1ST Constitution Bancorp (FCCY) 10-Q 2013 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended June 30, 2013

or

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

Commission file 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 filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	x

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

As of August 9, 2013, there were 5,994,782 shares of the registrant’s common stock, no par value, outstanding.

1ST CONSTITUTION BANCORP

FORM 10-Q

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets
	(unaudited) at June 30, 2013
	and December 31, 2012	1
	Consolidated Statements of Income
	(unaudited) for the Three Months and Six Months Ended
	June 30, 2013 and June 30, 2012	2
	Consolidated Statements of Comprehensive Income
	(unaudited) for the Three Months and Six Months Ended
	June 30, 2013 and June 30, 2012	3
	Consolidated Statements of Changes in Shareholders’ Equity
	(unaudited) for the Six Months Ended
	June 30, 2013 and June 30, 2012	4
	Consolidated Statements of Cash Flows
	(unaudited) for the Six Months Ended
	June 30, 2013 and June 30, 2012	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
PART II.	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 6.	Exhibits	57
SIGNATURES		58

PART I. FINANCIAL INFORMATION

Item 1.               Financial Statements.

1st Constitution Bancorp and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	June 30, 2013			December 31, 2012
ASSETS
CASH AND DUE FROM BANKS	$	110,096,949		$	14,033,501
FEDERAL FUNDS SOLD / SHORT-TERM INVESTMENTS		11,425			11,420
Total cash and cash equivalents		110,108,374			14,044,921
INVESTMENT SECURITIES:
Available for sale, at fair value		105,881,536			109,840,965
Hel          Held to maturity (fair value of $111,715,297 and $121,839,363 at Mar                 June 30, 2013 and December 31, 2012, respectively)		110,195,842			116,027,900
Total investment securities		216,077,378			225,868,865
LOANS HELD FOR SALE		28,235,113			35,960,262
LOANS		407,482,758			521,814,110
Less- Allowance for loan losses		(6,268,940	)		(7,151,212	)
Net loans		401,213,818			514,662,898
PREMISES AND EQUIPMENT, net		10,338,040			10,630,295
ACCRUED INTEREST RECEIVABLE		2,554,192			2,872,099
BANK-OWNED LIFE INSURANCE		15,258,872			15,026,506
OTHER REAL ESTATE OWNED		7,926,851			8,332,601
OTHER ASSETS		13,179,532			13,569,935
Total assets	$	804,892,170		$	840,968,382
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits
Non-interest bearing	$	145,412,945		$	152,334,759
Interest bearing		558,186,889			555,354,716
Total deposits		703,599,834			707,689,475
BORROWINGS		10,000,000			42,400,000
REDEEMABLE SUBORDINATED DEBENTURES		18,557,000			18,557,000
ACCRUED INTEREST PAYABLE		943,105			1,057,779
ACCRUED EXPENSES AND OTHER LIABILITIES		6,516,359			6,210,596
Total liabilities		739,616,298			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 5,994,782  and 5,977,924 shares outstanding   as of June 30, 2013 and December 31, 2012, respectively		48,986,383			48,716,032
Retained earnings		18,476,641			15,594,293
Treasury Stock, at cost, 13,441 shares and 7,351shares at June 30, 2013  and December 31, 2012, respectively		(119,114	)		(61,086	)
Accumulated other comprehensive income (loss)		(2,068,038	)		804,293
Total shareholders’ equity		65,275,872			65,053,532
Total liabilities and shareholders’ equity	$	804,892,170		$	840,968,382

See accompanying notes to consolidated financial statements.

1

1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Income

(Unaudited)

		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
INTEREST INCOME:
Loans, including fees	$	5,645,259	$	6,319,104	$	11,617,454	$	12,733,563
Securities:
Taxable		901,711		1,143,554		1,838,796		2,327,759
Tax-exempt		545,620		411,225		1,058,498		831,794
Federal funds sold and short-term investments		89,662		33,306		139,342		48,340
Total interest income		7,182,252		7,907,189		14,654,090		15,941,456
INTEREST EXPENSE:
Deposits		869,598		1,079,048		1,825,934		2,265,522
Borrowings		104,254		103,639		207,527		221,561
Redeemable subordinated debentures		87,771		96,580		175,644		195,892
Total interest expense		1,061,623		1,279,267		2,209,105		2,682,975
Net interest income		6,120,629		6,627,922		12,444,985		13,258,481
PROVISION FOR LOAN LOSSES		236,666		549,998		236,666		1,149,996
Net interest income after provision for loan losses		5,883,963		6,077,924		12,208,319		12,108,485
NON-INTEREST INCOME:
Service charges on deposit accounts		221,604		231,256		444,670		459,228
Gain on sales of loans		479,146		495,147		1,210,855		963,364
Income on Bank-owned life insurance		119,758		113,176		232,366		225,098
Other income		627,351		348,387		1,168,531		705,441
Total non-interest income		1,447,859		1,187,966		3,056,422		2,353,131
NON-INTEREST EXPENSE:
Salaries and employee benefits		3,045,241		3,154,903		6,398,104		6,095,253
Occupancy expense		622,499		613,534		1,300,305		1,337,320
Data processing expense		294,306		252,545		595,688		516,120
FDIC insurance expense		15,000		139,873		34,687		287,266
Other operating expenses		1,185,254		1,213,119		2,916,484		2,750,532
Total non-interest expenses		5,162,300		5,373,974		11,245,268		10,986,491
Income before income taxes		2,169,522		1,891,916		4,019,473		3,475,125
INCOME TAXES		612,492		593,808		1,137,125		1,010,285
Net income	$	1,557,030	$	1,298,108	$	2,882,348	$	2,464,840
NET INCOME PER COMMON SHARE:
Basic	$	0.26	$	0.24	$	0.48	$	0.46
Diluted	$	0.25	$	0.24	$	0.47	$	0.46

See accompanying notes to consolidated financial statements.

2

1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

		Three months ended June 30,					Six months ended June 30,
		2013			2012		2013			2012
Net Income	$	1,557,030		$	1,298,108	$	2,882,348			2,464,840
Other comprehensive income (loss) net of tax
Unrealized holding gains (losses) on securities available for sale		(2,479,180	)		28,135		(2,912,215	)		37,930
Pension liability		37,959			1,926		39,884			3,852
Other comprehensive income (loss)		(2,441,221	)		30,061		(2,872,331	)		41,782
Comprehensive income (loss)	$	(884,191	)	$	1,328,169	$	10,017		$	2,506,622

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

3

1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended June 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 program		176,371										176,371
Share-based compensation		48,777										48,777
Treasury stock purchased						(58,270	)					(58,270	)
Net Income for the six months ended       June 30, 2012				2,464,840								2,464,840
Other comprehensive income									41,782			41,782
Balance, June 30, 2012	$	41,073,077	$	15,535,446	$	(68,492	)	$	1,133,244		$	57,673,275
Balance, January 1, 2013	$	48,716,032	$	15,594,293	$	(61,086	)	$	804,293		$	65,053,532
Exercise of stock options and issuance of     vested shares under employee  benefit program		219,783										219,783
Share-based compensation		50,568										50,568
Treasury stock purchased						(58,028	)					(58,028	)
Net income for the three months ended June 30, 2013				2,882,348								2,882,348
Other comprehensive (loss)									(2,872,331	)		(2,872,331	)
Balance, June 30, 2013	$	48,986,383	$	18,476,641	$	(119,114	)	$	(2,068,038	)	$	65,275,872

See accompanying notes to consolidated financial statements.

4

1st Constitution Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	2,882,348		$	2,464,840
Adjustments to reconcile net income to net cash provided by operating activities-
Provision for loan losses		236,666			1,149,996
Provision for loss on other real estate owned		662,918			501,644
Depreciation and amortization		539,640			579,455
Net amortization of premiums and discounts on securities		613,720			750,689
Gains on sales of other real estate owned		(291,452	)		0
Gains on sales of loans held for sale		(1,210,855	)		(963,364	)
Originations of loans held for sale		(83,349,024	)		(79,079,430	)
Proceeds from sales of loans held for sale		92,285,028			82,681,059
Income on Bank – owned life insurance		(232,366	)		(225,098	)
Share-based compensation expense		267,958			224,221
Decrease (increase) in accrued interest receivable		317,907			228,889
(Increase) decrease in other assets		1,270,240			211,685
Decrease in accrued interest payable		(114,674	)		(175,606	)
Increase (decrease) in accrued expenses and other liabilities		305,763			895,796
Net cash provided by operating activities		14,183,817			9,244,776
INVESTING ACTIVITIES:
Purchases of securities -
Available for sale		(15,947,558	)		(28,280,554	)
Held to maturity		(10,839,022	)		0
Proceeds from maturities and prepayments of securities -
Available for sale		15,257,223			24,322,808
Held to maturity		16,295,574			18,892,905
Net decrease (increase) in loans		110,901,189			(5,260,752	)
Capital expenditures		(113,402	)		(635,328	)
Additional investment in other real estate owned		0			(81,812	)
Proceeds from sales of other real estate owned		2,653,518			855,030
Net cash  provided by investing activities		118,207,522			9,812,297
FINANCING ACTIVITIES:
Exercise of stock options and issuance of vested shares		219,783			176,371
Purchase of Treasury Stock		(58,028	)		(58,270	)
Net increase (decrease)  in demand, savings and time deposits		(4,089,641	)		45,208,965
Net (decrease) in borrowings		(32,400,000	)		(63,000,000	)
Net cash used in financing activities		(36,327,886	)		(17,672,934	)
Increase in cash and cash equivalents		96,063,453			1,384,139
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD		14,044,921			15,195,259
CASH AND CASH EQUIVALENTS
AT END OF PERIOD	$	110,108,374		$	16,579,398
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash paid during the period for -
Interest	$	2,323,779		$	2,858,581
Income taxes		1,153,000			887,000
Non-cash investing activities
Real estate acquired in full satisfaction of loans in foreclosure	$	2,311,225		$	470,405

See accompanying notes to consolidated financial statements.

5

1st Constitution Bancorp and Subsidiaries

Notes To Consolidated Financial Statements

June 30, 2013 (Unaudited)

(1)  Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include 1st Constitution Bancorp (the “Company”), its wholly-owned subsidiary, 1st Constitution Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC.  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, filed with the SEC on March 22, 2013.

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 June 30, 2013 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)  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 stock 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.

6

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 June 30, 2013
	Net Income		Weighted- average shares		Per share amount
Basic earnings per common share:
Net income	$	1,557,030		5,992,743	$	0.26
Effect of dilutive securities:
Stock options and unvested stock awards				150,867
Diluted EPS:
Net income plus assumed conversion	$	1,557,030		6,143,610	$	0.25

	Three Months Ended June 30, 2012
	Net Income		Weighted- average shares	Per share amount
Basic earnings per common share:
Net income	$	1,298,108	5,351,133	$	0.24
Effect of Dilutive Securities:
Stock options and unvested stock awards			107,199
Diluted EPS:
Net income plus assumed conversions	$	1,298,108	5,458,332	$	0.24

	Six Months Ended June 30, 2013
	Net  Income		Weighted- average shares		Per share amount
Basic earnings per common share:
Net income	$	2,882,348	5,944,633		$	0.48
Effect of Dilutive Securities:
Stock options and unvested stock awards				148,498
Diluted EPS:
Net income plus assumed conversions	$	2,882,348		6,093,131	$	0.47

7

	Six Months Ended June 30, 2012
	Net  Income		Weighted- average shares	Per share amount
Basic earnings per common share:
Net income	$	2,464,840	5,351,065	$	0.46
Effect of Dilutive Securities:
Stock options and unvested stock awards			85,115
Diluted EPS:
Net income plus assumed conversions	$	2,464,840	5,436,180	$	0.46

8

(3)           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
June 30, 2013	Cost		Gains		Losses			Value
Available for sale-
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies	$	23,378,634	$	20,330	$	(664,019	)	$	22,734,945
Residential collateralized mortgage obligations- GSE		4,663,863		173,205		0			4,837,068
Residential collateralized mortgage obligations-              non GSE		3,232,267		91,167		(4,858	)		3,318,576
Residential mortgage backed securities – GSE		33,843,616		965,566		(485,521	)		34,323,661
Obligations of State and Political subdivisions		22,555,947		183,767		(2,642,597	)		20,097,117
Trust preferred debt securities – single issuer		2,467,422		0		(444,222	)		2,023,200
Corporate debt securities		17,307,169		237,319		(35,619	)		17,508,869
Restricted stock		1,013,100		0		0			1,013,100
Mutual fund		25,000		0		0			25,000
	$	108,487,018	$	1,671,354	$	(4,276,836	)	$	105,881,536

June 30, 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-
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”)           and agencies	$	3,049,540	$	0		$	3,049,540	$	20,975	$	0		$	3,070,515
Residential collateralized          mortgage obligations – GSE		16,978,587		0			16,978,587		735,867		0			17,714,454
Residential collateralized mortgage          obligations – non – GSE		12,020,659		0			12,020,659		471,876		0			12,492,535
Residential mortgage backed          securities – GSE		17,248,695		0			17,248,695		482,239		(265,174	)		17,465,760
Obligations of State and
political subdivisions		52,078,885		0			52,078,885		1,412,990		(1,366,778	)		52,125,098
Trust preferred debt securities-pooled		656,662		(500,944	)		155,718		0		(8,754	)		146,964
Corporate debt securities		8,663,758		0			8,663,758		36,214		0			8,699,972
	$	110,696,786	$	(500,944	)	$	110,195,842	$	3,160,161	$	(1,640,706	)	$	111,715,297

9

December 31, 2012		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair 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 Loss			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

Restricted stock at June 30, 2013 and December 31, 2012 consists of $998,100 and $2,478,300, respectively, of Federal Home Loan Bank of New York stock and $15,000 of Atlantic Central Bankers Bank stock.

The amortized cost and estimated fair value of investment securities at June 30, 2013, 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 - Due in one year or less.”

10

	Amortized Cost		Fair Value
Available for sale-
Due in one year or less
U.S. Treasury securities and obligations of US Government                          sponsored corporations (“GSE”) and agencies	$	5,997,740	$	6,005,380
Residential mortgage backed securities-GSE		47,334		49,545
Obligations of State and Political subdivisions		410,000		412,286
Corporate Debt Securities		1,515,305		1,519,310
Restricted Stock		1,013,100		1,013,100
Mutual Fund		25,000		25,000
	$	9,008,479	$	9,024,621
Due after one year through five years
U.S. Treasury securities and obligations of                     US Government sponsored corporations (“GSE”)and agencies	$	4,965,059	$	4,977,750
Residential mortgage backed securities-GSE		4,490,884		4,423,040
Obligations of State and Political subdivisions		374,156		375,750
Corporate Debt Securities		14,705,928		14,921,539
	$	24,536,027	$	24,698,079
Due after five years through ten years
U.S. Treasury securities and obligations of US Government sponsored                           corporations (“GSE”) and agencies	$	12,415,835	$	11,751,815
Residential collateralized mortgage obligations -GSE		24,526		27,328
Residential mortgage backed Securities - GSE		10,152,052		10,122,709
Obligations of State and Political Subdivisions		2,694,464		2,805,477
	$	25,286,877	$	24,707,329
Due after ten years
Residential collateralized mortgage obligations -GSE	$	4,639,337	$	4,809,741
Residential collateralized mortgage obligations –non GSE		3,232,267		3,318,575
Residential mortgage backed securities - GSE		19,153,346		19,728,367
Obligations of State and Political subdivisions		19,077,327		16,503,604
Corporate Debt Securities		1,085,936		1,068,020
Trust Preferred Debt Securities		2,467,422		2,023,200
	$	49,655,635	$	47,451,507
Total	$	108,487,018	$	105,881,536
Held to maturity-
Due in one year or less
U.S. Treasury securities and obligations of US Government sponsored                          Corporations (“GSE”) and agencies	$	2,539,392	$	2,553,355
Obligations of State and Political subdivisions		2,246,484		2,264,220
Corporate Debt Securities		8,153,363		8,177,722
	$	12,939,239	$	12,995,297
Due after one year through five years
U.S. Treasury securities and obligations of                          US Government sponsored corporations (“GSE”) and agencies	$	510,147	$	517,160
Obligations of State and Political subdivisions		7,335,015		7,582,959
Corporate Debt Securities		510,395		522,250
	$	8,355,557	$	8,622,369
Due after five years through ten years
Residential collateralized mortgage obligations – GSE	$	126,031	$	128,142
Residential mortgage backed securities – GSE		2,762,128		2,830,022
Obligations of State and Political subdivisions		21,837,646		22,665,201
	$	24,725,805	$	25,623,365
Due after ten years
Residential collateralized mortgage obligations - GSE		16,852,556		17,586,313
Residential collateralized mortgage obligations – non GSE		12,020,659		12,492,534
Residential mortgage backed securities - GSE		14,486,567		14,635,738
Obligations of State and Political subdivisions		20,659,741		19,612,717
Trust Preferred Debt Securities - Pooled		656,662		146,964
	$	64,676,185	$	64,474,266
Total	$	110,696,786	$	111,715,297

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Gross unrealized losses on securities and the estimated fair value of the related securities aggregated by security category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012 are as follows:

June 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	$	11,751,815	$	(664,020	)	$	-	$	-		$	11,751,815	$	(664,020	)
Residential collateralized mortgage        obligations – non-GSE	2		977,936		(2,308	)		132,075		(2,550	)		1,110,011		(4,858	)
Residential mortgage backed       Securities - GSE	16		18,324,020		(750,695	)		-		-			18,324,020		(750,695	)
Obligations of State and Political       Subdivisions	78		25,377,846		(4,009,376	)		-		-			25,377,846		(4,009,376	)
Trust preferred debt securities –         single issuer	4		0		0			2,023,200		(444,222	)		2,023,200		(444,222	)
Trust preferred debt securities –         pooled	1		0		0			146,964		(509,697	)		146,964		(509,697	)
Corporate Debt Securities	4		3,321,708		(35,618	)		0		0			3,321,708		(35,618	)
Total temporarily impaired securities	108	$	59,753,325	$	(5,462,017	)	$	2,302,239	$	(956,469	)	$	62,055,564	$	(6,418,486	)

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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 securities	5		3,176,328		(25,876	)		-		-			3,176,328		(25,876	)
Total temporarily impaired securities	53	$	31,762,447	$	(544,580	)	$	2,300,951	$	(981,072	)	$	34,063,398	$	(1,525,652	)

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 interest rate increases.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.  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.

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 interest rate increases. 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. 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.

Obligations of State and Political Subdivisions:  The unrealized losses or investments in these securities were caused by interest rate increases.  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.

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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, 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. 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.  Both of the issuers continue to maintain investment grade credit ratings and neither has defaulted on interest payments.  Because the decline in fair value is attributable to widening of interest rate spreads and the lack of an active trading market for these securities and, to a lesser degree, market concerns on the issuers’ 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.

Trust preferred debt securities – 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 (“PRETSL XXV”)), consisting primarily of financial institution holding companies.  During 2009, the Company recognized an other-than-temporary impairment of $864,727, of which $363,783 was determined to be a credit loss and charged to operations and $500,944 was recognized in 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 projected cash flow where that present value of cash flow was less than the amortized cost basis of the security.  The present value of cash flow 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.

On a quarterly basis, management evaluates this security to determine if any additional other-than-temporary impairment is required.  As of June 30, 2013, our evaluation was as follows:

a. We obtained the PRETSL XXV Depository Institutions Issuer List as of June 30, 2013 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;

(2) 75 to 100; and

(3) Below 75.

c. We then applied the following asset specific deferral/default assumptions to each of these buckets:

(1) Above 100 - 100% default; 0% recovery;

(2) 75 to 100 – 100% deferred; 15% recovery at 2 years from initial date of deferral; and

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(3) Below 75 – no deferral/default.

d. We then ran a cash flow projection to analyze the impact of future deferral/default activity by applying the following assumption on those institutions in bucket (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) The FDIC lists the number of bank failures each year from 1934 – 2008.  Comparing bank failures to the number of FDIC institutions produces an annual average default rate of 36 basis points. Given the continuing uncertain economic environment, we believe the 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-year stated maturity of this pooled security even though the individual institutions are currently performing according to terms.

e. This June 30, 2013 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 other-than-temporary impairment issues were present at June 30, 2013.

A number of factors could cause management to conclude in one or more future reporting periods that an unrealized loss that exists with respect to PRETSL 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 June 30, 2013:

Security

Class

Amortized 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)

Amount

%  of  Current Performing Collateral

PreTSL  XXV

B-1

$656,662

$103,069

($553,593)

66.5%

14.1%

19.4%

14.3%

C/ NR

$115,000

23.0%

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” 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 in 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 of underlying collateral performing” is the ratio of the “excess subordination amount” to current performing collateral - a higher percentage means there is more excess subordination to absorb additional defaults / deferrals, and the better our security is protected from loss.

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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 PRETSL XXV, which have been recognized in earnings for debt securities held to maturity and not intended to be sold.

(in thousands)	Three and Six months ended June 30, 2013		Three and Six months ended June 30, 2012
Balance at beginning of period	$	364	$	364
Change during the period		-		-
Balance at end of period	$	364	$	364

(4)   Allowance for Loan Losses and Credit Quality Disclosure

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 June 30, 2013:

	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	$	40,550,995	$	41,546,825	$	-	$	-
Commercial Business		222,494		-		482,557		705,051		56,828,626		57,533,677		-		482,557
Commercial Real Estate		50,131		6,006,773		520,184		6,577,088		94,619,237		101,196,325		-		860,567
Mortgage Warehouse Lines		-		-		-		-		185,739,734		185,739,734		-		-
Residential Real Estate		352,141		-		164,542		516,683		10,687,558		11,204,241		-		164,542
Consumer
Loans to Individuals		275,773		95,702		-		371,475		8,831,824		9,203,299		-		-
Other		-		-		-		-		175,303		175,303		-		-
Deferred Loan Fees		-		-		-		-		883,354		883,354		-		-
Total	$	1,896,369	$	6,102,475	$	1,167,283	$	9,166,127	$	398,316,631	$	407,482,758	$	-	$	1,507,666

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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		54,904
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

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 include a specific reserve for impaired loans, an allocated reserve, and an unallocated portion.  

The Company consistently applies the following comprehensive methodology.  During the quarterly review of the allowance for loan losses, the Company considers a variety of factors that include:

· General economic conditions.

· Trends in charge-offs.

· Trends and levels of delinquent loans.

· Trends and levels of non-performing loans, including loans over 90 days delinquent.

· Trends in volume and terms of loans.

· Levels of allowance for specific classified loans.

· Credit concentrations.

The methodology includes the segregation of the loan portfolio into loan types with a further segregation into 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 is 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.

17

The watch list includes loans that are assigned a rating of special mention, substandard, doubtful and loss.  Loans criticized 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 reserve for impaired loans is established for specific loans which have been identified by management as being impaired. These impaired loans are primarily assigned a doubtful risk rating grade because the loan has 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 doubtful 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, 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 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 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.  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.

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 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.

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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 banking regulatory agencies.  The grades assigned and 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 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 ability of individuals or company principals are excellent.  Loans to individuals supported by high net worths and liquid assets.

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 has established a profitable record 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 requiring 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 from 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" or weak 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 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.

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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 from the Bank's loan loss reserve.  Any accrued interest should immediately be backed out of income.

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

Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Grade:
Pass	$	37,530,315	$	54,760,756	$	69,061,842	$	185,739,734	$	11,039,699
Special Mention		-		1,492,992		27,174,795		-		164,542
Substandard		4,016,510		1,144,755		4,959,688		-		-
Doubtful		-		135,174		-		-		-
Total	$	41,546,825	$	57,533,677	$	101,196,325	$	185,739,734	$	11,204,241
Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other
Performing	$	9,203,299	$	175,303
Nonperforming		-		-
Total	$	9,203,299	$	175,303

The following table provides a breakdown of the loan portfolio by credit quality indictor 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 the 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 June 30, 2013 and December 31, 2012:

20

Period-End Allowance for Credit Losses by Impairment Method June 30, 2013

					Commercial		Mortgage		Residential								Loan		Total
	Construction		Commercial		Real Estate		Warehouse		Real Estate		Consumer		Other		Unallocated		Costs
Allowance for credit losses:
Ending Balance	$	1,212,578	$	985,919	$	2,451,856	$	928,699	$	92,733	$	99,890	$	2,104	$	495,161	$	-	$	6,268,940
Ending Balance
Individually evaluated      for impairment		-		173,155		793,926		-		-		-		-		-		-		967,081
Collectively evaluated       for impairment	$	1,212,578	$	812,764	$	1,657,930	$	928,699	$	92,733	$	99,890	$	2,104	$	495,161	$	-	$	5,301,859
Loans receivables:
Ending Balance	$	41,546,825	$	57,533,677	$	101,196,325	$	185,739,734	$	11,204,241	$	9,203,299	$	175,303	$	-	$	883,354	$	407,482,758
Individually evaluated         for impairment		540,975		792,376		4,477,287		-		164,542		-		-		-		-		5,975,180
Collectively evaluated        for impairment	$	41,005,850	$	56,741,301	$	96,719,038	$	185,739,734	$	11,039,699	$	9,203,299	$	175,303	$	-	$	883,354	$	401,507,578

Period-End Allowance for Credit Losses by Impairment Method December 31, 2012

					Commercial		Mortgage		Residential								Loan		Total
	Construction		Commercial		Real Estate		Warehouse		Real Estate		Consumer		Other		Unallocated		Costs
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	$	-	$	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

The activity in the allowance for loan losses by loan class for the six months ended June 30, 2013 and 2012 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				160,163			321,659			(62,039	)		(19,632	)		(2,444	)		45		(162,958	)		236,666
Loans charged off		-				-			-			-			-			-			-		-			-
Recoveries of loans charged off		417				8,575			-			-			-			-			-		-			8,992
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

21

The activity in the allowance for loan losses by loan class for the six months ended June 30, 2012 and 2011 was as follows:

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
Provision charged to operations		217,501			15,757			241,180		(115,451	)		148,497			22,076			6,803			63,635			599,998
Loans charged off		(32,650	)		(144,827	)		-		-			-			(77,858	)		(6,001	)		-			(261,336	)
Recoveries of loans charged off		3,403			5,427			-		-			-			-			-			-			8,830
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

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.

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Impaired Loans Receivables (By Class) – June 30, 2013
							Three months ended
							June 30, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial
Construction	$	540,975	$	540,975	$	-	$	725,974	$	11,078
Commercial Business		177,980		232,022		-		168,683		1,450
Commercial Real Estate		-		-		-		123,945		-
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		718,955		772,997		-		1,018,602		12,528
Residential Real Estate		164,542		164,542		-		121,246		-
Consumer
Loans to Individuals		-		-		-		22,540		-
Other		-		-		-		-		-
Subtotal				-		-		22,540		-
With no related allowance:	$	883,497	$	937,539	$	-	$	1,162,388	$	12,528
With an allowance:
Commercial
Construction	$	-	$	-	$	-	$	-	$	-
Commercial Business		614,396		759,223		173,155		617,054		834
Commercial Real Estate		4,477,287		4,477,287		793,926		4,372,626		64,468
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		5,091,683		5,236,510		967,081		4,989,680		65,302
Residential Real Estate		-		-		-		44,069		-
Consumer
Loans to Individuals		-		-		-		-		-
Other		-		-		-		-		-
Subtotal		-		-		-		-		-
With an allowance:		5,091,683		5,236,510		967,081		5,033,749		65,302
Total:
Commercial		5,810,638		6,009,507		967,081		6,008,282		77,830
Residential Real Estate		164,542		164,542		-		165,315		-
Consumer		-		-		-		22,540		-
Total	$	5,975,180	$	6,174,049	$	967,081	$	6,196,137	$	77,830

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Impaired Loans Receivables (By Class) – December 31, 2012							Year to date
							December 31, 2012
	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	$	-
Commercial Business		387,950		430,632		-		474,839		9,490
Commercial Real Estate		-		-		-		321,743		-
Mortgage Warehouse Lines		-		-		-				-
Subtotal		1,748,864		1,791,546		-		1,209,298		9,490
Residential Real Estate		-		-		-		23.600		-
Consumer
Loans to Individuals		54,904		54,904		-		54,904		-
Other		-		-		-		-		-
Subtotal		54,904		54,904		-		54,904		-
Subtotal with no Related Allowance		1,803,768		1,846,450		-		1,287,802		-
With an 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
Commercial Real Estate		3,952,546		3,999,032		447,193		2,964,744		29,291
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		5,952,239		6,143,552		1,270,370		3,544,711		45,037
Residential Real Estate		134,193		134,193		21,693		287,395		-
Consumer
Loans to Individuals		-		-		-		-		-
Other		-		-		-		-		-
Subtotal		-		-		-		-		-
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
Residential Real Estate		134,193		134,193		21,693		310,995		-
Consumer		54,904		54,904		-		54,904		-
Total	$	7,890,200	$	8,124,195	$	1,292,063	$	5,119,908	$	54,527

24

Impaired Loans Receivables (By Class) –June 30, 2012							Three months ended June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial
Construction	$	-	$	-	$	-	$	35,802	$	-
Commercial Business		431,381		474,063		-		423,129		-
Commercial Real Estate		-		-		-		81,666		-
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		431,381		474,063		-		540,597		-
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:	$	486,285	$	528,967	$	-	$	595,501	$	-
With a related allowance:
Commercial
Construction	$	-	$	-	$	-	$	-	$	-
Commercial Business		420,438		565,265		138,597		435,032		3,790
Commercial Real Estate		2,507,360		2,614,922		357,074		2,313,770		6,792
Mortgage Warehouse Lines		-		-		-		-		-
Subtotal		2,927,798		3,180,187		495,671		2,748,802		10,582
Residential Real Estate		140,492		140,492		28,566		313,517		-
Consumer
Loans to Individuals		-		-		-		-		-
Other		-		-		-		-		-
Subtotal		-		-		-		-		-
With a related allowance:		3,068,290		3,320,679		524,237		3,062,319		10,582
Total:
Commercial		3,359,179		3,654,250		495,671		3,289,399		10,582
Residential Real Estate		140,492		140,492		28,566		313,517		-
Consumer		54,904		54,904		-		54,904		-
Total	$	3,554,575	$	3,849,646	$	524,237	$	3,657,820	$	10,582

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).

25

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 TDR. In evaluating whether a restructuring constitutes a TDR, ASU No. 2011-02 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 the terms and restructurings.  The following table is a breakdown of TDR, all of which are classified as impaired, which occurred during the three months ended June 30, 2013.

Modifications During the three months ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		-		-		-
Commercial Real Estate		2		3,224,980		3,154,157
Residential Real Estate		-		-		-

	Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted:
Commercial		-		-
Commercial Real Estate		-		-
Residential Real Estate		-		-

If the Bank determines that a borrower has suffered deterioration in their 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.  Most of the modifications employed by the Bank during the three month period ended June 30, 2013 have resulted in lower amortization payments for a limited time period without any reduction in the interest rate.  The lower payments are determined by an analysis of the borrower’s cash flow ability to meet the modified terms while anticipating an improved financial condition to enable a resumption of the original payment terms.

26

(5)  Share-Based Compensation

As of June 30, 2013, the Company’s stock based incentive plans (“Stock Plans”) authorize the issuance of an aggregate of 440,701   shares of 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 – Scholes option valuation model.  As of June 30, 2013, there were 395,763 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.

Stock-based compensation expense related to options was $50,568 and $48,777 for the six months ended June 30, 2013 and 2012, respectively.

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

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
Stock Options	Shares		Exercise Price		Term (years)		Value
Outstanding at January 1, 2013		221,894	$	8.91
Granted		25,305		8.06
Exercised		-		-
Forfeited		-		-
Expired		-		-
Outstanding at June 30, 2013		247,199	$	8.81		5.9	$	392,068
Exercisable at June 30, 2013		184,215	$	9.42		5.0	$	237,630

The fair value of each option and the significant weighted average assumptions used to calculate the fair value of the options granted for the six months ended June 30, 2013 are as follows:

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

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

As of June 30, 2013, there was approximately $175,844 of unrecognized compensation cost related to nonvested stock option- based compensation arrangements granted under the Company’s stock incentive plans. That cost is expected to be recognized over the next four years.

The following table summarizes nonvested restricted shares for the six months ended June 30, 2013 (as adjusted to reflect the 5% stock dividend declared in December 2012).

27

				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		(9,307	)		8.33
Forfeited		-			-
Non-vested at June 30, 2013		150,901		$	6.55

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 year service period with compensation expense recognized on a straight-line basis.

Stock based compensation expense related to stock grants was $217,390 and $175,444 for the six months ended June 30, 2013 and 2012.

As of June 30, 2013, there was approximately $782,497 of unrecognized compensation cost related to non-vested stock grants that will be recognized over the next three years.

(6)  Benefit Plans

The Bank has a 401(k) plan which covers substantially all employees with six months or more of service.  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.  The plan is unfunded and the Company accrues actuarial determined benefit costs over the estimated service period of the employees in the plan.  The Company recognizes the over funded or underfunded 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 to recognize changes in that funded status in the year in which the changes occur, through comprehensive income.

The components of net periodic expense for the Company’s supplemental executive retirement plan for the three and six months ended June 30, 2013 and 2012 were as follows:

	Three months ended June 30,					Six months ended June 30,
	2013			2012		2013			2012
Service cost	$	30,539		$	61,823	$	214,257		$	123,646
Interest cost		22,229			50,073		155,951			100,146
Actuarial (gain) loss recognized		(29,893	)		5,300		(209,721	)		10,600
Prior service cost recognized		942			24,858		6,611			49,716
	$	23,817		$	142,054	$	167,098		$	284,108

(7)  Other Comprehensive Income and Accumulated Other Comprehensive Income

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

28

	Before-Tax Amount			Income Tax Effect			Net-of-Tax Amount
Three Months Ended June 30, 2013:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(3,833,028	)	$	1,353,848		$	(2,479,180	)
Reclassification adjustment for (gains) realized in income		-			-			-
Other comprehensive gain (loss) on available-for-sale securities		(3,833,028	)		1,353,848			(2,479,180	)
Unfunded pension liability:
Changes from plan actuarial gains and (losses)        included in other comprehensive income		63,266			(25,307	)		37,959
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		63,266			(25,307	)		37,959
Total other comprehensive gain (loss)	$	(3,769,762	)	$	1,328,541		$	(2,441,221	)

	Before-Tax Amount		Income Tax Effect			Net-of-Tax Amount
Three Months Ended June 30, 2012:
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities	$	42,628	$	(14,493	)	$	28,135
Reclassification adjustment for losses realized in income		-		-			-
Other comprehensive gain (loss) on available-for-sale securities		42,628		(14,493	)		28,135
Unfunded pension liability:
Changes from plan actuarial gains and (losses)        included in other comprehensive income		3,220		(1,294	)		1,926
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		3,220		(1,294	)		1,926
Total other comprehensive gain (loss)	$	45,848	$	(15,787	)	$	30,061

	Before-Tax Amount			Income Tax Effect			Net-of-Tax Amount
Six Months Ended June 30, 2013:
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities	$	(4,614,989	)	$	1,702,774		$	(2,912,215	)
Reclassification adjustment for losses realized in income		-			-			-
Other comprehensive gain (loss) on available-for-sale securities	$	(4,614,989	)	$	1,702,774		$	(2,912,215	)
Unfunded pension liability:
Changes from plan actuarial gains and (losses)        included in other comprehensive income		66,486			(26,602	)		39,884
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		66,486			(26,602	)		39,884
Total other comprehensive income (loss)	$	(4,548,503	)		1,676,172		$	(2,872,331	)

29

	Before-Tax Amount		Income Tax Effect			Net-of-Tax Amount
Six Months Ended June 30, 2012:
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities	$	57,469	$	(19,539	)	$	37,930
Reclassification adjustment for losses realized in income		-		-			-
Other comprehensive gain (loss) on available-for-sale securities		57,469		(19,539	)		37,930
Unfunded pension liability:
Changes from plan actuarial gains and (losses)        included in other comprehensive income	$	6,441	$	(2,589	)	$	3,852
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		6,441		(2,589	)		3,852
Total other comprehensive income (loss)	$	63,910	$	(22,128	)	$	41,782

Changes in the components of accumulated other comprehensive income 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
Six Months Ended June 30, 2013:
Balance, beginning of period	$	1,235,204		$	(330,623	)	$	(100,288	)	$	804,293
Other comprehensive income (loss) before      reclassifications		(2,912,215	)		-			39,884			(2,872,331	)
Amounts reclassified from accumulated other      comprehensive income (loss)		-			-			-			-
Other comprehensive income (loss)		(2,912,215	)		-			39,884			(2,872,331	)
Balance, end of period	$	(1,677,011	)	$	(330,623	)	$	(60,404	)	$	(2,068,038	)

	Unrealized Holding Gains (Losses) on Available for Sale Securities		Unrealized Impairment Loss on Held to Maturity Security			Unfunded Pension Liability			Accumulated Other Comprehensive Income
Six Months Ended June 30, 2012:
Balance, beginning of period	$	1,530,078	$	(330,623	)	$	(107,993	)	$	1,091,462
Other comprehensive income (loss) before      reclassifications		37,930		-			3,852			41,782
Amounts reclassified from accumulated other      comprehensive income (loss)		-		-			-			-
Other comprehensive income (loss)		37,930		-			3,852			41,782
Balance, end of period	$	1,568,008	$	(330,623	)	$	(104,141	)	$	1,133,244

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Items reclassified out of each component of other comprehensive income (loss) are as follows:

For the Three Months Ended June 30, 2013 (In Thousands)
Details about Accumulated Other Comprehensive Income Components		Reclassified from Accumulated Other Comprehensive Income (Loss)	Affected Line Item in the Consolidated Statements of Income
Unrealized gains (losses) on available-for-      sale securities	$	-	Total other-than-temporary impairment losses on      Available-for-sale securities
		-	Realized gains (losses) on available-for-sale securities, net
		-	Total before tax
		-	Income tax (expense) benefit
		-	Net of tax
Unfunded pension liability
Prior service cost		-	Salaries and employee benefits
Actuarial loss		-	Salaries and employee benefits
		-	Total before tax
		-	Income tax (expense) benefit
		-	Net of tax
Total reclassifications for the period, net of tax	$	-

For the Six Months Ended June 30, 2013 (In Thousands)
Details about Accumulated Other Comprehensive Income Components		Reclassified from Accumulated Other Comprehensive Income (Loss)	Affected Line Item in the Consolidated Statements of Income
Unrealized gains (losses) on available-for-      sale securities	$	-	Total other-than-temporary impairment losses on      Available-for-sale securities
		-	Realized gains (losses) on available-for-sale securities, net
		-	Total before tax
		-	Income tax (expense) benefit
		-	Net of tax
Unfunded pension liability
Prior service cost		-	Salaries and employee benefits
Actuarial loss		-	Salaries and employee benefits
		-	Total before tax
		-	Income tax (expense) benefit
		-	Net of tax
Total reclassifications for the period, net of tax	$	-

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(8) Recent Accounting Pronouncements

 ASU 2011-11 (Disclosures about offsetting Assets and Liabilities)

On December 19, 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance affects all entities with financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or a similar arrangement.  The ASU does not change existing offsetting criteria 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 ASU 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 annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods. The FASB has published a short recap highlighting the significant issues the ASU addresses.  The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial position or results of operations.

ASU 2011-05, 2001-12 and 2013-12 (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 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 15, 2012. The FASB has published a short recap of the reasons for the ASU 2011-12 deferrals.  The adoption of this guidance did not to have any impact on the Company’s consolidated financial position or results of operations.

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(9)  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.

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 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.

Securities Available for Sale.  Securities classified as available for sale are reported at fair value utilizing quoted market prices on nationally recognized exchanges (Level 1) or by using Level 2 Inputs.  For Level 2 securities, the Company obtains fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. 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, 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”), establishing a new accounting basis.  The Company subsequently adjusts the fair value on 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.

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:

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	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2013:
Securities available for sale:
U. S. Treasury securities and
obligations of U.S. Government
sponsored corporations (“GSE”) and agencies	$	21,219,240	$	1,515,705	$	-	$	22,734,945
Residential collateralized mortgage obligations- GSE		-		4,837,068		-		4,837,068
Residential collateralized mortgage obligations - non GSE		-		3,318,576		-		3,318,576
Residential mortgage backed securities – GSE		-		34,323,661		-		34,323,661
Obligations of State and Political subdivisions		-		20,097,117		-		20,097,117
Trust preferred debt securities – single issuer		-		2,023,200		-		2,023,200
Corporate debt securities		-		17,508,869		-		17,508,869
Restricted stock		-		1,013,100		-		1,013,100
Mutual fund		-		25,000		-		25,000

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 31, 2012:
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
Residential collateralized mortgage obligations- GSE		-		6,632,665		-		6,632,665
Residential collateralized mortgage obligations - non GSE		-		3,924,182		-		3,924,182
Residential mortgage backed securities – GSE		-		26,489,335		-		26,489,335
Obligations of State and Political subdivisions		-		20,682,301		-		20,682,301
Trust preferred debt securities – single issuer		-		1,998,366		-		1,998,366
Corporate debt securities		-		18,100,281		-		18,100,281
Restricted stock		-		2,493,300		-		2,493,300
Mutual fund		-		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 June 30, 2013 and December 31, 2012 were as follows:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2013:
Impaired loans	$	-	$	-	$	4,124,602	$	4,124,602
Other real estate owned		-		-		4,071,747		4,071,747
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 10 loans having an aggregate recorded investment of $5,091,683 and specific loan loss allowances of $967,081 at June 30, 2013 and 16 loans at December 31, 2012, having an aggregate recorded investment of $6,086,432 and specific loan loss allowances of $1,292,063.

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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 Adjustments
June 30, 2013
Impaired loans	$	4,124,602	Appraisal of	Appraisal
			collateral (1)	adjustments (2)	5-50%
Other real estate owned	$	4,071,747	Appraisal of	Appraisal
			collateral (1)	adjustments (2)	8-60%
December 31, 2012
Impaired loans	$	4,794,369	Appraisal of	Appraisal
			collateral (1)	adjustments (2)	5-50%
Other real estate owned	$	6,568,781	Appraisal of	Appraisal
			collateral (1)	adjustments (2)	8-60%

    (1)  Fair value is generally determined through independent appraisals of the underlying collateral, which generally

           include various Level 3 inputs which are not identifiable.

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

The fair value 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 the Company’s financial instruments.  For the Company and the Bank, as for most financial institutions, the bulk of its 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 with no significant change in credit risk, fair values are based on carrying values.

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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 to a schedule of aggregated expected monthly maturities on 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 maturity. 

The estimated fair values and carrying amounts of financial assets and liabilities were as follows:

June 30, 2013
	Carrying	Level 1			Level 2	Level 3		Fair
	Value	Inputs			Inputs	Inputs		Value
Cash and cash equivalents	$110,108,374	$	110,108,374	$	-	$	-	$	110,108,374
Securities available for sale	105,881,536		21,219,240		84,662,296		-		105,881,536
Securities held to maturity	110,195,842		-		111,715,297		-		111,715,297
Loans held for sale	28,235,113		28,235,113		-		-		28,235,113
Loans	401,213,818		-		-		402,702,060		402,702,060
Accrued interest receivable	2,554,192		2,554,192		-		-		2,554,192
Deposits	(703,599,834)		-		(704,673,000)		-		(704,673,000)
Borrowings	(10,000,000)		-		(11,302,000)		-		(11,302,000)
Redeemable subordinated    debentures	(18,557,000)		-		(18,557,000)		-		(18,557,000	)
Accrued interest payable	(943,105)		(943,105)				-		(943,105	)

36

December 31, 2012
	Carrying			Level 1		Level 2			Level 3		Fair
	Value			Inputs		Inputs			Inputs		Value
Cash and cash equivalents	$	14,044,921		$	14,044,921	$	-		$	-	$	14,044,921
Securities available for sale		109,840,965			27,923,670		81,917,295			-		109,840,965
Securities held to maturity		116,027,900			-		121,839,363			-		121,839,363
Loans held for sale		35,960,262			-		35,960,262			-		35,960,262
Loans		514,662,898			-		-			515,577,788		515,577,788
Accrued interest receivable		2,872,099			-		2,872,099			-		2,872,099
Deposits		(707,689,475	)		-		(709,678,000	)		-		(709,678,000	)
Borrowings		(42,400,000	)		-		(43,906,000	)		-		(43,906,000	)
Redeemable subordinated   debentures		(18,557,000	)		-		(18,557,000	)		-		(18,557,000	)
Accrued interest payable		(1,057,779	)		-		(1,057,779	)		-		(1,057,779	)

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

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 June 30, 2013 is 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 six month periods ended June 30, 2013 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, 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 Operation) for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2013.

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, 1st Constitution Investment Company of New Jersey, Inc., FCB Assets Holdings, Inc., 1st Constitution Title Agency, LLC, 204 South Newman Street Corp. and 249 New York Avenue, LLC.  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 fourteen branches, and manages an investment portfolio through its subsidiary, 1st Constitution Investment Company of New Jersey, Inc.  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.

37

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 speaks 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.

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, 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.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

Summary

The Company reported net income of $1,557,030 for the three months ended June 30, 2013, an increase of $258,922, or 19.9%, from the $1,298,108 reported for the three months ended June 30, 2012.  The increase was primarily due to a decrease of $313,332 in the loan loss provision, an increase of $259,893 in non-interest income and a reduction in non-interest expenses of $211,674.  Net income per diluted common share was $0.25 for the three months ended June 30, 2013 and $0.24 for the three months ended June 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 remained strong for the three months ended June 30, 2013 due to higher net income for that period compared to the three months ended June 30, 2012.  Return on average assets and return on average equity were 0.77% and 9.40% for the three months ended June 30, 2013 compared to 0.68% and 9.18%, respectively, for the three months ended June 30, 2012.

38

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 three months ended June 30, 2013 was 3.42% as compared to the 3.87% net interest margin recorded for the three months ended June 30, 2012, a decrease of 45 basis points.  This decrease in the Company’s net interest margin for the three months ended June 30, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the expected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loan prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances. The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging 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 80.9% of the Company’s net revenues for the three month period ended June 30, 2013 and 84.8% of net revenues for the three-month period ended June 30, 2012. 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.

Average interest earning assets increased by $42,158,682, or 6.0%, to $749,307,863 for the three month period ended June 30, 2013 from $707,149,181 for the three month period ended June 30, 2012. The overall yield on interest earning assets, on a tax-equivalent basis, decreased 62 basis points to 3.98% for the three month period ended June 30, 2013 when compared to 4.60% for the three month period ended June 30, 2012 due to sustained pressure on asset yields.

Average interest bearing liabilities increased by $18,917,905, or 3.3%, to $596,564,151 for the three month period ended June 30, 2013 from $577,646,246 for the three month period ended June 30, 2012.  Overall, the cost of total interest bearing liabilities decreased 18 basis points to 0.71% for the three months ended June 30, 2013 compared to 0.89% for the three months ended June 30, 2012.

The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.42% for the three months ended June 30, 2013 compared to 3.87% the three months ended June 30, 2012.  

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 classification, collateral values, and the growth and size of the loan portfolio.

At June 30, 2013, non-performing loans decreased by $4,455,836, to $1,507,666 and the ratio of non-performing loans to total loans was 0.37% at June 30, 2013 compared to 1.14% at December 31, 2012.  At June 30, 2013, the loan portfolio balance was $407,482,758, which represented a decrease of $114,331,352 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 recorded a provision for loan losses of $236,666 for the three months ended June 30, 2013 compared to $549,998 for the three months ended June 30, 2012.

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Non-Interest Income

Total non-interest income for the three months ended June 30, 2013 was $1,447,859, an increase of $259,893, or 21.9%, over non-interest income of $1,187,966 for the three months ended June 30, 2012. This component represented 19.1% of the Company’s net revenues for the three month period ended June 30, 2013 and 15.2% of net revenues for the three month period ended June 30, 2012.

Service charges on deposit accounts represent a consistent source of non-interest income. Service charge revenues decreased nominally to $221,604 for the three months ended June 30, 2013 from $231,256 for the three months ended June 30, 2012. This decrease was the result of a lower volume of uncollected funds and overdraft fees collected on deposit accounts during the first three months of 2013 compared to the first three months of 2012.

Gain on sales of loans held for sale decreased by $16,001, or 3.2%, to $479,146 for the three months ended June 30, 2013 when compared to $495,147 for the three months ended June 30, 2012.  The Bank sells both residential mortgage loans and Small Business Administration loans in the secondary market.  The volume of mortgage loan sales decreased for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $119,758 for the three months ended June 30, 2013 compared to $113,176 for the three months ended June 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 to the other income component of non-interest income amounting to $627,351 for the three months ended June 30, 2013, compared to $348,387 for the three months ended June 30, 2012, an increase of $278,964 for the second quarter of 2013 as compared to the second quarter of 2012.

Non-Interest Expense

Non-interest expenses decreased by $211,674, or 3.9%, to $5,162,300 for the three months ended June 30, 2013 from $5,373,974 for the three months ended June 30, 2012.  The following table presents the major components of non-interest expenses for the three months ended June 30, 2013 and 2012.

Non-interest Expenses
	Three months ended June 30,
	2013		2012
Salaries and employee benefits	$	3,045,241	$	3,154,903
Occupancy expenses		622,499		613,535
Data processing services		294,306		252,545
Equipment expense		188,286		101,452
Marketing		92,087		53,789
Regulatory, professional and other fees		271,908		232,028
FDIC insurance expense		15,000		139,873
Directors’ fees		22,000		21,000
Other real estate owned expenses		48,557		575,343
Amortization of intangible assets		66,992		66,991
Other expenses		495,424		162,515
Total	$	5,162,300	$	5,373,974

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Salaries and employee benefits, which represent the largest portion of non-interest expenses, decreased by $109,662, or 3.5%, to $3,045,241 for the three months ended June 30, 2013 compared to $3,154,903 for the three months ended June 30, 2012. The decrease in salaries and employee benefits for the three months ended June 30, 2013 was primarily a result of a lower level of compensation expense for stock option and stock grant awards for the current period compared to the prior year period.

Occupancy expenses increased marginally by $8,964, to $622,499 for the three months ended June 30, 2013 compared to $613,535 for the three months ended June 30, 2012.  The increase in expense was primarily attributable to marginally higher maintenance costs occurred in maintaining the Bank’s branch properties.  

The cost of data processing services increased to $294,306 for the three months ended June 30, 2013 from $252,545 for the three months ended June 30, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank’s expanding mobile banking systems.

Equipment expense increased by $86,834, or 86%, to $188,286 for the three months ended June 30, 2013 compared to $101,452 for the three months ended June 30, 2012 primarily due to increased costs associated with the number of maintenance contracts and supplies on equipment in connection with the expansion of mobile banking capabilities as compared with the prior period.

Regulatory, professional and other fees increased by $39,880, or 17.2%, to $271,908 for the three months ended June 30, 2013 compared to $232,028 for the three months ended June 30, 2012.  During the second quarter of 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements and risk management program.

FDIC insurance expense decreased to $15,000 for the three months ended June 30, 2013 compared to $139,873 for the three months ended June 30, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC assessment rules.

Other real estate owned expenses decreased by $526,786 to $48,557 for the three months ended June 30, 2013 compared to $575,343 for the three months ended June 30, 2012 as the Company incurred a lower level of property taxes, maintenance and other expenses on repossessed properties during the three months ended June 30, 2013 than were incurred during the same period in 2012.  In addition, the Company entered into a number of rental agreements on certain OREO properties with the resulting rents received being offset against maintenance expenses.

All other expenses increased by $332,908 to $495,424 for the three months ended June 30, 2013 compared to $162,516 for the three months ended June 30, 2012 as current year increases occurred in correspondent bank fees, payroll processing fees, insurance premiums  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.

An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income plus 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 three months ended June 30, 2013, compared to 68.8% for the three months ended June 30, 2012.

Income Taxes

Income tax expense increased by $18,684 to $612,492 for the three months ended June 30, 2013 from $593,808 for the three months ended June 30, 2012.  The increase was primarily due to a higher level of pretax income for the second quarter of 2013 as compared to the second quarter of 2012.  

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Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Summary

The Company realized net income of $2,882,348 for the six months ended June 30, 2013, an increase of 16.9% from the $2,464,840 reported for the six months ended June 30, 2012.  This increase was due primarily to a decrease in the provision for loan losses plus an increase in non-interest income which, in total, offset a decrease in net interest income plus an increase in noninterest expenses, for the six months ended June 30, 2013 compared to the same period in 2012.  Diluted net income per common share was $0.47 for the six months ended June 30, 2013 compared to diluted net income per common share of $0.46 for the six months ended June 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, 2012 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 six months ended June 30, 2013 as compared to the six months ended June 30, 2012 due to higher net income for the 2013 period.  Return on average assets and return on average equity were 0.71% and 8.81% for the six months ended June 30, 2013 compared to 0.65% and 8.81%, respectively, for the six months ended June 30, 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 six months ended June 30, 2013 was 3.46% as compared to the 3.92% net interest margin recorded for the six months ended June 30, 2012, a decrease of 46 basis points.  The Company will continue to closely monitor the mix of earning assets and funding sources to maximize net interest income during this challenging 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 79.8% of the Company’s net revenues for the six month period ended June 30, 2013 and 84.9% of net revenues for the six month period ended June 30, 2012. Net interest income also depends upon the relative amount of interest-earning assets, 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, liabilities and shareholders’ equity as well as interest income and expense on related items and the Company’s average yield or rate for the six month periods ended June 30, 2013 and 2012, respectively. 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)	Six months ended June 30, 2013								Six months ended June 30, 2012
	Average Balance			Interest		Average Yield			Average Balance			Interest		Average Yield
Assets:
Federal Funds Sold/Short-Term Investments	$	108,464,994		$	139,342		0.26	%	$	36,860,458		$	48,340		0.26	%
Investment Securities:
Taxable		155,253,462			1,838,797		2.39	%		171,349,167			2,327,759		2.72	%
Tax-exempt		65,948,918			1,566,576		4.79	%		51,276,230			1,230,374		4.81	%
Total		221,202,380			3,405,373		3.10	%		222,625,397			3,558,133		3.21	%
Loan Portfolio:
Construction		42,304,486			1,295,504		6.18	%		54,948,513			1,855,335		6.77	%
Residential real estate		11,033,073			288,311		5.27	%		12,303,773			316,592		5.16	%
Home Equity		9,115,975			248,644		5.50	%		10,779,569			303,956		5.65	%
Commercial and commercial real estate		141,990,388			5,078,830		7.21	%		144,033,903			5287,559		7.36	%
Mortgage warehouse lines		175,027,892			4,074,237		4.69	%		184,622,769			4,396,188		4.78	%
Installment		247,069			8,070		6.59	%		378,818			12,629		6.69	%
All Other Loans		44,819,859			623,857		2.81	%		32,259,311			561,304		3.49	%
Total		424,538,742			11,617,453		5.52	%		439,326,656			12,733,563		5.81	%
Total Interest-Earning Assets		754,206,116			15,162,168		4.05	%		698,812,511			16,340,036		4.69	%
Allowance for Loan Losses		(6,789,347	)							(5,955,926	)
Cash and Due From Bank		22,409,931								12,726,136
Other Assets		51,299,291								52,881,065
Total Assets	$	821,125,991							$	758,463,786
Liabilities and Shareholders’ Equity: Interest-Bearing Liabilities:
Money Market and NOW Accounts	$	228,737,438		$	401,594		0.35		$	204,902,097		$	542,887		0.53	%
Savings Accounts		205,378,084			457,986		0.45			191,355,779			620,354		0.65	%
Certificates of Deposit		141,510,623			966,354		1.38			147,499,965			1,101,598		1.50	%
Other Borrowed Funds		10,574,309			207,527		3.96			16,220,330			221,561		2.74	%
Trust Preferred Securities		18,557,000			175,644		1.91			18,557,000			195,892		2.12	%
Total Interest-Bearing Liabilities		604,757,454			2,209,105		0.74			578,535,171			2,682,292		0.93	%
Net Interest Spread							3.31	%							3.76	%
Demand Deposits		140,566,574								115,201,429
Other Liabilities		9,826,621								8,634,205
Total Liabilities		755,150,649								702,370,805
Shareholders’ Equity		65,975,342								56,092,981
Total Liabilities and Shareholders’ Equity	$	821,125,991							$	758,463,786
Net Interest Margin				$	12,953,063		3.46	%				$	13,657,744		3.92	%

The Company’s net interest income decreased on a tax-equivalent basis by $704,681, or 5.2%, to $12,953,063 for the six months ended June 30, 2013 from the $13,657,744 reported for the six months ended June 30, 2012. The decrease in net interest income for the six – month period ended June 30, 2013 compared with the comparable 2012 period was primarily due to two factors: (1) the unexpected seasonal decline in the balance of outstanding mortgage warehouse lines and (2) the unexpected amount of loan prepayments in construction loans and commercial business loans. The repayment of these loans provided excess liquidity that was allocated to much lower yielding overnight fund balances.

Average interest earning assets increased by $55,393,605, or 7.9%, to $754,206,116 for the six month period ended June 30, 2013 from $698,812,511 for the six month period ended June 30, 2012.  The average investment securities portfolio decreased by $1,423,017, to $221,202,380 for the six month period ended June 30, 2013 compared to $222,625,397 for the six month period ended June 30, 2012. The average loan portfolio decreased by $14,787,914, or 3.4%, to $424,538,742 for the six month period ended June 30, 2013 compared to $439,326,656 for the six month period ended June 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 of $12,644,027, or 23.0%, to $42,304,486 for the six month period ended June 30, 2013 compared to $54,948,513 for the six month period ended June 30, 2012 as the current adverse economic conditions have resulted in depreciation of collateral values securing these loans.  Overall, the yield on interest earning assets, on a tax-equivalent basis, decreased 64 basis points to 4.05% for the six month period ended June 30, 2013 when compared to 4.69% for the six month period ended June 30, 2012.

Average interest bearing liabilities increased by $26,222,283, or 4.5%, to $604,757,454 for the six month period ended June 30, 2013 from $578,535,171 for the six month period ended June 30, 2012.  Overall, the cost of total interest bearing liabilities decreased 19 basis points to 0.74% for the six months ended June 30, 2013 compared to 0.93% for the six months ended June 30, 2012.

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The net interest margin (on a tax-equivalent basis), which is net interest income divided by average interest earning assets, was 3.46% for the six months ended June 30, 2013 compared to 3.92% the six months ended June 30, 2012.

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, non-accrual loans, problem loans as identified through internal classifications, 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’s provision for loan losses was $236,666 for the six months ended June 30, 2013 compared to $1,149,996 for the six months ended June 30, 2012.  The decreased provision for 2013 was primarily the result of a $4,455,836 decrease in the level of non-performing loans to $1,507,666 at June 30, 2013.  The ratio of non-performing loans to total loans was 0.37% at June 30, 2013, compared to 1.14% at December 31, 2012.

Non-Interest Income

Total non-interest income for the six months ended June 30, 2013 was $3,056,422, an increase of $703,291, or 29.9%, over non-interest income of $2,353,131 for the six months ended June 30, 2012. This component represented 20.2% of the Company’s net revenues for the six – month period ended June 30, 2013 and 15.1% of net revenues for the three – month period ended June 30, 2012.

Service charges on deposit accounts represent a significant source of non-interest income. Service charges on deposit accounts decreased by $14,558, or 3.2%, to $444,670 for the six months ended June 30, 2013 from $459,228 for the six months ended June 30, 2012.  This decrease was primarily the result of a decrease in the number of deposit accounts subject to service charges during the six months ended June 30, 2013 compared to the prior year period.

Gain on sales of loans increased by $247,491, or 25.7%, to $1,210,855 for the six months ended June 30, 2013 compared to $963,364 for the six months ended June 30, 2012.  The Bank sells both residential mortgage loans and SBA loans in the secondary market.  The volume of mortgage loan sales increased for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

Non-interest income also includes income from bank-owned life insurance (“BOLI”), which amounted to $232,366 for the six months ended June 30, 2013 compared to $225,098 for the six months ended June 30, 2012. The Bank purchased tax-free BOLI assets to partially offset the cost of employee benefit plans and reduced 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 to the other income component of non-interest income amounting to $1,168,531 for the six months ended June 30, 2013, compared to $705,441 for the six months ended June 30, 2012.

Non-Interest Expense

Non-interest expenses increased by $258,777, or 2.4%, to $11,245,268 for the six months ended June 30, 2013 from $10,986,491 for the six months ended June 30, 2012. The following table presents the major components of non-interest expenses for the six months ended June 30, 2013 and 2012.

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Non-interest Expenses
	Six months ended June 30,
	2013		2012
Salaries and employee benefits	$	6,398,104	$	6,095,253
Occupancy expenses		1,300,305		1,337,320
Data processing services		595,688		516,120
Equipment expense		499,933		373,415
Marketing		139,670		98,824
Regulatory, professional and other fees		466,901		414,736
FDIC insurance expense		34,687		287,266
Directors’ fees		54,000		45,000
Other real estate owned expenses		594,062		882,550
Amortization of intangible assets		133,984		133,983
Other expenses		1,027,934		802,024
Total	$	11,245,268	$	10,986,491

Salaries and employee benefits, which represent the largest portion of non-interest expenses, increased by $302,851, or 5.0%, to $6,398,104 for the six months ended June 30, 2013 compared to $6,095,253 for the six months ended June 30, 2012. The increase in salaries and employee benefits for the six months ended June 30, 2013 was a result of regular merit increases and increased health care costs.

Occupancy expenses decreased by $37,015 to $1,300,305 for the six months ended June 30, 2013 compared to $1,337,320 for the six months ended June 30, 2012.  The decrease in occupancy expenses for the current period was primarily attributable to a lesser level of maintenance costs in maintaining the Bank’s branch properties.

The cost of data processing services increased to $595,688 for the six months ended June 30, 2013 from $516,120 for the six months ended June 30, 2012 as additional expenses were incurred in connection with a 2013 initiative to upgrade the software capabilities in branch offices in order to fully implement the Bank’s expanding mobile banking systems.

Equipment expense increased by $126,518 for the six months ended June 30, 2013 to $499,933 compared to $373,415 for the six months ended June 30, 3012 primarily due to increased costs associated with the maintenance contracts and supplies for equipment in connection with the expansion of mobile banking capabilities as compared with the prior period.

Regulatory, professional and other fees increased by $52,165, or 12.6%, to $466,901 for the six months ended June 30, 2013 compared to $414,736 for the six months ended June 30, 2012.  During the first six months of 2013, the Company incurred professional fees in connection with consultants engaged to assess the Company’s compliance with regulatory requirements.

FDIC insurance expense decreased to $34,687 for the six months ended June 30, 2013 compared to $287,266 for the six months ended June 30, 2012 as a result of the changes required by the Dodd-Frank Act with respect to FDIC assessment rules.

Other real estate owned expenses decreased by $288,488 to $594,062 for the six months ended June 30, 2013 compared to $882,550 for the six months ended June 30, 2012 as the Company incurred a lower level of property tax and maintenance costs on properties held as other real estate owned during the first six months of 2013 as compared to the first six months of 2012. In addition, the Company entered into a number of rental agreements on certain OREO properties with the resulting rents received being offset against maintenance expenses.

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All other expenses increased by $225,910 to $1,027,934 for the six months ended June 30, 2013 compared to $802,024 for the six months ended June 30, 2012 as current year increases incurred in correspondent bank fees, payroll processing fees, insurance premiums 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.

An important financial services industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income plus 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 was 72.5% for the six months ended June 30, 2013 compared to 70.4% for the six months ended June 30, 2012.  

Income Taxes

The Company had income tax expense of $1,137,125 for the six months ended June 30, 2013 compared to income tax expense of $1,010,285 for the six months ended June 30, 2012.  The increase in the income tax expense for the 2013 period was primarily due to the higher level of taxable interest income for the first six months of 2013 as compared to the first six months of 2012.

Financial Condition

June 30, 2013 Compared with December 31, 2012

Total consolidated assets at June 30, 2013 were $804,892,170, representing a decrease of $36,076,212, or 4.29%, from total consolidated assets of $840,968,382 at December 31, 2012.  

Cash and Cash Equivalents

Cash and cash equivalentsat June 30, 2013 totaled $110,108,374 compared to $14,044,921 at December 31, 2012. Cash and cash equivalents at June 30, 2013 consisted of cash and due from banks of $110,096,949 and Federal funds sold/short term investments of $11,425. The corresponding balances at December 31, 2012 were $14,033,501 and $11,420, respectively.  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 June 30, 2013 amounted to $28,235,113 compared to $35,960,262 at December 31, 2012. As indicated in the Consolidated Statements of Cash Flows, the amount of loans originated for sale was $83,349,024 for the six months ended June 30, 2013 compared to $79,079,430 at June 30, 2012.

Investment Securities

Investment securities represented 26.8% of total assets at June 30, 2013 and 26.9% at December 31, 2012. Total investment securities decreased $9,791,487, or 4.3%, to $216,077,378 at June 30, 2013 from $225,868,865 at December 31, 2012.  Purchases of investments totaled $26,786,580 during the six months ended June 30, 2013, and proceeds from calls and repayments totaled $31,552,797 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 June 30, 2013, securities available for sale totaled $105,881,536, which is a decrease of $3,959,429, or 3.6%, from securities available for sale totaling $109,840,965 at December 31, 2012.

At June 30, 2013, the securities available for sale portfolio had net unrealized losses of $2,605,482 compared to net unrealized gains of $1,806,967 at December 31, 2012.  These unrealized (losses) / gains are reflected, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income.

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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 June 30, 2013, securities held to maturity were $110,195,842, a decrease of $5,832,058, or 5.0%, from $116,027,900 at December 31, 2012.  The fair value of the held to maturity portfolio at June 30, 2013 was $111,715,297.

Proceeds from maturities and prepayments of securities during the first six months of 2012 were used to reduce the Company’s borrowings.

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 forth the classification of loans by major category at June 30, 2013 and December 31, 2012.  

Loan Portfolio Composition	June 30, 2013					December 31, 2012
Component	Amount		Percentage of Total			Amount		Percentage of Total
Construction loans	$	41,546,825		10	%	$	55,691,393		11	%
Residential real estate loans		11,204,241		3	%		10,897,307		2	%
Commercial business		57,533,677		14	%		57,865,436		11	%
Commercial real estate		101,196,325		25	%		102,412,694		20	%
Mortgage warehouse lines		185,739,734		46	%		284,127,530		54	%
Loans to individuals		9,203,301		2	%		9,643,385		2	%
Deferred loan costs		883,354		0	%		987,086		0	%
All other loans		175,301		0	%		189,279		0	%
	$	407,482,758		100	%	$	521,814,110		100	%

The loan portfolio decreased by $114,331,352, or 21.9%, to $407,482,758 at June 30, 2013 compared to $521,814,110 at December 31, 2012.  This decrease in the loan portfolio was primarily the result of two factors: (1) the expected seasonal decrease in outstanding Mortgage warehouse lines during the first six months of 2013 and (2) the unexpected increase in loan prepayments in the Construction loan and Commercial business components of the loan portfolio.

The Mortgage warehouse lines component of the loan portfolio decreased by $98,387,796, or 34.6%, compared to $284,127,530 at December 31, 2012.

The Bank’s Mortgage Warehouse Funding Group offers a revolving line of credit that is 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 mortgage bankers 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.

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The Bank’s Construction loans portfolio decreased by $14,144,568 during the first six months of 2013. The Bank received $13,737,207 in prepayments for the Construction loan portfolio. 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 the loan portfolio.

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 which 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 that generally, 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 decreased by $4,455,836 to $1,507,666 at June 30, 2013 from $5,963,502 at December 31, 2012.  The major segments 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, non-performing loans to total loans decreased to 0.37% at June 30, 2013 from 1.14% at December 31, 2012.  Loan quality is considered to be sound. This was accomplished through quality loan underwriting, a proactive approach to loan monitoring and aggressive workout strategies.

Non-Performing Assets	June 30,			December 31,
	2013			2012
Non-Performing loans:
Loans 90 days or more past due and still accruing	$	0		$	84,948
Non-accrual loans		1,507,666			5,878,554
Total non-performing loans		1,507,666			5,963,502
Other real estate owned		7,926,851			8,332,601
Total non-performing assets	$	9,434,517		$	14,296,103
Non-performing loans to total loans		0.37	%		1.14	%
Non-performing loans to total loans excluding mortgage          warehouse lines		0.68	%		2.51	%
Non-performing assets to total assets		1.17	%		1.70	%
Non-performing assets to total assets excluding mortgage          warehouse lines		1.52	%		2.57	%

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Non-performing assets decreased by $4,861,586 to $9,434,517 at June 30, 2013 from $14,296,103 at December 31, 2012.  Other real estate owned decreased by $405,750 to $7,926,851 at June 30, 2013 from $8,332,601 at December 31, 2012.  Since December 31, 2012, the Bank sold and transferred out of other real estate owned properties totaling approximately $2,054,056.  In addition, during the six months ended June 30, 2013, the Bank recorded a provision for loss on other real estate owned of $662,918.

At June 30, 2013, the Bank had nine loans totaling $4,864,966 which were troubled debt restructurings.  Three of these loans totaling $397,453 are included in the above table as non-accrual loans; the remaining four loans totaling $4,467,513 are considered performing.

Non-performing assets represented 1.17% of total assets at June 30, 2013 and 1.70% at December 31, 2012.

Management takes a proactive approach in addressing delinquent loans. The Company’s President 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-due and again at 15 days past-due.

In most cases, the Company’s collateral is real estate and when 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 to 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 include a specific reserve for impaired risk loans, an allocated reserve, and an unallocated portion.  

The Company consistently applies the following comprehensive methodology.  During the quarterly review of the allowance for loan losses, the Company considers a variety of factors that include:

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·   General economic conditions.

·   Trends in charge-offs.

·   Trends and levels of delinquent loans.

·   Trends and levels of non-performing loans, including loans over 90 days delinquent.

·   Trends in volume and terms of loans.

·   Levels of allowance for specific classified loans.

·   Credit concentrations.

The methodology includes the segregation of the loan portfolio into loan types with a further segregation into 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 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 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 reserve for impaired loans is established for specific loans which have been identified by management as being impaired. These impaired loans are primarily assigned a doubtful risk rating grade because the loan has 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 doubtful 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, 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 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.

Loans are placed in a nonaccrual status when the ultimate collectability of principal or interest in whole, or part, is in doubt.  Past-due loans contractually past-due 90 days or more for either principal or interest are also placed in nonaccrual status unless they are both well secured and in the process of collection.  Impaired loans are evaluated individually.

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The following table presents, for the periods indicated, an analysis of the allowance for loan losses and other related data.

Allowance for Loan Losses
	June 30,			December 31,			June 30,
	2013			2012			2012
Balance, beginning of period	$	7,151,212		$	5,534,450		$	5,534,450
Provision charged to operating expenses		236,666			2,149,992			1,149,996
Loans charged off :
Construction loans		(561,993	)		(57,650	)		(57,650	)
Residential real estate loans		-			(130,694	)		(130,694	)
Commercial and commercial real estate		(483,966	)		(275,888	)		(165,026	)
Loans to individuals		(90,865	)		(83,859	)		(77,858	)
Lease financing		-			-			-
All other loans		-			-			-
		(1,136,824	)		(548,091	)		(437,229	)
Recoveries
Construction loans		417			3,403			3,403
Residential real estate loans		-			-			-
Commercial and commercial real estate		17,469			11,458			6,800
Loans to individuals		-			-			-
Lease financing		-			-			-
All other loans		-			-			-
		17,886			14,861			10,203
Net (charge offs) / recoveries		(1,118,938	)		(533,230	)		(427,026	)
Balance, end of period	$	6,268,940		$	7,151,212		$	6,257,420
Loans :
At period end	$	407,482,758		$	521,814,110		$	479,795,092
Average during the period		394,098,700			444,064,283			421,111,355
Net charge offs to average loans outstanding		(0.28	%)		(0.12	%)		(0.10	%)
Allowance for loan losses to :
Total loans at year end		1.54	%		1.37	%		1.30	%
Total loans at year end excluding mortgage warehouse         lines		2.83	%		3.01	%		2.34	%
Non-performing loans		474.32	%		119.92	%		231.85	%

The Company recorded a provision for loan losses of $236,666 for the six months ended June 30, 2013 and $1,149,996 for the six months ended June 30, 2012.  In addition to the results of management’s comprehensive review of the adequacy of the allowance, the decision for the reduced level of the current provision was further supported by the risk profile of the loan portfolio being reduced by a $114,331,352 decrease in the total loan portfolio at June 30, 2013 compared to the December 31, 2012 balance and a 4,455,836% decrease in non-performing loans at June 30, 2013 compared to December 31, 2012.  Net charge offs/recoveries amounted to a net charge-off of $1,118,938 for the six months ended June 30, 2013.

At June 30, 2013, the allowance for loan losses was $6,268,940 compared to $7,151,212 at December 31, 2012, a decrease of $882,272.  The ratio of the allowance for loan losses to total loans at June 30, 2013 and December 31, 2012 was 1.54% and 1.37%, respectively.  The allowance for loan losses as a percentage of non-performing loans was 474.32% at June 30, 2013, compared to 119.92% at December 31, 2012. 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.

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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, June 30, 2013 and December 31, 2012.

	June 30, 2013		December 31, 2012
Demand
Non-interest bearing	$	145,412,945	$	152,334,759
Interest bearing		216,024,165		211,475,765
Savings		199,402,150		202,261,035
Time		142,760,574		141,617,916
	$	703,599,834	$	707,689,475

At June 30, 2013, total deposits were $703,599,834, a decrease of $4,089,641, or 0.6%, from $707,689,475 at December 31, 2012.  

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 $10,000,000 at June 30, 2013, consisting solely of FHLB long-term borrowings, and $42,400,000 at December 31, 2012, consisting of long-term FHLB borrowings of $10,000,000 and overnight funds purchased of $32,400,000.

The Bank has a fixed 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 $222,340, to $65,275,872 at June 30, 2013 from $65,053,532 at December 31, 2012.  Tangible book value per common share increased by $0.03, to $10.05 at June 30, 2013 from $10.02 at December 31, 2012.  The current period increase in tangible book value per common share was the result of net income of $2,882,348 for the six months ended June 30, 2013, partially offset by the comprehensive loss of $2,872,331 for the six-month period. The ratio of shareholders’ equity to total assets was 8.11% at June 30, 2013 and 7.74% at December 31, 2012, respectively.  The increase in shareholders’ equity was primarily the result of net income of $2,882,348 for the six months ended June 30, 2013, partially offset by the other comprehensive loss of $2,872,331 for the six-month period.

In lieu of cash dividends to common shareholders, the Company (and its predecessor, the Bank) has declared a stock dividend every year since 1992 and has paid such dividends every year since 1993.  5% stock dividends were declared in 2012 and 2011 and paid in 2013 and 2012, respectively.  

The Company’s common stock is quoted on the Nasdaq Global Market under the symbol “FCCY”.

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In 2005, the Company’s board of directors 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 June 30, 2013 is set forth under Part II, Item 2 of this report, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Actual capital amounts and ratios for the Company and the Bank as of June 30, 2013 and December 31, 2012 were as follows:

	Actual				For Capital Adequacy Purposes			To Be Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio	Amount		Ratio
As of June 30, 2013
Company
Total Capital to Risk Weighted Assets	$	82,280,291		16.42%	$	40,098,080	>8%		N/A	N/A
Tier 1 Capital to Risk Weighted Assets		76,011,351		15.17%		20,049,040	>4%		N/A	N/A
Tier 1 Capital to Average Assets		76,011,351		9.46%		32,131,943	>4%		N/A	N/A
Bank
Total Capital to Risk Weighted Assets	$	79,803,850		15.92%	$	40,098,080	>8%	$	50,122,600	>10%
Tier 1 Capital to Risk Weighted Assets		73,534,910		14.67%		20,049,040	>4%		30,073,560	>6%
Tier 1 Capital to Average Assets		73,534,910		9.20%		31,985,538	>4%		39,981,922	>5%
As of December 31, 2012
Company
Total Capital to Risk Weighted Assets	$	81,213,909		12.98%	$	50,044,960	>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
Tier 1 Capital to Average Assets		74,062,697		9.29%		31,881,576	>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%
Tier 1 Capital to Risk Weighted Assets		71,470,528		11.43%		25,022,480	>4%		37,533,720	>6%
Tier 1 Capital to Average Assets		71,470,528		9.05%		31,604,458	>4%		39,505,573	>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 March 31, 2013, 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-capitalized institution.  On July 2, 2013, the Federal Reserve Board approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule. Management is currently evaluating the provisions of the final rules and their expected impact to the Company.

 Liquidity

At June 30, 2013, 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.

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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 earnings 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 $402,446,085, of its total assets at June 30, 2013.  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.  The Bank also maintains an unsecured federal funds line of $20,000,000 with a correspondent bank.

The Consolidated Statements of Cash Flows present the changes in cash from operating, investing and financing activities.  At June 30, 2013, the balance of cash and cash equivalents was $110,108,374.

Net cash provided by operating activities totaled $14,183,817 for the six months ended June 30, 2013 compared to net cash provided by operations of $9,244,776 for the six months ended June 30, 2012.  The primary 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 $118,207,522 for the six months ended June 30, 2013 compared to net cash provided by investing activities of $9,812,297 for the six months ended June 30, 2012.  The increase for the 2013 period resulted from a reduction of $110,901,189 in the loan portfolio primarily through repayments.

Net cash used in financing activities totaled $36,327,886 for the six months ended June 30, 2013 compared to net cash used in financing activities of $17,672,934 for the six months ended June 30, 2012.  

The securities portfolios are also a source of liquidity, providing cash flows from maturities and periodic repayments of principal.  For the six months ended June 30, 2013, prepayments and maturities of investment securities totaled $31,552,797.  Another source of liquidity is the loan portfolio, which provides a flow of payments and maturities.

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 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. 

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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.

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 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 June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 board of directors 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 made by or on behalf of the Company during the three months ended June 30, 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 As Part of Publicly Announced Plan or Program	Maximum Number of Shares That May Yet be Purchased Under the Plan or Program
Beginning	Ending
April 1, 2013	April 30, 2013	-	-	-	187,559
May 1, 2013	May 31, 2013	-	-	-	187,559
June 1, 2013	June 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.

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Item 6.   Exhibits.

10.1		1st Constitution Bancorp 2013 Equity Incentive Plan, incorporated by reference to Appendix A of the Company’s proxy statement filed with the SEC on April 11, 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 DocumentX
101.SCH	*	XBRL Taxonomy Extension Schema DocumentX
101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB	*	XBRL Taxonomy Extension Label Linkbase DocumentX
101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase DocumentX

_____________________

*             Filed herewith.

X These interactive data files are being furnished as part of this Quarterly Report, and in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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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: Aug 14, 2013	By:	/s/ ROBERT F. MANGANO
		Robert F. Mangano
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: Aug 14, 2013	By:	/s/ JOSEPH M. REARDON
		Joseph M. Reardon
		Senior Vice President and Treasurer
		(Principal Financial and Accounting Officer)

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