumer                    
   Loans to Individuals  -   -   -   -   - 
   Other  -   -   -   -   - 
  Subtotal  -   -   -   -   - 
With an allowance:  4,996,458   5,141,285   657,907   4,329,077   11,667 
                     
Total:                    
   Commercial  5,422,456   5,609,965   629,341   5,647,454   11,667 
   Residential Real Estate  135,963   135,963   28,566   136,781   - 
Consumer  54,904   54,904   -   54,904   - 
  Total $5,613,323  $5,800,832  $657,907  $5,839,139  $11,667 
24

Impaired Loans Receivables (By Class)         
December 31, 2012           
Impaired Loans Receivables (By Class) – March 31, 2014
Impaired Loans Receivables (By Class) – March 31, 2014
 
 
 
Recorded
Investment
 
 
Unpaid
Principal Balance
 
 
Related
Allowance
 
Year to Date
Average
Recorded
Investment
 
Year to Date
Interest Income
Recognized
           Three months ended
March 31, 2014
 
            
Recorded
Investment
  
 
Unpaid
Principal
Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance:                          
                          
Commercial                          
Construction $1,360,914  $1,360,914  $-  $412,716  $-  $189,363  $189,363  $-  $119,741  $1,069 
Commercial Business  387,950   430,632   -   474,839   9,490   1,176,713   1,176,713   -   918,192   3,265 
Commercial Real Estate  -   -   -   321,743   -   1,109,462   1,109,462   -   783,597   6,742 
Mortgage Warehouse Lines  -   -   -   -   -   -   -   -   -   - 
Subtotal  1,748,864   1,791,546   -   1,209,298   9,490   2,475,538   2,475,538   -   1,821,530   11,076 
            
Residential Real Estate  -   -   -   23,600      1,318,225   1,318,225   -   789,481   1,724 
                                
Consumer                                
Loans to Individuals  54,904   54,904   -   54,904   -   360,080   360,080   -   285,458   1,155 
Other  -   -   -   -   -   -   -   -   -   - 
Subtotal  54,904   54,904   -   54,904   -   360,080   360,080   -   285,458   1,155 
With no related allowance: $4,153,843  $4,153,843  $-  $2,896,469  $13,955 
                                
Subtotal with no Related Allowance  1,803,768   1,846,450   -   1,287,802   - 
           
With an allowance:           
With a related allowance:                    
                               
Commercial                               
Construction  1,481,117   1,481,117   569,579   123,426   -      $-  $-  $-  $- 
Commercial Business  518,576   663,403   253,598   456,541   15,746   193,982   704,934   73,681   471,283   - 
Commercial Real Estate  3,952,546   3,999,032   447,193   2,964,744   29,291   9,117,675   9,117,675   1,490,169   9,123,212   48,873 
Mortgage Warehouse Lines  -   -   -   -   -   -   -   -   -   - 
Subtotal  5,952,239   6,143,552   1,270,370   3,544,711   45,037   9,311,657   9,822,609   1,563,850   9,594,495   48,873 
           
Residential Real Estate  134,193   134,193   21,693   287,395   -   315,615   315,615   15,015   105,205   - 
                               
Consumer                               
Loans to Individuals  -   -   -   -   -   -   -   -   -   - 
Other  -   -   -   -   -   -   -   -   -   - 
Subtotal  -   -   -   -   -   -   -   -   -   - 
With a related allowance:  9,627,272   10,138,224   1,578,865   9,699,700   48,873 
                               
Subtotal with an Allowance  6,086,432   6,277,745   1,292,063   3,832,106   45,037 
Total:                               
Commercial  7,701,103   7,935,098   1,270,370   4,754,009   54,527   11,787,195   12,298,147   1,563,850   11,416,025   59,949 
Residential Real Estate  134,193   134,193   21,693   310,995   -   1,633,840   1,633,840   -   894,686   1,724 
Consumer  54,904   54,904   -   54,904   -   360,080   360,080   -   285,458   1,155 
Total $7,890,200  $8,124,195  $1,292,063  $5,119,908  $54,527  $13,781,115  $14,292,067  $1,578,865  $12,596,169  $62,828 

 
25

Impaired Loans Receivables (By Class)        Year to date 
December 31 , 2013          12/31/2013 
  
Recorded
Investment
  
Unpaid
Principal Balance
  
Related
Allowance
  
Average
Recorded
Investment
  
Interest Income
Recognized
 
                
With no related allowance:               
                
Commercial               
   Construction $19,930  $19,930  $-  $965,268  $33,946 
   Commercial Business  243,840   400,297   -   258,139   5,094 
   Commercial Real Estate  -   -   -   1,032,115   - 
   Mortgage Warehouse Lines  -       -   -   - 
Subtotal  263,770   420,227   -   2,255,522   39,040 
                     
Residential Real Estate  162,012   162,012   -   117,746   - 
                     
Consumer                    
   Loans to Individuals  92,103   92,103   -   34,292   - 
   Other  -   -   -   -   - 
Subtotal  92,103   92,103   -   34,292   - 
Subtotal with no Related Allowance  517,885   674,342   -   2,407,560   39,040 
                     
With an allowance:                    
                     
Commercial                    
   Construction  -   -   -   246,853   - 
   Commercial Business  532,261   532,261   293,692   562,346   9,728 
   Commercial Real Estate  9,130,605   9,130,605   1,490,169   5,546,690   247,277 
   Mortgage Warehouse Lines  -   -   -   -   - 
Subtotal  9,662,866   9,662,866   1,783,861   6,355,889   257,005 
                     
Residential Real Estate  -   -   -   44,196   - 
                     
Consumer                    
   Loans to Individuals  -   -   -   4,238   - 
   Other  -   -   -   -   - 
Subtotal  -   -   -   4,238   - 
Subtotal with an Allowance  9,662,866   9,662,866   1,783,861   6,404,323   257,005 
                     
Total:                    
   Construction  19,930   19,930   -   1,212,121   33,946 
   Commercial Business  776,101   932,558   293,692   820,485   14,822 
   Commercial Real Estate  9,130,605   9,130,605   1,490,169   6,578,805   247,277 
   Residential Real Estate  162,012   162,012       161,942   - 
   Consumer  92,103   92,103   -   38,530   - 
Total $10,180,751  $10,337,208  $1,783,861  $8,811,883  $296,045 
26

Impaired Loans Receivables (By Class) Three months ended 
  March 31, 2013 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance:      
       
Commercial      
   Construction $1,270,340  $17,903 
   Commercial Business  313,089   1,257 
   Commercial Real Estate      - 
   Mortgage Warehouse Lines      - 
 Subtotal  1,583,429   19,160 
Residential Real Estate  22,329   - 
         
Consumer        
   Loans to Individuals  45,079   - 
   Other  -   - 
  Subtotal  45,079   - 
 With no related allowance: $1,650,837  $19,160 
         
With an allowance:        
         
Commercial        
   Construction $987,411  $- 
   Commercial Business  552,611   9,576 
   Commercial Real Estate  2,421,681   8,800 
   Mortgage Warehouse Lines  -   - 
  Subtotal  3,961,703   18,376 
Residential Real Estate  132,716   - 
         
Consumer        
   Loans to Individuals  16,952   - 
   Other  -   - 
  Subtotal  16,952   - 
With an allowance:  4,111,371   18,376 
         
Total:        
Commercial  5,545,132   37,536 
Residential Real Estate  155,045   - 
Consumer  62,031   - 
  Total $5,762,208  $37,536 
27

 
In the normal course of business, the Bank may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or as a re-amortization or extension of a loan term to better match the loan’s repayment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).

If the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for that time period. Where possible, the Bank would attempt to obtain additional collateral and/or secondary repayment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.
The Bank adopted Accounting Standards Update (“ASU”) No. 2011-02 on July 1, 2011. ASU No. 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). In evaluating whether a restructuring constitutes a troubled debt restructuring, ASU No. 2011-02applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties.  As a result of our adoption of ASU No. 2011-02, we reassessed

There were no loans modified that were TDRs in the terms of loan restructurings.  There was no TDR activity duringperiod ended March 31, 2014 or December 31, 2013.

Changes in the accretable discount for acquired credit impaired loans for the three months ended September 30, 2013.  At September 30, 2013, the Bank had 8 loans classifiedMarch 31, 2014 were as TDRs with an aggregate outstanding balance of $4,248,442.follows:

 If the Bank determines that a borrower has suffered deterioration in its financial condition, a restructuring of the loan terms may occur.  Such loan restructurings may include, but are not limited to, reductions in principal or interest, reductions in interest rates, and extensions of the maturity date.  When modifications are implemented, such loans meet the definition of a TDR.  The lower payments are determined by an analysis of the borrower’s cash flow to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.
Balance at beginning of period $- 
Acquisition of impaired loans  293,976 
Accretion of discount  (19,593)
Balance at end of period $274,383 


The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:

 February 7, 2014 March 31, 2014
 Acquired loans with
Evidence of Credit
Deterioration
 Acquired loans with
Evidence of Credit
Deterioration
    
Outstanding balance$3,409,340 $3,351,031
Carrying amount$2,613,826 $2,575,110


There were no changes in the expected cash flows of these loans during the first quarter of 2014. No allowance for loan losses has been recorded for acquired loans with or without evidence of deterioration as of the acquisition date or as of March 31, 2014.

28

(6)  Share-Based Compensation

As of September 30, 2013,The Company’s stock-basedshare-based incentive plans (the “Stock(“Stock Plans”) authorizedauthorize the issuance of an aggregate of 440,701 shares of the Company’s common stock (as adjusted for subsequent stock dividends) pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of common stock (“Stock Awards”).  The purpose of the Stock Plans is to attract and retain personnel for positions of substantial responsibility and to provide additional incentive to certain officers, directors, employees and other persons to promote the success of the Company.  Under the Stock Plans, options have a term of ten years after the date of grant, subject to earlier termination in certain circumstances.  Options are granted with an exercise price at the then fair market value of the Company’s common stock.  The grant date fair value is calculated using the Black-ScholesBlack – Scholes option valuation model.  As of September 30, 2013,March 31, 2014, there were 395,763393,466 shares of common stock (as adjusted for the 5% stock dividend declared December 20, 2012 and paid January 31, 2013 to shareholders of record on January 14, 2013) available for future grants under the Stock Plans.Plans, of which 343,540 shares are available for future grants under the 2013 Equity Incentive Plan and 49,926 shares are available for future grant under the 2006 Directors Stock Plan.

Share-basedStock-based compensation expense related to options was $25,381$37,143 and $25,187 for the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively.  Share-based compensation expense related to options was $75,949 and $75,661 for the nine months ended September 30, 2013 and 2012, respectively.
26


Transactions under the Stock Plans during the ninethree months ended September 30, 2013 (as adjusted to reflect the 5% stock dividend declared December 2012)March 31, 2014 are summarized as follows:

     Weighted        Weighted   
     Average        Average   
   Weighted Remaining Aggregate    Weighted Remaining Aggregate 
 Number of Average Contractual Intrinsic  Number of Average Contractual Intrinsic 
Stock Options Shares Exercise Price Term (years) Value  Shares Exercise Price Term (years) Value 
Outstanding at January 1, 2013  221,894  $8.91     
Outstanding at January 1, 2014  235,598  $8.81     
Granted  25,305   8.06       8,700   11.29     
Exercised  -   -       -   -     
Forfeited - -      -  -     
Expired  - -       -  -     
Outstanding at September 30, 2013  247,199  $8.81   5.6  $574,159 
Outstanding at March 31, 2014  244,298  $8.90   5.6  $524,375 
                   
Exercisable at September 30, 2013  184,215  $9.42   4.7  $352,473 
Exercisable at March 31, 2014  176,705  $9.45   4.6  $318,997 

The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted for the ninethree months ended September 30, 2013March 31, 2014 are as follows:

 January 2014
   
Fair value of options granted $2.69  $4.75 
Risk-free rate of return 0.81% 1.65%
Expected option life in years 7  7 
Expected volatility 30.82% 38.01%
Expected dividends (1)
 -  - 

(1)  To date, the Company has not paid any cash dividends on its common stock.

As of September 30, 2013,March 31, 2014, there was approximately $150,270$200,614 of unrecognized compensation cost related to nonvested stock optionoption- based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next threefour years.

The following table summarizes nonvested restricted shares for the ninethree months ended September 30, 2013 (as adjusted to reflect the 5% stock dividend declared in December 2012):March 31, 2014:

     Average 
  Number of  Grant-Date 
Non-vested shares Shares  Fair Value 
Non-vested at January 1, 2014  136,490  $6.59 
Granted  31,800   11.29 
Vested  (25,265)  6.15 
Forfeited  -   - 
Non-vested at March 31, 2014  143,025  $7.71 

     Average 
  Number of  Grant Date 
Non-vested shares Shares  Fair Value 
Non-vested at January 1, 2013  140,575  $6.41 
Granted  19,633   8.42 
Vested  (49,178)  8.97 
Forfeited  -   - 
Non-vested at September 30, 2013  111,030  $5.63 
 
2729

 
The value of restricted shares is based upon the closing price of the common stock on the date of grant. The shares generally vest over a four-yearfour year service period with compensation expense recognized on a straight-line basis.

Share-basedStock based compensation expense related to stock grants was $87,132$126,661 and $87,289$108,695 for the three months ended September 30, 2013March 31, 2014 and 2012, respectively, and $326,085 and $262,933 for the nine months ended September 30, 2013 and 2012, respectively.2013.

As of September 30, 2013,March 31, 2014, there was approximately $673,803$1,083,520 of unrecognized compensation cost related to nonvestednon-vested stock grants that will be recognized over the next three years.


(7)  Benefit Plans
 
The Bank has a 401(k) plan which covers substantially all employees with six months or more of service. The 401(k) plan permits all eligible employees to make contributions to the plan up to the IRS salary deferral limit. The Bank’s contributions to the 401(k) plan are expensed as incurred.
 
The Company also provides retirement benefits to certain employees under a supplemental executive retirement plan.plans.  The plan isplans are unfunded and the Company accrues actuariallyactuarial determined benefit costs over the estimated service period of the employees in the plan.  The Company recognizes the over funded or under funded status of a defined benefit post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and recognizesto recognize changes in that funded status in the year in which the changes occur, through comprehensive income.

In connection with the benefit plans, the Bank has life insurance policies on the lives of its executives, directors and divisional officers. The Bank is the owner and beneficiary of the policies. The cash surrender values of the policies total approximately $20.8 million and $16.2 million at March 31, 2014 and December 31, 2013, respectively.
 
The components of net periodic expense for the Bank’s planCompany’s supplemental executive retirement plans for the three and nine months ended September 30,March 31, 2014 and 2013 and 2012 were as follows:
 
 
Three months ended
March 31,
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
  2014  2013 
 2013 2012 2013 2012       
Service cost $30,539  $61,823  $244,796  $185,469  $65,460  $183,718 
Interest cost  22,229   50,073   178,179   150,219   49,626   133,722 
Actuarial (gain) loss recognized  (29,893  5,300   (239,614  15,900   (2,378)  (179,829)
Prior service cost recognized  942    24,858   7,553   74,574   -   5,669 
 $23,817  $142,054  $190,914  $426,162  $112,708  $143,280 
30


(8)  Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
 

ComprehensiveOther comprehensive income (loss) is the total of (1) net income (loss), and (2) all other changes in equity from non-shareholder sources, which are referred to as other comprehensive income.income (loss).  The components of accumulated other comprehensive income (loss), and the related tax effects, are as follows:

  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Three Months Ended September 30, 2013:         
Unrealized gains (losses) on available-for-sale securities:         
     Unrealized holding gains on available-for-sale securities $(53,738) $18,270  $(35,468)
     Reclassification adjustment for (gains) realized in income  -   -   - 
Other comprehensive gain (loss) on available-for-sale securities  (53,738)  18,270   (35,468)
             
Unfunded pension liability:            
     Changes from plan actuarial gains and (losses)
       included in other comprehensive income
  63,265   (25,305)  37,960 
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  63,265   (25,305)  37,960 
             
Total other comprehensive gain (loss) $9,527  $(7,035) $2,492 
  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Three Months Ended March 31, 2014:         
Unrealized holding (losses) gains on available-for-sale securities:         
     Unrealized holding (losses) on available-for-sale securities $(1,777,421) $689,160  $(1,088,261)
     Reclassification adjustment for (gains) realized in income  -   -   - 
Other comprehensive (loss) on available-for-sale securities  (1,777,421)  689,160   (1,088,261)
             
Unrealized impairment loss on held to maturity security:            
     Unrealized impairment (loss) on held to maturity security  (500,944)  170,321   (330,623)
             
Unfunded pension liability:            
     Changes from plan actuarial gains and losses
       included in other comprehensive income
  90,502   (37,027)  53,475 
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  90,502   (37,027)  53,475 
             
Accumulated other comprehensive income ( loss) $(2,187,863) $822,454  $(1,365,409)

  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Three Months Ended March 31, 2013:         
Unrealized holding (losses) gains on available-for-sale securities:         
     Unrealized holding (losses) gains on available-for-sale securities $1,025,006  $(222,837) $802,169 
     Reclassification adjustment for (gains)  realized in income  -   -   - 
Other comprehensive (loss) gain on available-for-sale securities  1,025,006   (222,837)  802,169 
             
Unrealized impairment loss on held to maturity security:            
     Unrealized impairment (loss) on held to maturity security:  (500,944)  170,321   (330,623)
             
Unfunded pension liability:            
     Changes from plan actuarial gains and losses
       included in other comprehensive income
  (162,561)  64,198   (98,363)
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  (162,561)  64,198   (98,363)
             
Accumulated other comprehensive income (loss) $361,501  $11,682  $373,183 

 
2831

  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Three Months Ended September 30, 2012:         
Unrealized holding gains (losses) on available-for-sale securities:         
     Unrealized holding gains (losses) on available-for-sale securities $652,571  $(221,873) $430,698 
     Reclassification adjustment for losses realized in income  -   -   - 
Other comprehensive gain (loss) on available-for-sale securities  652,571   (221,873)  430,698 
             
Unfunded pension liability:            
     Changes from plan actuarial gains and (losses)
       included in other comprehensive income
  3,219   (1,294)  1,925 
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  3,219   (1,294)  1,925 
             
Total other comprehensive gain (loss) $655,790  $(223,167) $432,623 



  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Nine Months Ended September 30, 2013:         
Unrealized holding gains (losses) on available-for-sale securities:         
     Unrealized holding gains (losses) on available-for-sale securities $(4,466,187) $1,518,504  $(2,947,683)
     Reclassification adjustment for losses realized in income  -   -   - 
Other comprehensive gain (loss) on available-for-sale securities $(4,466,187) $1,518,504  $(2,947,683)
             
Unfunded pension liability:            
     Changes from plan actuarial gains and (losses)
       included in other comprehensive income
  129,751   (51,907)  77,844 
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  129,751   (51,907)  77,844 
             
Total other comprehensive income (loss) $(4,336,436) $1,466,597  $(2,869,839)



  
Before-Tax
Amount
  
Income Tax
Effect
  
Net-of-Tax
Amount
 
          
Nine Months Ended September 30, 2012:         
Unrealized holding gains (losses) on available-for-sale securities:         
     Unrealized holding gains (losses) on available-for-sale securities $710,040  $(241,412) $468,628 
     Reclassification adjustment for losses realized in income  -   -   - 
Other comprehensive gain (loss) on available-for-sale securities  710,040   (241,412)  468,628 
             
Unfunded pension liability:            
     Changes from plan actuarial gains and (losses)
       included in other comprehensive income
  9,660   (3,883)  5,777 
     Amortization of net transition obligation, prior service cost and net
       actuarial loss included in net periodic benefit cost
  -   -   - 
Other comprehensive gain (loss) on unfunded retirement obligations  9,660   (3,883)  5,777 
             
Total other comprehensive income (loss) $719,700  $(245,295) $474,405 


29

Changes in the components of accumulated other comprehensive income (loss) are as follows and are presented net of tax:

 
Unrealized
Holding
Gains
(Losses) on
Available for
Sale
Securities
  
Unrealized
Impairment
Loss on
Held to Maturity
Security
  
Unfunded
Pension Liability
  
Accumulated
Other
Comprehensive
Income
  
Unrealized
Holding
Gains
(Losses) on
Available for
Sale
Securities
  
Unrealized
Impairment
Loss on
Held to Maturity
Security
  
Unfunded
Pension
Liability
  
Accumulated
Other
Comprehensive
Income (Loss)
 
                        
Nine Months Ended September 30, 2013:            
Three Months Ended March 31, 2014:            
Balance, beginning of period $1,235,204  $(330,623) $(100,288) $804,293  $(1,932,526) $(330,623) $15,515  $(2,247,634)
Other comprehensive income (loss) before
reclassifications
  (2,947,683)  -   77,844   (2,869,839)  844,265   -   37,960   882,225 
Amounts reclassified from accumulated other
comprehensive income (loss)
  -   -   -   -   -   -   -   - 
Other comprehensive income (loss)  (2,947,683)  -   77,844   (2,869,839)  844,265   -   37,960   882,225 
Balance, end of period $(1,712,479) $(330,673) $(22,444) $(2,065,546) $(1,088,261) $(330,623) $53,475  $(1,365,409)
 
 

 
Unrealized
Holding
Gains
(Losses) on
Available for
Sale
Securities
  
Unrealized
Impairment
Loss on
Held to Maturity
Security
  
Unfunded
Pension Liability
  
Accumulated
Other
Comprehensive
Income
  
Unrealized
Holding
Gains
(Losses) on
Available for
Sale
Securities
  
Unrealized
Impairment
Loss on
Held to Maturity
Security
  
Unfunded
Pension
Liability
  
Accumulated
Other
Comprehensive
Income
 
                        
Nine Months Ended September 30, 2012:            
Three Months Ended March 31, 2013:            
Balance, beginning of period $1,530,078  $(330,623) $(107,993) $1,091,462  $1,235,204  $(330,623) $(100,288) $804,293 
Other comprehensive income (loss) before
reclassifications
  468,628   -   5,777   474,405   (433,035)  -   1,925   (431,110)
Amounts reclassified from accumulated other
comprehensive income (loss)
  -   -   -   -   -   -   -   - 
Other comprehensive income (loss)  468,628   -   5,777   474,405   (433,035)  -   1,925   (431,110)
Balance, end of period $1,998,706  $(330,623) $(162,216) $1,565,867  $802,169  $(330,623) $(98,363) $373,183 
 
 
There were no items reclassified out of each component of other comprehensive income (loss) for the three and nine months ended September 30, 2013.
30

(9) Recent Accounting Pronouncements

ASU 2011-112014-04 (Disclosures about offsetting Assets and LiabilitiesReceivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure)
 
On December 19, 2011,In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210)ASU 2014-04, ReceivablesTroubled Debt Restructurings by Creditors (Subtopic 310-40): Disclosures about Offsetting AssetsReclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and Liabilities.” This new guidance affectsa creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all entities with financial instrumentsinterest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or derivativesthrough a similar legal agreements. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are either presented on a net basis in the balance sheet or subjectprocess of foreclosure according to an enforceable master netting arrangement or a similar arrangement.local requirements of the applicable jurisdiction. The ASU does not change existing offsetting criteriaamendments in U.S. generally accepted accounting principles (“U.S. GAAP”) or the permitted balance sheet presentation for items meeting the criteria.  To help financial statement users better assess the effect or potential effect of offsetting arrangements on an entity’s financial position, the new guidance requires disclosures in the financial statement notes that provide both net and gross information about assets and liabilities that have been offset and the related arrangements.
The new disclosure requirements in the ASUthis update are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared in accordance with International Financial Reporting Standards (“IFRS”).  The eligibility criteria for offsetting are different in U.S. GAAP and IFRS. In January 2011, the FASB and the International Accounting Standards Board issued an exposure draft proposing new common criteria for offsetting, but the boards could not agree.  The FASB voted to retain existing U.S. GAAP guidance on offsetting and to require expanded disclosures for financial instruments and derivative instruments that are either offset in the balance sheet or eligible for offset subject to a master netting arrangement or similar arrangement.
The ASU is effective for public business entities for annual reporting periods, beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required byperiods, beginning after December 15, 2014. An entity can elect to adopt the amendments should be provided retrospectively for all comparative periods. The FASB has publishedin this update using either a short recap highlighting the significant issues the ASU addresses.modified retrospective transition method or a prospective transition method. The Company does not expectis currently evaluating the impact the adoption of this ASU tothe standard will have a material impact on the Company’s consolidated financial position or results of operations.
ASU 2011-05, 2011-12 and 2013-02 (Presentation of Comprehensive Income)
 
The provisions of ASU 2011-05 amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of shareholders’ equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous U.S. GAAP, all three presentations were acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities.  The Company adopted this update on January 1, 2012 and the new Consolidated Statements of Comprehensive Income are included in these financial statements.
ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“AOCI”) in Accounting Standards Update No. 2011-05,” was issued by the FASB on December 23, 2011. This ASU defers the implementation of only those provisions in ASU 2011-05, dealing only with the presentation of items reclassified out of AOCI.

The amendments in ASU 2011-12 and ASU 2011-05 are effective at the same time.  For public entities, the guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011.  The requirements are effective for nonpublic entities for fiscal years ending after December 12, 2012.  The FASB has published a short recap of the reasons for the ASU 2011-12 deferrals.  The adoption of this guidance did not have any impact on the Company’s consolidated financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”) to improve the reporting of reclassifications out of accumulated comprehensive income.  ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements.  However, ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.  ASU 2013-02 is effective for reporting periods beginning after December 15, 2012.  The adoption of ASU 2013-02 did not have a significant impact on the Company’s consolidated financial statements.
31

ASU 2013-04 (Presentation of Joint and Several Liability Arrangements)

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”).  ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements.  ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:

a. The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and

b. Any additional amount the reporting entity expects to pay on behalf of its co-obligors.

ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.  For public companies ASU 2013-04 is effective for reporting periods beginning after December 15, 2013.  The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU No. 2013-11 (Presentation of Unrecognized Tax Benefit)

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740):  Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”).  Currently, there is diversity in practice in the presentation of unrecognized tax benefits.  The aim of ASU 2013-11 is to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists.  An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except for circumstances outlined in ASU 2013-11.  For public companies, ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  Early adoption is permitted.  The adoption of ASU 2013-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

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(10)  Fair Value Disclosures
 
U.S. GAAP has established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:
 
Level 1:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2:Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
 
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.
 
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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 credit quality and counterparty creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values.  While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
33

Securities Available for Sale.  Securities classified as available for sale are reported at fair value utilizing Level 1 andquoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 Inputs.  For theseLevel 2 securities, the Company obtains fair value measurements from an independent pricing service.  For Level 2 securities, theThe fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things.
 
Impaired loans.  Loans included in the following table are those which the Company has measured and recognized impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third party appraisals of the properties,collateral, or discounted cash flows based on the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balances less specific valuation allowances.

Other Real Estate Owned.  Foreclosed properties are adjusted to fair value less estimated selling costs at the time of foreclosure in preparation for transfer from portfolio loans to other real estate owned (“OREO”), thereby establishing a new accounting basis.  The Company subsequently adjusts the fair value ofon the OREO utilizing Level 3 inputs on a non-recurring basis to reflect partial write-downs based on the observable market price, current appraised value of the asset or other estimates of fair value.

34

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
  
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  
Total Fair
Value
 
March 31, 2014:            
  Securities available for sale:                
       U. S. Treasury securities and                
           obligations of U.S. Government                
           sponsored corporations (“GSE”) and agencies $9,245,300  $1,523,385   $-  $10,768,685 
       Residential collateralized mortgage obligations- GSE  -   4,444,789   -   4,444,789 
       Residential collateralized mortgage obligations - non GSE  -   3,203,358   -   3,203,358 
       Residential mortgage backed securities – GSE  -   30,954,662   -   30,954,662 
       Obligations of State and Political subdivisions  -   20,481,993   -   20,481,993 
       Trust preferred debt securities – single issuer  -   2,086,400   -   2,086,400 
       Corporate debt securities  -   43,973,829   -   43,973,829 
       Restricted stock  -   1,710,000   -   1,710,000 
       Mutual fund  -   25,000   -   25,000 
 
34

  
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  
Total Fair
Value
 
September 30, 2013:            
  Securities available for sale:            
  U. S. Treasury securities and            
      obligations of U.S. Government            
      sponsored corporations (“GSE”) and agencies $20,101,450  $1,525,215  $-  $21,626,665 
  Residential collateralized mortgage obligations- GSE  -   4,196,441   -   4,196,441 
  Residential collateralized mortgage obligations – non GSE  -   3,052,663   -   3,052,663 
  Residential mortgage backed securities –GSE  -   33,338,768   -   33,338,768 
  Obligations of State and Political subdivisions  -   19,745,599   -   19,745,599 
  Trust preferred debt securities – single issuer  -   2,038,200   -   2,038,200 
  Corporate debt securities  -   16,520,775   -   16,520,775 
  Restricted stock  -   1,013,000   -   1,013,000 
  Mutual fund  -   25,000   -   25,000 



 
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  
Total Fair
Value
  
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  
Total Fair
Value
 
December 31, 2012:            
December 31, 2013:            
Securities available for sale:                        
U. S. Treasury securities and                        
obligations of U.S. Government                        
sponsored corporations (“GSE”) and agencies $27,923,670  $1,571,865  $-  $29,495,535  $19,994,430  $1,515,270  $-  $21,509,700 
Residential collateralized mortgage obligations- GSE  -   6,632,665   -   6,632,665   -   3,681,792   -   3,681,792 
Residential collateralized mortgage obligations - non GSE  -   3,924,182   -   3,924,182   -   2,826,396   -   2,826,396 
Residential mortgage backed securities – GSE  -   26,489,335   -   26,489,335   -   31,965,947   -   31,965,947 
Obligations of State and Political subdivisions  -   20,682,301   -   20,682,301   -   19,646,044   -   19,646,044 
Trust preferred debt securities – single issuer  -   1,998,366   -   1,998,366   -   2,013,100   -   2,013,100 
Corporate debt securities  -   18,100,281   -   18,100,281   -   16,517,728   -   16,517,728 
Restricted stock  -   2,493,300   -   2,493,300   -   1,013,100   -   1,013,100 
Mutual fund  -   25,000   -   25,000   -   25,000   -   25,000 

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).  Financial assets and financial liabilities measured at fair value on a non-recurring basis at September 30, 2013andMarch 31, 2014 and December 31, 20122013 were as follows:

 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
  
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
Total Fair
Value
 
September 30, 2013:
         
March 31, 2014:         
Impaired loans $-  $-  $8,048,407  $8,048,407 
         
         
December 31, 2013:         
Impaired loans  -   -  $8,410,298  $8,410,298  $-  $-  $7,879,005  $7,879,005 
Other real estate owned  -   -   571,950   571,950   -   -   209,937   209,937 
         
         
December 31, 2012:         
Impaired loans  -   -  $4,794,369  $4,794,369 
Other real estate owned  -   -   6,568,781   6,568,781 

Impaired loans measured at fair value and included in the above table consisted of 1310 loans having an aggregate balancerecorded investment of $10,121,957$9,627,272 and specific loan loss allowances of $1,711,659$1,578,865 at September 30, 2013March 31, 2014 and 1617 loans at December 31, 20122013, having an aggregate recorded investmentbalance of $6,086,432$9,662,866 and specific loan loss allowances of $1,292,063.
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$1,783,861.
 
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Estimate
Valuation
Techniques
Unobservable
Input
Range of(Weighted
AdjustmentsAverage)
September 30, 2013March 31, 2014    
     Impaired loans$8,410,2988,048,407Appraisal ofAppraisal 
     collateral (1)   adjustments (2)5-50%10-40 (19.1%)
  Other Real Estate Owned$571,950Appraisal ofAppraisal
collateral (1)adjustments (2)8-60%
     
December 31, 20122013    
     Impaired loans$4,794,3697,879,005Appraisal ofAppraisal 
     collateral (1)   adjustments (2)5-50%5-15 (9.7%)
    Other Real Estate Ownedreal estate owned$6,568,781209,937Appraisal ofAppraisal 
     collateral (1)adjustments (2)8-60%10-50 (32.6%)

(1)  Fair value is generally determined through independent appraisals of the underlying collateral, which generally
           include various Level 3 inputs which generally include various Level 3 inputs that are not identifiable.

(2) Includes qualitative adjustments by management and estimated liquidation expenses.
    (2)  Includes qualitative adjustments by management and estimated liquidation expenses. 

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The fair valuesvalue of other real estate owned was determined using appraisals, which may be discounted based on management’s review and changes in market conditions.
 
The following is a summary of fair value versus the carrying value of all of the Company’s financial instruments.  For the Company and the Bank, as for most financial institutions, the bulk of theirits assets and liabilities are considered financial instruments.  Many of the financial instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Therefore, significant estimations and present value calculations were used for the purpose of this note.  Changes in assumptions could significantly affect these estimates.
 
Estimated fair values have been determined by using the best available data and an estimation methodology suitable for each category of financial instruments as follows:
 
Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost).The carrying amounts reported in the balance sheet for cash and cash equivalents, accrued interest receivable and accrued interest payable approximate fair value.
 
Securities Held to Maturity (Carried at Amortized Cost). The fair values of securities held to maturity are determined in the same manner as for securities available for sale.
 
Loans Held For Sale (Carried at Lower of Aggregated Cost or Fair Value).The fair values of loans held for sale are determined, when possible, using quoted secondary market prices. If no such quoted market prices exist, fair values are determined using quoted prices for similar loans, adjusted for the specific attributes of the loans.
 
Gross Loans Receivable (Carried at Cost).The fair values of loans, excluding impaired loans subject to specific loss reserves, are estimated using discounted cash flow analyses, using market rates at the balance sheet date 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 re-price frequently and havewith no significant change in credit risk, fair values are based on carrying values.
 
Deposit Liabilities (Carried at Cost). The fair values disclosed for demand deposits (e.g., interest and non-interest demand and savings 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 of deposit to a schedule of aggregated expected monthly maturities ofon time deposits.
 
Borrowings and Subordinated Debentures (Carried at Cost). The carrying amounts of short-term borrowings approximate their fair values. The fair values of long-term FHLB advances and subordinated debentures are estimated using discounted cash flow analysis, based on quoted or estimated interest rates for new borrowings with similar credit risk characteristics, terms and remaining maturities.maturity. 

36


The estimated fair values and the recorded book balances, at September 30, 2013carrying amounts of financial assets and December 31, 2012liabilities were as follows:
March 31, 2014 
  Carrying  Level 1  Level 2  Level 3  Fair 
  Value  Inputs  Inputs  Inputs  Value 
                
Cash and cash equivalents $108,919,056  $108,919,056  $-  $-  $108,919,056 
Securities available for sale   117,630,716   9,245,300   108,385,416   -   117,630,716 
Securities held to maturity   152,734,559   -   155,795,659   -   155,795,659 
Loans held for sale   3,253,009   -   3,298,551   -   3,298,551 
Loans, net  524,374,540   -   -   531,865,000   531,865,000 
Accrued interest receivable  2,943,400   -   2,943,400   -   2,943,400 
Deposits   (838,998,207)  -   (839,805,000)  -   (839,805,000)
Borrowings   (20,978,549)  -   (22,078,000)  -   (22,078,000)
Redeemable subordinated
   debentures 
  (18,557,000)  -   (18,557,000)  -   (18,557,000)
Accrued interest payable  (937,278)  -   (937,278)  -   (937,278)


     September 30, 2013 
                
  Carrying  Level 1  Level 2  Level 3  Fair 
  Value  Inputs  Inputs  Inputs  Value 
                
Cash and cash equivalents $123,815,138  $123,815,138   -  $-  $123,815,138 
Securities available for sale   101,557,211   20,101,450   81,455,761   -   101,557,211 
Securities held to maturity   150,572,922   -   152,186,281   -   152,186,281 
Loans held for sale   14,535,681   14,535,681   -   -   14,535,681 
Loans  355,729,293   -   -   361,388,000   361,388,000 
Accrued interest receivable  2,143,535   2,143,535   -   -   2,143,535 
Deposits  (686,943,954)  -   (688,159,000)  -   (688,159,000
Borrowings   (10,000,000)  -   (11,252,000  -   (11,252,000
Redeemable subordinated debentures   (18,557,000  -   (18,557,000)  -   (18,557,000
Accrued interest payable   (787,927)  (787,927)  -   -   (787,927)
    December 31, 2012 
               
December 31, 2013December 31, 2013 
 Carrying  Level 1  Level 2  Level 3  Fair  Carrying  Level 1  Level 2  Level 3  Fair 
 Value  Inputs  Inputs  Inputs  Value  Value  Inputs  Inputs  Inputs  Value 
                              
Cash and cash equivalents $14,044,921  $14,044,921   -  $-  $14,044,921  $69,278,771  $69,278,771  $-  $-  $69,278,771 
Securities available for sale   109,840,965   27,923,670   81,917,295   -   109,840,965   99,198,807   19,994,430   79,204,377   -   99,198,807 
Securities held to maturity   116,027,900   -   121,839,363   -   121,839,363   152,816,815   -   153,629,773   -   153,629,000 
Loans held for sale   35,960,262   -   35,960,262   -   35,960,262   10,923,689   -   10,924,000   -   10,924,000 
Loans  514,662,898   -   -   515,577,788   515,577,788   366,297,511   -   -   372,548,000   372,548,000 
Accrued interest receivable  2,872,099   -   2,872,099   -   2,872,099   2,542,602   -   2,542,602   -   2,542,602 
Deposits  (707,689,475)  -   (709,678,000  -   (709,678,000  (638,552,030)  -   (639,539,000)  -   (639,539,000
Borrowings   (42,400,000)  -   (43,906,000  -   (43,906,000  (10,000,000)  -   (11,148,000)  -   (11,148,000
Redeemable subordinated debentures   (18,557,000  -   (18,557,000)  -   (18,557,000  (18,557,000)  -   (18,557,000  -   (18,557,000
Accrued interest payable   (1,057,779)  -   (1,057,779)  -   (1,057,779)  (883,212)  -   (883,212)  -   (883,212)

Loan commitments and standby letters of credit as of September 30, 2013March 31, 2014 and December 31, 2012 were2013 are based on fees charged for similar agreements; accordingly, the estimated fair value of loan commitments and standby letters of credit wasis nominal.

(11)  Subsequent Event

Subsequent to March 31, 2014, management of the Bank became aware of a fraud against a lead lender in a loan facility in which the Bank is a participant. The borrower under the loan facility appears to have submitted borrowing base certificates that allegedly vastly overstated the amount of its accounts receivable and falsified verifications of those accounts receivable.   The Bank’s total exposure under its participation in the loan facility at March 31, 2014 was $3,656,250. The Bank anticipates that some of that exposure will be reduced by collateral in the possession of the lead lender but the exact amount of the collateral is currently unknown.  Together with the lead lender and another participant in the facility, the Bank is conducting a full review of the matter. The Bank is unable to quantify its potential loss exposure at this time due to the early stage of this investigation and has not provided a specific loan loss reserve or charged-off any portion of the loan as of March 31, 2014, but is likely to recognize losses related to the loan in 2014.
 
37

 
Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The purpose of this discussion and analysis of the operating results and financial condition at September 30, 2013March 31, 2014 is intended to help readers analyze the accompanying financial statements, notes and other supplemental information contained in this document. Results of operations for the three month and nine month periodsperiod ended September 30, 2013March 31, 2014 are not necessarily indicative of results to be attained for any other period.
 
This discussion and analysis should be read in conjunction with the Consolidated Financial Statements,consolidated financial statements, notes and tables included elsewhere in this report and Part II, Item 7 of the Company’s Form 10-K (Management’s Discussion and Analysis of Financial Condition and Results of Operations)Operation) for the year ended December 31, 2012,2013, as filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2013.31, 2014.
 
General
 
Throughout the following sections, the “Company” refers to 1st Constitution Bancorp and, as the context requires, its wholly-owned subsidiary, 1st Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and, 249 New York Avenue, LLC. and RFHB Investment Company.  1st Constitution Capital Trust II, (“Trust II”), a subsidiary of the Company,  is not included in the Company’s consolidated financial statements as it is a variable interest entity and the Company is not the primary beneficiary.
 
The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was organized under the laws of the State of New Jersey in February 1999 for the purpose of acquiring all of the issued and outstanding stock of the Bank, a full service commercial bank which began operations in August 1989, and thereby enabling the Bank to operate within a bank holding company structure. The Company became an active bank holding company on July 1, 1999. The Bank is a wholly-owned subsidiary of the Company. Other than its ownership interest in the Bank, the Company currently conducts no other significant business activities.
 
The Bank operates fourteennineteen branches, and manages an investment portfolio through its subsidiary,subsidiaries, 1st Constitution Investment Company of New Jersey, Inc. and RFHB Investment Company. The Bank plans to merge RFHB Investment Company into 1st Constitution Investment Company of New Jersey, Inc. during the second quarter of 2014.   FCB Assets Holdings, Inc., a subsidiary of the Bank, is used by the Bank to manage and dispose of repossessed real estate.
 
Trust II, a subsidiary of the Company, was created in May 2006 to issue trust preferred securities to assist the Company to raise additional regulatory capital.

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Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward looking statements.  When used in this and in future filings by the Company with the SEC, in the Company’s press releases and in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases “will,” “will likely result,” “could,” “anticipates,” “believes,” “continues,” “expects,” “plans,” “will continue,” “is anticipated,” “estimated,” “project” or “outlook” or similar expressions (including confirmations by an authorized executive officer of the Company of any such expressions made by a third party with respect to the Company) are intended to identify forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, each of which speakspeaks only as of the date made.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.
38

 
Factors that may cause actual results to differ from those results expressed or implied, include, but are not limited to, those listed under “Business”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K filed with the SEC on March 22, 2013,31, 2014, such as the overall economy and the interest rate environment; the ability of customers to repay their obligations; the adequacy of the allowance for loan losses; competition; significant changes in accounting, tax or regulatory practices and requirements; certain interest rate risks; risks associated with investments in mortgage-backed securities; and risks associated with speculative construction lending. Although management has taken certain steps to mitigate any negative effect of the aforementioned items, significant unfavorable changes could severely impact the assumptions used and could have an adverse effect on profitability. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as required by law.

Recent Developments

On February 7, 2014, the Company completed its acquisition of Rumson-Fair Haven Bank and Trust Company, a New Jersey state chartered commercial bank (“Rumson”), which merged with and into the Bank, with the Bank as the surviving entity. The merger agreement among the Company, the Bank and Rumson (the “Merger Agreement”) provided that the shareholders of Rumson would receive, at their election, for each outstanding share of Rumson common stock that they own at the effective time of the merger, either 0.7772 shares of the Company common stock or $7.50 in cash, subject to proration as described in the Merger Agreement, so that 60% of the aggregate merger consideration consisted of cash and 40% consisted of shares of the Company’s common stock. The Company issued an aggregate of 1,019,242 shares of its common stock and paid $14.8 million in cash in the transaction.

The merger was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values as of the acquisition date. Rumson’s results of operations have been included in the Company’s Consolidated Statements of Income since February 7, 2014.

RESULTS OF OPERATIONS
 
Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
 
Summary
The Company reported net income of $641,712 for the three months ended March 31, 2014 compared to net income of $1,325,318 for the three months ended March 31, 2013. On a diluted per share basis, net income per share was $0.09 for the 2014 first quarter compared to $0.22 for the 2013 first quarter.

On February 7, 2014, the Company completed its merger with Rumson and during the first quarter of 2014 integrated the operations of Rumson. The Company’s financial statements reflect the impact of the merger from February 7, 2014.
The following table provides a reconciliation of net income as reported with net income adjusted for after-tax merger-related expenses :
Net income as reported $641,712 
     
After-tax merger-related expenses 896,545 
     
Net income as adjusted $1,538,257 
As a result of the merger, the Company incurred pre-tax merger-related expenses of $1,422,723 (or $896,545 after taxes). Excluding after-tax merger-related expenses, net income for the first quarter of 2014 would have been $1,538,254, a 15.8% increase over the first quarter net income of $1,325,318 for 2013. On a diluted per share basis, net income per share would have been $0.22 for the 2014 first quarter and equal to last year’s first quarter diluted net income per share.  The Company has used the measure of net income excluding after-tax merger-related expenses, which is a non-GAAP performance measure.  Management believes that it is useful to calculate net income without the impact of expenses of the merger of the Bank and Rumson that are not part of the ordinary operations of the Company and make this measure more comparable to prior-period net income.  The Company cautions that non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results. At March 31, 2014, the Company’s book value and tangible book value per common share were $11.47 and $9.54, respectively.
 
 
39

 
RESULTS OF OPERATIONS
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Summary
The Company realized net income of $1,523,238 for the three months ended September 30, 2013, an increase of $168,319, or 12.4%, from the $1,354,919 reported for the three months ended September 30, 2012.  The increase was due primarily to an increase in non-interest income and a lower level of non-interest expenses which, in total, offset the decrease in net interest income and a higher loan loss provision.  Net income per diluted common share was $0.25 for the three months ended September 30, 2013, which was unchanged when compared to the three months ended September 30, 2012.   All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.

During the third quarter of 2012, the Company launched a shareholders’ common stock rights offering, which expired on October 5, 2012. The Company received gross proceeds of $5.0 million from holders of subscription rights who exercised their basic subscription rights and from holders who exercised the over-subscription privilege. The rights offering was fully subscribed.  Accordingly, the Company issued a total of 555,555 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, including pursuant to the exercise of the over-subscription privilege.

Key performance ratios improved for the three months ended September 30, 2013 due to higher net income for that period compared to the three months ended September 30, 2012.  Returnreturn on average assets and return on average equity were 0.76%0.30% and 9.25%3.43%, respectively, for the three months ended September 30, 2013first quarter of 2014, compared to 0.69%0.65% and 9.24%8.20%, respectively for the three months ended September 30, 2012.same quarter of 2013. Both the returns on average assets and on average equity for the first quarter of 2014 were adversely affected by the Rumson merger-related expenses. Excluding these after-tax merger-related expenses, the returns on average assets and the return on average equity would have been 0.71% and 8.21%, respectively, for the first quarter of 2014.  The Company has used the measure of net income excluding after-tax merger-related expenses, which is a non-GAAP performance measure, to calculate returns on average assets and on average equity.  Management believes that it is useful to calculate returns on average assets and on average equity by using net income without the impact of expenses of the merger of the Bank and Rumson that are not part of the ordinary operations of the Company and make this measure more comparable to prior-period net income.  The Company cautions that non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results.

The Bank’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities.  Other factors that may affect the Bank’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities.  The net interest margin on a tax-equivalent basis for the three months ended September 30, 2013March 31, 2014 was 3.52%3.56% as compared to the 4.09%3.53% net interest margin recorded for the three months ended September 30, 2012, a decreaseMarch 31, 2013, an increase of 573 basis points.  This decrease in the Company’s net interest margin for the three months ended September 30, 2013 compared with the corresponding 2012 period was primarily due to two factors: (1) the decline in the balance of outstanding borrowings under mortgage warehouse lines and (2) the allocation of excess liquidity to much lower yielding overnight fund balances.  The decline in borrowings under mortgage warehouse lines was due to the increase in long-term interest rates during the third quarter of 2013, which led to lower levels of mortgage refinancings, and the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close.   The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during thisthe challenging current interest rate environment.
 
Earnings Analysis

Net Interest Income
 
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 79.6%80.8% of the Company’s net revenues for the three-monththree month period ended September 30, 2013March 31, 2014 and 84.6%79.7% of net revenues for the three-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
 
The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the three month periods ended March 31, 2014 and 2013. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.

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Average Balance Sheets with Resultant Interest and Rates 
(yields on a tax-equivalent basis) 
  
  Three months ended March 31, 2014  Three months ended March 31, 2013 
  
Average
Balance
  Interest  
Average
Yield
  
Average
Balance
  Interest  
Average
Yield
 
  Assets:                  
  Federal Funds Sold/Short-Term
  Investments
 $96,201,833  $55,291   0.23% $85,173,422   49,680   0.24%
Investment Securities:                        
Taxable  184,772,750   1,121,584   2.43%  159,023,828   937,085   2.36%
Tax-exempt (4)  79,584,499   880,274   4.42%  63,549,292   777,088   4.89%
Total  264,357,249   2,001,858   3.03%  222,573,120   1,714,173   3.08%
                         
  Loan Portfolio: (1)                        
Construction  60,008,415   1,020,198   6.89%  44,654,565   680,811   6.18%
Residential real estate  35,313,975   333,464   3.83%  10,920,962   144,890   5.38%
Home Equity  18,829,088   213,117   4.59%  9,222,618   124,683   5.48%
Commercial and commercial
 real estate
  227,575,170   3,314,871   5.91%  143,147,048   2,527,366   7.16%
Mortgage warehouse lines  91,860,959   1,079,526   4.77%  189,436,939   2,189,236   4.69%
Installment  274,288   4,107   6.07%  255,018   4,391   6.98%
All Other Loans 22,406,473   273,156   4.94%  49,279,947   300,818   2.48%
Total  456,268,368   6,238,439   5.55%  446,917,097   5,972,195   5.42%
                         
Total Interest-Earning Assets  816,827,450   8,295,588   4.11%  754,663,639   7,736,048   4.14%
                         
Allowance for Loan Losses  (7,740,866)          (7,363,842)        
Cash and Due From Bank  17,893,491           30,994,778         
Other Assets  53,197,450           51,277,385         
           Total Assets $880,177,525          $829,571,960         
                         
Liabilities and Shareholders’ Equity:                        
Money Market and NOW Accounts$255,097,589  $207,924   0.33% $231,758,247  $217,524   0.38%
Savings Accounts  199,706,974   222,659   0.45%  209,362,823   236,745   0.46%
Certificates of Deposit  160,831,323   468,148   1.18%  141,505,368   502,067   1.44%
Other Borrowed Funds  15,899,762   115,578   2.95%  11,155,000   103,273   3.75%
Trust Preferred Securities  18,557,000   85,107   1.86%  18,557,000   87,873   1.92%
Total Interest-Bearing Liabilities  650,092,648   1,099,416   0.69%  612,338,438   1,147,482   0.76%
                         
Net Interest Spread (2)          3.42%          3.38%
                         
Demand Deposits  146,567,857           141,764,416         
Other Liabilities  7,705,277           9,973,569         
Total Liabilities  804,365,782           764,076,423         
Shareholders’ Equity  75,811,743           65,495,537         
Total Liabilities and Shareholders’ Equity $880,177,525          $829,571,960         
Net Interest Margin (3)     $7,196,173   3.56%     $6,588,566   3.53%

(1)Loan origination fees are considered an adjustment to interest income.  For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans.
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(2)The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
(3)The net interest margin is equal to net interest income divided by average interest earning assets.
(4)Tax- equivalent basis.


The Company’s net interest income decreasedincreased on a tax-equivalent basis by $939,380,$607,607, or 13.0 %,9.2%, to $6,305,022$7,196,173 for the three months ended September 30, 2013March 31, 2014 from the $7,244,402$6,588,566 reported for the three months ended September 30, 2012.  The decreaseMarch 31, 2013. This increase in the Company’s net interest incomemargin for the three months ended March 31, 2014 compared with the comparable 2013 period was primarily attributabledue to a lower level of higher yielding mortgage warehouse portfolio loansrates paid on interest-bearing liabilities during the current period. The average rate paid on interest-bearing liabilities for the three months ended September 30, 2013March 31, 2014 was 0.70%0.69%, a reduction of 147 basis points compared to 0.84%from 0.76% paid for the three months ended September 30, 2012. The average yield on assets decreased to 4.07% for the three months ended September 30, 2013 from 4.77% for the three months ended September 30, 2012 due to a shift in average assets away from loans which typically have higher yields than securities.March 31, 2013.

Average interest earning assets increased by $17,843,175,$62,163,811, or 2.5%8.2%, to $743,290,714$816,827,450 for the three-monththree month period ended September 30, 2013March 31, 2014 from $725,447,539$754,663,639 for the three-monththree month period ended September 30, 2012.March 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 703 basis points to 4.07%4.11% for the three-monththree month period ended September 30, 2013March 31, 2014 when compared to 4.77%4.14% for the three-monththree month period ended September 30, 2012.   
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March 31, 2013.
 
Average interest bearing liabilities decreasedincreased by $1,138,771$37,754,210, or 6.2%, to $585,200,612$650,092,648 for the three-monththree month period ended September 30, 2013March 31, 2014 from $586,339,383$612,338,438 for the three-monththree month period ended September 30, 2012.March 31, 2013.  Overall, the cost of total interest bearing liabilities decreased 147 basis points to 0.70%0.69% for the three months ended September 30, 2013 compared to 0.84%March 31, 2014 from 0.76% for the three months ended September 30, 2012.March 31, 2013.
 
The net interest margin (on a tax-equivalent basis), which is net interest income on a tax equivalent basis divided by average interest earning assets, was 3.52%3.56% for the three months ended September 30, 2013March 31, 2014 compared to 4.09% for3.53% the three months ended September 30, 2012.March 31, 2013.  

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal classifications,review and classification, collateral values, and the growth and size of the loan portfolio.

At September 30, 2013, the loan portfolio balance was $362,549,473, which represented a decrease of $159,264,637, or 30.5%, compared to the December 31, 2012 balance of $521,814,110.  In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions.  Using this evaluation process, the Company’sCompany recorded a provision for loan losses was $539,998 for the three months ended September 30, 2013 compared toof $499,998 for the three months ended September 30, 2012.  March 31, 2014 compared to no provision for the three months ended March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013.  At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082.  There were no changes in the expected cash flows of the acquired loans from the Rumson merger during the quarter.  No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014.  The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.

Non-InterestEarnings Analysis

Net Interest Income
 
Total non-interestNet interest income, for the three months ended September 30, 2013 was $1,616,548, an increaseCompany’s largest and most significant component of $299,821, or 22.8%, over non-interestoperating income, of $1,316,727 foris the three months ended September 30, 2012.difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 20.4%80.8% of the Company’s net revenues for the three monthsmonth period ended September 30, 2013March 31, 2014 and 15.4%79.7% of net revenues for the three-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
 
Service chargesThe following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased modestly to $231,169related items, and the Company’s average yield or rate for the three monthsmonth periods ended September 30, 2013 from $243,443 forMarch 31, 2014 and 2013. The average rates are derived by dividing interest income and expense by the three months ended September 30, 2012.  This decrease was the resultaverage balance of a lower volume of uncollected fundsassets and overdraft fees collected on deposit accounts during the three months ended September 30, 2013 compared to the three months ended September 30, 2012.liabilities, respectively.
 
Gain on sales of loans held for sale increased to $641,966 for the three months ended September 30, 2013 compared to $509,138 for the three months ended September 30, 2012.  The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market.  The volume of mortgage loan sales increased for the three months ended September 30, 2013 compared to the three months ended September 30, 2012.
 
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $115,840 for the three months ended September 30, 2013 compared to $112,276 for the three months ended September 30, 2012. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduce the Company’s overall effective tax rate.
 
The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees, cash counting fees and Automated Teller Machine fees for non-Bank customers. Increased customer demand for these services contributed $627,573 to the other income component of non-interest income for the three months ended September 30, 2013 compared to $451,870 for the three months ended September 30, 2012, an increase of $175,703 for the third quarter of 2013 as compared to the third quarter of 2012.
 
Non-Interest Expenses
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Non-interest expenses decreased by $929,691, or 15.0%, to $5,253,483 for the three months ended September 30, 2013 from $6,183,174 for the three months ended September 30, 2012.  The current period decrease in other real estate owned expenses was the primary cause for this current period decrease in total non-interest expenses when compared with the prior period’s non-interest expenses.  The following table presents the major components of non-interest expenses for the three months ended September 30, 2013 and 2012.
Average Balance Sheets with Resultant Interest and Rates 
(yields on a tax-equivalent basis) 
  
  Three months ended March 31, 2014  Three months ended March 31, 2013 
  
Average
Balance
  Interest  
Average
Yield
  
Average
Balance
  Interest  
Average
Yield
 
  Assets:                  
  Federal Funds Sold/Short-Term
  Investments
 $96,201,833  $55,291   0.23% $85,173,422   49,680   0.24%
Investment Securities:                        
Taxable  184,772,750   1,121,584   2.43%  159,023,828   937,085   2.36%
Tax-exempt (4)  79,584,499   880,274   4.42%  63,549,292   777,088   4.89%
Total  264,357,249   2,001,858   3.03%  222,573,120   1,714,173   3.08%
                         
  Loan Portfolio: (1)                        
Construction  60,008,415   1,020,198   6.89%  44,654,565   680,811   6.18%
Residential real estate  35,313,975   333,464   3.83%  10,920,962   144,890   5.38%
Home Equity  18,829,088   213,117   4.59%  9,222,618   124,683   5.48%
Commercial and commercial
 real estate
  227,575,170   3,314,871   5.91%  143,147,048   2,527,366   7.16%
Mortgage warehouse lines  91,860,959   1,079,526   4.77%  189,436,939   2,189,236   4.69%
Installment  274,288   4,107   6.07%  255,018   4,391   6.98%
All Other Loans 22,406,473   273,156   4.94%  49,279,947   300,818   2.48%
Total  456,268,368   6,238,439   5.55%  446,917,097   5,972,195   5.42%
                         
Total Interest-Earning Assets  816,827,450   8,295,588   4.11%  754,663,639   7,736,048   4.14%
                         
Allowance for Loan Losses  (7,740,866)          (7,363,842)        
Cash and Due From Bank  17,893,491           30,994,778         
Other Assets  53,197,450           51,277,385         
           Total Assets $880,177,525          $829,571,960         
                         
Liabilities and Shareholders’ Equity:                        
Money Market and NOW Accounts$255,097,589  $207,924   0.33% $231,758,247  $217,524   0.38%
Savings Accounts  199,706,974   222,659   0.45%  209,362,823   236,745   0.46%
Certificates of Deposit  160,831,323   468,148   1.18%  141,505,368   502,067   1.44%
Other Borrowed Funds  15,899,762   115,578   2.95%  11,155,000   103,273   3.75%
Trust Preferred Securities  18,557,000   85,107   1.86%  18,557,000   87,873   1.92%
Total Interest-Bearing Liabilities  650,092,648   1,099,416   0.69%  612,338,438   1,147,482   0.76%
                         
Net Interest Spread (2)          3.42%          3.38%
                         
Demand Deposits  146,567,857           141,764,416         
Other Liabilities  7,705,277           9,973,569         
Total Liabilities  804,365,782           764,076,423         
Shareholders’ Equity  75,811,743           65,495,537         
Total Liabilities and Shareholders’ Equity $880,177,525          $829,571,960         
Net Interest Margin (3)     $7,196,173   3.56%     $6,588,566   3.53%

(1)Loan origination fees are considered an adjustment to interest income.  For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans.
 
 
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Non-Interest Expenses      
  Three months ended September 30, 
  2013  2012 
         
Salaries and employee benefits $3,060,143  $3,061,065 
Occupancy expenses  629,922   523,126 
Data processing services  273,272   257,991 
Marketing  79,656   46,969 
Regulatory, professional and other fees  303,114   196,870 
FDIC insurance expense  111,563   139,693 
Other real estate owned expenses  176,796   1,246,221 
Amortization of intangible assets  66,992   66,993 
All other expenses  552,025   644,246 
  $5,253,483  $6,183,174 
         
(2)The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
(3)The net interest margin is equal to net interest income divided by average interest earning assets.
Salaries and employee benefits, which represent the largest portion of non-interest expenses, decreased marginally
(4)Tax- equivalent basis.


The Company’s net interest income increased on a tax-equivalent basis by $607,607, or 9.2%, to $3,060,143$7,196,173 for the three months ended September 30, 2013 compared to $3,061,065March 31, 2014 from $6,588,566 reported for the three months ended September 30, 2012.

Occupancy expenses increased by $106,796 to $629,922 for the three months ended September 30, 2013 compared to $523,126 for the three months ended September 30, 2012.  TheMarch 31, 2013. This increase in expense was primarily attributable to higher maintenance costs incurred to maintain the Bank’s branch operations and the timing of these repairs.

The cost of data processing services increased to $273,272 for the three months ended September 30, 2013 from $257,991 for the three months ended September 30, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade software capabilities in branch offices in order to fully implement the Bank’s expanding mobile banking systems.

Regulatory, professional and other fees increased by $106,244 to $303,114 for the three months ended September 30, 2013 compared to $196,870 for the three months ended September 30, 2012.  During the three months ended September 30, 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management programs and legal fees in connection with the proposed merger of Rumson-Fair Haven Bank & Trust Company with and into the Bank.

Other real estate owned expenses decreased by $1,069,425 to $176,796 for the three months ended September 30, 2013 compared to $1,246,221 for the three months ended September 30, 2012 as the Company incurred a lower level of  property taxes, maintenance and other expenses on fewer repossessed properties during the third quarter of 2013 compared to the third quarter of 2012.  At September 30, 2013, the Bank held four properties with an aggregate value of $2,808,554 as other real estate owned compared to nine properties with an aggregate value of $10,225,740 at September 30, 2012.

FDIC insurance expense decreased to $111,563 for the three months ended September 30, 2013 compared to $139,693 for the three months ended September 30, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC premium assessment rules.
All other expenses decreased to $552,025 for the three months ended September 30, 2013 from $644,246 for the three months ended September 30, 2012. Current period decreases occurred in correspondent bank fees, maintenance agreements and ATM operating expenses.  All other expenses are comprised of a variety of operating expenses and fees as well as expenses associated with lending activities.
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An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by the sum of net interest income on a tax-equivalent basis and non-interest income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources.  The Company’s efficiency ratio decreased to 64.1% for the three months ended September 30, 2013 compared to 70.6% for the three months ended September 30, 2012 primarily as a result of the $1,069,425 decrease in other real estate owned expenses.  
Income Taxes
Income tax expense increased by $81,813 to $604,851 for the three months ended September 30, 2013 from $523,038 for the three months ended September 30, 2012.  The increase was primarily due to a higher level of pretax income for the third quarter of 2013 as compared to the third quarter of 2012.  

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012
Summary
The Company realized net income of $4,405,588 for the nine months ended September 30, 2013, an increase of 15.3% from the $3,819,759 reported for the nine months ended September 30, 2012.  The increase was due primarily to an increase in non-interest income, a lower level of the provision for loan losses and a decrease in noninterest expenses which, in total, offset a decrease in net interest income for the nine months ended September 30, 2013 compared to the same period in 2012.
Diluted net income per share was $0.72 for the nine months ended September 30, 2013 compared to diluted net income per share of $0.70 for the nine months ended September 30, 2012.  All prior year share information has been adjusted for the effect of a 5% stock dividend declared on December 20, 2012 and paid on January 31, 2013 to shareholders of record on January 14, 2013.
During the third quarter of 2012, the Company launched a shareholders’ common stock rights offering, which expired on October 5, 2012.  The Company received gross proceeds of $5.0 million from holders of subscription rights who exercised their basic subscription rights and from holders who exercised the over-subscription privilege. The rights’ offering was fully subscribed.  Accordingly, the Company issued a total of 555,555 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, including pursuant to the exercise of the over-subscription privilege.

Return on average assets and return on average equity were 0.73% and 8.96%, respectively, for the nine months ended September 30, 2013 compared to 0.67% and 9.01%, respectively, for the nine months ended September 30, 2012.  Return on average assets improved for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 due to the higher level of net income for the 2013 period and the slight reduction in return on average equity for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily due to the issuance of new shares in the Company’s rights offering completed in October 2012.

The Bank’s results of operations depend primarily on net interest income, which is primarily affected by the market interest rate environment, the shape of the U.S. Treasury yield curve, and the difference between the yield on interest-earning assets and the rate paid on interest-bearing liabilities.  Other factors that may affect the Bank’s operating results are general and local economic and competitive conditions, government policies and actions of regulatory authorities.  The net interest margin for the nine months ended September 30, 2013 was 3.48% as compared to the 3.98% net interest margin recorded for the nine months ended September 30, 2012, a decrease of 50 basis points.  This decrease in the Company’s net interest margin for the ninethree months ended September 30, 2013March 31, 2014 compared with the corresponding 2012comparable 2013 period was primarily due to two factors: (1) the decline in the balance of outstanding borrowings under mortgage warehouse lines and (2) the allocation of excess liquidity to much lower yielding overnight fund balances.  The decline in borrowings under mortgage warehouse lines was due to the increase in long-term interest rates paid on interest-bearing liabilities during the third quartercurrent period. The average rate paid on interest-bearing liabilities for the three months ended March 31, 2014 was 0.69%, a reduction of 2013, which led to lower levels of mortgage refinancings, and7 basis points from 0.76% paid for the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close.  The Company will continue to closely monitor the mix ofthree months ended March 31, 2013.

Average interest earning assets and funding sourcesincreased by $62,163,811, or 8.2%, to maximize$816,827,450 for the three month period ended March 31, 2014 from $754,663,639 for the three month period ended March 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 3 basis points to 4.11% for the three month period ended March 31, 2014 when compared to 4.14% for the three month period ended March 31, 2013.
Average interest bearing liabilities increased by $37,754,210, or 6.2%, to $650,092,648 for the three month period ended March 31, 2014 from $612,338,438 for the three month period ended March 31, 2013.  Overall, the cost of total interest bearing liabilities decreased 7 basis points to 0.69% for the three months ended March 31, 2014 from 0.76% for the three months ended March 31, 2013.
The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.56% for the three months ended March 31, 2014 compared to 3.53% the three months ended March 31, 2013.  

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal review and classification, collateral values, and the growth and size of the loan portfolio.

In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions.  Using this evaluation process, the Company recorded a provision for loan losses of $499,998 for the three months ended March 31, 2014 compared to no provision for the three months ended March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013.  At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082.  There were no changes in the expected cash flows of the acquired loans from the Rumson merger during this challenging interest rate environment.the quarter.  No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014.  The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.

Earnings Analysis

Net Interest Income
 
Net interest income, the Company’s largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 80.0%80.8% of the Company’s net revenues for the nine-monththree month period ended September 30, 2013March 31, 2014 and 84.8%79.7% of net revenues for the nine-monththree-month period ended September 30, 2012.March 31, 2013. Net interest income also depends upon the relative amount of average interest-earning assets, average interest-bearing liabilities, and the interest rate earned or paid on them, respectively.
 
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The following table sets forth the Company’s consolidated average balances of assets and liabilities and shareholders’ equity as well as interest income and expense on related items, and the Company’s average yield or rate for the ninethree month periods ended September 30, 2013March 31, 2014 and 2012, respectively.2013. The average rates are derived by dividing interest income and expense by the average balance of assets and liabilities, respectively.

 
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Average Balance Sheets with Resultant Interest and RatesAverage Balance Sheets with Resultant Interest and Rates Average Balance Sheets with Resultant Interest and Rates 
(yields on a tax-equivalent basis) Nine months ended September 30, 2013 Nine months ended September 30, 2012 (yields on a tax-equivalent basis) 
 
 Three months ended March 31, 2014 Three months ended March 31, 2013 
 
Average
Balance
 Interest 
Average
Yield
 
Average
Balance
 Interest 
Average
Yield
  
Average
Balance
 Interest 
Average
Yield
 
Average
Balance
 Interest 
Average
Yield
 
Assets:                                    
Federal Funds Sold/Short-Term Investments $112,351,662  $221,087   0.26%  $28,950,888 $55,315 0.26%  $96,201,833  $55,291   0.23% $85,173,422 49,680 0.24%
Investment Securities:                               
Taxable  156,884,880   2,818,801   2.40%   171,836,158 3,430,770 2.66%   184,772,750   1,121,584   2.43%  159,023,828 937,085 2.36%
Tax-exempt  67,610,995   2,418,022   4.77%   50,443,281  1,837,521  4.86% 
Tax-exempt (4)  79,584,499   880,274   4.42%  63,549,292  777,088  4.89%
Total  224,495,875   5,236,823   3.11%   222,279,439 5,268,291 3.16%   264,357,249   2,001,858   3.03%  222,573,120 1,714,173 3.08%
                               
Loan Portfolio:                
Loan Portfolio: (1)               
Construction  42,149,774   1,926,931   6.11%   57,303,861 2,861,353 6.67%   60,008,415   1,020,198   6.89%  44,654,565 680,811 6.18%
Residential real estate  11,057,154   430,207   5.20%   11,920,919 463,905 5.20%   35,313,975   333,464   3.83%  10,920,962 144,890 5.38%
Home Equity  9,208,816   373,778   5.43%   10,529,455 445,123 5.65%   18,829,088   213,117   4.59%  9,222,618 124,683 5.48%
Commercial and commercial real estate  143,067,333   7,838,953   7.33%   145,668,346 8,013,835 7.35%   227,575,170   3,314,871   5.91%  143,147,048 2,527,366 7.16%
Mortgage warehouse lines  166,142,165   5,808,889   4.67%   198,007,591 7,060,451 4.76%   91,860,959   1,079,526   4.77%  189,436,939 2,189,236 4.69%
Installment  254,238   12,284   6.46%   356,875 18,221 6.82%   274,288   4,107   6.07%  255,018 4,391 6.98%
All Other Loans  41,800,648   928,216   2.97%   32,771,044  837,561  3.41% All Other Loans 22,406,473   273,156   4.94%  49,279,947  300,818  2.48%
Total  413,680,128 17,319,258 5.60%   456,558,091   19,700,449   5.76%   456,268,368 6,238,439 5.55%  446,917,097 5,972,195 5.42%
                                       
Total Interest-Earning Assets  750,527,665  22,777,168 4.05%   707,788,418   25,024,055   4.72%   816,827,450  8,295,588  4.11%  754,663,639   7,736,048   4.14%
                                       
Allowance for Loan Losses  (6,777,671)       (6,150,075)           (7,740,866)       (7,363,842)        
Cash and Due From Bank  18,481,914       10,091,843           17,893,491       30,994,778         
Other Assets  48,636,271       52,478,160           53,197,450       51,277,385         
Total Assets $810,868,179      $764,208,346          $880,177,525        $829,571,960         
                            
Liabilities and Shareholders’ Equity:                                 
Interest-Bearing Liabilities:                    
Money Market and NOW Accounts $225,215,899 $579,798 0.34%  $203,155,986  $762,799   0.50% Money Market and NOW Accounts$255,097,589 $207,924 0.33% $231,758,247  $217,524   0.38%
Savings Accounts  202,754,977 676,979 0.45%   192,802,238   894,090   0.62%   199,706,974 222,659 0.45%  209,362,823   236,745   0.46%
Certificates of Deposit  141,258,225 1,411,530 1.34%   147,548,296   1,634,787   1.48%   160,831,323 468,148 1.18%  141,505,368   502,067   1.44%
Other Borrowed Funds  10,380,769 310,649 4.00%   19,101,642   340,784   2.38%   15,899,762 115,578 2.95%  11,155,000   103,273   3.75%
Trust Preferred Securities  18,557,000  263,982  1.90%   18,557,000   292,759   2.11%   18,557,000  85,107  1.86%  18,557,000   87,873   1.92%
Total Interest-Bearing Liabilities  598,166,870  3,242,938 0.72%   581,165,162   3,925,219   0.90%   650,092,648  1,099,416  0.69%  612,338,438   1,147,482   0.76%
                                       
Net Interest Spread        3.33%           3.82% 
Net Interest Spread (2)         3.42%          3.38%
                                       
Demand Deposits  139,542,141       117,413,216           146,567,857       141,764,416         
Other Liabilities  7,394,439       8,790,417           7,705,277       9,973,569         
Total Liabilities  745,103,450       707,368,795           804,365,782       764,076,423         
Shareholders’ Equity  65,764,729       56,839,551           75,811,743       65,495,537         
Total Liabilities and Shareholders’
Equity
 $810,868,179      $764,208,346          $880,177,525       $829,571,960       
                    
Net Interest Margin(3)     $19,534,230 3.48%     $21,098,837   3.98%    $7,196,173 3.56%   $6,588,566 3.53%
                    

(1)Loan origination fees are considered an adjustment to interest income.  For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income and includes the average balance of Loans Held for Sale. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operation under the heading “Non-Performing Assets” for a discussion of the Bank’s policy with regard to non-accrual loans.
 
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(2)The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
(3)The net interest margin is equal to net interest income divided by average interest earning assets.
(4)Tax- equivalent basis.


The Company’s net interest income decreasedincreased on a tax-equivalent basis by $1,752,876,$607,607, or 8.5%9.2%, to $18,750,007$7,196,173 for the ninethree months ended September 30, 2013March 31, 2014 from $20,502,883$6,588,566 reported for the ninethree months ended September 30, 2012. The decreaseMarch 31, 2013. This increase in the Company’s net interest incomemargin for the three months ended March 31, 2014 compared with the comparable 2013 period was attributableprimarily due to a decreased volume of loans in the loan portfolio combined with lower rates earned on interest-earning assets, which more than offset the lower rates paid on interest-bearing liabilities during the current period. The average rate paid on interest-bearing liabilities for the three months ended March 31, 2014 was 0.69%, a higher volumereduction of interest-bearing liabilities.7 basis points from 0.76% paid for the three months ended March 31, 2013.
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Average interest-earninginterest earning assets increased by $42,739,247,$62,163,811, or 6.0%8.2%, to $750,527,665$816,827,450 for the nine-month period ended September 30, 2013 from $707,788,418 for the nine-month period ended September 30, 2012.  The average investment securities portfolio increased by $2,216,436, or 1.0%, to $224,495,875 for the nine-month period ended September 30, 2013 compared to $222,279,439 for the nine-month  period ended September 30, 2012. The average loan portfolio decreased by $42,877,963, or 9.4%, to $413,680,128 for the nine-month period ended September 30, 2013 compared to $456,558,091 for the nine-month period ended September 30, 2012.  The overall risk profile of the loan portfolio was reduced by a change in its composition via a reduction in average construction loans (which are generally riskier than other loans) of $15,154,087, or 26.4%, to $42,149,774 for the nine-month period ended September 30, 2013 compared to $57,303,861 for the nine-three month period ended September 30, 2012. In addition, the third quarter of 2013 saw an increase in long-term interest rates that accelerated the decrease in the balance of outstanding mortgage warehouse lines.  The average balance of mortgage warehouse lines decreased by $31,865,426, or 16.1%, to $166,142,165March 31, 2014 from $754,663,639 for the nine monthsthree month period ended September 30, 2013 compared to an average balance of $198,007,591 for the nine months ended September 30, 2012.  Overall, theMarch 31, 2013. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 673 basis points to 4.05%4.11% for the nine-monththree month period ended September 30, 2013March 31, 2014 when compared to 4.72%4.14% for the nine-monththree month period ended September 30, 2012.March 31, 2013.
 
Average interest-bearinginterest bearing liabilities increased by $17,001,708,$37,754,210, or 2.9%6.2%, to $598,166,870$650,092,648 for the nine-monththree month period ended September 30, 2013March 31, 2014 from $581,165,162$612,338,438 for the nine-monththree month period ended September 30, 2012.March 31, 2013.  Overall, the cost of total interest-bearinginterest bearing liabilities decreased 187 basis points to 0.72%0.69% for the ninethree months ended September 30, 2013 compared to 0.90%March 31, 2014 from 0.76% for the ninethree months ended September 30, 2012.March 31, 2013.
 
The net interest margin (on a tax-equivalent basis), which is net interest income on a tax equivalent basis divided by average interest earning assets, was 3.48%3.56% for the ninethree months ended September 30, 2013March 31, 2014 compared to 3.98%3.53% the ninethree months ended September 30, 2012.March 31, 2013.  

Provision for Loan Losses

Management considers a complete review of the following specific factors in determining the provisions for loan losses: historical losses by loan category, the level of non-accrual loans and problem loans as identified through internal classifications,review and classification, collateral values, and the growth and size of the loan portfolio.

At September 30, 2013, the loan portfolio balance was $362,549,473, which represented a decrease of $159,264,637, or 30.5%, from the December 31, 2012 balance of $521,814,110.

In addition to these factors, management takes into consideration current economic conditions and local real estate market conditions.  Using this evaluation process, the Company’sCompany recorded a provision for loan losses was $776,664of $499,998 for the ninethree months ended September 30, 2013March 31, 2014 compared to $1,649,994no provision for the ninethree months ended September 30, 2012.  March 31, 2013. At March 31, 2014, non-performing loans increased by $1,133,853, or 17.9%, to $7,455,809 and the ratio of non-performing loans to total loans was 1.40% at March 31, 2014 compared to 1.69% at December 31, 2013.  At March 31, 2014, the loan portfolio balance was $531,405,382, which represented an increase of $158,069,300 compared to the December 31, 2013 balance of $373,336,082.  There were no changes in the expected cash flows of the acquired loans from the Rumson merger during the quarter.  No allowance for loan losses was recorded for acquired loans with or without evidence of deteriorated credit quality as of March 31, 2014.  The primary cause of the current period increase in the loan portfolio balance was the $143,714,000 of loans acquired in the Rumson merger.

Non-Interest Income

Total non-interest income for the ninethree months ended September 30, 2013March 31, 2014 was $4,672,970,$1,636,982, an increase of $1,003,112,$28,419, or 27.3%1.8%, over non-interest income of $3,669,858$1,608,563 for the ninethree months ended September 30, 2012.  This component represented 20.0% of the Company’s net revenues for the nine-month period ended September 30, 2013 and 15.2% of net revenues for the nine-month period ended September 30, 2012.March 31, 2013.
 
Service charges on deposit accounts represent a significantconsistent source of non-interest income. Service charges on deposit accountscharge revenues decreased by $26,832, or 3.8%,nominally to $675,839$219,116 for the ninethree months ended September 30, 2013March 31, 2014 from $702,671$223,066 for the ninethree months ended September 30, 2012.  The lower service charges were primarilyMarch 31, 2013. This decrease was the result of a decrease in the numberlower volume of uncollected funds and overdraft fees collected on deposit accounts subject to service charges during the ninefirst three months ended September 30, 2013of 2014 compared to the prior-year period.first three months of 2013.
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Gain on sales of loans originated for sale increased by $380,319,$7,872, or 25.8%1.1%, to $1,852,821$739,581 for the ninethree months ended September 30, 2013March 31, 2014 when compared to $1,472,502$731,709 for the ninethree months ended September 30, 2012.March 31, 2013.  The Bank sells both residential mortgage loans and SBASmall Business Administration loans in the secondary market.  The current higher interest rate environment for mortgage loans resulted in a lower demand for mortgage financings. The resulting volume of mortgage loan sales increasedorigination decreased for the ninefirst three months ended September 30, 2013of 2014 compared to the ninefirst three months ended September 30, 2012.
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2013.
 
Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $348,206$129,151 for the ninethree months ended September 30, 2013March 31, 2014 compared to $337,374$112,608 for the ninethree months ended September 30, 2012.March 31, 2013. The Bank purchased tax-freeacquired $4.5 million of BOLI assets to partially offsetin the cost of employee benefit plans and reduce the Company’s overall effective tax rate.Rumson merger.
 
The Bank also generates non-interest income from a variety of fee-based services. These include safe deposit box rental, wire transfer service fees cash counting fees and Automated Teller Machine fees for non-Bank customers. GreaterIncreased customer demand for these services contributed to the other income component of non-interest income increasingamounting to $1,796,104$549,134 for the ninethree months ended September 30, 2013March 31, 2014, compared to $1,157,311$541,180 for the ninethree months ended September 30, 2012.March 31, 2013.
 
Non-Interest ExpensesExpense
 
Non-interest expenses decreasedincreased by $670,914,$1,263,057, or 3.9%20.8%, to $16,498,751$7,346,025 for the ninethree months ended September 30, 2013March 31, 2014 from $17,169,665$6,082,968 for the ninethree months ended September 30, 2012.  The current period decreaseMarch 31, 2013.  Excluding merger related expenses of $1,422,723, non-interest expenses declined to $5,963,305 in other real estate ownedthe first quarter of 2014. Non-interest expenses was the most significant factor contributingattributable to the decrease in total non-interest expenses when compared withformer Rumson operation were $473,000 from February 7, 2014 (the date of the corresponding prior year period’s non-interest expenses.closing of the Rumson merger) through March 31, 2014. The following table presents the major components of non-interest expenses for the ninethree months ended September 30, 2013March 31, 2014 and 2012.2013.
 
Non-Interest Expenses Nine months ended September 30, 
Non-interest Expenses     
 Three months ended March 31, 
 2013 2012  2014 2013 
Salaries and employee benefits $9,458,247  $9,156,318  $3,587,905  $3,352,863 
Occupancy expenses  1,930,227   1,860,446   826,195   677,806 
Data processing services  868,960   774,110   316,049   301,382 
Equipment expense  184,813   311,648 
Marketing  219,326   145,793   69,793   47,583 
Regulatory, professional and other fees  770,015   611,606   206,638   194,993 
Office expense  188,316   186,648 
Merger-related expenses 1,422,723 - 
FDIC insurance expense  146,249   426,960   150,000   19,687 
Directors’ fees  24,500   32,000 
Other real estate owned expenses  770,858   2,128,771   41,432   545,505 
Amortization of intangible assets  200,975   200,975  103,017 66,992 
Other expenses  2,133,894  1,864,686   224,644   345,861 
Total $7,346,025  $6,082,968 
 $16,498,751  $17,169,665      
 
Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $301,929,$235,042, or 3.3%7.0%, to $9,458,247$3,587,905 for the ninethree months ended September 30, 2013March 31, 2014 compared to $9,156,318$3,352,863 for the ninethree months ended September 30, 2012.March 31, 2013. $82,980 of this increase is due to salary and benefits for former Rumson employees that were retained by the Bank. The balance of the increase in salaries and employee benefits for the ninethree months ended September 30, 2013March 31, 2014 was thea result of an increase in the number of employees, regular merit increases and increased health care costs. As a result of the Rumson merger completed on February 7, 2014 staffing levels increased to 172 full time equivalent employees at March 31, 2014 as compared to 141 full time equivalent employees at March 31, 2013.
 
Occupancy expenses increased by $69,781,$148,389, or 3.8%21.9%, to $1,930,227$826,195 for the ninethree months ended September 30, 2013March 31, 2014 compared to $1,860,446$677,806 for the ninethree months ended September 30, 2012.March 31, 2013.  The increase in occupancy expenses for the current period was primarily attributable toincrease resulted from increased depreciation, property taxes and maintenance costs related toof the Bank’s branch properties.five properties acquired as a result of the Rumson merger.
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The cost of data processing services increased to $868,960$316,049 for the ninethree months ended September 30, 2013March 31, 2014 from $774,110$301,382 for the ninethree months ended September 30, 2012March 31, 2013 as additional expenses were incurred to support and maintain the five new locations acquired through the Rumson merger to the Bank’s data systems.
Equipment expense decreased by $126,835, or 14.6%, to $184,813 for the three months ended March 31, 2014 compared to $311,648 for the three months ended March 31, 2013 primarily due to non-recurring costs associated with the expansion of mobile banking capabilities incurred during the first quarter of 2013.
During the first quarter of 2014, the Company incurred merger-related expenses of $1,422,723 in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank’s mobile banking system.
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(1) change-in-control payments of $883,000; (2) data processing contract termination payments of $174,000; (3) investment banker fees of $215,000; (4) legal fees of $40,000 and (5) severance payments of $111,723.
 
Regulatory, professional and other fees increased by $158,409,$11,645, or 25.9%6.0%, to $770,015$206,638 for the ninethree months ended September 30, 2013March 31, 2014 compared to $611,606$194,993 for the ninethree months ended September 30, 2012.March 31, 2013.  During the first ninethree months of 2013,2014, the Company incurred higher professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management programs.  In addition, the increase in regulatory, professionallending, collections and other feesgeneral corporate matters.
FDIC insurance expense increased to $150,000 for the ninethree months ended September 30,March 31, 2014 compared to $19,687 for the three months ended March 31, 2013 was partially dueas a result of the inflow of deposits subject to FDIC insurance assessment as a result of the Company’s incurrence of legal feesRumson merger and changes in connection with the proposed merger of Rumson-Fair Haven Bank & Trust Company with and intoinsurance premium calculation mandated by the Bank.Sarbanes-Oxley Act in 2013.

Other real estate owned expenses decreased by $1,357,913$504,073 to $770,858$41,432 for the ninethree months ended September 30, 2013March 31, 2014 compared to $2,128,771$545,505 for the ninethree months ended September 30, 2012March 31, 2013 as the Company incurred a lower level of property tax, maintenance and other costs on fewer repossessed properties held as other real estate owned during the first nine months of2014 period compared with the 2013 compared toperiod. At March 31, 2014, the first nine months of 2012.  At September 30, 2013, the BankCompany held fourthree properties with an aggregate value of $2,808,554$2,136,341 as other real estate owned compared to nineeight properties with an aggregate value of $10,225,740$8,294,887 at September 30, 2012.March 31, 2013.
 
FDIC insurance expense decreasedAmortization of intangible assets increased $36,025 to $146,249 for$103,017 during the nine months ended September 30, 2013 comparedfirst quarter of 2014 due to $426,960 for the nine months ended September 30, 2012increase in core deposit intangible assets of $1,189,000 as a result ofrecorded in the changes required by the Dodd-Frank Act with respect to FDIC premium assessment rules.Rumson merger.

All other expenses increaseddecreased by $269,208$121,217 to $2,133,894$224,644 for the ninethree months ended September 30, 2013 from $1,864,686March 31, 2014 compared to $345,861 for the ninethree months ended September 30, 2012March 31, 2013 as a result of current year increasesdecreases occurred in payroll processingcorrespondent bank fees, maintenance agreements and ATM operationoperating expenses.  All other expenses are also comprised of a variety of operating expenses and insurance premiums.
An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operatingfees as well as expenses by the sum of net interest income on a tax-equivalent basis and non-interest income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income, while a decrease would indicate a more efficient allocation of resources.  The Company’s efficiency ratio decreased to 68.2% for the nine months ended September 30, 2013 compared to 69.3% for the nine months ended September 30, 2012 primarily as a result of the $1,357,913 decrease in other real estate owned expenses.  associated with lending activities.
 
Income Taxes
Pre-tax income decreased to $687,838 for the three months ended March 31, 2014 compared to $1,849,951 for the three months ended March 31, 2013.
 
The Company had income tax expense of $1,741,974$46,126 for the ninethree months ended September 30, 2013March 31, 2014 and an effective tax rate of 6.7% compared to income tax expense of $1,533,323$524,633 and an effective tax rate of 28.4% for the ninethree months ended September 30, 2012.March 31, 2013. The increasedecrease in the income tax expense for the 2013current period was primarily due to the higher level$1,422,723 of taxablepre-tax merger related expenses incurred by the Company as a result of the Rumson merger completed on February 7, 2014 and the effect of tax-exempt interest income for the first nine months of 2013 compared to the first nine months of 2012.income.
 
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Financial Condition
 
September 30, 2013March 31, 2014 Compared with December 31, 20122013
 
Total consolidated assets at September 30,March 31, 2013 were $790,168,852,$967,090,613, representing a decreasean increase of $50,799,530,$224,765,526, or 6.0%30.3%, from total consolidated assets of $840,968,382$742,325,087 at December 31, 2012.  2013.  The increase in assets was primarily attributable to the merger with Rumson, which was completed on February 7, 2014. The merger was accounted for under the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their fair values as of the acquisition date. Included in the acquisition were the assumption of deposit liabilities of $189.5 million, primarily consisting of demand deposits, and the acquisition of cash and cash equivalents of $36.0 million, securities available for sale of $30.0 million and loans of $143.7 million. The Bank recorded goodwill of approximately $7.7 million and a core deposit intangible asset of approximately $1.1 million as a result of the acquisition.

Cash and Cash Equivalents
 
Cash and cash equivalents at September 30, 2013March 31, 2014 totaled $123,815,138$108,919,056 compared to $14,044,921$69,278,771 at December 31, 2012.2013. Cash and cash equivalents at September 30, 2013March 31, 2014 consisted of cash and due from banks of $123,803,713$108,819,056 and Federal funds sold/short term investments of $11,425.$100,000. The corresponding balances at December 31, 20122013 were $14,033,501$69,267,345 and $11,420,$11,426, respectively. The current period increase in long-term market interest rates that occurred duringwas primarily due to the third quartercash inflow of 2013 reducedapproximately $30.0 million resulting from the demand for mortgage refinancings,Rumson merger, which led to a decrease in borrowings under mortgage warehouse lines extended to licensed mortgage banking companiesclosed on February 7, 2014, which was partially offset by the Bank.$14.8 million that was paid as the cash component of the merger consideration to Rumson shareholders. To the extent that the Bank did not utilize the funds for loan originations or securities purchases, the cash inflows accumulated in cash and cash equivalents.

Loans Held for Sale
 
Loans held for sale at September 30, 2013March 31, 2014 amounted to $14,535,681$3,253,009 compared to $35,960,262$10,923,689 at December 31, 2012.2013. As indicated in the Consolidated Statements of Cash Flows, the amount of mortgage loans originated for sale was $114,126,927$15,191,079 for the ninethree months ended September 30, 2013March 31, 2014 compared to $128,302,763$44,012,744 for the ninethree months ended September 30, 2012.March 31, 2013. The current period decrease was primarily due to the increase in long-term market interest rates that occurred during late 2013 and continued into 2014 reduced the demand for mortgage loan financings during the nine months ended September 30, 2013.
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2014. As a result, the balance of Loans Held for Sale decreased accordingly.
 
Investment Securities
 
Investment securities represented 31.9%28.0% of total assets at September 30, 2013March 31, 2014 and 26.9%33.9% at December 31, 2012.2013. Total investment securities increased $26,261,268,$18,349,653, or 11.6%7.3%, to $252,130,133$270,365,275 at September 30, 2013March 31, 2014 from $225,868,865$252,015,622 at December 31, 2012.2013 primarily as a result of the Rumson merger.  Purchases of investments totaled $79,508,130$4,178,849 during the ninethree months ended September 30, 2013,March 31, 2014, and proceeds from calls and repayments totaled $47,912,035$16,828,128 during the period.
 
Securities available for sale are investments that may be sold in response to changing market and interest rate conditions or for other business purposes.  Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns.  At September 30, 2013,March 31, 2014, securities available for sale totaled $101,557,211,$117,630,716, which is a decreasean increase of $8,283,754,$18,431,909, or 7.5%18.6%, from securities available for sale totaling $109,840,965$99,198,807 at December 31, 2012.2013.
 
At September 30, 2013,March 31, 2014, the securities available for sale portfolio had net unrealized losses of $(2,659,220),$1,777,421 compared to net unrealized gainslosses of $1,806,967$2,992,624 at December 31, 2012.2013.  These unrealized (losses)/gainslosses are reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income.
 
Securities held to maturity, which are carried at amortized historical cost, are investments for which there is the positive intent and ability to hold to maturity.  At September 30, 2013,March 31, 2014, securities held to maturity were $150,572,922, an increase$152,734,559, a decrease of $34,545,022, or 29.8%,$82,256, from $116,027,900$152,816,815 at December 31, 2012.2013.  The fair value of the held to maturity portfolio at September 30, 2013March 31, 2014 was $152,186,281.$155,795,659.
 
Proceeds from maturities and prepayments of securities during the first nine months of 2013 were used primarily to reduce the Company’s borrowings.
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Loans
 
The loan portfolio, which represents our largest asset, is a significant source of both interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. The Bank’s primary lending focus continues to be mortgage warehouse lines, construction loans, commercial loans, owner-occupied commercial mortgage loans and tenanted commercial real estate loans.
 
The following table sets forthrepresents the classificationcomponents of loans by major categorythe loan portfolio at September 30, 2013March 31, 2014 and December 31, 2012.2013.  
 
Loan Portfolio Composition September 30, 2013 December 31, 2012 March 31, 2014  December 31, 2013 
Component Amount  
%
of total
 Amount  
%
of total
 Amount  %  Amount  % 
Construction loans $43,233,737        12% $55,691,393  11% $62,790,449   12% $51,002,172   14%
Residential real estate loans  11,656,190          3%  10,897,307    2%  41,775,546   8%  13,764,178   4%
Commercial business  65,724,407        18%  57,865,436  11%  118,543,799   22%  82,348,055   22%
Commercial real estate  96,490,718        27%  102,412,694  20%  178,205,347   34%  98,389,730   26%
Mortgage warehouse lines  134,534,202       37%  284,127,530  54%  104,334,990   20%  116,951,357   31%
Loans to individuals  9,847,383        3%  9,643,385    2%  24,884,525   5%  9,766,114   3%
Deferred loan fees and costs  905,896        -%  987,086     -%
Deferred loan costs  665,211   0%  943,950   0%
All other loans  170,940       -%  189,279     -%  205,515   0%  170,526   0%
 $362,563,473  100% $521,814,110  100% $531,405,382   100% $373,336,082   100%
The loan portfolio decreasedincreased by $159,264,637,$158,069,300, or 30.5%42.3%, to $362,563,473$531,405,382 at September 30, 2013March 31, 2014 compared to $521,814,110$373,336,082 at December 31, 2012.  This decrease2013.  The primary cause of this increase in the loan portfolio was the Rumson merger which was completed on February 7, 2014 and added approximately $143.7 million in loans to the existing portfolio, principally in the residential real estate and commercial real estate components.

Commercial and commercial real estate loans totaled $296,749,146 at March 31, 2014, an increase of $116,011,361 when compared to $180,737,785 for the year ended December 31, 2013. Commercial loans consist primarily of loans to small and middle market businesses and are typically working capital loans used to finance inventory, receivables or equipment needs. These loans are generally secured by business assets of the result of two factors: (1) the increase in long-term interest rates during the third quarter of 2013, which led to lower levels of mortgage refinancings, and (2) the shift from borrowings for mortgage refinancings to borrowings for new mortgages to purchase real property, which typically require more time to document and close.commercial borrower.

The Mortgage warehouse lines component of the loan portfolio decreased by $149,593,328,$12,616,367 or 52.7%10.8%, to $134,534,702$104,334,990 compared to $284,127,530$116,951,357 at December 31, 2012.
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2013, as the current increased long-term interest rate environment has reduced the demand for mortgage loan financings.
 
The Bank’s Mortgage Warehouse Funding Group offers a revolving linelines of credit that isare available to licensed mortgage banking companies (the “Warehouse Line of Credit”) and that we believe has been successful from inception in 2008.. The Warehouse Line of Credit is used by the  mortgage bankersbanker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others.  On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market.  Interest (the spread between our borrowing cost and the rate charged to the client) and a transaction fee are collected by the Bank at the time of repayment.  Additionally, customers of the Warehouse Line of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the loan balances.

The Bank’s Construction loans portfolio decreased by $12,457,656 during the first nine months of 2013.  The Bank received $13,737,207 in prepayments for the Construction loan portfolio during the first nine months of 2013.  In the current highly competitive marketplace for commercial and construction loans, developing new lending relationships and limiting the amount of loan prepayments will be essential for maintaining this portion of the Bank’s loan portfolio.
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The ability of the Company to enter into larger loan relationships and management’s philosophy of relationship banking are key factors in the Company’s strategy for loan growth.  The ultimate collectability of the loan portfolio and recovery of the carrying amount of real estate are subject to changes in the Company’s market region’s economic environment and real estate market.
 
Non-Performing Assets
 
Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans are composed of (1) loans on a non-accrual basis and (2) loans which are contractually past due 90 days or more as to interest and principal payments but thatwhich have not been classified as non-accrual. Included in non-accrual loans are loans whose terms have been restructured to provide a reduction or deferral of interest and/or principal because of deterioration in the financial position of the borrower and which have not performed in accordance with the restructured terms.

The Bank’s policy with regard to non-accrual loans is tothat generally, place loans are placed on a non-accrual status when they are 90 days past due, unless these loans 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 or interest is in doubt.  Consumer loans are generally charged off after they become 120 days past due.  Subsequent payments on loans in non-accrual status are credited to income only if collection of principal is not in doubt.
 
Non-performing loans increased by $1,784,638$1,133,853 to $7,748,140$7,455,809 at September 30, 2013March 31, 2014 from $5,963,502$6,321,956 at December 31, 2012.2013.  The major segmentsegments of non-accrual loans consist of commercial real estate loans and SBA loans, which are in the process of collection. The table below sets forth non-performing assets and risk elements in the Bank’s portfolio for the periods indicated.

As the table demonstrates, while non-performing loans to total loans increaseddecreased to 2.14%1.40% at September 30, 2013March 31, 2014 from 1.14%1.69% at December 31, 2012, loan2013 principally due to the increase in loans from the Rumson merger.  Loan quality is still considered to be sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

          
Non-Performing Assets and Loans September 30, December 31,  March 31, December 31, 
 2013 2012  2014 2013 
Non-Performing loans:            
Loans 90 days or more past due and still accruing $94,898  $84,948  $-  $- 
Non-accrual loans  7,653,242   5,878,554   7,455,809   6,321,956 
Total non-performing loans  7,748,140   5,963,502   7,455,809   6,321,956 
Other real estate owned  2,808,554   8,332,601   2,136,341  2,136,341 
Total non-performing assets $10,556,694  $14,296,103   9,592,150   8,458,297 
Performing troubled debt restructurings  3,840,255  3,858,796 
Performing troubled debt restructurings and total non-performing assets $13,432,405 $12,317,093 
              
Non-performing loans to total loans  2.14%   1.14%   1.40%  1.69%
Non-performing loans to total loans excluding mortgage warehouse lines  3.40%   2.51%  1.75% 2.47%
Non-performing assets to total assets  1.34%   1.70%   0.99%  1.14%
Non-performing assets to total assets excluding mortgage warehouse lines  1.61%   2.57%  1.11% 1.35%
          
Total non-performing assets and performing troubled debt restructurings to
total assets
 1.39% 1.66%
     
Non-performing assets increased by $1,133,853 to $9,592,150 at March 31, 2014 from $8,458,297 at December 31, 2013.  Other real estate owned totaled $2,136,341 at March 31, 2014 and December 31, 2013.  
 
 
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Non-performing assets decreased by $3,739,409 to $10,556,694 at September 30, 2013 from $14,296,103 at December At March 31, 2012.  Other real estate owned decreased by $6,124,047 to $2,208,554 at September 30, 2013 from $8,332,601 at December 31, 2012.  Since December 31, 2012, the Bank sold and transferred properties totaling approximately $7,183,854 out of other real estate owned. In addition, during the nine months ended September 30, 2013, the Bank recorded a provision for loss on other real estate owned of $662,918.
At September 30, 2013,2014, the Bank had eightseven loans totaling $4,248,442 that$4,212,561 which were classified as troubled debt restructurings.  Two of these loans totaling $374,173$372,306 are included in the above table as non-accrual loans.  Theloans; the remaining sixfour loans totaling $3,874,269$3,840,255 are considered performingperforming.
As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired with evidence of deteriorated credit quality of $2,575,110 at March 31, 2014 were not classified as non-performing loans.
 
Non-performing assets represented 1.34%0.99% of total assets at September 30, 2013March 31, 2014 and 1.70%1.14% at December 31, 2012.2013.
 
Management takes a proactive approach in addressing delinquent loans. The Company’s President and Chief Executive Officer meets weekly with all loan officers to review the status of credits past-due 10 days or more. An action plan is discussed for delinquent loans to determine the steps necessary to induce the borrower to cure the delinquency and restore the loan to a current status. Also, delinquency notices are system generated when loans are five days past duepast-due and again at 15 days past due.past-due.
 
In most cases, the Company’s collateral is real estate and whenestate. If the collateral is foreclosed upon, the real estate is carried at the lower of fair market value less the estimated selling costs or the initially recorded amount. The amount, if any, by which the recorded amount of the loan exceeds the fair market value of the collateral, less estimated selling costs, is a loss which is charged againstto the allowance for loan losses at the time of foreclosure or repossession. Resolution of a past-due loan can be delayed if the borrower files a bankruptcy petition because a collection action cannot be continued unless the Company first obtains relief from the automatic stay provided by the bankruptcy code.
 
Allowance for Loan Losses and Related Provision
 
The allowance for loan losses is maintained at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements.  The allowance for loan losses is a valuation reserve available for losses incurred or inherent in the loan portfolio and other extensions of credit.  The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company.

The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit.  Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values.  Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.
 
All, or part, of the principal balance of commercial and commercial real estate loans, and construction loans are charged off against the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for loan losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is adequate based on management’s assessment of probable estimated losses. The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements.  These elements may includeand is consistent with generally accepted accounting principles (GAAP) and interagency supervisory guidance.  The allowance for loan losses methodology consists of two major components.  The first component is an estimation of losses associated with individually identified impaired loans, which follows Accounting Standards Codification (ASC) Topic 310 (formerly SFAS 114).  The second major component is an estimation of losses under ASC Topic 450 (formerly SFAS 5), which provides guidance for estimating losses on groups of loans with similar risk characteristics.  The Company’s methodology results in an allowance for loan losses which includes a specific reserve for doubtful or high riskimpaired loans, an allocated reserve, and an unallocated portion.

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When analyzing groups of loans under ASC 450, the Bank follows the Interagency Policy Statement on the Allowance for Loan and Lease Losses.  The Company consistently appliesmethodology considers the following comprehensive methodology.  During the quarterly reviewCompany’s historical loss experience adjusted for changes in trends, conditions, and other relevant factors that affect repayment of the allowance for loan losses,loans as of the Company considers a variety ofevaluation date.  These adjustment factors, thatknown as qualitative factors, include:

 ·General economic conditions;Delinquencies and nonaccruals
 ·Trends in charge-offs;Portfolio quality
 ·Trends and levelsConcentration of delinquent loans;credit
·Trends and levels of non-performing loans, including loans over 90 days delinquent;
 ·Trends in volume and terms of loans;loans
 ·LevelsQuality of allowance for specific classified loans; andcollateral
 ·Credit concentrations.Policy and procedures
·Experience, ability, and depth of management
·Economic trends – national and local
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·External factors – competition, legal and regulatory



The methodology includes the segregation of the loan portfolio into loan types with a further segregation into risk rating categories.categories, such as special mention, substandard, doubtful and loss. This allows for an allocation of the allowance for loan losses by loan type; however, the allowance is available to absorb any loan loss without restriction.  Larger balance, non-homogeneous loans representing significant individual credit exposures are evaluated individually through the internal loan review process.  It is this process that produces the watch list.  The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated. Based on these reviews, an estimate of probable losses for the individual larger-balance loans are determined, whenever possible, and used to establish specific loan loss reserves.  In general, for non-homogeneous loans not individually assessed, and for homogeneous groups of loans, such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.

The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss.  Loans classified as special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified as doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans rated as doubtful in whole, or in part, are placed in nonaccrual status.  Loans classified as a loss are considered uncollectible and are chargedcharged-off against the allowance for loan losses.

The specific reserveallowance for impaired loans is established for specific loans which have been identified by management as being high-risk loan assets.impaired. These impaired loans are assigned a doubtful risk rating gradeconsidered to be impaired primarily because the loan hasloans have not performed according to payment terms and there is reason to believe that repayment of the loan principal in whole, or part, is unlikely. The specific portion of the allowance is the total amount of potential unconfirmed losses for these individual doubtfulimpaired loans. To assist in determining the fair value of loan collateral, the Company often utilizes independent third party qualified appraisal firms which in turn employ their own criteria and assumptions that may include occupancy rates, rental rates, and property expenses, among others.
 
The second category of reserves consists of the allocated portion of the allowance.  The allocated portion of the allowance is determined by taking pools of loans outstanding loans that have similar characteristics and applying historical loss experience for each pool.  This estimate represents the potential unconfirmed losses within the portfolio. Individual loan pools are created for commercial and commercial real estate loans, construction loans, warehouse lines of credit, and various types of loans to individuals.  The historical estimation for each loan pool is then adjusted to account for current conditions, current loan portfolio performance, loan policy or management changes, or any other factorsqualitative factor which may cause future losses to deviate from historical levels.

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The Company also maintains an unallocated allowance.  The unallocated allowance is used to cover any factors or conditions which may cause a potential loan loss but are not specifically identifiable.  It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential loan losses is performed, these estimates by definition lack precision.  Management must make estimates using assumptions and information that is often subjective and changing rapidly.
The following discusses the risk characteristics of each of our loan portfolio segments, commercial, mortgage warehouse lines of credit, and consumer.
Commercial

LoansThe Company’s primary lending emphasis is the origination of commercial and commercial real estate loans. Based on the composition of the loan portfolio, the inherent primary risks are placeddeteriorating credit quality, a decline in the economy, and a non-accrual status whendecline in New Jersey real estate market values. Any one or a combination of these events may adversely affect the ultimate collectabilityloan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

Mortgage Warehouse Lines of principalCredit

The Company’s Mortgage Warehouse Unit provides revolving lines of credit that are available to licensed mortgage banking companies. The Warehouse Line of Credit is used by the mortgage banker to originate one-to-four family residential mortgage loans that are pre-sold to the secondary mortgage market, which includes state and national banks, national mortgage banking firms, insurance companies and government-sponsored enterprises, including the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and others. On average, an advance under the Warehouse Line of Credit remains outstanding for a period of less than 30 days, with repayment coming directly from the sale of the loan into the secondary mortgage market. Interest and a transaction fee are collected by the Bank at the time of repayment. Additionally, customers of the Warehouse Lines of Credit are required to maintain deposit relationships with the Bank that, on average, represent 10% to 15% of the loan balances.

As a separate segment of the total portfolio, the warehouse loan portfolio is individually analyzed as a whole for allowance for loan losses purposes.  Warehouse lines of credit are subject to the same inherent risks as other commercial lending, but the overall degree of risk differs. While the Company’s loss experience with this type of lending has been non-existent since the product was introduced in 2008; there are other risks unique to this lending that still must be considered in assessing the adequacy of the allowance for loan losses. These unique risks may include, but are not limited to, (i) credit risks relating to the mortgage bankers that borrow from us, (ii) the risk of intentional misrepresentation or fraud by any of such mortgage bankers, (iii) changes in the market value of mortgage loans originated by the mortgage banker, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit, due to changes in interest rates during the time in wholewarehouse, or part is(iv) unsalable or impaired mortgage loans so originated, which could lead to decreased collateral value and the failure of a purchaser of the mortgage loan to purchase the loan from the mortgage banker.

 These factors, along with the other qualitative factors such as economic trends, concentrations of credit, trends in doubt.  Past-duethe volume of loans, contractually past-due 90 days or more for either principal or interestportfolio quality, delinquencies and nonaccruals, are also placedconsidered and may have positive or negative effects on the allocated allowance.  The aggregate amount resulting from the application of these qualitative factors determines the overall risk for the portfolio and results in non-accrual status unless theyan allocated allowance for warehouse lines of credit.

Consumer

The Company’s loan portfolio consumer segment is comprised of residential real estate loans, home equity loans and other loans to individuals. Individual loan pools are both well secured and increated for the processvarious types of collection.  Impaired loans are evaluated individually.to individuals.
 
 
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In general, for homogeneous groups such as residential mortgages and consumer credits, the loans are collectively evaluated based on delinquency status, loan type, and historical losses. These loan groups are then internally risk rated.

The Company considers the following credit quality indicators in assessing the risk in the loan portfolio:

·Consumer credit scores
·Internal credit risk grades
·Loan-to-value ratios
·Collateral
·Collection experience

 
The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.
 
Allowance for Loan Losses              
 
Nine Months
Ended
 
Year
 Ended
 
Nine Months
Ended
  
Three Months Ended
March 31,
 
Year Ended
December 31,
 
Three Months Ended
March 31,
 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2012
  2014 2013 2013 
Balance, beginning of period $7,151,212  $5,534,450  $5,534,451  $7,038,571  $7,151,212  $7,151,212 
              
Provision charged to operating expenses  776,664   2,149,992   1,649,994  499,998   1,076,662 - 
              
Loans charged off :              
Construction loans  (561,993)   (57,650)   (57,650)   -   (561,993) (561,993
Residential real estate loans  -   (130,694)   (208,552)  -  - - 
Commercial and commercial real estate  (486,034)   (275,888)   (235,402)   (510,952)  (554,827) (483,966
Loans to individuals  (90,865)   (83,859)   -   -   (91,920)  (90,865)
Lease financing  -   -   -   - -   - 
All other loans  -   -   -   -  -  - 
  (1,138,892)   (548,091)   (501,604)   (510,952)  (1,208,740)  (1,136,824)
Recoveries              
Construction loans  417   3,403   3,403  - 417 - 
Residential real estate loans  -   -   -  - - - 
Commercial and commercial real estate  17,947   11,458   6,799   3,225   19,020   8,895 
Loans to individuals  12,832   -   -  - - - 
Lease financing  -   -   -  - - - 
All other loans  -   -   -   -  -  - 
  31,196   14,861   10,202   3,225   19,437   8,895 
                   
Net (charge offs) / recoveries  (1,107,696)   (533,230)   (491,402)   (507,727)  (1,189,303)  (1,127,929)
                 
Balance, end of period $6,820,180  $7,151,212  $6,693,043  $7,030,842  $7,038,571  $6,023,283 
              
Loans :              
At period end $362,549,473  $521,814,110  $497,247,199  $531,405,382  $373,336,082  $415,037,282 
Average during the period  386,475,158   444,064,283   438,292,781   450,571,417   248,126,605   412,089,628 
Net (charge offs)/recoveries to average loans outstanding
(annualized)
  (0.29)%   (0.12)%   (0.11)% 
Net charge offs to average loans outstanding  (0.11%)  (0.48%)  (0.27%)
              
Allowance for loan losses to :              
Total loans at period end  1.88%   1.37%   1.35%   
1.32%
   1.89%   1.45% 
Total loans at period end excluding mortgage
warehouse lines
  2.99%   3.01%   2.72%  
1.02%
  2.52%  2.78% 
Non-performing loans  88.02%   119.92%   139.47%   
94.30%
   111.34%   0.00% 
                 

51


The following table represents the allocation of the allowance for loan losses (ALL”) among the various categories of loans and certain other information as of March 31, 2014 and December 31, 2013, respectively.  The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
  
    
  March 31, 2014  December 31, 2013 
  Amount  
ALL
as a %
of Loans
  
% of
Loans
  Amount  
ALL
as a %
of Loans
  
% of
Loans
 
                   
Commercial and commercial real
estate
 $4,353,764   2.41%  56% $4,293,499   2.38%  48%
Construction loans  1,265,430   2.48%  12%  1,205,267   2.36%  14%
Residential real estate loans  182,005   1.32%  8%  164,673   1.20%  4%
Loans to individuals  94,010   0.96%  5%  111,032   1.14%  3%
              Subtotal  5,895,209   2.31%  80%  5,774,471   2.26%  69%
Mortgage warehouse lines  521,675   0.45%  20%  584,757   0.50%  31%
Unallocated reserves  613,958   -   -   679,343   -   - 
                         
               Total $7,030,842   1.32%  100% $7,038,571   1.89%  100%
The Company recorded a provision for loan losses of $776,664$499,998 for the ninethree months ended September 30, 2013 compared to $1,649,994March 31, 2014.  The Company recorded no loan loss provision for the ninethree months ended September 30, 2012.March 31, 2013.  In addition to the results of management’s comprehensive review of the adequacy of the allowance, the decision for the reduced levelamount of the current provision was further supported by the risk profile of the loan portfolio being reduced by a $159,264,637, or 30.5%, decreaseincreased due to the $158,069,300 increase in the total loan portfolio at September 30, 2013March 31, 2014 compared to the December 31, 2012 balance.2013 and an increase of $1,133,853 in non-performing loans at March 31, 2014 compared to December 31, 2013.  Net charge offs/recoveries amounted to a net charge-off of $1,107,696$507,728 for the ninethree months ended September 30, 2013.March 31, 2014.
52


At September 30, 2013,March 31, 2014, the allowance for loan losses was $6,820,180$7,030,842 compared to $7,151,212$7,038,571 at December 31, 2012,2013, a decrease of $331,032.$7,729.  The ratio of the allowance for loan losses to total loans was 1.88% and 1.37%, respectively, at September 30, 2013March 31, 2014 and December 31, 2012.2013 was 1.32% and 1.89%, respectively.  The allowance for loan losses declined to 1.32% of loans at March 31, 2014 due to the recording of $143,714,000 of loans at fair value that were acquired in the Rumson merger. No allowance for loan losses was recorded at the date of acquisition or at March 31, 2014 with respect to these loans.  The allowance for loan losses as a percentage of non-performing loans was 88.02%94.30% at September 30, 2013March 31, 2014 compared to 119.92%111.34% at December 31, 2012.2013. Management believes that the quality of the loan portfolio remains sound considering the economic climate and economy in the State of New Jersey and that the allowance for loan losses is adequate in relation to credit risk exposure levels.
 
Deposits
 
Deposits, which include demand deposits (interest bearing and non-interest bearing), savings deposits and time deposits, are a fundamental and cost-effective source of funding.  The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition.  The Bank offers a variety of products designed to attract and retain customers, with the Bank’s primary focus being on the building and expanding of long-term relationships.
 
The following table summarizes deposits at September 30, 2013March 31, 2014 and December 31, 2012.2013.

     
 
September 30,
 2013
   
December 31,
 2012
 March 31, 2014 December 31, 2013 
Demand          
Non-interest bearing $147,179,144  $152,334,759 $166,747,113  $121,891,752 
Interest bearing  207,300,503  211,475,765  287,532,684   200,737,912 
Savings  191,785,124  202,261,035  206,170,352   180,002,971 
Time  140,679,183   141,617,916  178,548,058   135,919,395 
 $686,943,954,  $707,689,475 $838,998,207  $638,552,030 
           

52

At September 30, 2013,March 31, 2014, total deposits were $686,943,954, a decrease$838,998,207, an increase of $20,745,521,$200,446,177 or 2.9%31.4%, from $707,689,475$638,552,030 at December 31, 2012.2013.  This increase is primarily due to the inflow of deposits resulting from the Rumson merger. On the February 7, 2014 closing date, the Company assumed approximately $189.5 million in total deposits.

Borrowings
 
Borrowings are mainly comprised of Federal Home Loan Bank (“FHLB”) borrowings and overnight funds purchased.  These borrowings are primarily used to fund asset growth not supported by deposit generation.  The balance of borrowings was $20,978,549 at March 31, 2014, and $10,000,000 at September 30,December 31, 2013, consisting solely of long-term FHLB long-termborrowings.  Two long term FHLB fixed rate convertible advances were assumed by the Bank as a result of the Rumson merger. These two advances total $10,000,000 and bear interest at 4.11% and 4.63%, respectively. As a result of acquisition accounting, the two advances were fair valued and a premium of $1,030,000 was assigned. The premium is amortized over the remaining term of the borrowings. The balancetwo advances had a carrying amount of borrowings$10,978,549 at DecemberMarch 31, 2012 consisted of long-term FHLB borrowings of $10,000,000 and overnight funds purchased of $32,400,000.2014.
 
The Bank also has a fixed-ratefixed rate convertible advance from the FHLB in the amount of $10,000,000 that bears interest at the rate of 4.08%.  This advance may be called by the FHLB quarterly at the option of the FHLB if rates rise and the rate earned by the FHLB is no longer a “market” rate.  This advance is fully secured by marketable securities.
 
Shareholders’ Equity and Dividends
 
Shareholders’ equity increased by $2,098,588$12,906,109, or 18.9%, to $67,152,120$81,264,423 at September 30, 2013March 31, 2014 from $65,053,532$68,358,314 at December 31, 2012.2013.  Tangible book value per common share increaseddecreased by $0.37, or 3.7%,$0.98 to $10.39$9.54 at September 30, 2013March 31, 2014 from $10.02$10.52 at December 31, 2012.  The current period increase in tangible book value per common share was the result of net income of $4,405,588 for the nine months ended September 30, 2013.   The ratio of average shareholders’ equity to total average assets was 8.50%8.61% at March 31, 2014 and 7.74%, respectively,8.26% at September 30, 2013 and December 31, 2012.  The increase2014, respectively.  

During the first three months of 2014, the Company issued an aggregate of 1,019,242 shares of its common stock in conjunction with the Rumson merger that increased shareholders’ equity by $11,160,700. Shareholders’ equity was primarily the result ofalso increased by net income of $4,405,588 for the nine months ended September 30, 2013, which was partially offset by thethree month period of $641,712 and other comprehensive lossincome of $2,869,839 for$882,225. Partially offsetting these increases were treasury stock purchases of $39,844 during the nine-month period.
53

 
In lieu of cash dividends to common shareholders, the Company (and its predecessor, the Bank) hashad declared a stock dividend every year (except 2013) since 1992 and has paid such dividends every year since 1993.  Five percent1993 (except 2014). A 5% stock dividends weredividend was declared in 2012 and 2011 and paid in 2013 and 2012, respectively.2013. No stock dividend was declared in 2013.  
 
The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.
 
In 2005, the Company’s Boardboard of Directorsdirectors authorized a common stock repurchase program that allows for the repurchase of a limited number of the Company’s shares at management’s discretion on the open market. The Company undertook this repurchase program in order to increase shareholder value. Disclosure of repurchases of Company shares, if any, made during the quarter ended September 30, 2013March 31, 2014 is set forth under Part II, Item 2 of this report, “Unregistered Sales of Equity Securities and Use of Proceeds.”
 
53

Actual capital amounts and ratios for the Company and the Bank as of September 30, 2013March 31, 2014 and December 31, 20122013 were as follows:
 
 Actual 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
 Actual 
For Capital
Adequacy Purposes
 
To Be Well Capitalized
Under Prompt
Corrective Action
Provision
 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2013            
As of March 31, 2014           
Company                       
Total Capital to Risk Weighted Assets $87,981,099 19.30% $36,455,840 >8%  N/A N/A $93,986,832 13.94%  $53,951,120 >8%  N/A N/A
Tier 1 Capital to Risk Weighted Assets  82,261,099 18.05% 18,227,920 >4%  N/A N/A  86,955,832 12.89%   26,975,560 >4%  N/A N/A
Tier 1 Capital to Average Assets  82,261,099 10.36% 31,769,544 >4%  N/A N/A  86,955,832 10.04%   34,660,160 >4%  N/A N/A
Bank                        
Total Capital to Risk Weighted Assets $85,640,189 18.79% $36,455,840 >8% $45,569,800 >10% $91,715,049 13.60%  $53,951,120 >8% $67,438,900 >10%
Tier 1 Capital to Risk Weighted Assets  79,930,189 17.54% 18,227,920 >4%  27,341,880 >6%  84,684,049 12.56%   26,975,560 >4%  40,463,340 >6%
Tier 1 Capital to Average Assets  79,930,189 10.06% 31,769,440 >4%  39,711,800 >5%  84,684,049 9.77%   34,660,160 >4%  43,325,200 >5%


As of December 31, 2012
            
As of December 31, 2013             
Company                         
Total Capital to Risk Weighted Assets $81,213,909 12.98% $50,044,960 >8% N/A   N/A $89,532,373 19.29%  $37,123,200 >8%  N/A N/A
Tier 1 Capital to Risk Weighted Assets  74,062,697 11.84% 25,022,480 >4% N/A   N/A  83,716,373 18.04%   18,561,600 >4%  N/A N/A
Tier 1 Capital to Average Assets  74,062,697   9.29% 31,881,576 >4% N/A   N/A  83,716,373 10.89%   30,757,840 >4%  N/A N/A
Bank                        
Total Capital to Risk Weighted Assets $78,621,740 12.57% $50,044,960 >8% $62,556,200   >10% $87,253,384 18.80%  $37,123,200 >8% $46,404,000 >10%
Tier 1 Capital to Risk Weighted Assets  71,470,528 11.43% 25,022,480 >4% 37,533,720   >6%  81,437,384 17.55%   18,561,600 >4%  27,842,400 >6%
Tier 1 Capital to Average Assets  71,470,528 9.05% 31,604,458 >4% 39,505,573   >5%  81,437,384 10.59%   30,757,840 >4%  38,447,300 >5%
                         
 
The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 capital to average assets ratio of 4.0%, a Tier 1 capital to risk weighted assets ratio of 4.0% and a total capital to risk weighted assets ratio of 8.0%.  To be considered “well capitalized,” an institution must have a minimum Tier 1 leverage ratio of 5.0%.  At September 30, 2013,March 31, 2014, the ratios of the Company exceeded the ratios required to be considered well capitalized. It is management’s goal to monitor and maintain adequate capital levels to continue to support asset growth and continue its status as a well-capitalizedwell capitalized institution.

In July 2013, the Federal Reserve Board and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).  The Federal Reserve Board’s final rules and the FDIC’s interim final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”).  Among other things, the rules establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and increase the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets).  Banking organizations will also be required to have a total capital  ratio of 8% (unchanged from current rules) and a Tier 1 leverage ratio of 4% (unchanged from current rules).  The rules also limit a banking organization’s ability to pay dividends, engage in share repurchases or pay discretionary bonuses if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.  The rules become effective for the Company and the Bank on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning in January 1, 2016 at 0.625% of common equity Tier 1 capital to risk-weighted assets and would increase by that amount each year until fully implemented in January 2019 at 2.5% of common equity Tier 1 capital to risk-weighted assets.  Management is currently evaluating the provisions of these rules and their expected impact on the Company and the Bank.
 
54

Liquidity
 
At September 30, 2013,March 31, 2014, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational and customer credit needs could be satisfied.
 
Liquidity management refers to the Company’s ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers.  In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank’s ability to meet its liquidity needs.  On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale.  Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities.  On the liability side, the primary source of liquidity is the ability to generate core deposits.  Short-term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earningearnings assets.
 
The Bank has established a borrowing relationship with the FHLB which further supports and enhances liquidity. During 2010, FHLB replaced its Overnight Line of Credit and One-Month Overnight Repricing Line of Credit facilities available to member banks with a fully secured line of up to 50 percent of a bank’s quarter-end total assets.  Under the terms of this facility, the Bank’s total credit exposure to FHLB cannot exceed 50 percent, or $395,084,426,$483,545,307, of its total assets at September 30, 2013.March 31, 2014.  In addition, the aggregate outstanding principal amount of the Bank’s advances, letters of credit, the dollar amount of the FHLB’s minimum collateral requirement for off-balance sheet financial contracts and advance commitments cannot exceed 30 percent of the Bank’s total assets, unless the Bank obtains approval from FHLB’s Board of Directors or its Executive Committee.  These limits are further restricted by a member’s ability to provide eligible collateral to support its obligations to FHLB as well as the ability to meet the FHLB’s stock requirement. At March 31, 2014, the Bank pledged collateral to the FHLB to support additional borrowings of $97,693,371. The Bank also maintains an unsecured federal funds line of $20,000,000 with a correspondent bank.
54

 
The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities.  At September 30, 2013,March 31, 2014, the balance of cash and cash equivalents was $123,815,138.$108,919,056.
 
Net cash provided by operating activities totaled $31,153,912$9,549,070 for the ninethree months ended September 30, 2013March 31, 2014 compared to net cash provided by operations of $5,307,557$8,253,494 for the ninethree months ended September 30, 2012.  The primaryMarch 31, 2013.  A source of funds is net income from operations adjusted for activity related to loans originated for sale, the provision for loan losses, depreciation expenses, and net amortization of premiums on securities.
 
Net cash provided by investing activities totaled $131,274,935$18,947,444 for the ninethree months ended September 30,March 31, 2014 compared to net cash provided by investing activities of $108,160,577 for the three months ended March 31, 2013.  Net cash received as a result of the Rumson merger was the primary cause of the cash provided by investing activities in 2014, whereas the 2013 amount was primarily due to the decrease in loans.
Net cash provided by financing activities totaled $11,143,771 for the three months ended March 31, 2014 compared to net cash used in investing activities of $6,864,102 for the nine months ended September 30, 2012.  The increase for the 2013 period resulted from a reduction of $155,845,716 in the loan portfolio primarily through repayments.
Net cash used in financing activities totaled $52,658,630 for the nine months ended September 30, 2013 compared to net cash provided by financing activities of $361,464$29,019,565 for the ninethree months ended September 30, 2012.  March 31, 2013.  The primary source of funds for the 2014 period was the net increase in deposits while in 2013, the decrease in borrowings was the primary use of funds.
 
The securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal.  For the ninethree months ended September 30, 2013,March 31, 2014, prepayments and maturities of investment securities totaled $47,912,035.$16,828,128.  Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.

55

 
Interest Rate Sensitivity Analysis
 
The largest component of the Company’s total income is net interest income, and the majority of the Company’s financial instruments are composed of interest rate-sensitive assets and liabilities with various terms and maturities. The primary objective of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences and magnitude of relative changes in the repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. Management actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities.
 
The Company continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Bank’s spread by attracting lower-cost retail deposits.
 
Item 3.                    Quantitative and Qualitative Disclosures About Market Risk.
 
Not required. 
 
Item 4.                    Controls and Procedures.
 
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
 
55

The Company’s principal executive officer and principal financial officer, with the assistance of other members of the Company’s management, have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.  Based upon such evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
 
The Company’s principal executive officer and principal financial officer have also concluded that there was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2013March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
56

 
PART II. OTHER INFORMATION
 
Item 2.                    Unregistered Sales of Equity Securities and Use of Proceeds.
 
Issuer Purchases of Equity Securities
 
On July 21, 2005, the Boardboard of Directorsdirectors authorized a stock repurchase program under which the Company may repurchase in open market or privately negotiated transactions up to 5% of its common shares outstanding at that date.  The Company undertook this repurchase program in order to increase shareholder value. The following table provides common stock repurchases if any, made by or on behalf of the Company during the three months ended September 30, 2013.March 31, 2013, if any.

 Issuer Purchases of Equity Securities (1)
 
Period
 
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased
Purchased As
Part of Publicly
Announced Plan or
or Program
 
Maximum Number
of Shares That May
Yet be Purchased
Under the Plan or
Program
 
Beginning
 
Ending
        
July
January 1, 2013
2014
July
January 31, 2013
2014
---187,559
February 1,
2014
February
29, 2014
---187,559
March 1,
2014
March 31,
2014
 - - - 187,559
 
August 1, 2013August 31, 2013---187,559
September 1, 2013September 30, 2013---187,559
Total - - - 187,559


(1)The Company’s common stock repurchase program covers a maximum of 225,824 shares of common stock of the Company, representing 5% of the outstanding common stock of the Company on July 21, 2005, as adjusted for subsequent common stock dividends.
 
 
57

 
Exhibits.

Exhibit No.10.1 Description
2.1Letter Agreement, and Plan of Merger, dated August 14, 2013, by andJanuary 31, 2014, between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust CompanyStephen J. Gilhooly (incorporated by reference to Exhibit 2.110.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013)April 1, 2014)
   
2.2*First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company
10.2 
3(i)(A)Certificate of Incorporation ofAmendment to the Amended and Restated Employment Agreement, dated April 4, 2014, between the Company (conformed copy)and Robert F. Mangano (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC on March 27, 2009)
3(i)(B)Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.110.1 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
3(i)(C)Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
3(ii)(A)By-laws of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22, 2007)
4.1Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002)
4.2Rights Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No. 000-32891) filed with the SEC on March 18, 2004)
4.3Warrant, dated December 23, 2008, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
4.4Subscription Agent Agreement, dated as of September 5, 2012, between 1st Constitution Bancorp and Registrar and Transfer Company (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2012)
4.5Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013)
4.6Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013)April 8, 2014)
   
31.1*Certification of Robert F. Mangano, principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
   
31.2*Certification of Joseph M. Reardon,Stephen J. Gilhooly , principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
   
32*Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal executive officer of the Company, and Joseph M. Reardon, principal financial officer of the Company
   
101.INS*XBRL Instance Document
   
101.SCH*XBRL Taxonomy Extension Schema Document
   
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
_____________________
_____________________
*                                 Filed herewith.
 
 
58


 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 1ST CONSTITUTION BANCORP 
    
    
Date: November 12, 2013May 14, 2014         By:
/s/ RobertROBERT F. Mangano
MANGANO
 
  Robert F. Mangano 
  President and Chief Executive Officer 
  (Principal Executive Officer) 
    
    
Date: November 12, 2013May 14, 2014   By:
/s/ Joseph M. Reardon
STEPHEN J. GILHOOLY 
 
  Joseph M. ReardonStephen J. Gilhooly 
  Senior Vice President and Treasurer 
  (Principal Financial and Accounting Officer) 
 
 
 
 
 
59

EXHIBIT INDEX
Exhibit No.Description
2.1Agreement and Plan of Merger, dated August 14, 2013, by and between the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on August 15, 2013)
2.2*First Amendment to Agreement and Plan of Merger, dated September 19, 2013, by and among the Company, 1st Constitution Bank and Rumson-Fair Haven Bank & Trust Company
3(i)(A)Certificate of Incorporation of the Company (conformed copy) (incorporated by reference to Exhibit 3(i)(A) to the Company’s Form 10-K filed with the SEC on March 27, 2009)
3(i)(B)Certificate of Amendment to the Certificate of Incorporation increasing the number of shares designated as Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
3(i)(C)Certificate of Amendment to the Certificate of Incorporation establishing the terms of the Fixed Rate Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
3(ii)(A)By-laws of the Company (conformed copy) (incorporated by reference to Exhibit 3(ii)(A) to the Company’s Form 8-K filed with the SEC on October 22, 2007)
4.1Specimen Share of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-KSB (SEC File No. 000-32891) filed with the SEC on March 22, 2002)
4.2Rights Agreement, dated as of March 18, 2004, between 1st Constitution Bancorp and Registrar and Transfer Company, as Rights Agent (incorporated by reference to Exhibit 4.5 to the Company’s Form 8-A12G (SEC File No. 000-32891) filed with the SEC on March 18, 2004)
4.3Warrant, dated December 23, 2008, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed with the SEC on December 23, 2008)
4.4Subscription Agent Agreement, dated as of September 5, 2012, between 1st Constitution Bancorp and Registrar and Transfer Company (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2012)
4.5Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-K filed with the SEC on March 22, 2013)
4.6Warrant, dated November 23, 2011, to purchase shares of 1st Constitution Bancorp common stock (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-K filed with the SEC on March 22, 2013)
31.1*Certification of Robert F. Mangano, principal executive officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
31.2*Certification of Joseph M. Reardon, principal financial officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
32*Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, signed by Robert F. Mangano, principal executive officer of the Company, and Joseph M. Reardon, principal financial officer of the Company
101.INS*XBRL Instance Document
101.SCH*XBRL Taxonomy Extension Schema Document
101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*XBRL Taxonomy Extension Label Linkbase Document
101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document
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*   Filed herewith.